An Analysis of the President's 

Budgetary Proposals for Fiscal Year 1992 

Pmpored at the Request of the 

Senate Committee on Appropriations 

AN ANALYSIS OF THE PRESIDENT'S 

BUDGETARY PROPOSALS 

FOR FISCAL YEAR 1992 

The Congress of the United States 

Congressional Budget Office 

For sale by the Superintendent of Documents, Congressional Sales Office 

U.S. Government Printing ORce, Washington, DC 20402 
NOTES 

Unless otherwise indicated, all years referred to in Chapter I1 are calendar 

years, and all years in 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 (commonly 

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 Omnibus 

Budget Reconciliation Act of 1990, referred to in this volume as OBRA or 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 

1992- 1996 (January 1991). 
PREFACE 

This analysis of the President's budget for fiscal year 1992 was prepared at the request of the Senate Committee on Appropriations. The 

report discusses the President's policies in terms of changes from the 

Congressional Budget Office (CBO) baseline budget projections for 

1992 through 1996. It provides estimates of the budgetary impact of 

the Administration's proposals using CBO's economic 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 D. Marcuss. Paul N. 

Van de Water was responsible for Chapter I; Robert W. Arnold for 

Chapter II; Rosemary D. Marcuss for Chapter III; Michael A. Miller for 

Chapter IV; Charles E. Seagrave and Robert A. Sunshine for Chapter 

V; and Kathy A. Ruffing for Appendix A. The principal contributors to 

the revenue and spending estimates and analysis are listed in Appendix B. 

Paul L. Houts supervised the editing and production of the report. 

Major portions were edited by Sheila Harty, Francis S. Pierce, and 

Sherry Snyder. Nancy H. Brooks provided editorial support during 

production. The authors wish to thank Cindy Cleveland, Marion 

Curry, Wanda Holmes, Janice Johnson, Verlinda Lewis, L. Rae Roy, 

Simone Thomas, and Emma Tuerk for typing the many drafts. 

Kathryn Quattrone prepared the report for publication with the assistance of Martina Wojak. 

Robert D. Reischauer 

Director 

March 1991 

CONTENTS 

SUMMARY AND INTRODUCTION 1 

The New Budget Process 2 

CBO and Administration Budget 

Estimates 6 

The Administration's Budget 

Program 9 

COMPARISON OF ECONOMIC 

FORECASTS 

Short-Term Outlooks 19 

Medium-Term Projections 23 

Implications of Economic Forecasts 

for Deficits 31 

THE ADMINISTRATION'S 

REVENUE PROPOSALS 

Pay-As-You-Go Revenue Proposals 35 

Other Revenue Proposals 51 

CBO's Reestimate of the Administration's 

Budget Revenues 53 

THE ADMINISTRATION'S PROPOSALS 

FOR DEFENSE AND INTERNATIONAL 

AFFAIRS 57 

The Defense Budget and Operations 

Desert Shield and Desert Storm 59 

The Defense Budget Compared 

With the CBO Baseline 62 

Major Defense Proposals 66 
vi ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

CBO Reestimates of the Administration's 

Request for National Defense 82 

The Administration's Budget Request 

for International Affairs 84 

CBO Reestimates of the Administration's 

Request for International Affairs 89 

THE ADMINISTRATION'S 

DOMESTIC PROPOSALS 

General Science, Space, 

and Technology 96 

Energy 99 

Natural Resources and 

Environment 105 

Agriculture 109 

Commerce and Housing 

Credit 114 

Transportation 122 

Community and Regional 

Development 126 

Education, Training, Employment, 

and Social Services 130 

Health 137 

Medicare 144 

Income Security 153 

Social Security 164 

Veterans Benefits and 

Services 168 

Administration of Justice 176 

General Government 179 

Net Interest 182 

Allowances 186 

Undistributed Offsetting 

Receipts 188 
CONTENTS v ii 

APPENDIXES 

A Baseline Budget Projections 195 

Major Contributors to the 

Revenue and Spending 

Projections 201 
viii ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

TABLES 

1-1. CBO Estimates of the Deficit Under 

Administration Policies 

Differences Between Administration and 

CBO Estimates of the President's 

Proposed Budget 

The Administration's Policy Proposals 

as Estimated by CBO 

CBO Estimates of the President's 

Budget 

The Administration's Proposals for 

Domestic Discretionary Spending in 

Fiscal Year 1992 

The Administration's Pay-As-Y ou-Go 

Proposals 

Comparison of CBO, Administration, and 

Blue Chip Short-Run Economic Forecasts 

Comparison of CBO, Administration, 

and Blue Chip Economic Projections, 

Calendar Years 1990-1996 

11-3. Growth in Labor Productivity in the 

Nonfarm Business Sector 

11-4. Effects of CBOYs Economic Projections 

on Estimates of the Administration's 

Budget 

111-1. Administration and CBO Estimates 

of Administration Budget Revenues, 

by Major Source 
CONTENTS 

111-2. CBO Estimates of Revenue Proposals 

in the Administration's 1992 Budget 

111-3. CBOIJCT and Administration Estimates 

of Proposed Extensions of Expiring 

Income Tax Provisions 

CBOIJCT and Administration Estimates 

of Proposad Savings and Investment 

Incentives 

CBOIJCT and Administration Estimates 

of Proposed Medicare Coverage Extension 

CBOIJCT and Administration Estimates 

of the Proposed Highway Tax Extension 

CBOIJCT and Administration Estimates 

of Other Revenue Proposals 

CBOIJCT and Administration Estimates 

of the Proposed Internal Revenue 

Service Initiative 

CBO Reestimates of the Administration's 

Budget Revenues 

Proposed Major Spending Changes in 

the President's Budget for Function 050, 

National Defense 

Real Changes in National Defense 

Budget Authority 

Changes in Active Forces and 

Manpower, 1990 to 1995 
x ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

FIGURE 

11-1. 

Program Changes in the 1992 Procurement 

Request for Key Weapons Deployed in 

Operation Desert Storm 

Selected Program Changes for Aircraft 

and Missile Procurement in the President's 

Request for Fiscal Year 1992 

Investment in the Next Generation and 

Current Generation of Weapons 

CBO Reestimates of Proposed Spending 

in the President's Budget for Function 050, 

National Defense 

Proposed Major Spending Changes in the 

President's Budget for Function 150, 

International Affairs 

CBO Reestimates of Proposed Spending 

in the President's Budget for Function 150, 

International Affairs 

Revisions to the CBO Baseline 

Savings Required to Comply With 

the Discretionary Spending Caps 

CBO Baseline Budget Projections, 

Assuming Compliance With 

Discretionary Spending Caps 

Comparison of CBO and Administration 

Economic Assumptions 26 
CHAPTER I 

SUMMARY AND INTRODUCTION 

The Bush Administration's 1992 budget is largely shaped by last year's 

budget summit agreement, as incorporated in the Budget Enforcement 

Act of 1990. Nonetheless, the Congressional Budget Office (CBO) 

estimates that the budget violates some of the requirements of the new 

law. Specifically, the budget breaches the limits on discretionary 

spending in 1992 as well as in the following three years. CBO also estimates that the Administration's proposed changes in mandatory 

spending and revenues would increase the deficit in 1994 and 1995, 

thus violating the pay-as-you-go discipline for those years, if no further 

actions were taken before 1994. For 1992 and 1993, the Administration's mandatory spending and receipt proposals would slightly reduce 

the deficit. 

Both CBO and the Administration estimate that the total federal 

deficit, including Social Security and the Postal Service, will top $300 

billion in 1991. The Administration projects that its policies will 

achieve a near balance in the total budget by 1995 and a small surplus 

in 1996. CBO's economic and technical estimating assumptions are 

less optimistic than those of the Administration. Even so, CBO projects that by 1995 the total federal deficit under Administration policies will fall below $100 billion for the first time in 15 years. 

While the total deficit has been the exclusive focus of attention in 

the past, two other deficit measures are now likely to be considered as 

well. One is the deficit excluding deposit insurance--the best simple 

measure of the government's effect on the economy. Federal spending 

to close or subsidize the sale of insolvent savings and loan institutions 

and banks will amount to roughly $100 billion in both 1991 and 1992, 

slow sharply in 1993 and 1994, and turn negative in 1995 and 1996, 

when the proceeds from asset sales will exceed the costs of closing 

failed institutions. These large swings in spending on deposit insurance do not represent changes in the federal government's effect on the 
2 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

economy and have little impact on interest rates. Excluding deposit 

insurance, CBO estimates that the federal deficit under the President's 

policies would decline gradually from about $200 billion in 1991 to 

about $100 billion in 1996. The other deficit measure that will receive 

attention is the on-budget deficit, which excludes the receipts and 

outlays of the Postal Service and the two Social Security trust funds. 

Table 1-1 shows all three measures of the deficit. 

THE NEW BUDGET PROCESS 

The Budget Enforcement Act establishes three major budgetary 

rules--dollar limits on discretionary spending, a pay-as-you-go requirement for most mandatory spending and revenues, and flexible deficit 

targets. Congressional procedures have been strengthened to assure 

that any new legislation conforms to the new rules. If these procedures 

fail, automatic cutbacks (termed sequestration) will do the job. While 

CBO is required to provide estimates at each stage of the budget process, CBO's estimates will be relevant only for enforcement of the Congressional budget resolution. The estimates of the Office of Management and Budget (OMB) will be controlling for purposes of sequesTABLE 1-1. CBO ESTIMATES OF THE DEFICIT UNDER 

ADMINISTRATION POLICIES 

(By fiscal year, in billions of dollars) 

Total Deficit 308 290 221 173 71 56 

Deficit Excluding 

Deposit Insurance 205 192 173 149 118 99 

On-Budget Deficit 

(Excluding Social 

Security and 

Postal Service) 368 359 300 2 70 183 184 

SOURCE: Congressional Budget Office. 
CHAPTER I SUMMARY AND INTRODUCTION 3 

tration. This section summarizes the new budget process. A more 

detailed description may be found in Chapter I1 of CBO's January 

report, The Economic and Budget Outlook: Fiscal Years 1992-1 996. 

Discretionary Spending Limits 

Discretionary spending is controlled by annual appropriations. The 

Budget Enforcement Act divides discretionary appropriations into 

three parts--defense, international, and domestic. For 1991, 1992, and 

1993, there are separate limits on budget authority and outlays for 

each of these three components. For 1994 and 1995, budget authority 

and outlay caps are set for discretionary spending as a whole If defense, international, or domestic discretionary spending exceeds its 

budget authority or outlay limit, the excess will be eliminated through 

an across-the-board cutback, or sequestration, affecting only the offending category. A few discretionary programs are exempt, and some 

health programs are subject to a maximum cut of 2 percent, but most 

discretionary spending is subject to sequestration. 

Like most of the other numbers in the Budget Enforcement Act, 

the discretionary spending limits will be adjusted periodically according to rules specified in law. Adjustments to the discretionary spending limits will be made twice each year--at the beginning and at the 

end of a session of the Congress. In the fiscal year 1992 budget, OMB 

adjusted the caps for changes in budgetary concepts and definitions 

made by the Budget Enforcement Act and for differences between 

actual and estimated inflation for fiscal year 1990. After the Congress 

adjourns, the caps will be adjusted again to reflect any additional 

amounts appropriated for enforcement activities of the Internal Revenue Service (up to a specified limit), International Monetary Fund 

quota increases, certain debt forgiveness, or designated emergencies. 

In addition, the international discretionary cap will be increased by 

about $1.2 billion in budget authority, and the domestic cap will be 

increased by $1.5 billion, with corresponding increases in outlays. 
4 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

Mandatory Spending and Revenues 

Unlike discretionary appropriations, spending for entitlements and 

other mandatory programs (also called direct spending) does not require annual decisions on funding levels. Instead, these programs (of 

which the largest are Social Security, Medicare and Medicaid, and federal civilian and military retirement) continue making payments to 

eligible recipients unless the Congress changes the underlying laws. 

Under the new procedures, changes in revenues and most mandatory 

spending are now required to be deficit-neutral in each year. Special 

rules apply to Social Security, deposit insurance, and asset sales. 

Pay-As-You-Go. The Budget Enforcement Act provides that changes 

in mandatory spending programs and in governmental receipts 

combined must not increase the deficit in any year. An entitlement 

program can be increased only if another entitlement is cut or if taxes 

or fees are raised. Similarly, a tax can be cut only if another is 

increased or if entitlement spending is reduced. This requirement, 

which is termed pay-as-you-go, applies not to each new law 

individually, but to the total of all laws affecting a fiscal year. As with 

discretionary spending, spending for designated emergencies is exempt 

from the pay-as-you-go requirement. 

If changes in mandatory spending or receipts increase the deficit 

in any year, a pay-as-you-go sequestration will be triggered, and certain mandatory programs would be cut to the extent necessary to 

eliminate the overage. Unlike discretionary spending, most mandatory spending--including means-tested programs, unemployment compensation, and retirement and disability benefits--is not subject to sequestration. Medicare is subject to a maximum pay-as-you-go reduction of 4 percent. 

Other Mandatory Spending. Some mandatory spending and receipts 

are not subject to the general pay-as-you-go requirement of the Budget 

Enforcement Act. First, Social Security and the Postal Service are 

classified as off-budget. (Social Security has its own special pay-asyou-go rules.) Second, spending necessary to meet the government's 

existing deposit insurance commitments is not regarded as a change in 

policy, even if the Congress and the Administration must provide addi- 
CHAPTER I SUMMARY AND INTRODUCTION 5 

tional resources to finish the job. Third, proceeds from asset sales cannot be counted as deficit reduction. Fourth, changes in mandatory 

programs or receipts that stem indirectly from changes in discretionary spending are not included on the pay-as-you-go scorecard. 

Deficit Targets 

The Budget Enforcement Act eliminated the fixed deficit targets that 

characterized the 1985 Gramm-Rudman-Hollings law and its 1987 

revision. Although the deficit is likely to fall significantly between 

now and 1995 as a result of the spending cuts and tax increases enacted 

last year, the new version of Gramm-Rudman-Hollings does not guarantee this result, as previous versions purported to do. The Budget 

Enforcement Act establishes deficit targets through 1995, but the targets are not constraining through at least 1993. There are two reasons 

for this. First, the President must adjust the deficit targets for revised 

economic and technical assumptions and for any adjustments to the 

discretionary caps when submitting the budgets for fiscal years 1992 

and 1993. Second, the economic and technical assumptions used to prepare the budget must be used by OMB for all subsequent calculations 

that year. Sequestration to enforce the discretionary spending limits 

and the pay-as-you-go requirements will assure that there will be no 

separate sequestration to achieve the deficit targets in 1992 and 1993. 

Credit Reform 

The Budget Enforcement Act changed the way that federal credit programs are reflected in the budget and brought them within the scope of 

the discretionary spending limits, pay-as-you-go requirements, and 

other budget enforcement provisions starting in fiscal year 1992. 

Previously, federal direct loans and loan guarantees were included in 

the budget on a cash-flow basis. Henceforth, the government's longrun cost, or subsidy, for a direct loan or loan guarantee will be recorded 

as a budget outlay at the time the loan is disbursed. This change in 

accounting, termed credit reform, places direct loans, loan guarantees, 

and other federal spending on an equal footing. Discretionary credit 
6 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

programs will be included in the discretionary spending caps, and appropriate adjustments have been made to the caps as stated in the Budget Enforcement Act so that the accounting change does not disadvantage the Appropriations Committees. 

CBO AND ADMINISTRATION BUDGET ESTIMATES 

CBO and the Administration do not differ sharply in their views of the 

economy's likely performance through 1992, helping to narrow the gap 

between the two agencies1 short-run budget projections. But in the 

1994-1996 period, differences between CBO1s and OMB's deficit estimates are substantial, peaking at a staggering $112 billion in 1994 

(see Table 1-2). A major cause of these differences is the assumed pattern of deposit insurance spending, a category of spending that is 

notoriously difficult to predict. In addition, CBO estimates steadily 

lower revenues and higher interest costs than does OMB, driving up its 

estimate of the deficit. 

Reestimates to Pay -As-You-Go Proposals 

The Budget Enforcement Act shifted the focus away from fixed deficit 

targets and toward attaining (or surpassing) the savings agreed to in 

the summit agreement. Thus, from an enforcement standpoint, differences in OMB and CBO estimates of the Administration's pay-as-yougo proposals take on key importance. The biggest disagreement between CBO and OMB lies in their estimates of the Administration's 

proposal to reduce taxes on capital gains. Both agencies concur that 

the proposed 30 percent exclusion would boost revenues in 1991 and 

1992, when taxpayers respond with a burst of asset sales. The Administration believes that the proposal would generate extra revenues 

in later years as well; in contrast, CBO and the Joint Committee on 

Taxation believe the proposal will reduce revenues beginning in 1993. 

Reestimates to other pay-as-you-go proposals are modest in total. 
CHAPTER I SUMMARY AND INTRODUCTION 7 

TABLE 1-2. DIFFERENCES BETWEEN ADMINISTRATION AND CBO 

ESTIMATES OF THE PRESIDENT'S PROPOSED BUDGET 

(By fiscal year, in billions of dollars) 

Administration Deficit 

or Surplus Estimates 

Reestimates to Pay-AsYou-Go ~ ~ Pro~osalsb 

Capital gains proposalc 

Other proposals 

Subtotal 

Other Economic Reestimates 

Revenuesc 

Benefit programs 

Net interest 

Subtotal 

Other Technical Reestimates 

Revenuesc 

Deposit insurancee 

Proposed asset salesf 

Benefit programs 

Defense 

Net intereste 

Other outlays 

Subtotal 

Total Reestimates 

Administration's Proposed 

Deficit as Estimated by CBO 

Memoranda: 

Total Economic Reestimates 

Total Technical Reestimates 

SOURCES: Congressional Budget Office; Joint Committee on Taxation; and Office of Management and 

Budget. 

a. Figures in parentheses represent estimated surpluses. 

b. The reestimates are almost wholly technical. 

c. Revenue reductions are shown as positive because they add to the deficit. 

d. Less than $500 million. 

e. Excludes reestimates of interest payments by the deposit insurance agencies to the Federal 

Financing Bank, which are intrabudgetary. 

f. Asset sales are ineligible for pay-as-you-go scoring. 
8 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

Other Economic and Technical Reestimates 

In the short run, CBO's economic forecast is slightly more upbeat than 

the Administration's, boosting revenues and lowering the deficit. But 

after 1992, CBO envisions more modest economic growth than does the 

Administration; on average, CBO's assumed growth rate of real GNP 

falls almost a half of a percentage point shy of the Administration's. 

As a result, CBO's estimates of the revenues that current tax laws 

would generate diverge more and more from the Administration's over 

time. The medium-term economic assumptions that underlie CBO's 

estimates are close to the consensus of private-sector forecasters, as 

discussed in Chapter 11, while those of the Administration are clearly 

optimistic. Furthermore, even if CBO used exactly the same assumptions about economic growth and incomes as OMB, CBO would estimate consistently lower revenues; this disagreement over effective tax 

rates is classified as technical. 

Deposit insurance is by far the most volatile area of disagreement. 

CBO estimates lower spending than the Administration in all years for 

the Bank Insurance Fund, which primarily insures commercial bank 

deposits. Projections for the Resolution Trust Corporation (RTC), the 

chief agency responsible for the savings and loan cleanup, vary wildly, 

peaking in a huge estimating difference in 1994. CBO assumes that 

RTC will resolve about 1,600 failed or failing institutions through 

1994. OMB optimistically assumes a caseload of just over 1,000 institutions, permitting RTC to wind up its work in 1993. CBO and OMB 

differ as well about outlays of working capital (that is, the portion of 

the money spent by RTC to acquire assets that eventually will be recouped); CBO estimates a greater need for working capital in the 

1992-1994 period, and greater receipts in later years. 

Net interest estimates are another area of difference. CBO assumes higher interest rates than does the Administration, fueling net 

interest costs. And CBO's reestimates to revenues and noninterest 

spending join to raise the estimated borrowing needs of the government, adding to debt service costs. Other economic and technical reestimates are scattered over many spending areas. 
CHAPTER I SUMMARY AND INTRODUCTION 9 

THE ADMINISTRATION'S BUDGET PROGRAM 

The budget baseline has traditionally served as the benchmark against 

which the Administration's budget program is measured. For tax revenues and mandatory spending, the baseline generally assumes that 

laws now on the statute books will continue. For defense, international, and domestic discretionary spending, the baseline projections 

are based on the most recent appropriations, increased only to keep 

pace with inflation. The baseline no longer represents current budgetary policy, however, because the new dollar limits for discretionary 

appropriations are below the baseline levels. Assuming that discretionary spending is held to the caps, CBO projects that the baseline 

deficit would be $294 billion in 1992, $221 billion in 1993, and less 

than $70 billion in 1995 and 1996. (Appendix A summarizes the current baseline budget projections, which incorporate minor revisions to 

those CBO released in January.) 

Table 1-3 shows the Administration's budget proposals in the three 

major categories established by the Budget Enforcement Act--discreTABLE 1-3. THE ADMINISTRATION'S POLICY PROPOSALS AS 

ESTIMATED BY CBO (By fiscal year, in billions of dollars) 

CBO Deficit Estimate Assuming 

Discretionary Capsa 2 94 221 169 69 66 

Policy Changes 

Discretionary 

Pay-As-You-Go 

Spending 

Revenuesb 

Subtotal 

Other mandatory 

Total 

President's Budget as 

Estimated by CBO - - - 

SOURCES: Congressional Budget Office and Joint Committee on Taxation. 

NOTE: The estimates include Social Security and the Postal Service, which are off-budget. 

a. The discretionary spending limits apply only through 1995. The 1996 figure is a baseline projection. 

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

c. Less than $500 million. 
10 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

tionary spending, mandatory spending and revenues subject to pay-asyou-go, and other mandatory spending. CBO estimates that the Administration's proposals for discretionary spending would exceed the 

outlay limits by $5 billion in 1992, $1 billion in 1993, $4 billion in 

1994, and $1 billion in 1995. The Administration's pay-as-you-go proposals would reduce the deficit by $9 billion in 1992 and $2 billion in 

1993 but would increase the deficit by small amounts in later years. 

Other mandatory spending proposals, primarily asset sales that cannot 

be counted for purposes of pay-as-you-go, would reduce the deficit by $1 

billion in 1992 and by similarly small amounts thereafter. Table 1-4 

shows CBO's estimates of the Administration's budget program by 

major tax source and spending category. 

Discretionary Spending 

CBO estimates that the Administration's proposals for discretionary 

spending would exceed the outlay limits each year. For fiscal year 

1992, the excess totals $5.4 billion--$2.9 billion in defense, $0.2 billion 

in international, and $2.2 billion in domestic discretionary spending. 

While the budget exceeds the discretionary caps by smaller amounts 

after 1992, the appropriation figures for the out-years are less relevant, because the Appropriations Committees will consider only the 

1992 request this year. 

Defense Discretionary Spending. Consistent with the caps, the Bush 

Administration is requesting defense discretionary appropriations for 

1992 and 1993 of $291 billion, an increase of $2 billion over 1991. 

These amounts represent reductions in real purchasing power of 4 

percent in 1992 and another 4 percent in 1993. Beyond 1993, when 

there are no defense caps, the Administration is requesting continued 

real decreases (that is, small nominal increases) in defense discretionary appropriations. These figures do not include any additional 

appropriations for the costs of Operation Desert Storm, which are to be 

treated as an emergency need and will result in a corresponding increase in the discretionary spending limits. 
CHAPTER I SUMMARY AND INTRODUCTION 11 

TABLE 1-4. CBO ESTIMATES OF THE PRESIDENT'S BUDGET 

(By fiscal year) 

1991 1992 1993 1994 1995 1996 

In Billions of Dollars 

Revenues 

Individual income 

Corporate income 

Social insurance 

Other 

Total 

Outlays 

Defense discretionary 

International discretionary 

Domestic discretionary 

Subtotal 

Desert Storm 

Mandatoryb 

Deposit insurance 

Net interest 

Total 

Deficit 

As a Percentage of GNP 

Revenues 

Individual income 

Corporate income 

Social insurance 

Other 

Total 

Outlays 

Defense discretionary 

International discretionary 

Domestic discretionary 

Subtotal 

Deeert Storm 

Mandator yb 

Deposit insurance 

Net interest 

Total 

Deficit 

SOURCE: Congressional Budget Office. 

NOTE: The projections include Social Security and the Postal Service, which are off-budget. a. Less than $500 million. 

b. Includes offsetting receipts and defense mandatory spending. c. Lese than 0.05 percent of GNP. 
12 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

While the Administration's defense request comports with the 

budget authority limits, CBO estimates that it exceeds the outlay 

limits by $2.9 billion in 1992 and $0.8 billion in 1993. Of the 1992 

overage, $2.3 billion arises because the Administration has, in CBO's 

view, inappropriately claimed savings for a proposal to change the 

budgetary accounting for funds that the Defense Department transfers 

to intelligence agencies. While this proposal would reduce reported 

outlays, it would neither result in any real savings to the government 

nor reduce government borrowing needs. The proposal is analogous to 

the change in accounting for federal credit programs. Therefore, CBO 

believes that the Administration should have lowered the defense 

discretionary cap by an equal amount, in the same manner as it adjusted the domestic discretionary limits for credit reform. 

The budget also contains two other defense proposals that, CBO 

believes, the Administration has used inappropriately to hold down 

defense discretionary spending in later years. The first proposal involves the timing of military pay. When a pay date falls on a weekend, 

the law allows the Department of Defense to issue military pay checks 

on the previous Friday. Because the first paydays of fiscal years 1995 

and 1996 will fall on a weekend, CBO assumes these paydays will be 

advanced to the previous fiscal years, consistent with normal Defense 

Department practice. The Administration has not made this assumption, however, thereby holding down 1994 outlays by $3.6 billion. 

The Administration also proposes a change in the method of accounting for the accrued retirement costs of members of the armed services. As described by the Administration, this proposal would reduce 

military personnel spending by about $3 billion per year in 1994 and 

thereafter, but it would reduce receipts to the Military Retirement 

Trust Fund by exactly the same amount and leave the deficit unaffected. There are two ways of assuring that this accounting change has 

no effect on the deficit. Either the defense cap could be reduced by the 

amount of the reduction in defense spending, or the loss in receipts to 

the trust fund could be charged on the pay-as-you-go scorecard. The 

Administration has not made either adjustment. CBO assumes the 

latter in its reestimate of the President's budget. 
CHAPTER I SUMMARY AND INTRODUCTION 13 

International Discretionary Spending. The Administration is requesting international discretionary appropriations of $34 billion in 

1992. Of this amount, $12 billion is a proposed increase in the United 

States quota with the International Monetary Fund, which, if appropriated, would automatically increase the discretionary spending 

limits, as provided in the Budget Enforcement Act. The Administration is also requesting real increases in spending for the Enterprise for 

the Americas Initiative, construction and rehabilitation of State 

Department buildings, and a Presidential contingency fund. While the 

budget complies with the limit on international discretionary budget 

authority for 1992, CBO estimates that outlays for international affairs would go over the limit by $0.2 billion. 

Domestic Discretionary Spending. The budget authority cap for 

domestic discretionary spending is slightly above the baseline--the 

amount needed to maintain a constant level of real domestic discretionary spending in 1992. But appropriating this amount of budget 

authority would cause outlays to exceed the cap by $3.6 billion (see 

Table 1-5). Therefore, the budget proposes reductions of $2.3 billion in 

budget authority, compared with the baseline. While this would reduce outlays by $1.4 billion, outlays still breach the cap by $2.2 billion, 

according to CBO's estimates. CBO's estimates of discretionary outlays exceed the Administration's estimates by $0.6 billion in transportation, $0.5 billion in energy, $0.4 billion in natural resources, and 

$0.3 billion each in veterans benefits and the administration of justice. 

While domestic discretionary spending as a whole must grow less 

rapidly than inflation in order to meet the outlay caps, the Administration is proposing substantial real increases in spending for science 

and space and for the administration of justice, thereby necessitating 

deeper cuts in other areas. Some of the largest cuts relative to the 

baseline would be made in social services, where the President proposes to eliminate both grants to states for certain costs of legalizing 

undocumented aliens and also community services block grants. In the 

community and regional development function, the President proposes 

to reduce funding for community development block grants and to 

eliminate the programs of the Economic Development Administration. 

The budget counts as reductions in discretionary spending about $0.9 

billion in new or increased user fees, including fees for Medicaid and 
14 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

Medicare certification, Food and Drug Administration reviews, and 

veterans medical care copayments. CBO believes that the Budget Ehforcement Act requires all changes in direct spending and receipts to 

be counted on the pay-as-you-go scorecard, but this report follows the 

Administration's treatment of such changes as discretionary if they 

are included in appropriation bills. 

TABLE 1-5. THE ADMINISTRATION'S PROPOSALS FOR 

DOMESTIC DISCRETIONARY SPENDING IN 

FISCAL YEAR 1992 (In billions of dollars) 

Function 

President's Budget 

CBO as Estimated 

Baseline by CBO Difference 

Budget Budget Budget 

Authority Outlays Authority Outlays Authority Outlays 

General Science, Space, 

and Technology 

Energy 

Natural Resources and 

Environment 

Agriculture 

Commerce and Housing Credit 

Transportation 

Community and 

Regional Development 

Education, Training, 

Employment 

and Social Services 

Health 

Medicare 

Income Security 

Social Security 

Veterans Benefits and Services 

Administration of Justice 

General Government 

Allowances 

Total 

Domestic Discretionary Cap 200.1 212.1 200.1 212.1 n.a. n.a. 

Difference -0.5 3.6 -2.9 2.2 n.a. n.a. 

SOURCE: Congressional Budget Office. 

NOTE: n.a. = not applicable. 

a. Less than $50 million. 
CHAPTER I SUMMARY AND INTRODUCTION 15 

Pay-As-You-Go Proposals 

The Administration estimates that its pay-as-you-go proposals would 

reduce the deficit by $8 billion to $10 billion per year in 1992 through 

1995. CBO's estimate is similar to the Administration's for 1992 but 

diverges sharply thereafter, as shown in Table 1-6. The difference has 

three sources. First, CBO and the Administration differ in their estimates of particular proposals, notably the capital gains exclusion. 

Second, the Administration improperly includes receipts from leasing 

the Elk Hills naval petroleum reserve (NPR) and the Alaska National 

Wildlife Refuge (ANWR) for oil drilling, which CBO regards as asset 

sales. Third, the Administration fails to count the loss in receipts 

stemming from the proposal to change military retirement accruals. 

Spending Proposals. The Administration's pay-as-you-go spending 

proposals would reduce outlays by $4 billion to $6 billion per year. Proposed Medicare cuts would save $3 billion in 1992, growing to $6 billion in 1995 and 1996. About three-quarters of the Medicare savings 

would stem from reducing payments to providers, mostly hospitals, 

and one-quarter would come from increasing copayments and premiums paid by beneficiaries. Proposals to reduce defaults on veterans 

housing and guaranteed student loans would reduce credit subsidies by 

$2 billion in 1992 and by smaller amounts in later years. Increasing 

interest charged on loans to power marketing administrations (PMAs) 

would bring in $0.4 billion per year in additional offsetting receipts 

starting in 1993. The proposed reduction in military retirement 

charges would increase outlays by $3 billion annually in 1994 and 

later years. 

Revenue Proposals. The Administration's revenue proposals would 

increase tax receipts by $3 billion in 1992 but reduce them by $4 billion 

in 1993 and growing amounts thereafter. This pattern mainly reflects 

the effect of the Administration's proposal to exclude up to 30 percent 

of capital gains from taxation. Other major revenue proposals include: 

o Creating tax-favored family savings accounts, which the Administration views as a spur to personal saving; 
16 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

TABLE 1-6. THE ADMINISTRATION'S PAY-AS-YOU-GO 

PROPOSALS (By fiscal year, in billions of dollars) 

Spending 

PMA debt restructuring 

Guaranteed student loans 

Medicare 

Veterans benefits 

Military retirement accruals 

Other 

Subtotal 

Revenuesb 

Extend expiring income 

tax provisions 

Exclude 30 percent 

of capital gainsc 

Establish family 

savings accounts 

Extend Medicare taxes 

to all state and local 

government employees 

Other 

Subtotal 

CBO Estimate of Pay-AsYou-Go Proposals 

Administration Estimate of 

Pay-As-You-Go Proposals 

Differences 

CBO reestimates 

Classification differences 

Total 

SOURCES: Congreesional Budget Office; Joint Committee on Taxation; and Ofice of Management and 

Budget. 

a. Lese than $50 million. 

b. Revenue increase8 are shown with a negative sign because they reduce the deficit. 

c. Increases revenue8 by $0.8 billion in 1991. 
CHAPTER I SUMMARY AND INTRODUCTION 17 

o Extending permanently the income tax credit for research 

and experimentation expenses, which is scheduled to expire 

at the end of 1991, and extending other expiring tax preferences for one year; 

o Requiring all employees of state and local governments to 

pay Medicare's Hospital Insurance tax; and 

o Extending gasoline and and other motor fuel excises after 

their expiration in 1995, but at the rate which prevailed 

before last year's increase of 5 cents per gallon. 

Other Mandatory Spending Proposals 

CBO estimates that the proposed leasing of NPR and ANWR oil exploration rights and the sale of the Alaska Power Marketing Administration would together yield $1 billion in 1992, $2 billion in 1994, and 

$1 billion in 1996. These asset sales are excluded from the pay-as-yougo calculation. The budget also proposes small changes affecting 

Social Security and the Postal Service, which also fall outside the payas-you-go regime. 

Chapter I1 of this report compares CBO's economic assumptions 

with those of the Administration. Chapter I11 describes the Administration's tax proposals and CBO's revenue estimates in more detail. 

The Administration's proposals for defense and international affairs 

are covered in Chapter IV. Chapter V, which is organized by budget 

function, discusses the Administration's domestic spending proposals, 

both discretionary and pay-as-you-go. 

CHAPTER I1 

COMPARISON OF 

ECONOMIC FORECASTS 

The Administration's economic forecast is quite similar to that of the 

Congressional Budget Ofice over the short term, but it is more optimistic over the medium term. The Administration's outlook for economic growth is slightly lower than CBO's for 1991, but it is higher 

over the next four years, so that by 1996 the Administration's estimate 

of real gross national product (GNP) exceeds CBO's by 1.1 percent. 

Similarly, the Administration forecasts slightly higher inflation than 

CBO in the short term and slightly lower inflation by the end of the 

projection period. The Administration's outlook for interest rates is 

more optimistic than CBO's for both the short and the medium term. 

The differences in economic forecasts help explain the difference 

between CBO's and the Administration's projections of the deficit. In 

1991, for example, the Administration's deficit projection is $10 billion 

higher than CBO's projection, with $9 billion of the difference resulting from less optimistic economic forecasts. By 1996, however, the Administration's projection of the deficit is $76 billion lower than CBO's, 

with $54 billion of the difference resulting from its more optimistic economic forecast. This chapter compares the two economic forecasts and 

discusses their budgetary implications. 

SHORT-TERM OUTLOOKS 

Both CBO's and the Administration's forecasts embody a mild recession in 1990 and early 1991 and a moderate recovery that begins by 

mid-1991. The Administration's outlook for growth in real gross 

national product is 0.4 percentage points lower than CBO's for 1991 (on 

a fourth-quarter-over-fourth-quarter basis) and 0.2 percentage points 
20 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

higher in 1992 (see Table 11-1). Not only are the forecasts close to one 

another, but both are similar to the consensus of private forecasters 

recently surveyed by the Blue Chip Economic Indicators.1 

One unusual feature of the short-term forecasts is that the Administration expects weaker economic growth than does CBO--a situation 

that never occurred during the Gramm-Rudman-Hollings era. Each of 

the six budgets released by the Office of Management and Budget 

(OMB) between 1985 and 1990 assumed stronger economic growth 

than the corresponding CBO forecast. OMB's less optimistic assumption for growth in the current forecast is a by-product of the Omnibus 

Budget Reconciliation Act of 1990, which amended the 1985 GrammRudman-Hollings law to do away with fixed deficit targets. Under the 

new regime, the deficit targets are adjusted to reflect changes in the 

economic outlook. An optimistic economic forecast, therefore, no longer helps the Administration reach the deficit targets. 

Little difference also exists between CBO's and the Administration's short-term forecasts of inflation, whether these are measured 

using the consumer price index or the GNP deflator. The inflation 

rates forecast by both the Administration and CBO are close to the 

Blue Chip consensus. Only interest rates differ significantly in the 

forecasts over the short term. For three-month Treasury bills, the 

Administration forecasts rates that average 0.6 percentage points 

lower than what CBO forecasts over the 1991-1992 period; for 10-year 

Treasury notes, the Administration forecasts rates that average 0.5 

percentage points lower than CBO's. In addition, the Administration 

differs from CBO and the Blue Chip consensus, as well as from historical experience, by forecasting short-term interest rates that decline 

during an economic recovery. 

The overall similarity between the Administration's and CBO's 

forecasts for the next two years is not surprising because both agree on 

the factors that brought on the current recession and those that are 

likely to determine its course. Several factors were responsible for the 

1. Eggert Economic Enterprisea, Inc.. Blue Chip Economic Indicators (February 10,1991). 
CHAPTER 11 COMPARISON OF ECONOMIC FORECASTS 21 

TABLE 11-1. COMPARISON OF CBO, ADMINISTRATION, AND 

BLUE CHIP SHORT-RUN ECONOMIC FORECASTS 

(By calendar year) 

Actual Estimated Forecast 

1989 1990 1991 1992 

Fourth Quarter to Fourth Quarter (Percentage change) 

Real Gross National Product 

CBO 1.8 0.2 1.3 

Administration 1.8 0 0.9 

Blue Chip 1.8 0.3 0.9 

Implicit GNP Deflator 

CBO 3.7 4.4 4.1 

Administration 3.7 4.5 4.3 

Blue Chip 3.7 4.0 3.8 

Consumer Price Indexa 

CBO 

Administration 

Blue Chip 

Calendar-Year Average (Percent) 

Civilian Unemployment Rateb 

CBO 5.3 5.5 6.8 6.4 

Administration 5.2 5.4 6.7 6.6 

Blue Chip 5.3 5.5 6.5 6.3 

Three-Month Treasury Bill Rate 

CBO 8.1 7.5 6.6 7.0 

Administration 8.1 7.5 6.4 6.0 

Blue Chip 8.1 7.5 6.0 6.3 

Ten-Year Government Note Rate 

CBO 8.5 8.6 7.9 7.7 

Administration 8.5 8.5 7.5 7.2 

Blue Chip 8.5 8.5 7.8 8.0 

Spread Between Ten-Year Government 

Note Rate and Three-Month Treasury Bill Rate 

CBO 0.4 1.0 1.2 0.7 

Administration 0.4 1.0 1.1 1.2 

Blue Chip 0.4 1.0 1.8 1.7 

SOURCES: Congressional Budget M~ce; Office of Management and Budget; Eggert Economic Enterprises, Inc., Blue Chip Economic Indicators (February 10,1991). 

NOTE: The CBO forecast is based on data available through December 1990 and does not reflect the 

fourth-quarter data for GNP or CP1 published in January 1991. The Blue Chip forecast is an 

average of 50 private forecasters. 

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

the coneumer 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 points 

below the rate for the civilian labor force alone. 

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

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

and 10-year government notes. 

d. Inflation-acljusted interest rates are nominal rates less the fourth-quarter-to-fourth-quarter percentage change in the CPI-U. 
22 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

economic downturn. First, the Federal Reserve, concerned about inflationary pressures, held interest rates at relatively high levels during 

1989 and early 1990. Second, problems in the financial sector, largely 

a reaction to the savings and loan crisis and problems in the banking 

sector, somewhat reduced the availability of credit. Finally, Iraq's 

invasion of Kuwait, with its negative impact on real incomes, interest 

rates, and consumer confidence, was the final precipitating factor for 

the recession. 

There are four reasons why both the Administration and CBO 

forecast a recession that, by historical standards, is anticipated to be 

mild in depth and duration. First, the current recession is not expected 

to be marked by a strong inventory cycle. In past recessions, an early 

slowing of sales was matched by a sharp increase in business inventories; these inventories had to be worked off later through lower production. Because inventories are currently at low levels, relative to 

sales, firms are not expected to slash production in order to draw down 

bloated stocks of inventories, as was required in previous recessions. 

Second, CBO and the Administration expect this recession to be 

milder than average because of the relatively low and stable underlying rate of inflation that existed in the second half of 1990. This 

situation, resulting from a restrained monetary policy that was followed from early 1987 through mid-1990, has allowed the Federal 

Reserve more flexibility than was the case in recent recessions to pursue a gradual easing in its monetary policy as the current recession 

developed. The lower interest rates that have resulted from this policy 

should play an important role in initiating the recovery from the recession. After the recovery is under way, CBO, but not the Administration, expects the Federal Reserve to allow short-term interest 

rates to rise as the economy recovers--a pattern consistent with recoveries from past recessions. 

Third, a mild recession is expected because of the continued 

growth in real exports, a key difference from previous recessions. 

Strong growth in exports during the late 1980s raised their share of 

GNP to its highest level in the postwar period. Growth in exports is 

expected to continue, bolstered by the dollar's recent decline and 

modest growth in the economies of most U.S. trading partners. 
CHAPTER I1 COMPARISON OF ECONOMIC FORECASTS 23 

Finally, the Administration and CBO downplay any lasting effects 

from the recent surge in oil prices. Both note that the recent run up in 

prices was smaller in real terms than the oil shocks of the 1970s and 

that the world's economies are better prepared to weather the current 

oil shock. These economies have improved their energy conservation; 

their industries are better able to substitute other fuels for oil when 

necessary; they have stocked strategic oil reserves; and they have 

largely eliminated oil price controls, which often discouraged production. 

MEDIUM-TERM PROJECTIONS 

Neither CBO nor the Administration attempts to forecast cyclical fluctuations beyond 1992. Instead, their projections are based on extrapolating trends in fundamental economic variables. The growth paths of 

variables such as output, inflation, and interest rates are projected 

based on the gap between their values at the end of 1992 and their 

long-run or potential values implied by projections of fundamental 

economic conditions. 

In general, the Administration's medium-term projections appear 

optimistic relative to both the projections of CBO and the Blue Chip 

consensus of private forecasters (see Table 11-2 and Figure 11-1): 

o The Administration's projection of real GNP growth averages 0.5 percentage points higher than the CBO projection 

and 0.6 percentage points above the Blue Chip consensus 

over the 1993-1996 period. 

o The Administration projects that inflation (measured using 

the implicit GNP deflator) will decline slightly over the 

medium term, reaching a rate 0.2 percentage points below 

the CBO projection and 0.5 percentage points below the Blue 

Chip consensus by 1996. 
24 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

o Interest rates are also substantially lower in the Administration's medium-term projection, regardless of whether 3- 

month Treasury bills or 10-year Treasury notes are compared. 

TABLE 11-2. COMPARISON OF CBO, ADMINISTRATION, 

AND BLUE CHIP ECONOMIC PROJECTIONS, 

CALENDAR YEARS 1990-1996 

Estimated Forecast Projected 

1990 1991 1992 1993 1994 1995 1996 

Nominal GNP 

(Billions of dollars) 

CBO 

Administration 

Real GNP (Percentage 

change, year over year) 

CBO 

Administration 

Blue Chip 

Consumer Price Indexa 

(Percentage change, 

year over year1 

CBO 

Administration 

Blue Chip 

GNP Deflator 

(Percentage change, 

year over year) 

CBO 

Administration 

Blue Chip 

.................................. 

(Continued) 

SOURCES: Congressional Budget Office; Office of Management and Budget; and Eggert Economic 

Enterprises. Inc., Blue Chip Economic Indicators. 

NOTE: The CBO forecast is baaed on data available through December 1990 and does not reflect fourthquarter data for GNP or CPI published in January 1991. The Blue Chip forecasts through 1992 

are based on a survey of 50 private forecasters, published on February 10, 1991. The Blue Chip 

projections from 1993 through 1996 are based on a survey of 41 forecasters, published on October 

10, 1990. 

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 ICPI-W) for the Administration. 
CHAPTER I1 COMPARISON OF ECONOMIC FORECASTS 25 

The Outlook for Economic Growth 

CBO's projection of potential GNP is computed using a growth model 

that combines projections of the growth rates of the capital stock, the 

TABLE 11-2. Continued 

Estimated Forecast Projected 

1990 1991 1992 1993 1994 1995 1996 

Unemployment Rateb 

CBO 

Administration 

Blue Chip 

Three-Month Treasury 

Bill Rate (Percent) 

CBO 

Administration 

Blue Chip 

Ten-Year Government 

Note Rate (Percentlc 

CBO 

Administration 

Blue Chip 

Income (Billions 

of dollars) 

Wage and salary 

disbursements 

CBO 

Administration 

Other personal 

incomed 

CBO 

Administration 

Corporate profitse 

CBO 

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 points 

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. Personal income less wage and salary disbursements. 

e. Corporate profits reported are book, not economic, profits. 
26 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

Figure 11-1. 

Comparison of CBO and Administration Economic 

Assumptions 

Real GNP Growth 

Percent 

4 Administration 

- 

- 

- 

I I I I I I 

CPI-U Inflation 

Percent 

6 

\ Administration 

---- - CBO 

- 

1 I I I I 

Three-Month Treasury Bills Ten-Year Government Notes 

Percent Percent 

- 

Administration - 

I I I I 

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

NOTE: CPI-U - consumer price index for all urban consumers. 

f\ .. '. . .- 

4 ------- 

- Administration 

- 

I I I I 
CHAPTER I1 COMPARISON OF ECONOMIC FORECASTS 27 

labor force, and a measure of productivity that reflects the contribution 

of both capital and labor--total factor productivity. Total factor productivity is a more basic measure of productivity than the more familiar labor productivity measure and is defined as the growth in output 

above the growth in the capital and labor inputs. Growth in total factor productivity is typically attributed to technological progress. 

The CBO model's projection of the capital stock depends on the 

rate of national saving (plus overseas borrowing), which determines 

the rate at which firms invest in plant and equipment. Growth in the 

labor force and total factor productivity are projected independently of 

the model: the labor force using projections of the Bureau of Labor 

Statistics, and total factor productivity based on recent historical experience. 

CBO's projection for growth in the capital stock reflects both the 

temporary reduction in national saving as a result of the recession and 

the increased national saving over the medium term as a result of the 

deficit reduction measures enacted in the reconciliation act. The net 

effect is a projected rate of capital accumulation that is near its average for the 1980s, beginning somewhat below and ending somewhat 

above that average. Growth in the labor force, the largest factor determining output growth in the model, is assumed to average 1.3 percent 

over the 1993-1996 period, following mid-range projections of the Bureau of Labor Statistics. Total factor productivity is projected to continue growing at its rate in the 1980s--0.9 percentage points, a rate 

that is also close to its average since the early 1960s. 

The Administration's projection for real GNP over the 1993-1996 

period appears to be based on projected growth of the labor force and 

labor productivity, as well as on the gap between actual and potential 

output. Because the Administration has a more optimistic view of the 

growth of potential GNP, its medium-term projection for actual GNP 

growth exceeds that of CBO. The Administration's assumption for 

growth in the labor force is identical to CBO's, averaging 1.3 percent 

per year over the 1993-1996 period. In contrast, the Administration's 

projection for labor productivity is well above CBO's projection and 

above recent trends, averaging 1.9 percent over the 1993-1996 period 

(see Table 11-3). 
28 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

Comparing Productivity Projections 

The difference in assumptions about labor productivity accounts for 

virtually all of the difference between CBO's and the Administration's 

projections of economic growth. The Administration's projected growth 

rate of labor productivity is roughly consistent with the average rate 

during the postwar period, but is well above recent experience. While 

the Administration defends this projection as being contingent upon 

adopting the President's entire domestic agenda, the fact remains that 

the Administration is assuming productivity growth that has not been 

sustained in this country since the early 1970s. 

CBO's projection for growth in labor productivity is a function of 

the assumed growth in total factor productivity and of the amount of 

TABLE 11-3. GROWTH IN LABOR PRODUCTIVITY IN THE 

NONFARM BUSINESS SECTOR (In percent) 

Period 

Average Annual 

Growth Rate 

Actual Growth 

1948:IV through 1990:III 

1960:II through 1990:III 

1981:III through 1990:III 

Projected Growth: 1993-1996 

CBO 

Administration 

SOURCES: Congressional Budget Office; Department of Labor, Bureau of Labor Statistics. 

NOTE: 1948:IV. 1960:II, and 1981:lII are cyclical peaks, as measured by the National Bureau of Economic Research. 
CHAPTER I1 COMPARISON OF ECONOMIC FORECASTS 29 

capital available per worker. Even though total factor productivity is 

assumed to continue growing at roughly its average rate in the 1980s, 

labor productivity grows somewhat faster than in recent years because 

growth of the labor force slows, while capital accumulation continues 

at recent trends. The resulting growth in capital per worker is expected to spur labor productivity. CBO's model suggests that the 

higher rates of growth that the Administration has assumed for labor 

productivity are unlikely to be realized without substantially higher 

rates of national saving (through its influence on capital accumulation) or much faster technological progress. Given recent experience 

with both of these factors, CBO concludes that there is little reason to 

expect changes in the growth of labor productivity beyond those in the 

CBO projections. 

The Outlook for Inflation and Interest Rates 

The Administration is slightly more optimistic than CBO about the 

prospects for inflation in the medium term. Both CBO and the Administration expect the current recession to reduce inflation substantially, and both are more optimistic on this score than the current consensus of private forecasters. But the Administration, unlike CBO, 

projects further small declines in inflation between 1993 and 1996, 

after the economy has fully recovered from the recession. As a result, 

while CBO's projections for inflation remain around 3.6 percent, down 

about one percentage point from its average during the second half of 

the 1980s, the Administration's projection falls further to 3.3 percent 

by 1996. 

The disparity between the Administration's and CBO's projection 

of interest rates is much wider than for any other variable. This difference reflects the combination of optimistic assumptions regarding 

both inflation rates and real interest rates. Comparing the threemonth Treasury bill rates over the 1993-1996 period, the Administration's projection averages 0.6 percentage points below CBO's projection and 1.3 percentage points below the Blue Chip consensus. The 

more optimistic assumptions about inflation, described above, and the 

projection of lower real interest rates, which average 0.5 percentage 

points below the private consensus over the 1993-1996 period, produce 
30 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

this disparity between the Administration's and CBO's projected interest rates. 

CBO's projections for real interest rates over the 1993-1996 period 

are based on projected strengths of both the supply of new national 

saving and the demand for new saving during that period. Purely 

domestic factors suggest that real interest rates will fall. Private 

saving is expected to rise gradually (for demographic reasons), while 

the Budget Enforcement Act should lower federal demands for funds. 

However, the CBO projection also takes into account the increased demand for funds that is expected to come from Europe. Investment 

needs on that continent, primarily in unified Germany, are likely to 

draw heavily on the world's supply of funds and to help keep interest 

rates higher than they would otherwise be. The destruction caused by 

the war in the Persian Gulf--which was not reflected in CBO's forecast 

or most likely in the Administration's forecast--will also probably raise 

world interest rates by small amounts in the early 1990s because of the 

capital demands associated with reconstruction in Kuwait and perhaps 

Iraq. 

Projections of Nominal Income and Its Components 

The differences between the Administration's and CBO's economic 

assumptions are reflected in their projections of nominal income and 

its components. Clearly, the level of nominal income is important for 

deficit projections: higher projections of nominal income imply higher 

tax receipts. The proportion of nominal income accounted for by each 

of its components is also important because each type of income is 

taxed at a different rate. The differences between revenue projections 

will be discussed in Chapter 111. 

The difference between the projected levels of nominal income accounts for most of the difference between the Administration's and 

CBO's projections of the income components. Wage and salary disbursements in the Administration's projection, for example, are $53 

billion higher in 1996 than in CBO's projection. Yet the difference is 

entirely a result of higher levels of nominal income: wage and salary 
CHAPTER I1 COMPARISON OF ECONOMIC FORECASTS 31 

disbursements account for exactly the same share of nominal income in 

1996 in both projections. 

The difference between the Administration's and CBO's projections of interest rates, however, does appear to affect the shares of 

nominal income accounted for by certain income components. The Administration's projected interest rates are lower than CBO's. The 

lower rates apparently allow corporate profits to grow more quickly 

than nominal income over the 1990-1996 period, thus raising their 

share of nominal income over time. Lower interest rates have the 

opposite effect on personal interest income (a part of "other personal 

income" in Table 11-2), slowing the growth of this component relative to 

nominal income and reducing its share. CBO projects the share of 

nominal income made up by corporate profits to decline slightly by 

1996, a decline that is in line with the long-term historical trend. CBO 

projects "other personal income" to remain at a roughly constant share 

of nominal income through the 1990-1996 period. 

IMPLICATIONS OF ECONOMIC FORECASTS FOR DEFICITS 

The different economic forecasts used by CBO and the Administration--for example, the differences in forecasts of economic growth, interest rates, and inflation--have pronounced effects on the budget projections (see Table 11-4). Economic growth raises nominal incomes 

(and, thus, tax revenues), while lowering outlays on certain benefit 

programs (for example, unemployment insurance). Nominal interest 

rates affect the deficit directly by raising interest costs, while inflation 

affects outlays through its influence on cost-of-living adjustments for 

benefit programs. 

The estimated deficits over the 1991-1992 period are reduced if 

CBO's economic assumptions are substituted for those of the Administration. The lower deficit estimate occurs because the decrease that 

results from CBO's more optimistic forecasts of growth and inflation is 

larger than the increase that results from substituting CBO's higher 

interest rates. 
32 I'LNALYSIS OF THE PRESIDENT'S BUDGET March 1991 

TABLE 11-4. EFFECTS OF CBO'S ECONOMIC PROJECTIONS ON 

ESTIMATES OF THE ADMINISTRATION'S BUDGET 

(By fiscal year, in billions of dollars) 

Outlays Benefit programsb c -2 -5 -6 -8 -7 

Interest costs 

From higher interest 

rates 1 5 12 14 15 15 

From additional 

debt service c - -1 - -1 - c - 2 - 6 

Total c 2 6 8 10 14 

Deficit - 9 -8 5 26 39 54 

SOURCE: Congressional Budget Ofice. 

a. Revenue losses are shown as positive because they increase the deficit. 

b. Includes small reestimates to the Administration's pay-as-you-go proposals becauve of contrasting 

economic assumptions. 

c. Less than $500 million. 

After 1992, however, a more familiar pattern returns. The Administration's forecast of economic growth over the 1993-1996 period is 

considerably more buoyant than CBO's. As the gap between CBO's 

and the Administration's projections of GNP and taxable income 

widens, so does the difference in their revenue projections. When combined with CBO's forecast of higher interest rates, the net effect is a 

deficit estimate that is $54 billion higher than it would be using the 

Administration's assumptions. 
CHAPTER I11 

THE ADMINISTRATION'S 

REVENUE PROPOSALS 

The President's budget contains little that is new in revenue proposals. 

Most have been submitted before and have not been accepted by the 

Congress. The major proposals include reducing the capital gains tax 

rate, establishing family savings accounts, and expanding Medicare 

taxes to all state and local government employees. Taken together, the 

proposals would increase revenues by a small amount in 1992 and then 

reduce revenues by increasing amounts in 1993 and later years. 

CBO estimates that total revenues under the Administration's 

budget proposals would rise from $1,094 billion in 1991 to $1,172 billion in 1992 and $1,486 billion in 1996. The CBO estimates are 

slightly higher than the Administration's for 1991 and 1992, but are 

increasingly below the Administration's in 1993 and later years (see 

Table 111-1). The differences in estimates of the tax proposals are not 

large. Moreover, the difference in estimates of the budget results mostly from different economic and technical assumptions regarding future 

tax receipts under current law. 

This chapter discusses those proposals that are classified as revenues and referred to as governmental receipts in the President's budget. In addition, the President's budget includes proposals for fees that 

are classified as negative outlays. These fees are analyzed in Chapter 

V, which discusses the President's domestic spending proposals. Three 

of these fee proposals are similar to proposals included in last year's 

budget as revenue (or governmental receipt) proposals: the Securities 

and Exchange Commission registration fee increase, the Commodity 

Futures Trading Commission transaction fee, and the Federal Emergency Management Agency fee for regulating the emergency plans of 

nuclear power plants. 
.34 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

TABLE 111-1. ADMINISTRATION AND CBO ESTIMATES OF 

ADMINISTRATION BUDGET REVENUES, 

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

Revenue Source 1991 1992 1993 1994 1995 1996 

Individual Income Taxes 

Corporate Income Taxes 

Social Insurance Taxes 

and Contributions 

On-budget 

Off-budget8 

Excise Taxes 

Other 

Total Revenues 

Percentage of GNP 

Individual Income Taxes 

Corporate Income Taxes 

Social Insurance Taxes 

and Contributions 

On-budget 

Off-budgeta 

Excise Taxes 

Other 

Total Revenues 

Percentage of GNP 

Administration Estimates 

492.6 529.5 572.0 632.9 688.9 742.1 

95.9 101.9 109.0 120.6 130.0 138.3 

CBO Estimates 

489.1 531.3 564.0 605.7 653.0 699.2 

99.1 102.1 105.6 107.1 107.4 109.0 

SOURCES: Congreesional Budget Office; Joint Committee on Taxation; and Ofice of Management and 

Budget. Budget of the United States Government, Fiscal Year 1992 (January 1991). 

a. Off-budget revenues consist of Old-Age. Survivors, and Disability Insurance IOASDD tax revenues. 
CHAPTER I11 THE ADMINISTRATION'S REVENUE PROPOSALS 35 

PAY-AS-YOU-GO REVENUE PROPOSALS 

The revenue effects of tax legislation are tallied on the pay-as-you-go 

scorecard with the outlay effects of direct spending legislation. Among 

proposed tax legislation this year, the Administration repeats proposals made last year to extend certain expiring income tax preferences. The targeted jobs credit and the business energy credit have 

been added to the list of extensions. The President's fiscal year 1991 

proposals for savings and investment incentives, most riotably a 30 

percent exclusion for capital gains and new family savings accounts, 

are also repeated. This year the President proposes to extend Highway 

Trust Fund taxes beyond their expiration date in 1995 at rates below 

those in current law. The proposed requirement that all state and local 

government employees contribute to the Medicare Hospital Insurance 

Trust Fund is again the only major revenue-raising proposal. 

CBO estimates that the President's proposed tax legislation would 

add $3.0 billion to revenues in 1992 under the pay-as-you-go regime 

(see Table 111-2).1 This is $0.3 billion higher than the Administration's 

estimate because CBO and the Joint Committee on Taxation (JCT) 

project a greater short-term revenue gain from the proposed capital 

gains exclusion. CBO estimates that the proposals would reduce revenues by $4.4 billion in 1993 and $9.2 billion in 1996. The Administration estimates that the proposals would boost revenues by $0.4 billion 

in 1993 and then reduce them by $0.9 billion in 1994 and $4.5 billion in 

1996. For the most part, the 1993-1996 differences result from the different estimates of the capital gains proposal. 

Extensions of Expiring Income Tax Provisions 

The Administration's revenue proposals include making the research 

and experimentation credit permanent . The Administration also proposes one-year extensions for the research and experimentation allocation rules, the deduction for health insurance expenses for the selfemployed, the low-income housing credit, the targeted jobs credit, and 

I. CBO has reestimated the Administration's payroll tax and fee proposals and the Internal Revenue 

Service initiative. The Joint Committee on Taxation has reestimated the income and excise tax 

proposals. 
36 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

the business energy credits for solar and geothermal energy-related 

investments. The proposed extensions of the targeted jobs and business energy credit proposals are new departures for the Administration. Both credits were not proposed for extension in the fiscal year 

1990 or fiscal year 1991 budgets, although both were scheduled to expire within the year. 

Research and Experimentation Credit. The Administration proposes 

to make the income tax credit for research and experimentation (R&E) 

TABLE 111-2. CBO ESTIMATES OF REVENUE PROPOSALS 

IN THE ADMINISTRATION'S 1992 BUDGET 

(By fiscal year, in billions of dollars) 

Proposal 1992 1993 1994 1995 1996 

CBO Baseline Revenues 1,169.2 1,250.7 1,331.5 1,415.4 1,495.4 

Pay-As-You-Go Proposals 

Extend expiring income 

tax provisions -1.3 -1.9 -1.8 -2.0 -2.2 

Savings and investment 

incentive proposals* 3.2 -4.0 -5.5 -5.6 -5.3 

Require Medicare contributions from all state and 

local government employeesb 1.1 1.5 1.5 1.5 1.5 

Extend and lower Highway 

Trust Fund taxesb 0.0 0.0 0.0 0.0 -2.8 

Other proposals - c -0.1 -0.3 - -0.5 -0.5 

Subtotal, Pay-As-You-Go 3.0 -4.4 -6.0 -6.6 -9.2 

IRS Enforcement Funding Proposal 0.0 0.0 0.0 0.0 0.0 

Total, Revenue Proposals 3.0 -4.4 -6.0 -6.6 -9.2 

President's Budget Revenues 

as Estimated by CBO 1,172.2 1,246.3 1,325.5 1,408.8 1,486.2 

- 

SOURCES: Congressional Budget Ofice; Joint Committee on Taxation. 

a. The prop08ed capital gains exclusion increases revenue by $0.8 billion in 1991. 

b. Net of income tax offsets. 

c. Revenue decrease of less than $50 million. 
CHAPTER I11 THE ADMINISTRATION'S REVENUE PROPOSALS 37 

expenses permanent; it is currently scheduled to expire for expenses 

paid after December 31, 1991. The credit allows businesses 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 R&E expenses. Qualifying R&E expenses include 

in-house wages and costs of supplies used in research, a portion of contract research costs undertaken by others and paid by the taxpayer, 

and certain computer costs. The Economic Recovery Tax Act of 1981 

enacted the R&E credit as a temporary four-year credit, and it has 

been modified and extended four times since then. JCT estimates that 

permanently extending the credit would reduce revenues by $0.5 billion in 1992 and by $1 billion to $2 billion per year through 1996 (see 

Table 111-3). 

Research and Experimentation Allocation Rules. Spending on research and experimentation eligible for the credit can also be deducted 

from current income. Companies that conduct operations both in the 

United States and abroad must allocate their income and expenses to 

their different operations. Expenses allocated to foreign operations, if 

sufficient, prevent companies from claiming foreign tax credits against 

their U.S. tax liability. Therefore, companies have an incentive to increase their income from foreign sources by allocating as many expenses as possible to their operations in the United States. 

Current tax law provides that the minimum fraction of domestic 

R&E expenses deductible from domestic income is 64 percent, but the 

percentage is scheduled to fall to 30 percent in 1992. The Administration proposes to extend the 64 percent rule for one more year. Extending the rules would allow more foreign tax credits to be claimed. 

JCT estimates retaining the rules for one year would reduce corporate 

tax receipts by close to $400 million in 1992 and $300 million in 1993. 

This loss is slightly larger than what the Administration estimated 

because it incorporates a greater use of foreign tax credits. 

Partial Deduction for Health Insurance Premiums for Self-Employed. 

The Administration proposes to extend for one year the provision that 

allows self-employed persons a deduction equal to 25 percent of the cost 

of providing health insurance for themselves and their families. The 

Tax Reform Act of 1986 enacted the provision, now scheduled to expire 
38 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

at the end of 1991, and it has been extended twice--most recently in the 

Omnibus Budget Reconciliation Act of 1990 (the reconciliation act). In 

last year's budget, the Administration proposed to make the deduction 

permanent. 

TABLE 111-3. CBOIJCT AND ADMINISTRATION ESTIMATES OF 

PROPOSED EXTENSIONS OF EXPIRING INCOME 

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

Proposal 1992 1993 1994 1995 1996 

Permanent Extension 

Research and Experimentation 

(R&E) Tax Credit 

CBOIJCT 

Administration 

One-Year Extensions 

R&E Allocation Rules 

CBOIJCT 

Administration 

Partial Deduction for Health 

Insurance Premiums for 

the Self-Employed 

CBO!JCT 

Administration 

Low-Income Housing Credil 

CBOIJCT 

Administration 

Targeted Jobs Credit 

CBOIJCT 

Administration 

Business Energy Credits 

CBOIJCT 

Administration 

Total 

All Extensions 

CBOIJCT 

Administration 

SOURCES: Joint Committee on Tax~tion; Office of Management and Budget. 

a. Revenue decrease of les~ than $50 million. 

b. Revenue increase of less than $50 million. 
CHAPTER 111 THE ADMINISTRATION'S REVENUE PROPOSALS 39 

The provision was designed to reduce the disparity between the 

treatment of self-employed individuals and other employed individuals. Corporations and noncorporate employers can deduct the cost of 

providing health insurance to their employees when calculating their 

business income tax liability, and the employees do not owe taxes on 

the value of the insurance. Noncorporate employers and self-employed 

individuals, however, cannot deduct the cost of their own insurance as 

a business expense. Last year's budget included a proposal to make the 

deduction permanent. JCT estimates that the extension would reduce 

revenues by close to $400 million during 1992 and 1993. The Administration assumes a different time pattern of revenue effects. 

Low-Income Housing Credit. The Administration proposes to extend 

for one year the credit for certain expenditures made by owners of lowincome housing projects. Eligible expenditures include depreciable 

costs of new construction and renovation, as well as the costs of acquiring certain old buildings. The Tax Reform Act of 1986 created the 

credit, and it has since been extended twice. The reconciliation act 

carried out the 1991 budget proposal by extending the credit for one 

year through December 31, 1991 and restoring full benefits for 1990. 

The current proposal would extend the credit for one year through 

December 31, 1992. The revenue loss, however, would extend beyond 

the budget period because the credit is claimed over 10 years. JCT 

estimates the revenue loss at almost $100 million in 1992 and close to 

$400 million per year beginning in 1994. The Administration assumes 

slightly lower use of the credit and, therefore, a smaller revenue loss. 

Targeted Jobs Credit. The President proposes to extend for one year 

the targeted jobs tax credit for certain wage payments made by employers to workers who are certified as members of one of nine targeted 

groups. Economically disadvantaged youth age 18 through 22 are the 

largest group of workers to receive this special treatment. Other 

groups include recipients of means-tested transfer programs, economically disadvantaged summer youth workers, and the disabled. 

The credit is available to the employer, and generally equals 40 percent of up to $6,000 of first-year wages, making the maximum credit 

per employee $2,400. The qualifying wages are limited to the first 

$3,000 for economically disadvantaged summer youth workers, yielding a maximum credit of $1,200. The credit is not available for any 
40 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

wages paid beyond the first year of employment. When calculating 

their business income tax liability, employers must reduce their deduction for wages paid by the amount of the credit. 

The credit was first enacted in the Revenue Act of 1978 as a temporary three-year credit. It has since been extended seven times and 

modified. This year is the first time the Bush Administration has proposed extending it. The credit is currently scheduled to expire for 

wages paid to employees who begin work after December 31, 1991. 

JCT estimates that a one-year extension would reduce revenues by less 

than $100 million in 1992 and a total of about $400 million through 

1996. The Administration assumes slightly lower use of the credit and 

therefore a smaller revenue loss. 

Business Energy Credits. For the first time, the Administration proposes to extend business energy tax credits for solar and geothermal 

properties. The proposed extension is for one year. The Energy Tax 

Act of 1978 created the credits, and they have since been extended 

several times. They are currently scheduled to expire after December 

31, 1991. The 10 percent tax credit is available for investments in 

equipment that uses solar or geothermal energy to generate electricity 

or to heat or cool structures. JCT estimates that extending the credit 

for one year would reduce revenues by a total of $42 million during 

1992 and 1993. 

Savings and Investment Incentives 

The Administration again offers three tax proposals to increase personal saving and encourage certain investment activity (see Table 

111-4). The proposals are to exclude a portion of capital gains from taxable income, establish family savings accounts, and to waive the 

penalty for early withdrawals from IRAs for first-time homebuyers. 

The efficacy of the proposals in achieving the savings and investment 

goals is uncertain. 

Exclude 30 Percent of Capital Gains. The Administration proposes to 

allow individuals to exclude from taxable income a percentage of capital gains on qualifying assets. The percentage would increase with the 
CHAPTER 111 THE ADMINISTRATION'S REVENUE PROPOSALS 41 

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 three 

years or more. The exclusion would be in addition to the 28 percent cap 

on the tax rate on capital gains enacted in the reconciliation act. 

Thus, the marginal tax rate on capital gains on qualifying assets 

held for at least three years would be 19.6 percent for taxpayers in the 

28 percent and 31 percent tax brackets and 10.5 percent for taxpayers 

in the 15 percent tax 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 24 percent. Depreciation deductions would be recaptured 

TABLE 111-4. CBOIJCT AND ADMINISTRATION ESTIMATES OF 

PROPOSED SAVINGS AND INVESTMENT INCENTIVES 

(By fiscal year, in billions of dollars) 

Proposal 1992 1993 1994 1995 1996 

Exclude 30 Percent of Capital Gainsa 

CBOIJCT 

Administration 

Establish Family Savings Accounts 

CBOIJCT 

Administration 

Waive the Penalty for Early 

Withdrawals from IRAs for 

First-Time Homebuyers 

CBOIJCT 

Administration 

Total 

CBOIJCT 

Administration 

SOURCES: Joint Committee on Taxation: Office of Management and Budget. 

NOTE: IRA = individual retirement account. 

a. CBO and JCT estimate that this increases revenue by $0.8 billion in 1991; the Administration 

estimates that this increases revenue by $0.4 billion in 1991. 
42 ANALYSTS OF THE PRESIDENT'S BUDGET March 1991 

as ordinary income; in 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 February 15, 1991. The requirements for two- and three-year 

holding periods would be phased in over three years. During the 

balance of 1991, all qualifying assets held for at least one year would 

be eligible for the 30 percent exclusion. In 1992, assets held for at least 

two years would be eligible for the 30 percent exclusion; assets held for 

at least one year would receive a 20 percent exclusion. The full sliding 

scale described above would take effect in 1993. The phase-in, by allowing the full 30 percent exclusion for assets held less than three 

years in 1991 and 1992, would not discourage sales of such assets during the first two years of the budget period and thus would boost 

short-run receipts. 

JCT estimates that the proposal would raise $3.7 billion in revenues in 1992, when taxpayers respond with a burst of asset sales, and 

thereafter reduce revenues by $3 billion to $4 billion a year (see Table 

111-4). The Administration estimates that the proposal would raise 

$3.0 billion in 1992 and thereafter increase revenues by $1 billion to 

$2 billion a year. The difference results, for the most part, because JCT 

assumes that taxpayers are less responsive to the changed capital 

gains tax rate than the Administration assumes. 

Establish Family Savings Accounts. The Administration proposes to 

create a new tax-favored saving vehicle called the family savings 

account (FSA). 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 the income tax when withdrawn but would not be subject to a 

penalty. A 10 percent penalty on investment income would be added 

for amounts left on deposit less than three years. The proposal would 

be effective starting January 1,1991. 

Eligibility to c~ntribut~e to FSAs would be limited to people with 

adjusted gross income below certain levels--$60,000 for single 
CHAPTER I11 THE ADMINISTRATION'S REVENUE PROPOSALS 43 

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 

$2,500 contribution limit. Each member of a couple filing jointly, however, could contribute up to $2,500, provided the total contribution did 

not exceed the couple's 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. 

JCT estimates that revenues would be reduced by $355 million 

from FSAs during 1992, and that the annual loss would increase to 

$1.8 billion in 1996 (see Table 111-4). The revenue loss from FSAs 

would grow after 1996 as people continued to shift 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 in the long run. The Administration estimates a higher revenue loss over the 1992-1996 period based on the assumption of greater shifting from taxable accounts. 

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 by taxpayers who purchase homes for the first time. The waiver would apply to early withdrawals after December 31,1990. These withdrawals would be subject 

to regular income taxation, as are IRA withdrawals after age 593 under current law. Withdrawals for a first home purchase would be 

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

of the median home price in its area. 

The full benefit of the proposal would be limited to relatively few 

individuals: first-time homebuyers who qualify for deductible IRAs. 

Only 6 percent of all taxpayers contributed to deductible IRAs in 1988, 
44 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

the most recent year for which data are available. First-time buyers 

saving through nondeductible contributions would benefit only from a 

relatively short deferral of taxation rather than the tax-free return 

offered by deductible IRAs. Use of IRAs by first-time buyers would 

also be limited by people's uncertainty at the time they are saving for a 

home as to whether they will ultimately decide not to buy a home or to 

buy a home costing more than 110 percent of their area's median price. 

JCT estimates the revenue loss from this proposal at $180 million 

in 1992, falling to about $57 million in 1996 (see Table 111-4). The 

revenue loss occurs because some people saving to buy a home are assumed to use IRAs instead of taxable accounts. The loss decreases over 

the budget period because the loss from not taxing IRA contributions 

or accruing interest is partially offset in later years by taxes paid on 

withdrawals. The Administration estimates that the losses would be 

smaller, based on the assumption that fewer new contributions would 

be diverted from otherwise taxable savings. 

Efficacy of Proposed Incentives for Saving and Investment. The effects of these proposals on national saving and economic growth are 

uncertain. Each proposal raises the return to private saving, but private saving has not been found to respond much to changes in the rate 

of return. Additional incentives for capital gains and homeownership 

will not necessarily allocate investment more effectively for economic 

growth. Furthermore, CBO and JCT estimate that the capital gains 

exclusion would add to the deficit, and increases in the deficit directly 

reduce national saving. 

The proposed capital gains exclusion would encourage savers to 

favor investments whose payoff is deferred. Such investments typically include riskier investments, new ventures, corporate investment 

through retained earnings, and some tax shelters. Appreciating assets 

currently benefit from tax provisions that allow taxation to be deferred 

until the assets are sold and that exempt from tax capital gains held 

until the death of the owner. The success of a capital gains exclusion in 
CHAPTER 111 THE ADMINISTRATION'S REVENUE PROPOSALS 46 

encouraging more productive investment, increasing saving, or raising 

revenue is controversial.2 

FSAs are intended to raise private saving. However, their effectiveness would depend on how much taxpayers would increase their 

total saving (inside and outside of tax-favored accounts) through using 

an FSA. The generous contribution limits combined with excluding 

high-income taxpayers means that many of the contributors to FSAs 

would face an incentive to save more. However, studies of saving behavior generally have not found that people save significantly more in 

response to higher after-tax returns. Any increase in private saving in 

response to FSAs would add to national saving if tax increases or direct spending reductions were enacted to offset the resulting revenue 

loss, provided that these other changes themselves did not discourage 

saving. 

Finally, waiving the penalty for IRA withdrawals to pay for the 

first purchase of a home would provide another incentive for investment in homeownership rather than other types of assets. Diverting 

savings from business investment into owner-occupied housing, however, is likely to have a small cost in terms of economic growth in light 

of the substantial tax incentives that already exist for homeownership. 

Require Medicare Contributions from 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 fifth year, the President's budget proposes to 

extend this requirement to all state and local government workers. 

The majority of the currently exempt workers already qualify for 

2. The controversial impacts of capital gains tax reductions are addressed in Department of the 

Treasury, General Explanations of the President's Budget Proposals Affecting Receipts (February 

19911, pp. 1-10; Congressional Budget Office, "Effects of Lower Capital Gains Taxes on Economic 

Growth" (August 1990); Congressional Budget Office, Indexing Capital Gains for Inflation (August 

1990); Joint Committee on Taxation. Explanation of Methodology Used to Estimate Proposals 

Affecting the Taxation of Income from Capital Gains (March 27, 1990); Statement of Kenneth W. 

Gideon, Assistant Secretary of the Department of the Treasury, before the Committee on Finance, 

United States Senate, March 6.1990. 
46 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

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 

workers receive Medicare benefits in retirement, only 75 percent of 

them have paid Medicare taxes while employed in government jobs. 

Therefore, they receive Medicare 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 beginning January 1, 1992, would raise $1.1 

billion in 1992 and $1.5 billion per year over the 1993-1996 period. 

Outlays for benefit payments would increase somewhat, but only about 

$50 million of the increased costs would occur by 1996 (see Table 111-5). 

Extend and Lower Highway Trust Fund Taxes 

Despite the Administration's proposal of other measures to help reduce 

U.S. dependence on imported oil, including extending the business 

energy tax credits, the budget proposes that motor fuel excise taxes be 

extended after they expire in 1995 at rates 5 cents per gallon below 

TABLE 111-5. CBOIJCT AND ADMINISTRATION ESTIMATES OF 

PROPOSED MEDICARE COVERAGE EXTENSION 

(By fiscal year, in billions of dollars) 

Proposal 1992 1993 1994 1995 1996 

Require Medicare Contributions 

from All State and Local 

Government Employeesa 

CBOMCT 1.1 1.5 1.5 1.5 1.5 

Administration 1.1 1.5 1.5 1.5 1.5 

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

a. Net of income tax offsets. Benefit increases, estimated at approximately $50 million over the 1992- 

1996 period, are not included in the revenue estimates. 
CHAPTER I11 THE ADMIMSTRATION'S REVENUE PROPOSALS 47 

rates under current law. The Administration proposes to extend the 

gasoline tax at 9 cents per gallon instead of the current rate of 14 cents 

and the diesel tax at 15 cents per gallon instead of the current rate of 

20 cents. 

The proposal would, in effect, rescind the increase in the motor fuel 

tax enacted in the reconciliation act beginning in 1996. The act increased gasoline and diesel tax rates by 5 cents per gallon and extended the taxes from September 30, 1993, to September 30, 1995. 

Revenue from half of the 5-cents-per-gallon tax increase and the revenue raised under prior-law rates go in the Highway Trust Fund. Revenue raised from the other half of the rate increase, known as the deficit 

reduction rate, remains in the general fund. 

Under Budget Enforcement Act guidelines, both the CBO baseline 

and the Administration current services estimate extend beyond the 

scheduled expiration date--through 1996--the taxes that finance the 

Highway Trust Fund but not the 2.5-cents-per-gallon deficit reduction 

tax. JCT estimates that, relative to CBO baseline revenues, the Administration's proposal to extend motor fuel excise taxes at the lower 

prereconciliation act rates would reduce 1996 Highway Trust Fund 

revenues by $3.4 billion and overall revenues by $2.8 billion (see Table 

111-6). The Administration's slightly lower estimate results from lower 

projected fuel consumption. 

TABLE III-6. CBOtJCT AND ADMINISTRATION ESTIMATES OF 

THE PROPOSED HIGHWAY TAX EXTENSION 

(By fiscal year, in billions of dollars) 

Proposal 1992 1993 1994 1995 1996 

Extend and Lower Highway 

Trust Fund Taxesa 

CBO/JC!T 

Adminiatration 

SOURCES: Joint Committee on Taxation; Office of Management and Budget. 

a. Net of income tax offaets. 
48 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

Other Pay-As-You-Go Proposals 

Other pay-as-you-go proposals include enterprise zones and several 

minor tax and fee initiatives. Taken together, the proposals would 

reduce revenues slightly. 

Establish Enterprise Zones. For the third year, the Administration 

proposes to establish enterprise zones--geographically designated 

areas in which tax incentives would be made available to businesses in 

an effort to boost investment and employment and reverse economic 

decline. This year's proposal is identical to last year's. 

The proposal is to designate up to 50 economically distressed areas 

as enterprise zones over the next four years. Businesses located in the 

zones and their employees would be provided the following tax preferences: elimination of the capital gains tax for tangible property used 

in the zone, a deduction for stock investments in zone corporations with 

assets of less than $5 million, and a refundable 5 percent credit for 

low-income employees on their first $10,500 in wages. Several variants of enterprise zone legislation have already been introduced in the 

102d Congress. The Administration estimates that the proposal would 

reduce income tax receipts by $50 million in 1992, about $300 million 

in 1994, and $750 million in 1996 (see Table 111-7). CBO accepts the 

estimate, recognizing that the revenue effect would depend on the size, 

location, and other characteristics of the zones actually designated. 

Restore and Double Adoption Deduction. The Administration proposes 

for the third year to restore the deduction for the costs incurred in 

adopting a child with special needs--for example, a physical or mental 

handicap--this time effective January 1, 1992. The Tax Reform Act of 

1986 repealed the deduction, and it was replaced with a program that 

reimburses families for these costs up to a limit. The proposal would 

specify that reimbursement for these adoption costs must be included 

in income for tax purposes, clarifying the present ambiguity in the law. 

It would then permit the deduction from income of these costs up to a 

maximum of $3,000 per child, double the maximum under pre-1986 
CHAPTER I11 THE ADMINISTRATION'S REVENUE PROPOSALS 49 

TABLE 111-7. CBOIJCT AND ADMINISTRATION ESTIMATES 

OF OTHER REVENUE PROPOSALS 

(By fiscal year, in billions of dollars) 

Proposal 1992 1993 1994 1995 1996 

Establish Enterprise Zones 

CBOa 

Administration 

Restore and Double Adoption 

Deduction 

CBOIJCT 0.0 b b b b 

Administration 0.0 b b b b 

Reinstate Reimbursable Status of 

Railroad Unemployment Insurancec 

CBOIJCT d d d b b 

Administration d d d b b 

Improve Retail Compliance with 

Alcohol Occupational Taxesc 

CBOIJCT d d d d d 

Administration d d d d d 

Extend Abandoned Mine 

Reclamation Fees 

CBOIJCTc 0.0 0.0 0.0 0.0 0.3 

Administration 0.0 0.0 0.0 0.0 0.3 

Increase Department of Housing 

and Urban Development Interstate 

Land Sales Fee 

CBOIJCT d d d d d 

Administration d d d d d 

Total 

CBO 

Administration 

SOURCES: Congressional Budget Office; Joint Committee on Taxation; Office of Management and 

Budget. 

a. CBO accepts the Administration's estimate. The JCT does not, and does not provide an estimate. 

b. Revenue decrease of leas than $50 million. 

c. Net of income tax offsets. 

d. Revenue increase of less than $50 million. 
50 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

Reform law. JCT and the Administration estimate that the proposal 

would reduce income tax revenues by $3 million per year beginning in 

1993. 

Reinstate Reimbursable Status of Railroad UI. In 1989 and 1990, 

commuter railroads and Amtrak were temporarily required to reimburse the Unemployment Insurance (UI) trust fund for the actual 

unemployment compensation benefits paid to former employees rather 

than pay the 8 percent UI tax on covered wages. The proposal would 

reinstate this status retroactively to January 1, 1991, and make it 

permanent. Both CBO and the Administration estimate that the proposal would increase UI revenues by $2 million in 1992 after reducing 

them in 1991. Thereafter, it would raise revenues slightly in some 

years and reduce them in others, depending on unemployment compensation benefits actually paid and the balance in the Railroad Retirement Unemployment Insurance Trust Fund. 

Improve Retail Compliance with Alcohol Occupational Taxes. The 

Administration proposes to require wholesale distributors of alcoholic 

beverages to ensure that their retail customers have complied with the 

axupational taxes levied on liquor retailers. The proposal would be 

effective October 1, 1991. JCT and the Administration estimate that 

this would increase revenues by $9 million per year and would bring in 

an additional $68 million in past-due taxes during 1992 and 1993. 

Extend Abandoned Mine Reclamation Fees. Abandoned mine reclamation fees were extended for three years in the reconciliation act, and 

are now scheduled to expire on September 30, 1995. The Administration proposes to extend the fees through 1996. The existing fee schedule would be retained: 35 cents per ton on coal from surface mines and 

15 cents per ton on coal from underground mines, or 10 percent of the 

value of the coal at the mine, whichever is lower. These fees fund 

grants to the states for the cleanup of abandoned mines. Both CBO and 

the Administration estimate that extending the fees would increase 

revenues by $260 million in 1996. 

Increase the HUD Interstate Land Sales Fee. For the third year, the 

Administration proposes to increase the fee the Department of Housing and Urban Development (HUD) levies on developers who register 
CHAPTER I11 THE ADMINISTRATION'S REVENUE PROPOSALS 51 

with HUD subdivisions they plan to market across state lines. The 

proposal would remove the present fee cap of $1,000 per developer, 

enabling HUD to raise the fee. CBO and the Administration estimate 

that the increase would raise revenues by less than $500,000 per year. 

OTHER REVENUE PROPOSALS 

The Administration proposes to increase the number of staff positions 

for Internal Revenue Service enforcement (IRS). In addition, an early 

budget proposal to extend special tax treatment to participants in 

Operations Desert Shield and Desert Storm has already been put in 

place through executive and legislative action. 

Proposal to Increase Funding for 

Internal Revenue Service Enforcement Procedures 

In addition to the pay-as-you-go revenue proposals, the President's 

budget proposes an increase in IRS enforcement funding and credits 

the initiative with revenue gains, above baseline levels, of $35 million 

in 1992 and $708 million over the 1992-1996 period. Because of problems in carrying out past proposals and generating net revenue gains, 

CBO does not credit the proposal with revenue gains (see Table 111-8). 

TABLE 111-8. CBOIJCT AND ADMINISTRATION ESTIMATES OF 

THE PROPOSED INTERNAL REVENUE SERVICE 

INITIATIVE (By fiscal year, in billions of dollars) 

Proposal 1992 1993 1994 1995 1996 

Increase Enforcement Funding 

CBOIJCT 0.0 0.0 0.0 0.0 0.0 

Administration a 0.1 0.2 0.2 0.2 

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

NOTE: The cost of the initiative. estimated at approximately $0.2 billion over the 1992-1996 period, is 

not included in the revenue estimate. 

a. Revenue increase of less than $50 million. 
52 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

The initiative contains two components: an increase of 94 positions in the examination staff to increase the number of field audits, 

and an increase of 671 positions in the collections staff to reduce the 

backlog of delinquent accounts ("accounts receivable"). Although the 

Administration has provided details of the components of the estimated revenue gain resulting from the staff increase, these details are 

not based on historical evidence documenting how similar initiatives 

were put in place or what additional revenues were collected. 

The General Accounting Office (GAO) published three reports in 

1990 addressing implementation and revenue effects of like IRS initiatives.3 These reports document problems with implementation and 

analyze shortcomings in data on IRS enforcement initiatives and in 

estimating methodology. Based on these reports, CBO concludes that 

revenue gains above baseline levels cannot be relied on and does not 

credit the proposal with revenue gains. 

Income Tax Treatment of Desert Storm Participants 

Compensation received by armed forces enlisted personnel for any 

month in which the person serves in a combat zone, or is hospitalized 

as a result of wounds or illness incurred while serving in a combat 

zone, is excludable from income for tax purposes. Excludable income is 

limited to $500 per month for officers. In addition, armed forces personnel (and their spouses) and support personnel serving in a combat 

zone are granted extensions for filing tax returns, paying taxes, and 

meeting other income tax obligations. 

On January 21, 1991, President Bush signed Executive Order 

12744 designating part of the Persian Gulf area as a combat zone retroactive to January 17 and putting the special income tax treatment in 

place. In addition, the Congress passed Public Law 1.02-2, which the 

President signed on January 30, liberalizing the combat zone income 

3. General Accounting Office, Tax Administration: IRS' Improved Estimates of Tax Examination 

Yield Need to be Refined (GAOIGGD-90-119, September 5, 1990); GAO, Tax Administration: IRS 

Needs More Reliable Information on Enforcement Revenues (GAOIGGD-90-85, June 20,1990); GAO, 

Tax Administration: Potential Audit Revenues Lost While Training New Revenue Agents 

(GAOIGGD-90-77, April 6,1993). 
CHAPTER 111 THE ADMIMSTRATION'S REVENUE PROPOSALS 53 

tax accommodations--in particular, specifying that interest on tax 

overpayments be credited during the period in which tax deadlines are 

suspended. 

The President's budget originally proposed suspending income tax 

deadlines for Desert Shield participants. Events overtook the initiative, and the full set of accommodations has been put in place. Subsequently, the Administration labeled its early proposal, which appears in the budget revenue tables, a "placeholder." The placeholder 

has been omitted from the proposals analyzed in this report. The CBO 

revenue baseline has been revised to include the reduction in income 

taxes resulting from both the Executive Order and Public Law 102-2. 

CBO'S REESTIMATE OF 

THE ADMINISTRATION'S BUDGET REVENUES 

While CBO and JCT disagree with the Administration's estimate of 

the revenue effects of the proposed capital gains exclusion, this difference is small compared with the much larger reestimate of total 

revenues under the President's proposed budget. The larger reestimate results from different. economic and technical assumptions used 

in projecting revenues unrelated to the capital gains exclusion. Examples of important economic assumptions are income tax bases and 

inflation. Examples of important technical assumptions are projected 

growth rates of exclusions and deductions available under the income 

tax, responses of individuals and corporations to changes in tax law, 

and inferences about tax collection drawn from recent payment patterns. 

CBO's estimate of total revenues in 1992 under the President's 

budget is $7 billion more than the Administration's estimate because 

CBO's forecast for a shallower recession and stronger economic rebound holds wages, salaries, and corporate profits above those of the 

Administration (see Table 111-9). After 1992, the Administration's 

projected economic growth catches up with and surpasses CBO's. The 

gap between projected tax bases and, consequently, revenues widens 

over the 1993-1996 period. 
54 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

A notable component of the CBO reestimate of the President's fiscal year 1992 budget is the large technical difference between CBO and 

Administration revenues in 1994 and later years. Technical reestimates hold CBO revenues progressively further below the Administration's after 1993. The largest technical reestimates are in the individual income tax, which the Administration has revised upward from 

its 1990 Mid-Session Review level for reasons other than changed economic assumptions or newly enacted legislation. The combination of 

the economic forecast and technical differences holds CBO revenues 

$40 billion below Administration revenues in 1994 and $75 billion below in 1996. 

TABLE 111-9. CBO REESTIMATES OF THE ADMINISTRATION'S 

BUDGET REVENUES (By fiscal year, in billions of dollars) 

Revenues as Estimated by 

the Administration 

CBO Reestimates 

Baseline 

Economic 

Technical 

Subtotal 

Pay-as-You-Go Proposals 

Economic 

Technical 

Subtotal 

IRS Enforcement Funding 

Proposal 

Economic 

Technical 

Subtotal 

Total 

Revenues as Estimated 

by CBO 

SOURCES: Congressional Budget Office; Joint Committee on Taxation; Office of Management and 

Budget, Budget of the United States Government, Fiscal Year 1992 (January 1991). 

NOTES: Revenues include payroll tax receipts of the Old-Age, Survivors, and Disability Insurance 

(OASDD trust funds, which are off-budget. 

n.a. = not applicable. 

a. Less than $50 million. 
CHAPTER 111 THE ADMINISTRATION'S REVENUE PROPOSALS 55 

The difference in the out-year revenue estimates is also apparent 

when the estimates are measured relative to the levels of economic 

activity on which they are based--that is, when gross national product 

(GNP) shares are compared. CBO projects that Administration budget 

revenues in 1995 will hold the same 19.4 percent share estimated for 

1991. The Administration projects that revenues will claim an increasing share of GNP, reaching 20.0 percent in 1995. This estimate is 

inconsistent with the Administration's projection of a falling taxable 

income share of GNP. 

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 mandatory and discretionary defense appropriations for 1992 totaling $291 billion, an increase 

of $2 billion over 1991. Based on CBO estimates, outlays would total 

about $298 billion, a reduction of about $2 billion from 1991. Compared with the CBO baseline, which provides for zero growth in inflation-adjusted dollars, the budget would represent a reduction in real 

purchasing power of $1 1 billion or about 4 percent. 

The discretionary portion of the Administration's defense budget 

meets the budget authority caps set forth in the Budget Enforcement 

Act for 1992 and 1993. But CBO estimates that the resulting outlays 

would exceed the outlay caps by $2.9 billion in 1992 and $0.8 billion in 

1993: 

Discretionarv 

Budget Discretionary 

Authority Outlays 

1992 1993 1992 1993 

Caps as determined 

by OMB for defense 

programs 291.4 291.5 295.8 292.5 

Administration's 

request as estimated 

by CBO 291.4 291.5 298.7 293.3 

Difference 0 0 2.9 0.8 
58 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

While CBO is the scorekeeper for the Congressional portion of the 

budget process, the Budget Enforcement Act charged the Office of 

Management and Budget (OMB) with the responsibility of estimating 

whether or not outlays for discretionary programs would breach the 

spending caps, thereby necessitating sequestration. There is a good 

deal of uncertainty inherent in estimating the outlay that will result 

from a given amount of budget authority. To allow for differences in 

outlay estimates between CBO and OMB, the act permits outlay estimates to exceed the defense caps by as much as $2.5 billion without 

triggering sequestration, as long as the budget authority caps are not 

breached. This special outlay allowance is not intended to be a margin 

for additional spending. Rather, it is to insulate the legislative process 

from estimating differences. CBO's reestimate of the Administration's 

national defense request exceeds this outlay allowance for 1992 but is 

within the allowance in 1993. 

The international affairs functional totals are affected by certain 

volatile mandatory programs and by International Monetary Fund 

(IMF) quota payments, which are treated in a special manner under 

the Budget Enforcement Act. The foreign military sales trust fund is 

the major mandatory account that can have large and sometimes erratic impacts on net budget authority and net outlays. 

The discretionary budget authority requested for international affairs would rise by $14.4 billion from 1991--an increase driven by a 

commitment to the International Monetary Fund--to a total of $33.9 

billion, according to CBO estimates. Outlays would reach $19.9 billion 

in 1992, an increase of $1.1 billion from 1991. Over five years, budget 

authority would total $124 billion, and outlays $105 billion. 

CBO's reestimate of the President's request for budget authority is 

$0.1 billion less than the 1992 cap for international programs as determined by OMB, and exceeds the 1993 cap by the same amount. The 

difference in 1992 is the net of CBO's lower estimate for arrearage payments to international organizations and peacekeeping activities, and 

a higher estimate for the buy-down of foreign military sales interest. 

In 1993, the difference results from a higher estimate for arrearage 

payments. 
CHAPTER IV PROPOSALS FOR DEFENSE AND INTERNATIONAL AFFAIRS 59 

Discretionary 

Budget Discretionary 

~uthirit~ Outlays 

1992 1993 1992 1993 

Caps as determined 

by OMB for international programs 34.0 22.6 19.6 20.4 

Administration's 

request as estimated 

by CBO 33.9 22.7 19.9 20.7 

Difference -0.1 0.1 0.2 0.3 

CBO's estimates of outlays exceed the international caps in both 

1992 and 1993 but are within the $1.5 billion estimating margin. The 

difference in 1992 is largely from CBO's higher estimates of outlays for 

food aid and the grant portion of foreign military financing. The 1993 

difference is the sum of smaller differences in many of the larger programs. 

THE DEFENSE BUDGET AND OPERATIONS 

DESERT SHIELD AND DESERT STORM 

The incremental costs of Operation Desert Shield and Operation 

Desert Storm do not fall under the caps for defense spending established in the Budget Enforcement Act. Because the Defense Department was not able to provide firm estimates of the costs of these operations at the time the budget was prepared, the Administration's request for national defense (function 050) does not include any funding 

for their incremental costs. 

However, the budget as submitted on February 4, 1991, made allowance for the possibility that some additional appropriations would 

be required by establishing a new category (subfunction 929) for Operations Desert ShieldIStorm. The "placeholder" included in this function indicated that the Administration would request $14 billion in 

budget authority for deployment costs in 1991, as well as the authority 

to spend an additional $15 billion in contributions that it expected 
60 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

from other countries. The net impact on the deficit in 1991 would be 

about $8 billion, and in 1992 about $5 billion. 

Since that budget submission, the Administration has submitted a 

supplemental appropriation request to the Congress for 1991 for 

operations in the Persian Gulf region. The Administration requests 

$15 billion in appropriations of U.S. funds and permission to spend 

whatever cash contributions the United States receives from other 

countries. Since the budget was prepared, other countries have 

pledged over $50 billion (compared with the $15 billion assumed in the 

budget) and have actually paid (as of February 28, 1991) about $14 

billion of the total pledge in cash and almost $3 billion in supplies and 

services. So if the Administration's supplemental request was approved and all the pledges were paid, the additional defense spending 

could total $65 billion. 

The Administration's supplemental request was prepared and 

submitted before the ground stage of the conflict in the Gulf region had 

begun. As a result of the uncertainty about the duration and intensity 

of the combat, the request did not support any one particular dollar 

level of added costs. Instead, the documentation gave specific estimates for only noncombat costs. The Administration estimated that 

about $40 billion would be needed for noncombat costs: $21 billion to 

cover the costs of building and sustaining forces through March, $7 

billion for projected in-theater costs as the combat phased down, and 

another $12 billion for near-term investment demands and to withdraw U.S. forces once the conflict was resolved. The Administration 

emphasized that the costs of combat could not be "definitively estimated at this point," but suggested that daily combat costs could range 

widely, from $150 million to $1,650 million, depending on how events 

unfolded. 

Using the Administration's factors and base costs, CBO estimated 

that the added costs of the hostilities, which extended from January 16 

through February 28, would be about $5 billion. The Administration's 

numbers, therefore, suggest that the total cost of the Gulf operation 

will be about $45 billion. But these estimates may overstate the 

amount of actual spending on the war for several reasons. First, .the 

estimate of $45 billion assumes that all equipment and munitions lost 
CHAPTER IV PROPOSALS FOR DEFENSE AND INTERNATIONAL AFFAIRS 61 

in the war would be replaced. However, the United States may decide 

not to replace some or all of the major equipment lost in combat 

because of planned reductions in its military forces, a decision that 

would hold down costs. 

Second, it appears that some of the Administration's base estimates may have been overstated. For example, all of the estimates included the extra costs associated with higher fuel prices, not just for 

U.S. forces involved in Operation Desert Storm but for all U.S. forces 

worldwide. Arguably, the costs of higher fuel prices for U.S. forces outside the Persian Gulf do not represent an added cost of Operation 

Desert Storm. If not, then the Administration's estimate of required 

additional funding during 1991 could be reduced by $2.8 billion. 

Added fuel costs may have been overstated for other reasons. The 

Defense Department's estimates were based on oil prices that are 

higher than those likely to prevail in the postconflict environment. If 

the department is able to purchase fuel for the rest of the year at the 

prices prevailing in early March, it would need about 50 percent fewer 

funds for added fuel costs. In some cases, the estimates also appeared 

to assume rates of fuel use higher than those suggested by military 

planning factors. 

The Administration's request for $6.4 billion for "near-term investment" may also be a bit on the high side. substantial portions of 

this request were based on anticipated rates of use during future combat. Included in this category are funds for several Army munitions 

(for example, MLRS rockets along with Patriot, Hellfire, and ATACMS 

missiles) and, possibly, some other munitions as well (for example, 

Tomahawk and HARM missiles). Before appropriating funds to replace such munitions, the number actually expended in combat should 

be ascertained. Nor does the documentation for near-term investment 

provide data about changes in requirements associated with the end of 

the Cold War. It is possible that some of the munitions expended in 

Operation Desert Storm may no longer be needed because of reductions 

in requirements. 

Finally, by the standards of the last major U.S. war, the Administration's estimates for certain costs seem high. Some of those esti- 
62 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

mates, which are made assuming no hostilities are under way, suggest 

that the Administration expects to spend an average of about $2 billion 

a month from August 1990 through March 1991 on operations and 

maintenance, to pay for day-to-day operating costs. That rate for noncombat operations and maintenance matches the rate of incremental 

monthly expenditures (adjusted to 1991 dollars) associated with the 

peak period of the Vietnam War, when fighting was intense. This apparent inconsistency might be explained by the high costs of operating 

and maintaining today's weapons, or because Operation Desert Storm 

involved many tanks whereas the Vietnam War did not. Or the high 

estimates for Operation Desert Storm may reflect the difficulty of identifying incremental costs. 

THE DEFENSE BUDGET COMPARED 

WITH THE CBO BASELINE 

The Budget Enforcement Act requires a real cut in defense funding 

levels. Comparing the Administration's proposals with the CBO baseline is one way of revealing how the Administration intends to stay 

within the discretionary appropriation caps for defense programs in 

1992 and 1993. It also gives an indication of what the Administration 

proposes for 1994 and 1995, when there will be only one global cap for 

all discretionary programs. Reductions in budget authority and outlays below the CBO baseline indicate a real cut in funding because the 

baseline adjusts each category of funding to be constant in real terms 

at the levels enacted for 1991. In 1992, the major categories of the defense budget would be reduced by 5 percent or more from the baseline. 

The key exception is research, development, test, and evaluation 

(RDT&E), which would rise by 9 percent. 

Table IV-1 shows how the Administration's request differs from 

the CBO baseline. Over five years, the largest reductions occur in 

funding for military personnel and operations and maintenance 

(O&M). Weapons procurement would fall by $25 billion, while increases for RDT&E through 1994 would be more than offset by reductions in 1995 and 1996. The Department of Energy's atomic energy 

defense activities would receive net funding increases over the period, 
CHAPTER IV PROPOSALS FOR DEFENSE AND INTERNATIONAL AFFAIRS 63 

TABLE IV-1. PROPOSED MAJOR SPENDING CHANGES IN THE 

PRESIDENT'S BUDGET FOR FUNCTION 050, 

NATIONAL DEFENSE (By fiscal year, in billions of dollars) 

Cumulative 

Five-Year 

1992 1993 1994 1995 1996 Changes 

Budget Authority 

CBO Baseline 301.7 314.3 327.8 341.9 356.6 

Proposed Changes 

Military personnel -4.6 -8.6 -16.5 -20.9 -23.8 -74.3 

Operations and 

maintenance -4.2 -10.2 -14.7 -18.3 -20.9 -68.3 

Procurement -5.9 -5.1 -5.8 -2.7 -5.5 -25.1 

RDT&E 3.2 2.7 0.2 -4.0 -7.1 -5.0 

Atomic energy defense 0.4 0.4 0.6 0.8 1.0 3.2 

Other defense 0.4 -2.6 0.3 -1.7 - -2.6 -6.2 

Total -10.9 -23.4 -35.9 -46.8 -58.8 -175.8 

President's 1992 Budget 290.8 290.9 291.9 295.1 297.8 

Outlays 

CBO Baseline 305.0 310.9 324.6 333.2 343.0 

Proposed Changes 

Military personnel -4.4 -8.3 -16.3 -20.6 -23.5 -73.2 

Operations and 

maintenance -3.8 -9.1 -13.5 -17.3 -20.1 -63.8 

Procurement -1.0 -2.9 -4.4 -4.1 -3.8 -16.2 

RDT&E 1.5 2.4 1.2 -1.9 -5.1 -1.9 

Atomic energy defense 0.4 0.4 0.5 0.6 0.8 2.8 

Other defense 0.4 - -0.6 - -1.7 -1.2 -1.7 -4.9 

Total -6.9 -18.1 -34.2 -44.5 -53.5 -157.2 

President's 1992 Budget 

as Estimated by CBO 298.2 292.8 290.4 288.7 289.6 

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

NOTE: RDT&E =research, development, test, and evaluation. 
64 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

a cumulative increase of $6 billion for environmental activities being 

partially offset by a $3 billion reduction in the department's nuclear 

weapons activities. 

Military Personnel 

Military personnel appropriations are below the baseline because the 

Administration would lower personnel levels by about 320,000 from 

the active-duty force and by about 270,000 reservists by 1995 compared with the level funded for 1991. (The Administration has not 

provided details on its personnel program through 1996.) Strength 

reductions account for $50 billion of the $74 billion difference between 

the baseline and the request for 1992 through 1996. However, Operation Desert Storm may postpone the reduction in forces anticipated in 

the appropriation bills for 1991 because the military services have 

temporarily prevented people from leaving the service who had expected to leave. The effects of Operation Desert Storm were not factored into this budget, and they may delay some of the anticipated savings in military pay accounts. 

Pay raises for military personnel are based on projections of the 

employment cost index (ECI) in both the Administration's budget request and the baseline. Because CBO's estimate of that index generally exceeds the Administration's projections, baseline pay costs are 

higher than Administration figures by $6 billion over five years. Finally, proposed transfers from military personnel accounts to other 

parts of the defense budget that are not included in the baseline explain an additional $6 billion in reductions from the CBO baseline over 

the 1992-1996 period. 

The Administration also proposes a change in the Department of 

Defense (DoD) contribution for the future retirement costs of military 

service members, which would take effect in 1994. The budget describes this change as an improvement in the present system because 

the new method for calculating DoD's payment would reflect actual 

experience more swiftly than the present method. Details about the 

proposed method of determining DoD's payment are not included in the 

budget. Even so, the DoD payment is assumed to be smaller by ap- 
CHAPTER IV PROPOSALS FOR DEFENSE AND INTERNATIONAL AFFAIRS 65 

proximately $3 billion each year beginning in 1994. Since this proposal is not well defined, CBO has no basis for a different estimate. 

The mechanics of executing this proposal could lead to larger budget outlays than those anticipated in the budget agreement. In the 

federal budget, the DoD contribution for military retirement is a discretionary intragovernmental payment that is fully offset in the undistributed offsetting receipts function (budget function 950), which is not 

part of the system of discretionary caps. Therefore, any change in the 

DoD payment would have no net budgetary effect; a reduction in DoD 

contributions would be balanced by a reduction in offsetting receipts. 

But the Budget Enforcement Act places a ceiling on total discretionary 

spending in 1994. If the military retirement payment is lower by $3 

billion, then spending on other programs can rise by $3 billion and stay 

within the spending cap. Consequently, this proposal could actually 

raise the deficit by increasing net spending, assuming discretionary 

spending does not fall below the fixed spending cap. 

Operations and Maintenance 

Proposed operations and maintenance appropriations fall short of CBO 

baseline levels for several reasons: a reduction in civilian personnel 

totaling 112,000 people by 1995; differences in pay raise and other 

price assumptions; force level reductions; and a myriad of other program decisions--some with increases and some with decreases--that result in a lower net request for budget authority. Over five years, the 

Administration's proposed budget authority is $68 billion below the 

CBO baseline--a reduction of 14 percent. 

Procurement 

The Administration has not yet provided much detail on the out-year 

component of its weapons procurement budget. In general, differences 

from the baseline occur because several programs would be terminated, including the Navy's stealth attack plane, the Peacekeeper missile, the F-15 fighter aircraft, the AV-8B Harrier aircraft, the M-1 

Abrams tank, and the Bradley fighting vehicle. Force reductions 
66 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

would reduce the need to procure other weapons in as large quantities 

as previously planned, including the F-16 and FIA-18 aircraft. Still, 

the procurement budget reflects a commitment to the next generations 

of many weapons, including the Navy's new attack submarine called 

the Seawolf, the newest destroyer, and the C-17 aircraft designed to 

move forces over long distances. 

Research, Development, Test, and Evaluation 

Proposed RDT&E appropriations exceed the baseline in 1992 through 

1994 because of the budget's emphasis on strategic programs, intelligence and communications programs, and other programs in which 

technologies are applied to weapons. Funding for pure research--DoD's 

technology base--appears to decline relative to the baseline, but data 

are available to support that observation for only 1992 and 1993. The 

Strategic Defense Initiative accounts for over half of the increase relative to the baseline; the SDI would receive $1.6 billion more in 1992 

than projected in the baseline. 

Other Defense 

The defense budget anticipates enactment of other legislation that 

would produce net budgetary savings. First, the Administration anticipates base closures beyond those recently approved in law. The new 

package of closures would lower spending in 1992 through'l996 by $5 

billion, but no list of bases is provided in the budget. The Administration also proposes changes in the Davis-Bacon law governing wages on 

government contracts that would save about $0.7 billion in budget 

authority and about $0.6 billion in outlays. Other proposed legislation 

would affect miscellaneous programs, saving a net $0.3 billion in budget authority and outlays. 

MAJOR DEFENSE PROPOSALS 

In inflation-adjusted terms, the defense budget for 1992 through 1996 

would continue a downward trend that began in 1986; over the five- 
CHAPTER IV PROPOSALS FOR DEFENSE AND INTERNATIONAL AFFAIRS 67 

year period, the downward trend averages about 3 percent per year. 

With respect to budget authority, the Administration's defense budget 

is consistent with the Budget Enforcement Act, which specified levels 

of budget authority and outlays for defense through 1993. For 1994 

and 1995, the budget request proposes increasing defense budget 

authority within the cap set on discretionary appropriations but not by 

enough to keep pace with inflation. The 1996 amounts are not 

constrained by the act, but nevertheless continue the real decline. 

Table IV-2 compares requested budget authority for the years 

1992,1995, and 1996 with the defense budgets of 1980 and 1990. The 

comparisons with 1990 show how the budget relates to the base used in 

last summer's budget negotiations. They show that by 1995 the defense budget will be about 22 percent lower in real terms. The budget 

categories commanding the largest shares of the defense budget are set 

to decline almost proportionately by 1995. Growth in other defense 

categories is explained by reclassification of funding and by real increases in some programs. For example, in 1995 the growth in military construction reflects activities previously funded in operations 

and maintenance. The growth in atomic energy defense activities reflects real program growth that began in the 1991 budget and is maintained throughout this period. 

The table also shows how this defense budget compares with that 

of 1980--the year used to mark the beginning of the defense buildup of 

the 1980s. In 1992 the budget will have about 16 percent more real 

purchasing power than in 1980, but in 1996 it will be reduced to the 

same purchasing power as in 1980. (However, the mix of forces and 

weapons purchases would be quite different.) The military personnel 

and operations and maintenance accounts commanded so large a share 

of the 1980 budget that the reductions in them leave room in the 

budget for real increases in almost every other category of defense 

spending. 

The next few sections of this chapter discuss some of the major proposals in the 1992 defense budget. This discussion follows a framework 

developed during the budget negotiations in the summer of 1990 and 

used by Congressman Les Aspin, Chairman of the House Committee 
68 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

on Armed Services, to articulate the choices facing the government in 

allocating defense resources. 

Force Structure 

The Administration's defense budget reflects many of the changes in 

force structure anticipated during last summer's budget negotiations. 

These changes, in terms of units and personnel strength, are shown in 

Table IV-3. The Army would lose 10 divisions, or 35 percent, of its 

major forces. In 1995, the Army would have about the same proportion 

of armored and mechanized divisions as today. Deployable aircraft 

carriers would be cut to twelve as four carriers are retired, two emerge 

TABLE IV-2. REAL CHANGES IN NATIONAL DEFENSE BUDGET 

AUTHORITY (By fiscal year, in percent) 

Real Change Real Change 

Compared with 1980 Compared with 1990 

1992 1995 1996 1992 1995 1996 

Department of Defense--Military 

Military Personnel -4 -18 -21 - 8 -22 -24 

Operations and Maintenance 15 0 - 2 -14 -26 -27 

Procurement 8 14 10 -28 -24 -27 

RDT&E 79 49 38 1 -16 -22 

Military Construction 2 3 5 4 53 -18 2 1 

Family Housing 44 40 3 4 5 2 -2 

Other DoD--Military n.a. 5 n.a. - n.a. - n.a. n.a. 

Weighted Average 14 I - 2 -14 -23 -26 

Other National Defense 

Atomic Energy Defense 139 146 149 12 15 17 

Other National Defense 210 193 184 10 4 1 

Weighted Average 142 148 151 12 15 16 

Total, National Defense 

Weighted Average 16 4 1 -13 -22 -24 - - - - - 

SOURCE: Congressional Budget Office. 

NOTES: RDT&E = research, development, test, and evaluation; n.a. = not applicable. 
CHAPTER IV PROPOSALS FOR DEFENSE AND INTERNATIONAL AFFAIRS 69 

from overhaul, and one new carrier is delivered. The Navy would be 

reduced by two active carrier air wings, and would also lose a net of 94 

battle force ships as about 200 ships are retired and shipyards deliver 

TABLE IV-3. CHANGES IN ACTIVE FORCES AND MANPOWER, 

1990 TO 1995 (By fiscal year) 

Decrease 

1990 1995 Units Percent 

Forces 

Army Divisions 

Active 

Reserve 

Deployed Aircraft Carriers 13 12 

Carrier Air Wings 

Active 

Reserve 

Battle Force Ships 545 451 

Tactical Fighter Wings 

Active 24 15 

Reserve 12 11 

Strategic Bombers 268 181 

Manpower (In thousands) 

Military 

Active 

Reserve 

Civilian 1,073 940 

SOURCE: Compiled by Congressional Budget Office based on data obtained from the Department of 

Defense. 
70 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

about 100 new ships. The Air Force's tactical air component would be 

cut by nine active wings and one reserve wing. 

Personnel strength would be reduced overall by about 20 percent 

below the 1990 level. Since both active and reserve personnel 

strengths would fall by the same proportions, the mix of active and reserve forces would not change. Personnel strengths are a useful measure of force levels, because many units in the force structure are not 

readily observable--for example, battalion- or company-level units in 

the Army that are separate from Army divisions. 

CBO estimates that the Administration's proposed changes in 

force structure account for $95 billion of the $176 billion difference between requested budget authority and the CBO baseline for 1992 

through 1996. In making these estimates, CBO relied on the Defense 

Department's Total Force Policy Study because the details of many 

force changes have not yet been released in an unclassified form by the 

Administration. 

Readiness 

DoD states that its budget request contains sufficient funding to 

maintain high levels of readiness. It appears that little of the difference between the Administration's defense budget and the CBO baseline can be explained by changes in readiness-related funding. Readiness is the ability to execute a mission at little or no notice. As such it 

depends on many factors, including the availability of new and current 

weapons. 

A common measure of readiness is the amount of time the military 

departments use their equipment in training and force operations, and 

by this measure unit readiness does not appear to change from 1991. 

The Army expects to drive each of its combat vehicles about 800 miles 

each year and provide its aircrews with 14.5 hours of flight each 

month. The Navy would sail deployed ships 50.5 days per quarter and 

nondeployed ships 29 days per quarter. (Deployed ships are assigned to 

perform specific missions in various parts of the world, while nondeployed ships leave port for only short periods of time). The Air 
CHAPTER IV PROPOSALS FOR DEFENSE AND INTERNATIONAL AFFAIRS 71 

Force's budget would allow its tactical aircrews to fly about 19 hours 

per month. 

Overhead 

The divisions, ships, and aircraft that account for the bulk of the defense forces are sustained by a vast support structure of bases, logistics 

depots, training facilities, and command elements. Some parts of the 

support establishment vary directly with the forces--that is, when 

forces change, some parts of the support structure make corresponding 

changes. But other parts of the support structure do not change as 

quickly if at all. 

For example, if the Army reduced its strength by one division it 

might close or realign a base and scale back training programs, but the 

numbers of people and functions performed at the department headquarters in the Pentagon might not change at all. A reduction of 10 

divisions could mean closing more bases, including training bases. 

While Pentagon operations might still be only marginally affected, 

other subordinate headquarters could be greatly affected. 

Reductions in the support establishment are likely to occur in 

discrete steps. That is, reductions in overall forces may cause little or 

no change in the support establishment until some threshold is 

reached, triggering a sharp reduction in support. It is not clear, however, where those thresholds are. Analysis has shown that in the past 

the support establishment's adjustments to changes in the force structure have often been less than proportional, and have taken place over 

time. 

Last summer's budget debate considered the support establishment as having two parts--one that is relatively sensitive to force 

changes and another, called overhead, that is not so sensitive. Although the boundary between these parts is not easy to define, the Administration would apparently make significant changes in overhead--perhaps cutting $60 billion from the overhead funding assumed 

in the CBO baseline for 1992 through 1996. 
72 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

Most overhead functions are funded by appropriations for operations and maintenance. The next few sections discuss changes in O&M 

funding and other topics related to overhead--the Defense Business 

Operations Fund, base closures, military construction, and environmental cleanup activities. 

Operations and Maintenance. O&M funding in the Administration's 

request would be $68 billion below the CBO baseline for 1992 through 

1996. CBO estimates that about $30 billion of this difference can be 

traced to changes in force levels. The remaining $38 billion would 

represent reductions in overhead. The Administration has released 

little detail on the content of the 1992 budget, and the reclassification 

of funding obscures analysis even more. For example, the Administration would place real property maintenance activities under military 

construction instead of O&M where it has been in the past, differing in 

this respect from the CBO baseline. 

Most of the changes in O&M occur in the out-years, which would 

be consistent with changes in overhead functions that occur over time, 

and with a number of management initiatives emphasized by the 

Defense Department. For example, DoD will consolidate certain finance functions into a departmentwide system--the Defense Finance 

and Accounting Service--while the Defense Logistics Agency will assume increased responsibility for supply operations of the services. 

The aim of these initiatives is to reduce redundancy and create efficiency. Another strongly emphasized initiative is the Defense Business Operations Fund (DBOF). 

Defense Business Operations Fund. The military services furnish certain supplies and industrial services to each other on a revolving fund 

basis. In other words, supplies and services provided by one element of 

a service for another element are paid for by the latter out of appropriated funds. The stock and industrial funds obligate $75 billion to $80 

billion per year. DoD is consolidating these accounts into one account--the Defense Business Operations Fund. The DBOF will change 

accounting practices so that prices will better reflect actual costs, and 

provide the customers of these businesslike activities with an incentive to seek low-cost solutions. 
CHAPTER IV PROPOSALS FOR DEFENSE AND INTERNATIONAL AFFAIRS 73 

The budget is silent on some matters related to the DBOF, such as 

how projected funding has been reduced in anticipation of lower costs. 

This issue is particularly relevant to O&M, which is the largest single 

customer of DBOF activities. Savings can be expected from streamlined administration, but savings are also likely to occur if customers 

are given the option to seek alternative sources of supply. It is not 

clear whether DoD customers will be permitted to seek suppliers from 

outside the government for some items. If not, then savings may be 

limited because the new accounting and pricing standards may only 

allocate funds differently without significantly changing incentives or 

costs. 

Base Closures. The Administration's defense budget includes $1.3 

billion in 1992 and 1993 to meet the one-time costs of closing a list of 

bases approved by the Congress a year ago. Over the next five years, 

more than 40 bases will be closed or realigned in accordance with that 

list, which was prepared by the Defense Secretary's Commission on 

Base Realignment and Closure. These closures cost money in the near 

term because of one-time expenditures for such items as transportation and new construction at sites to which activities are relocated. 

The Congress has appropriated $1.5 billion through 1991 for these activities. Such amounts are deposited in the Defense Base Closure Account to be used for the one-time costs of closures. 

The Administration expects to save about $5.3 billion in 1992 

through 1996 from closing still other bases that have not yet been 

identified. Legislation adopted in 1991 established a new process for 

future closures, in addition to those already recommended by the 1989 

Commission. Under this plan, a new Base Closure Commission composed of eight members appointed by the President will consider a list 

of potential base closures recommended by the Secretary of Defense. 

Separate lists are to be prepared and considered in 1991, 1993, and 

1995. The criteria for including bases on the closure list will be similar 

to those applied by the previous commission, except that less emphasis 

will be placed on how soon a specific closure must yield net budgetary 

savings. Also, as in the past, the commission's recommendations will 

be implemented unless a joint resolution of the Congress is passed in 

opposition to the entire list of recommendations--not just to isolated 

recommendations. 
74 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

Because of the uncertainty surrounding the number and type of 

installations that may eventually be considered for closure by the new 

commission, there is no way to estimate the future one-time costs of 

closing these bases and the recurring annual savings that will result. 

Future closures may differ in some important respects from the previous round of closures. The previous closures did not accompany major 

reductions in missions. Instead, many were aimed at raising operating 

efficiencies by relocating and consolidating activities. Future closures 

will occur at a time when many activities are being curtailed rather 

than reorganized. This could mean that future closures will involve 

fewer one-time costs because, for example, only minimal military construction would be required at the sites to which activities were being 

transferred. In addition, personnel savings, which constituted 70 percent to 80 percent of projected annual savings in the previous round of 

closures, could be even higher. 

Military Construction. The Administration's request for military construction is only $0.7 billion below the CBO baseline for 1992 through 

1996, but the actual reduction in the construction program is much 

larger than that. This construction budget includes billions of dollars 

for repair of real property that had previously been requested under 

O&M and RDT&E. In 1993 alone, $1.8 billion of repair funding is being shifted between the accounts. This shift masks a significant pause 

in the construction of facilities in 1992 and 1993. Construction funding 

rises above baseline levels after 1993, but if the baseline were adjusted 

for transfers between accounts the request would fall short of matching 

the rate of construction approved for 1991. 

Construction outside the United States would be $300 million in 

1992, decreasing to $100 million in 1993, as compared with about $250 

million in 1990 and about $100 million in 1991. 

Environmental Cleanup Activities. The budget for national defense 

includes funding for the Departments of Defense and Energy to restore 

or clean up the environment. The DoD budget would continue funding 

for environmental restoration at over $1 billion per year--about the 

same rate of real spending that has been the norm in recent years. 

Environmental activities of the Department of Energy (DOE) take a 

larger share of the atomic energy defense request each year--growing 
CHAPTER IV PROPOSALS FOR DEFENSE AND INTERNATIONAL AFFAIRS 75 

from 25 percent in 1991 to 38 percent in 1996. Within its request for 

the DOE, the Administration seeks about $310 million to develop technology for restoring the environment, an increase of about 30 percent 

over 1991. 

Modernization 

The reductions in forces planned for the next few years mean that 

fewer weapons will be needed, because the forces that remain can 

employ the stock of weapons left by those disbanded. However, there 

will still be a need to procure more modern weapons, as can be seen in 

the Administration's request for weapons procurement and RDT&E. 

Funding for weapons procurement would be $25 billion below the CBO 

baseline in 1992-1996, and funding for RDT&E would be $5 billion 

below. About $10 billion of the procurement reduction is a net cut in 

funds for modernization because the remaining reduction can be traced 

to changes in the force structure. No detailed information on the request is available for the whole period; consequently, the following discussion emphasizes the request for 1992. 

Procurement. In general, the Administration would buy fewer weapons than in the recent past, and fewer aircraft than in any year since 

1978. In 1992, it would buy 359 aircraft--about half as many aircraft 

as it bought in 1990. Tactical missiles, strategic missiles, and Army 

vehicles would also be purchased in lower quantities. The number of 

ships sought for 1992 is somewhat greater than in 1991, but only half 

as much as in 1990. 

Purchases of many weapons employed in the war in the Persian 

Gulf would be reduced in. 1992, not only in comparison with 1991 but in 

comparison with what was planned in the Administration's budget a 

year ago. For example, the current request for 1992 would buy 48 F-16 

aircraft; 108 are being purchased in 1991, and the Administration 

planned to buy 150 F-16s in 1992 when it submitted its budget a year 

ago (see Table IV-4). The Administration's plan for these weapons 

probably reflects force reductions planned for the next few years. DoD 

may have sufficient stocks of these weapons to satisfy its needs for the 
76 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

TABLE IV-4. PROGRAM CHANGES IN THE 1992 PROCUREMENT 

REQUEST FOR KEY WEAPONS DEPLOYED IN 

OPERATION DESERT STORM 

1992 Request Requested Quantities 

Millions of Compared With 

Dollars of Last Year's 

Budget 1991 Plan for 

Weapons Systems Quantity Authority Actual 1992 

AV-8B Aircraft 

E-2C Aircraft 

EA-6B Aircraft 

F-14 Aircraft 

F-15 Aircraft 

F-16 Aircraft 

FIA-18 Aircraft 

AH-1 Helicopter 

SH-GOB Helicopter 

SH-6OF Helicopter 

UH-6OL Helicopter 

Aircraft 

Missiles 

Army Tactical Missile System 

(ATACMS) 300 

HARM Missile (Navy) 749 

HARM Missile (Air Force) 465 

Hellfire Missile (Army) 112 

Hellfire Missile (Navy) 0 

Patriot Missile 0 

Tomahawk Missile 236 

TOW-2 Missile 10,000 

AGM-130 Missile 120 

Weapons and Tracked Combat Vehicles 

Bradley Fighting Vehicle 0 109 -600 

M-1A1 Abrams Tank 0 44 -225 

SOURCE: Compiled by Congressional Budget Office based on data obtained from the Department of 

Defense. 

a. Data not available. 
CHAPTER IV PROPOSALS FOR DEFENSE AND INTERNATIONAL AFFAIRS 77 

next several years. Also, it may seek to replenish stocks of these weapons through its supplemental request to cover war losses, because such 

incremental costs of the war do not count against the budget ceilings 

for defense. 

Overall, procurement funding would fall by only about 9 percent in 

real terms from 1991 to 1992. Some new, expensive weapons would be 

purchased, and reductions in the numbers bought would drive up the 

unit costs of current weapons. The Administration would buy four B-2 

Stealth bombers in 1992 at a cost of $3.2 billion, compared with $2.4 

billion in the CBO baseline. The Air Force would buy six C-17 transports with a request of $2.2 billion in 1992. The Navy would buy five 

new destroyers with $4.5 billion, compared with the $3.3 billion included in the baseline for four destroyers. 

Last year's budget stated that acquisition efficiency was a major 

priority, and it still receives special emphasis. However, the force reductions that are now possible mean that some weapons will be purchased at higher unit costs (see Table lV-5). For example, the request 

for 1992 will buy 36 FIA-18 aircraft, a cut of 25 percent from 1991, but 

unit costs will rise by almost 50 percent. Some of this increase may 

result from the program's carrying a higher share of McDonnell Douglas overhead, since two other McDonnell Douglas programs have been 

canceled (the AV-8B and the F-15E). Similarly, the E-2C early warning aircraft is being bought at the same rate as in 1991, but unit costs 

will rise by about 29 percent, possibly because the contractor, Grumman Aerospace Corporation, faces termination or deferral of two other 

of its programs--the F-14 remanufacture and the EA-6B. 

Overall, the Administration's defense budget emphasizes the next 

generation of weapons, as shown in Table IV-6. Funding for these 

weapons would exceed the CBO baseline by $6.1 billion, or 13 percent, 

while funding for the current generation of weapons would fall short of 

the baseline by $5.6 billion, or 10 percent. Growth in RDT&E accounts 

for most of this result, and of all RDT&E programs the Strategic 

Defense Initiative garners the largest increase. 
78 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

RDT&E. The Administration is seeking funds for research, development, test, and evaluation that would total $40 billion in 1992 and 

$41 billion in 1993. The 1992 request represents a $3.2 billion real inTABLE IV-5. SELECTED PROGRAM CHANGES FOR AIRCRAFT 

AND MISSILE PROCUREMENT IN THE PRESIDENT'S 

REQUEST FOR FISCAL YEAR 1992 

Weapons System 

Millions of 

Dollars of Change from 1991 

Budget Unit Cost 

Quantity Authority Quantity (Percent) 

MH-6OG Helicopter 

SH-GOB Helicopter 

Tanker Transport ('M"l'S) 

UH-6OL Helicopter 

RC-12 Aircraft 

F-16 Aircraft 

SH-6OF (CV ASW) Helicopter 

E-2C Aircraft, 

Civil Air Patrol Aircraft 

FIA-18 Aircraft 

Aircraft 

Missiles, Torpedoes, and Other Weapons 

AMRAAM Missile (Air Force) 1,000 782 530 

AGM-130 Powered GBU-15 120 7 2 72 

MK-50 ALWT Torpedo 246 274 - 19 

Advanced Cruise Missile 120 518 35 

Penguin Missile 42 46 2 

HARM Missile (Air Force) 465 117 345 

Avenger (LOS-R) Fire Units (Army) 144 180 5 6 

ATACMS Missile 300 175 -18 

AMRAAM Missile (Navy) 191 215 -74 

Standard Missiles (MR) 525 424 -265 

TOW-2 Missile (Army) 10,000 201 -284 

HAVE NAP Missile 3 2 37 6 

HARM Missile (Navy) 749 218 -571 

Tomahawk Missile 236 471 -164 

MD-48 ADCAP Torpedo 108 315 -132 

MLRS Rocket Launchers 43 183 -23 

Laser Hellfire Missile (Army) 112 2 0 -2,890 

SOURCE: Compiled by Congressional Budget Office based on data supplied by the Department of 

Defense. 
CHAPTER IV PROPOSALS FOR DEFENSE AND INTERNATIONAL AFFAIRS 79 

TABLE IV-6. INVESTMENT IN THE NEXT GENERATION 

AND CURRENT GENERATION OF WEAPONS 

(In billions of dollars of budget authority) 

1992 

CBO President's Difference 

Category Baseline Request Dollars Percent 

Selected Weapons Systems 

SSN-21 submarine 

DDG-51 destroyer 

Trident I1 missile 

AMRAAM missile 

B-2 bomber aircraft 

C-17 aircraft 

Other 

Other 

Army RDT&E 

Air Force RDT&E 

Navy RDT&E 

Other RDT&E 

Total 

Selected Weapons Systems 

Bradley Fighting Vehicle 

F-16 aircraft 

M-1 tanks 

FIA-18 aircraft 

MX missile 

Other 

Air Force aircraft 

Air Force missiles 

Air Force other procurement 

Navy aircraft 

Navy other procurement 

Navy ships 

Navy weapons 

All other procurement 

Total 

Next Generation 

Current Generation 

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. Less than 0.5 percent. 
80 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

crease, or 9 percent above CBO's baseline, while the 1993 amount is 

about 7 percent, or $2.7 billion, above the baseline. Although details of 

the Administration's plans beyond 1993 are not available, the following discussion identifies some of the more significant programs that 

are planned for 1992 and 1993. 

Most of the real growth in 1992 and 1993 is in programs managed 

by the Strategic Defense Initiative Organization (SDIO). The budget 

would provide $4.6 billion in 1992 and $4.9 billion in 1993 for the SDI 

program and would consolidate tactical missile defense programs under the control of SDIO at nearly $600 million in both years. Programs 

included in the tactical missile defense initiative are the Patriot missile, Extended Range Interceptor, and Arrow Continuation Experiments. 

Real growth in strategic programs in 1992 of about 14 percent can 

be traced to the Air Force's Milstar satellite communications system, 

which would receive nearly $1.1 billion in 1992 and about $1.2 billion 

in 1993. Other strategic programs in the 1992 request include $1.6 

billion for the Air Force's B-2 bomber, nearly $300 million to continue 

development of the Rail Garrison basing mode for Peacekeeper missiles, and about $550 million for full-scale development of the small intercontinental ballistic missile (S1CBM)--all next-generation weapons. 

While tactical programs would grow by 4 percent in 1992 and 5 

percent in 1993 in real terms, closer scrutiny reveals that this growth 

results from both cancellations and continuations in the next generation of weapons. The Air Force's Advanced Tactical Fighter would receive $1.6 billion in 1992 and $2.3 billion in 1993 for full-scale development. At the same time, the Air Force would cancel its version of the 

Navy's A-12 Aircraft--the Advanced Tactical Aircraft. The Navy also 

would cancel the A-12 program and its version of the Advanced Tactical Fighter, but it requests about $400 million in 1992 and $1.0 billion 

in 1993 to start developing a new variation of the FIA-18-a plane capable of performing fighter and attack roles. The Army requests about 

$450 million for modernization of armored systems in 1992 and $400 

million in 1993, along with $550 million in 1992 and about $600 million in 1993 to develop its Light Armed Scout Helicopter. 
CHAPTER IV PROPOSALS FOR DEFENSE AND INTERNATIONAL AFFAIRS 81 

Activities that explore basic research to ensure that the United 

States maintains technological superiority would decline in real terms 

by 6 percent, or $0.2 billion, in both years. Intelligence and communications programs would grow by 9 percent, or $0.4 billion, in 1992 in 

real terms. This increase can be traced primarily to changes in classified programs. Funding to support defense-wide mission support activities (that is, programs with many and diverse applications) would 

decline by 1 percent in 1992 and remain constant in 1993, both in real 

terms. 

Atomic Energy Defense Activities. The structure of the Department of 

Energy's nuclear weapons complex will undergo a sweeping change 

during the next five years. The vast complex of laboratories and plants 

will be restructured in response to the lower demand for nuclear material products and increased demand for environmental and security 

safeguards and verification technologies. 

Because of reduced demand for nuclear material products, and in 

response to problems with safety and the environment, DOE is not operating any reactors at present and it plans to reopen only one reactor 

(at Savannah River) in the near term. Accordingly, the budget request 

for materials production in 1992 is approximately $465 million, or 

almost 20 percent, lower than the 1991 funding level. Two facilities-- 

at Fernald, Ohio, and Hanford, Washington--have ceased production 

permanently and would be funded only for environmental cleanup. 

Meanwhile, DOE will examine alternatives for modernizing the 

U.S. atomic weapons complex. The largest increase in the 1992 weapons activities request (over 31 percent) is for new production reactors, 

including funding for preliminary design and testing of new production 

reactor technologies. A technology is to be chosen in December 1991. 

The budget includes funding to design and construct only one new production reactor embodying the chosen technology. 

Another area with an increase over the 1991 level is the development of naval reactors. The 1992 budget includes $800 million for this 

activity, in comparison with 1991 funding of just over $650 million. 

More than $120 million of this increase represents a shift in the funding source for the highly enriched uranium used in naval reactor cores, 
82 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

from the enriched materials budget to the naval reactors budget. The 

remaining $25 million of the increase is attributable to the development program for the Advanced Fleet Reactor (to power the Seawolf 

class submarines), and to the continued extensive servicing and refueling of prototype naval reactor plants. 

CBO REESTIMATES OF THE ADMINISTRATION'S 

REQUEST FOR NATIONAL DEFENSE 

In general, CBO and OMB have a common estimate of outlays for the 

accounts in the defense budget. But in two cases there are differences 

that are quite large (see Table IV-7). 

TABLE IV-7. CBO REESTIMATES OF PROPOSED SPENDING IN 

THE PRESIDENT'S BUDGET FOR FUNCTION 050, 

NATIONAL DEFENSE (By fiscal year, 

outlays in billions of dollars) 

President's 1992 Budget 298.9 295.2 292.0 286.7 288.6 

CBO Technical Reestimates 

Department of Defense 

Transfer proposal 0 2.3 0.5 0.1 a 

Military personnel 0 0 0 3.6 0.1 

Procurement 0.1 a a a a 

RDT&E 0 0.1 0.1 a a 

Other Department 

of Defense - 0.7 - 0.4 - 0.2 - 0.1 a 

Subtotal 0.7 2.8 0.7 3.7 0.1 

Atomic Energy a 0.1 0.1 a a 

Other Defense 3 3 - a a - a 

Total 0.7 3.0 0.8 3.7 0.1 

President's 1992 Budget 

as Estimated by CBO 299.6 298.2 292.8 290.4 288.7 

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

NOTE: RDT&E = research, development, test, and evaluation. 

a. Less than $50 million. 
CHAPTER IV PROPOSALS FOR DEFENSE AND INTERNATIONAL AFFAIRS 83 

The major estimating difference for 1992 between CBO and the 

Administration results from an Administration proposal to change the 

procedures that DoD uses to transfer funds to intelligence agencies. 

The Administration argues that the current budgetary treatment of 

funds appropriated to DoD for intelligence programs that are later 

transferred to other agencies overstates outlays for DoD and for the 

budget as a whole. Though legislation may not be necessary to change 

the procedures--and consequently the budgetary treatment--the budget seeks legislation aimed at slowing DoD's disbursement of appropriations destined for other intelligence agencies. The Administration 

estimates that this legislation would lower DoD outlays by $2.3 billion 

in 1992 and $2.9 billion over five years. 

CBO's reestimate of the Administration's defense budget does not 

assume any savings from this proposal. Funds transferred from the 

DoD budget to intelligence agencies are subsequently deposited in the 

U.S. Treasury, so any change in the transfer procedure would neither 

represent any real savings to the government nor affect government 

borrowing. In other words, the Administration proposes to change only 

an intragovernmental transaction. This change in accounting is analogous to credit reform, which changed the accounting for credit assistance programs. In this case, the caps on discretionary appropriations 

under the Budget Enforcement Act were adjusted to hold the appropriations harmless from an accounting change. CBO believes that a 

similar adjustment should be made for the defense intelligence transfer proposal and that it is inappropriate to claim outlay savings. 

Another 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 Friday, 

pushing it into the previous fiscal year. For example, the first paycheck of fiscal year 1990 fell on Sunday, October 1, 1989, and checks 

were issued on Friday, September 29, which was the last working day 

in fiscal year 1989. The first paydays of 1995 and 1996 will fall on the 

weekend. CBO assumes these paydays will be advanced to the previous fiscal year, affecting the timing of outlays but not of budget authority. The Administration's budget assumes that these paydays will not 

be advanced as was done previously, although this change could still be 

made after the budgets for these years are proposed. 
84 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

Also, CBO assumed different outlays in previous years for the Defense Business Operations Fund and for Coastal Defense Augmentation. These differences amounted to about $0.7 billion in 1991 and $0.4 

billion in 1992. In addition, CBO adjusted the outlay estimates for the 

Navy's aircraft and research accounts to reflect a proposed transfer of 

$165 million in 1992 for development of the V-22 Osprey. This adjustment raises the spending in 1992 from that budget authority because 

outlays occur more quickly from the research account than from the 

aircraft procurement account. 

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 conducted by the United States Information Agency 

and the Board for International Broadcasting, 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, offset by requests for future 

years that represent a real decline (see Table IV-8). Not counting the 

$12.2 billion appropriation request to meet the increased quota payment for the International Monetary Fund, the 1992 appropriation request for discretionary programs represents a 4.6 percent real increase 

over 1991. For most programs, the requests after 1992 grow at half the 

rate of inflation and fall below the baseline by 1995. In 1992, the President requests a large increase for the Enterprise for the Americas Initiative, for a Presidential Contingency Fund, and for construction and 

rehabilitation of State Department buildings, along with decreases in 

food aid and foreign military financing. 

Comparison of the President's request with the CBO baseline encounters a bias in the baseline. The Foreign Operations Appropriations Act for 1991 contained a technical error that provided $403.5 

million more in foreign military financing (FMF) than intended. This 
CHAPTER IV PROPOSALS FOR DEFENSE AND INTERNATIONAL AFFAIRS 86 

prompted sequestration of 1.9 percent of budgetary resources for all 

discretionary international affairs programs. The President requested 

a rescission of the extra FMF funds and a restoration of the sequestered resources, but the Congress had not completed action at the time 

this report was prepared. The CBO baseline is based on the postsequestration levels and is therefore skewed toward foreign military 

financing. 

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) 

Cumulative 

Five-Year 

1992 1993 1994 1995 1996 Changes 

CBO Baseline 

Policy Changes 

Foreign aid 

Enterprise for the 

Americas 

Presidential contingency fund 

Military assistance 

P.L. 480, food aid 

Other foreign aid 

Conduct of foreign affairs 

State Department 

Foreign information 

and exchange activities 

Export-Import Bank 

and other 

Total 

President's 1992 Budget 

as Estimated by CBO 

SOURCES: Ofice of Management and Budget; Congreeaional Budget Ofice. 
86 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

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 President is requesting two new programs--are Enterprise for the Americas Initiative and the Presidential 

Contingency Fund. 

Enterprise for the Americas Initiative. The Enterprise for the 

Americas Initiative (EAI) features budget authority of $0.7 billion over 

the next three years for restructuring bilateral debt, and $0.5 billion 

over the next five years for a contribution to an investment fund to be 

administered by the Inter-American Development Bank. The debt to 

be restructured is primarily old development assistance loans bearing 

interest rates between 0.75 percent and 3 percent with up to 37 years to 

repay. The appropriation represents the difference between the present value of the "expected" stream of repayments on the old loans and 

the present value of a new debt instrument that will replace them. 

Interest on the new debt instrument may support environmental activities within the debtor countries. In addition, the proposal includes 

a complicated triangular sale of Commodity Credit Corporation and 

Eximbank loan assets for debt-for-equity and debt-for-nature transactions. The EAI would increase spending by $1.0 billion over the 

five-year period. 

Presidential Contingency Fund. The President is requesting budget 

authority of $20 million in 1992, and $1.3 billion over the next five 

years, for a Presidential contingency fund. The fund is classified as an 

international financial program, but appears to be security assistance 

that can be programmed with flexibility. This request would increase 

spending by $1.2 billion over the five-year period. 

Military Assistance. The foreign military financing program provides 

credits and grants to enable foreign countries to buy U.S. military 

equipment and services. The President's request for FMF financing is 

below baseline by $0.2 billion in 1992 and by $2.0 billion over the fiveyear period. Over half of the savings are from freezing the financing 

for Israel and Egypt at $1.8 billion and $1.3 billion, respectively. The 
CHAPTER IV PROPOSALS FOR DEFENSE AND INTERNATIONAL AFFAIRS 87 

remainder stem from the President's proposal to rescind $0.4 billion in 

FMF grants appropriated for 1991 and already projected over the 

1992-1996 period in the CBO baseline. 

For the first time since 1989, the President is not requesting that 

FMF be provided solely as grants. In the past two years, the Congress 

provided $0.4 billion per year as concessional loans. The request for 

$0.3 billion in concessional loans represents a 25 percent reduction 

from baseline loan levels. In addition, the President is requesting that 

the Eximbank provide up to $1.0 billion in loan guarantees to finance 

the export of military equipment and services. 

Public Law 480, Food Aid. The creation of a new Title I11 grant program, along with the reform in the budgetary handling of credit, make 

comparison of the 1992 food aid program with the 1991 program difficult. The appropriation request of $1.3 billion for 1992 is an increase of 

$0.3 billion over 1991, but it represents a program cut of $0.2 billion 

from the CBO baseline and a reduction in commodity shipments of 0.7 

million metric tons. The request would lower spending for the P.L. 480 

program by $1.3 billion over the next five years. 

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. New replenishments for the MDBs will raise outlays 

$0.2 billion above the baseline over the next five years. Outlays for the 

Agency for International Development's assistance programs are higher than the baseline by $0.3 billion over the five-year period, while 

those for the economic support fund are lower by $0.4 billion. The subSaharan Africa development assistance and special assistance initiatives are funded at baseline levels. In other programs, the President is 

requesting an increase for narcotics control programs, and a decrease 

for migration and refugee assistance and in voluntary contributions to 

international organizations. In total, the request for other foreign aid 

programs would lower outlays by $0.1 billion over the five-year period. 
88 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

Conduct of Foreign Affairs 

The conduct of foreign affairs category 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. 

State Department. The President is proposing $130 million in start-up 

costs for a new embassy building in Moscow, but the request does not 

include additional funds in 1993 through 1996 to complete the Moscow 

project. He is also proposing a five-year rehabilitation and replacement program for other U.S. embassies and consulates. These two proposals are expected to increase spending by about $60 million in 1992 

and $800 million over the five-year period. 

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. In 1986 

through 1990, appropriations for many of these programs fell short of 

assessments. The President is proposing an appropriation of $503 million for full funding of the amounts owed by the United States from 

that five-year period. The obligation of these funds, however, would be 

spread over the next four years, resulting in spending near the levels 

projected in the CBO baseline. 

Foreign Information and Exchange Activities 

Funding for overseas broadcasting by the United States Information 

Agency (USIA) and the Board for International Broadcasting (BIB) is 

near baseline levels in 1992. Over the next five years, the request for 

the BIB is $0.2 billion below baseline levels, while the request for the 

USIA is lower by $0.1 billion. 
CHAPTER IV PROPOSALS FOR DEFENSE AND INTERNATIONAL AFFAIRS 89 

Export-Import Bank and Other Programs. 

In this category, the President is requesting a single subsidy appropriation and a single limitation of $9,525 million on loans, guarantees, 

and insurance. The limitation is lower than those provided in past 

years, but previous guarantee limitations were always in excess of 

actual activity. The single limitation will allow Eximbank flexibility 

to provide financing either as loans or as guarantees, as needed to meet 

demand. The President would eliminate the interest-equalization program in favor of more cost-effective direct loans. He is also proposing 

to finance exports of military equipment and services through Eximbank. 

For the International Monetary Fund, the President is requesting 

the appropriation of 8.6 billion in Special Drawing Rights (an international monetary unit), or $12.2 billion at the time the budget was 

prepared, for U.S. participation in the IMF quota increase. Transactions with the IMF are considered as exchanges of monetary assets and 

not as a part of receipts or expenditures. 

CBO REESTIMATES OF THE ADMINISTRATION'S 

REQUEST FOR INTERNATIONAL AFFAIRS 

CBO reestimates of the President's budget are smaller than in recent 

years, $0.2 billion or less per year for 1992 through 1996, and all are 

technical in nature (see Table IV-9). Differences in economic assumptions have in the past resulted in differences in estimates of interest 

income from the Exchange Stabilization Fund. This year, the President's estimate of outlays for the fund was rounded to the nearest halfbillion, obscuring any differences resulting from economic assumptions. 

Discretionary Programs 

Public Law 480, Food Aid. The Administration has changed its 

spendout rates for the Public Law 480 program from 100 percent in the 

first year to a three-year disbursement pattern. In the process, the 
90 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

third year of spending has been omitted. CBO continues to use a twoyear spendout rate, raising outlays by over $0.1 billion in all years. 

Foreign Military Financing. The CBO and Administration estimates 

for the foreign military financing program appear to be close in their 

totals. However, the reform in the budgetary handling of credit programs would move all pre-1992 loan activity to mandatory liquidating 

accounts. The Administration estimate of disbursements from loan 

balances appears to be prorated at an even rate. Most of the loan 

balances are for Greece, and CBO estimates these will disburse at a 

slower rate than the average for the account. The differences in estimates of grant and loan disbursement rates result in a higher CBO 

estimate for the discretionary foreign military financing account in 

TABLE IV-9. CBO REESTIMATES OF PROPOSED SPENDING IN 

THE PRESIDENT'S BUDGET FOR FUNCTION 150, 

INTERNATIONAL AFFAIRS 

(By fiscal year, outlays in billions of dollars) 

President's 1992 Budget 

CBO Reestimates 

Discretionary 

P.L. 480, food aid 

Foreign military financing 

Eximbank 

Other discretionary 

Mandatory 

Exchange Stabilization Fund 

Eximbank 

P.L. 480, food aid 

FMF liquidating account 

Total 

President's 1992 Budget 

as Estimated by CBO 

SOURCES: Office of Management and Budget: Congressional Budget Office. 
CHAPTER IV PROPOSALS FOR DEFENSE AND INTERNATIONAL AFFAIRS 91 

1992 and 1993, and lower CBO estimates thereafter. In the mandatory 

liquidating account, the differences would have the opposite effect. 

Eximbank. The President's request for the subsidy cost of Eximbank 

programs is nearly two and one-half times the CBO baseline level. 

This reflects estimating differences in the subsidy cost of the bank's 

programs--primarily for short- and medium-term guarantees to moderate-risk countries. Eximbank's financial estimates appear to be very 

conservative as compared with those of other agencies and of CBO. Obligations for the subsidy account were estimated using the lower CBO 

subsidy estimates. The lower obligation estimates reduce the estimate 

of outlays by $0.1 billion in 1992 and $0.7 billion over the five-year 

period through 1996. 

Other Discretionary. Higher outlays in 1993 are the sum of small 

differences in second- and third-year spendout rates for most programs. 

CBO has two major reestimates of budget authority. CBO would 

add $0.3 billion in budget authority in 1992 for an advance appropriation to buy down foreign military sales interest. The funds were provided by the Congress subject to a Presidential request. The Administration has not yet requested the funds and therefore does not count 

them. CBO counts them because they are available to the President 

without further action by the Congress. 

In addition, CBO would reestimate a $0.5 billion request for arrearage payments for assessed contributions to international organizations and peacekeeping activities. The President requested the funds 

for 1992, but limited their obligation to one-quarter of that amount per 

year over the next four years. CBO would score the funds as budget 

authority as they become available for obligation. This scoring would 

lower the request by $0.4 billion in 1992, but raise it by $0.1 billion 

annually for the following three years. 

Mandatory Programs 

CBO estimated the interest income of the Exchange Stabilization Fund 

by applying CBO interest-rate assumptions to the net equity in the 
92 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

fund. The Administration rounded its estimate to the nearest half 

billion. CBO estimates higher collections for the Eximbank liquidating account in 1992 and 1993 than does the Administration, and 

lower collections in 1995 and 1996. The President's estimate for the 

Public Law 480 liquidating account has no disbursements for loan balances, even though the estimates assume a two-year disbursement pattern for loans. 
CHAPTER V 

THE ADMINISTRATION'S 

DOMESTIC PROPOSALS 

The President's domestic proposals largely conform to the shape of last 

fall's budget summit agreement. The summit set multiyear caps on 

discretionary spending--that is, programs that are subject to the 

annual appropriation process. CBO gives the Administration a mixed 

grade on compliance, judging that its proposals meet the budget 

authority test but violate the outlay caps. Within the domestic discretionary cluster, some programs fare better than others; a few areas 

(notably science, space, and technology, as well as the administration 

of justice) are targeted for increases that outstrip the rate of inflation, 

while many others are trimmed. 

The biggest category of domestic spending--mandatory programs-- 

is not subject to dollar caps but is linked to federal government revenues in a pay-as-you-go scheme. The pay-as-you-go rule requires that 

actions affecting these programs be, at worst, deficit-neutral; of course, 

it does not bar attempts at further deficit reduction. The President 

proposes a small amount of additional deficit reduction in these programs, chiefly in Medicare and a handful of other benefit programs. 

The President proposes selling or leasing some government assets, 

mainly the naval petroleum reserve in Elk Hills, California, and the 

Arctic National Wildlife Refuge--proposals that are, in CBO's view, ineligible for credit under the pay-as-you-go rules. Finally, the President's program would lead to modest changes in the federal government's net interest costs. 

Chapter I sketched the outlines of the President's proposed budget 

using the broad categories--discretionary, pay-as-you-go, and other 

spending--that are central to the new budget enforcement process. 

This chapter presents a more detailed view of the Administration's 

proposals for 18 budget functions. Each function contains spending 

that addresses a particular national need--such as energy, transportation, health, or veterans' programs, to name just a few. (A few func- 
94 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

tions, such as net interest, do not address national needs as conventionally defined but are included for completeness.) A typical domestic 

function contains both discretionary and mandatory spending. 

The discussion in this chapter focuses on the proposed policy departures in the President's budget, comparing the Administration's 

request with the CBO baseline projections. The baseline capsulizes the 

outlook for the budget under current laws and policies--that is, it continues payments under mandatory programs such as Medicare and 

Social Security while preserving the current amounts (in real dollars) 

and mix of funding for discretionary programs. Of course, there is 

nothing sacred about current priorities; the budget records the Administration's own choice of priorities. The discussions also highlight 

major estimating differences between CBO and the Office of Management and Budget (OMB), differences that may stem from contrasting 

economic assumptions or from other, technical disagreements. 

Most domestic spending functions contain some federal credit activity--that is, programs in which the government lends money directly 

or guarantees loans extended by private lenders. The Budget Enforcement Act addressed long-standing criticism of the budgetary treatment of federal credit programs. Traditionally, credit activity has been 

reflected in the budget on a strict cash-flow basis; disbursements and 

repayments (in the case of direct loans) and fees and defaults (in the 

case of guaranteed loans) were recorded when they occurred. Critics 

argued that costs were recorded long after the government had irrevocably committed itself to the transaction, fatally weakening budgetary 

controls over these programs. Critics also pointed out that cash-flow 

accounting typically exaggerated the costs of direct loans and understated the costs of guaranteed loans in their initial years--the focus of 

policymakers' attention. 

Responding to these concerns, the Budget Enforcement Act required that the budgetary costs of future credit activity (starting with 

1992 obligations) will be reflected on a subsidy basis; that is, the 

government's entire expected loss (or, in a few cases, gain) on a credit 

transaction will be recorded .when the loan or guarantee is made. And 

for discretionary programs, the Appropriations Committees must explicitly approve. these subsidy costs, weighing them against other con- 
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 96 

tenders for scarce dollars. Throughout this chapter, reference is made 

to the subsidy cost of credit programs, reflecting the shift in 

measurement that takes place in 1992. More information about credit 

reform is contained in CBO's January 1991 report, The Economic and 

Budget Outlook: Fiscal Years 1992-1 996. 

A brand-new complexity in analyzing the President's budget has 

cropped up this year because of the existence of multiyear discretionary spending caps. By law and convention, baseline projections 

include full inflation adjustments for discretionary programs--that is, 

they preserve the current (fiscal year 1991) appropriation in real dollars. But the discretionary spending caps contained in the Budget Enforcement Act fall short of increases needed to compensate for projected 

inflation. A major task for the Congress this year will involve deciding 

how to comply with the caps. Because the caps will force trade-offs 

among programs, there are literally thousands of ways to comply with 

them. As the reader combs through the President's proposals for discretionary spending programs, he or she should keep in mind that 

some savings from the baseline will be necessary solely to conform 

with the statutory caps. 
96 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

FUNCTION 250: GENERAL SCIENCE, SPACE, AND TECHNOLOGY 

PROPOSED SPENDING CHANGES 

(By fiscal year, outlays in billions of dollars) 

CBO Baseline 15.9 

Proposed Changes 

Pay-As-You-Go 0 

Discretionary 

Department of Energy 0 

National Aeronautics and 

Space Administration 

Space science R&D 0 

Space station 0 

Space shuttle 0 

Space flight R&D 0 

Other NASA 0 

National Science Foundation - 0 

Total 0 

President's 1992 Budget 

as Estimated by CBO 15.9 

President's 1992 Budget 15.8 

CBO Reestimates 0.1 

a. Less than $50 million. 

PROPOSED POLICY CHANGES 

As part of the President's initiative to expand the human frontier, the 

1992 budget seeks significant increases for function 250. The proposed 

budget authority for 1992 would be $1.8 billion (11 percent) over the 

CBO baseline, with a resulting outlay increase of $1.1 billion (6 percent). Spending in the following years would require even larger increases, as both budget authority and outlays would be about $5 billion 

above the baseline by 1996. By that time, outlays would grow to more 

than $24 billion, compared with $16 billion in 1991. There are no payas-you-go proposals in this function. 
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 97 

All of the programs in the function would share in the spending increase. Budget authority for the National Aeronautics and Space Administration (NASA) would be above the baseline by $1.2 billion (9 

percent) in 1992; the National Science Foundation (NSF), by $300 million (13 percent); and the Department of Energy's (DOE'S) general science programs, by $350 million (30 percent). 

The largest increases would be for the DOE'S superconducting 

super collider (SSC) and NASA's space science and exploration initiatives. Building the SSC would require appropriations that are more 

than double the amounts in the baseline. The $534 million requested 

in 1992 would exceed the baseline by nearly $300 million. Budget 

authority proposed for the following years exceeds the baseline by $400 

million each year. The outlays from this authority would be more than 

$100 million above the baseline in 1992 and $250 million to $450 

million higher in each of the following years. Spending for other DOE 

general science programs would be above the baseline in 1992 and 

1993, and equal to or below the baseline after that. 

Spending for NASA's space science research and development 

(R&D), which includes the Mission to Planet Earth and the Mission 

from Planet Earth programs, would receive an increase in budget authority of nearly $600 million (19 percent) above the baseline in 1992. 

For 1993 through 1996, the budget authority levels would be $1.2 billion to $2.0 billion above the baseline. Outlays for these programs 

would be more than $300 million above the baseline in 1992, and $850 

million to $2 billion higher in the following years. 

Spending for other NASA programs would also be above the 

baseline. Outlays for the space station would be close to the baseline in 

1992, but would be $1.2 billion above it by 1996, when assembly is 

scheduled to begin. The space shuttle program would start slightly 

above the baseline, but would slip to $200 million below the baseline in 

1995 and 1996; these amounts are intended to support 8 to 10 shuttle 

flights per year. The President is also proposing additional spending in 

the space flight R&D program to fund the development of a new launch 

vehicle. Budget authority for this project would be $250 million (40 

percent) above the baseline in 1992 and $2 billion (59 percent) above 

the baseline over the five years. 
98 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

Spending for the National Science Foundation would again be 

raised. For 1992, the NSF appropriation would increase by $300 million (13 percent) over the baseline. Increases would continue in subsequent years, with appropriations rising to $3.9 billion in 1996. All 

major parts of the NSF budget--research and related activities, education and human resources, and the Antarctic program--would receive 

increased funding. 

CBO REESTIMATES 

CBO estimates for outlays are very close to the Administration's figures in 1991 and 1992, but are $300 million to $400 million higher in 

each of the following years. These reestimates result from differences 

in projected spending rates for NASA's space flight and research and 

development programs. 
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 99 

FUNCTION 270: ENERGY 

PROPOSED SPENDING CHANGES 

(By fiscal year, outlays in billions of dollars) 

CBO Baseline 3.1 4.4 5.4 5.8 4.9 4.9 

Proposed Changes 

Pay-As-You-Go 

Power marketing reforms 0 0 -0.4 -0.4 -0.4 -0.4 

Rural electrification 0 b b -0.1 -0.1 -0.2 

Strategic Petroleum Reserve - 0 -0.1 - 0.1 0 0 - 0 

Subtotal 0 -0.1 -0.3 -0.5 -0.5 -0.6 

Discretionary 

Fossil R&D 0 -0.1 -0.2 -0.3 -0.3 -0.3 

Strategic Petroleum Reserve 0 b -0.1 -0.3 -0.3 -0.3 

Conservation 0 b -0.2 -0.2 -0.2 -0.2 

Energy supply R&D 0 0.1 0.2 0.2 0.1 b 

Other - 0 0.1 -0.1 -0.1 -0.1 -0.2 

Subtotal 0 b -0.4 -0.7 -0.9 -1.1 

Other Changes 

Loss of Elk Hills and Alaska 

power marketing receiptsa - 0 0.6 0.6 0.6 0.5 

Total 0 -0.1 -0.1 -0.6 -0.9 -1.1 

President's 1992 Budget 

as Estimated by CBO 3.1 4.3 5.3 5.2 4.1 3.9 

President's 1992 Budget 2.6 3.6 4.6 5.0 3.9 3.4 

CBO Reestitriates 0.5 0.7 0.7 0.2 0.1 0.5 

a. Receipts from the proposed lease of the naval petroleum reserve at Elk Hills, California, and the 

proposed sale of the Alaska Power Marketing Administration are shown in function 950. Outlays in 

function 270 would increase relative to the baseline after these proposed asset sales, because the 

assets would no longer generate direct receipts to the government €or oil and electricity sales. For 

Elk Hills, the government would receive annual royalty payments after 1992; those receipts are also 

shown in function 950. The table includes the loss of receipts in function 270 under "other changes" 

because CBO considers these proposals to be asset sales, which should not count in the "pay-asyou-go" category. 

b. Less than $50 million. 
LOO ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

PROPOSED POLICY CHANGES 

The President proposes to increase receipts and cut spending in energy 

programs, which together would reduce net outlays in function 270 in 

1992 by $0.1 billion (or 2 percent) below the baseline. For discretionary energy programs, the President's 1992 request is about $0.5 

billion (or 8 percent) below the baseline. Because of lags in spending 

and in the collection of additional receipts, the effect of the budget proposals accelerates over time, reducing energy outlays by 22 percent below the baseline in 1996. Outlay savings would total $2.8 billion over 

the 1992-1996 period. 

The above savings are net of losses in receipts that would result 

from the proposed sale of the Alaska Power Marketing Administration 

(PMA) and from the proposed lease of the naval petroleum reserve at 

Elk Hills, California (NPR-1). Excluding the outlay effects of these 

asset transactions, outlay savings would total about $4.4 billion from 

1992 through 1996. 

Most of the proposed spending reductions are similar or identical 

to ones included in previous budgets. Net energy spending is expected 

to increase by more than $1 billion in 1992 and by another $1 billion in 

1993, under both the baseline assumptions and the Administration's 

proposals, because of large planned increases in capital investment by 

the Tennessee Valley Authority (TVA) and other spending and receipt 

changes that are not subject to future appropriation actions. 

Pay-As-You-Go Policy Changes 

Power Marketing Repayment Reforms. The President seeks to establish a fixed schedule for interest and principal repayments to the Treasury made by PMAs. Interest rates would be changed to the Treasury's 

cost of borrowing at the time each PMA investment went into service. 

These reforms would increase the price of federally generated hydropower, and would increase offsetting receipts by $1.6 billion for fiscal 

years 1993 through 1996. CBO expects that the policy cannot be fully 

implemented until 1993. 
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 101 

Rural Electrification. The President proposes gradually to eliminate 

direct loans by the Rural Electrification Administration (REA) to electric and telephone cooperatives. The budget includes proposals to reduce by about 70 percent the $698 million loan level for 1992 set in last 

year's Omnibus Budget Reconciliation Act and to eliminate direct 

loans by the Federal Financing Bank (FFB). Partial federal guarantees of privately financed loans would replace both the REA and 

FFB direct loans. Borrowers would pay a fee on the guaranteed portion 

of new private loans. CBO estimates that these proposals would save 

about $16 million in lower loan subsidies in 1992, and a total of $0.5 

billion in lower subsidies over the 1992-1996 period. About $0.4 billion 

of that total is in the pay-as-you-go category, because it reflects proposed legislation to cut mandatory loan levels for loans made by the 

REA. The other savings would accrue from the proposed loan guarantee fees and would be classified as discretionary. 

Discretionary Policy Changes 

Fossil Energy Research and Development. The President's appropriation request for fossil energy in 1992 is $227 million, 53 percent below 

the baseline level. Federal spending for fossil energy research and 

development (R&D) would be reduced by $1.2 billion, or 45 percent, 

over the 1992-1996 period. The budget would limit fossil spending to 

"high-risk" R&D; nearly all of the proposed reduction is in funding for 

coal-related research, which the President says could be supported by 

the private sector. 

Strategic Petroleum Reserve. The President's proposals to discontinue 

normal purchases of oil for the Strategic Petroleum Reserve (SPR) and 

to reduce expenditures for SPR facilities would leave outlays 14 percent below baseline levels over the next five years. Because the budget 

proposes instead to lease oil using existing spending authority, no new 

appropriations were requested for the SPR oil account. 

If the U.S. government negotiates an agreement to lease oil from a 

foreign oil-producing nation, annual cash payments for a given amount 

of oil would be considerably lower than the one-time cost of purchasing 

that oil. The Administration's budget includes only the amount of an- 
102 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

nual cash payments for "leased oil" as outlays. In contrast, CBO believes that the purchase value of the oil should be counted as outlays 

because the transaction is effectively equivalent to purchasing the oil 

over time. Hence, CBO estimates SPR oil outlays based on equivalent 

oil purchases as the reserve is filled. The CBO reestimate of outlays for 

the SPR oil account is therefore more than double the President's estimate for the 1992-1996 period. Because the President does not request 

any new funds for SPR oil, however, the policy would still represent a 

significant decrease from the baseline. CBO estimates that the cut in 

SPR oil outlays would be $0.1 billion in 1992 and $0.9 billion over the 

next five years, or about 50 percent below baseline spending. (The cut 

would be about 80 percent using the Administration's estimates of 

outlays for leased oil.) 

Conservation. For 1992, the President requests $326 million in appropriations for energy conservation, a 37 percent cut relative to the baseline. The request calls for a 21 percent increase over the 1991 appropriation for conservation R&D, but that increase would be more than 

offset by nearly eliminating grants to states for home weatherization 

and other conservation programs. 

Energy Supply Research and Development. The budget includes 1992 

funding of $2.8 billion for energy supply R&D, an increase of $189 million relative to the baseline. The five-year outlay increase of $480 million is 4 percent over baseline levels. Most of the increase would apply 

to environmental restoration and nuclear research activities. 

Other. The budget also includes proposals to establish a uranium enrichment revolving fund (instead of relying on annual appropriations), 

and to cancel advance appropriations of $600 million for round five of 

the Clean Coal Technology Program. CBO estimates that these proposals would not have a significant budgetary impact in 1992. 

Other Policy Changes 

Naval Petroleum Reserves. The President proposes to lease the government's naval petroleum reserve at Elk Hills, California, at the end 

of fiscal year 1992. CBO believes this would be an asset sale, and thus 
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 103 

should not be included for pay-as-you-go scoring. Receipts for this 

transaction appear in budget function 950 and are estimated to total 

$2.2 billion over the 1992-1996 period, including both bonus bid 

receipts and federal royalties. These savings would be partially offset 

by an increase in outlays in function 270, because the government 

would no longer be collecting receipts from selling oil and gas produced 

at Elk Hills. In 1993, the proposed asset sale 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 $1.5 billion because of the sale of NPR lease 

rights. 

CBO REESTIMATES 

CBOts estimates of net outlays for function 270 under the President's 

budget proposals are above the Administration's estimates by $0.5 

billion in 1991, $0.7 billion in 1992, $0.7 billion in 1993, and by smaller 

amounts in subsequent years. 

Pay-As-You-Go Reestimates 

The largest estimating difference involves the reform of PMA repayment terms. The budget assumes that PMA electric rates could be increased in time to collect an additional $0.4 billion in power receipts for 

1992. CBO estimates that such a large increase would require more 

time to implement and that additional receipts could not be collected 

until 1993. 

Because of the Gulf war and uncertainty in world oil markets, the 

President proposes to delay replacing the SPR oil sold late last year to 

test the reserve's marketing and distribution procedures. While the 

budget assumes a shift in $123 million of spending from fiscal year 

1991 to fiscal years 1992 and 1993, CBOts reestimate assumes that 

none of the oil sold last year would be replaced this year under current 

law, and that the President's proposal would actually shift all such 

spending from 1992 to 1993. 
104 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

Other Reestimates 

CBO's 1991 estimates include receipts totaling about $475 million for 

two recent sales of SPR oil and refunds of nuclear waste fees. The 

President's 1991 outlay estimates do not include these transactions. 

CBO reestimates for 1992 include higher spending for acquisition 

of oil for the SPR, lower receipts for the Western Area PMA, and higher spending by the TVA than assumed in the President's budget. The 

SPR reestimate reflects CBO's budgetary treatment of "oil leases" as 

purchases (see SPR discussion under Discretionary Policy Changes, 

above). 

In 1993, CBO's treatment of proposed SPR oil leases as purchases 

accounts for $0.3 billion of the budget reestimates. Other 1993 reestimates include lower Western Area PMA receipts, and higher outlays 

for disbursing previously approved loans to rural electric cooperatives. 
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 105 

FUNCTION 300: NATURAL RESOURCES AND ENVIRONMENT 

PROPOSED SPENDING CHANGES 

(By fiscal year, outlays in billions of dollars) 

CBO Baseline 18.8 20.1 21.0 21.8 22.8 23.6 

Proposed Changes 

Pay-As-You-Go 

Recreation and 

EPA user fees 

Discretionary 

Water resources 

Conservation and land 

management 

Recreational resources 

Pollution control and 

abatement 

Other natural resources 

Subtotal 

Total a -0.2 -0.7 -1.7 -3.2 -4.7 

President's 1992 Budget 

as Estimated by CBO 18.8 20.0 20.3 20.1 19.7 19.0 

President's 1992 Budget 18.8 19.5 20.0 20.1 19.6 18.9 

CBO Reestimates a 0.4 0.2 a 0.1 0.1 

a. Less than $50 million. 

PROPOSED POLICY CHANGES 

The President's proposals for natural resource and environmental programs would reduce outlays below the CBO baseline by about $160 

million in 1992 and by about $10 billion over the 1992-1996 period. 

Nearly all of the savings would result from proposed cuts in discretionary appropriations. 
106 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

Pay-As-You-Go Policy Changes 

The President's budget includes proposed new recreation user fees for 

the Forest Service and the U.S. Army Corps of Engineers, and additional fees for reregistering pesticides to be collected by the Environmental Protection Agency (EPA). The President's proposals would 

yield additional offsetting receipts of about $27.5 million in 1992, 

rising to $33 million a year thereafter. For 1992, the President proposes to spend $5.6 million of the new receipts for related recreational 

activities. In addition, 25 percent of the new Forest Service fees--about 

$2.5 million--would be spent for increased payments to states, as 

required by law. Budget authority and outlays for such payments are 

included in function 800. 

Discretionary Policy Changes 

The President is requesting 1992 appropriations of $20.1 billion for discretionary natural resource and environmental programs, $0.6 billion 

(or 2.9 percent) above the 1991 funding and 2.9 percent below the CBO 

baseline level of $20.7 billion. Outlay savings in 1992 would be about 

$130 million, or less than 1 percent, relative to the baseline. 

Water Resources. The President is requesting 1992 appropriations of 

$4.6 billion for discretionary water resources programs. This funding 

level is 3 percent ($145 million) below the CBO baseline in 1992, resulting in outlay savings of $118 million. This amount reflects decreases from baseline budget authority of 11 percent ($105 million) for 

the Bureau of Reclamation and 22 percent ($48 million) for the Soil 

Conservation Service. The request for the Army Corps of Engineers' 

activities to develop water resources is near the baseline level for 1992 

and includes funds to begin five new construction projects and to increase environmental restoration activities. 

Conservation and Land Management. The President's 1992 appropriation request for conservation and land management totals $4.7 billion, 

which is $97 million (or 2 percent) below the baseline. Outlays would 

be $60 million,below the baseline. The proposal reflects a 3 percent 

reduction in funding for the Forest Service, relative to the baseline, but 
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 107 

increases of 6 percent for the Bureau of Land Management (BLM) and 

1 percent for land conservation activities carried out by the Department of Agriculture. 

The Forest Service would receive a 5 percent ($121 million) increase over 1991. Most of the increase results from the $228 million in 

funding proposed for specified tree-planting and recreational improvement programs--up from $70 million in 1991. Proposed funding for 

other Forest Service activities is $37 million below 1991 levels and 

would save $229 million relative to the baseline in 1992. 

The BLM would receive a 14 percent increase ($109 million) over 

1991 levels. Nearly all of the proposed increase is funding for firefighting and for certain land acquisition, wildlife, and recreational 

activities. In addition, the President proposes to collect holding fees for 

hard-rock mining claims, which would increase receipts by $40 million 

in 1992 and by $35 million annually thereafter. 

Recreational Resources. The President's 1992 request for discretionary funding of recreational programs is $2.0 billion, about 4 percent less than the 1991 funding level of $2.1 billion and 10 percent 

below the CBO baseline. Outlay savings would total about $16 million 

(or less than 1 percent) for the budget year. Most of the decrease proposed for recreational programs would be borne by multiyear projects 

and grants to acquire recreational lands (cut by $37 million, or 11 percent, below the baseline) and to construct or repair recreational facilities (cut by $234 million, or 59 percent). These two proposed cuts 

would save about $51 million in 1992, but would be offset partially by 

increases in resource management and protection activities proposed 

as part of the president's America the Beautiful initiative. The net increase proposed for the annual operating and grant budgets of recreational agencies is about $43 million (or less than 3 percent) above the 

CBO baseline. 

Pollution Control and Abatement. The President's 1992 budget for 

environmental programs results in outlays that are $64 million, or 1 

percent, above the baseline. The budget includes 1992 funding increases above baseline levels for a number of activities of the Environmental Protection Agency--including cleanup of hazardous wastes 
108 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

(superfund and leaking underground storage tanks), research and 

development, and salaries and expenses. Over the 1992-1996 period, 

however, outlays would fall about $3.2 billion, or 9 percent, below the 

baseline. The proposed phase-out of the grant program for construction of wastewater treatment facilities would produce most of these 

savings--$2.5 billion over five years. Appropriations for these grants 

would drop from $2.1 billion in 1991 to $1.9 billion in 1992 and reach 

zero in 1995, consistent with the authorizations in the Clean Water 

Act. 

Other Natural Resources. The President's proposals for other natural 

resources would lower spending by $1.4 billion (11 percent) relative to 

the CBO baseline through 1996. Spending would be close to the baseline in 1992, but would fall below in each of the following years. The 

1992 budget authority for the National Oceanic and Atmospheric Administration (NOAA) would be $67 million (4 percent) above the baseline, but the U.S. Geological Survey (USGS) and the Bureau of Mines 

(BOM) would have their budget authority cut to levels $48 million (8 

percent) and $31 million (17 percent) below the baseline, respectively. 

In total, outlays over the five years would be below baseline levels by 

$0.7 billion (8 percent) for NOAA; by $0.5 billion (16 percent) for 

USGS; and by $0.2 billion (22 percent) for BOM. 

CBO REESTIMATES 

CBO's estimates of outlays are above the Administration's estimates 

by $0.4 billion in 1992 and by smaller amounts in subsequent years, 

reflecting different spending rates for many accounts, primarily in 

conservation and land management and pollution control programs. 
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 109 

FUNCTION 350: AGRICULTURE 

PROPOSED SPENDING CHANGES 

(By fiscal year, outlays in billions of dollars) 

CBO Baseline 15.4 17.2 15.8 14.5 13.6 13.0 

Proposed Changes 

Pay-As-You-Go 

Crop insurance 0 a -0.1 -0.1 -0.1 -0.1 

Commodity Credit 

Corporation 0 a -0.1 -0.1 -0.1 -0.1 

Other - 0 - a - a - a - a - a 

Subtotal 0 -0.1 -0.2 -0.2 -0.2 -0.2 

Discretionary 

Agricultural Credit 

Insurance Program 0 -0.2 -0.2 -0.2 -0.2 -0.2 

Administrative expenses 

for crop insurance 0 a -0.1 -0.1 -0.1 -0.1 

CCC Export Enhancement 

Program 0.3 -0.3 0.1 0 0 0 

Other 

Subtotal 

Total 0.4 -0.5 -0.5 -0.7 -0.8 -0.9 

President's 1992 Budget 

as Estimated by CBO 15.8 16.6 15.2 13.8 12.8 12.1 

President's 1992 Budget 15.9 15.3 14.2 13.5 12.1 12.6 

CBO Reestimates -0.1 1.3 1.1 0.3 0.7 -0.5 

a. Less than $50 million. 

PROPOSED POLICY CHANGES 

CBO estimates that proposed changes by the Administration would 

save $0.5 billion in 1992 and $3.5 billion over the 1992-1996 period 

relative to the CBO baseline. Spending during this period would average about 5 percent below baseline levels. 
110 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

Pay-As-You-Go Policy Changes 

Crop Insurance. This year, the Administration is proposing modifications to the crop insurance program that are less drastic than last 

year's plan to terminate crop insurance and replace it with a permanent disaster assistance program. The crop insurance premium subsidy would be reduced from 30 percent of each producer's premium to 

15 percent, effective for the 1992 crop year. The Administration believes that large premium subsidies encourage farmers to produce on 

marginal land and thus raise the costs of crop insurance. CBO estimates savings of $555 million over the 1992-1996 period from halving 

the premium subsidy. Of that amount, only about $25 million would 

occur in 1992, because the bulk of indemnity payments for the 1992 

crop year are expected to be made in fiscal year 1993. 

Commoditv Credit Corporation (CCC). This year's budget proposes a 

payment limit that is a variant of those rejected by the Congress during the 1990 farm bill deliberations. The Administration would exclude from CCC program benefits any producers who earn more than 

$125,000 per year in income from off-farm sources. This change would 

take effect with the 1992 crops. The Administration argues that only 

relatively well-off individuals who are less in need of government payments would be affected by this proposal. CBO estimates this proposal 

would reduce deficiency payments by about $75 million per year once 

the program is fully in effect and would save $325 million over the 

1992-1996 period. 

Other. The budget also includes proposed user fees for the Federal 

Grain Inspection Service and the Agricultural Marketing Service. Together they would bring in receipts of $12 million per year beginning 

in 1992. In addition, the Administration proposes to eliminate mandatory payments to states of almost $3 million per year by the Cooperative State Research Service. 

Discretionary Policy Changes 

Agricultural Credit Insurance Program. The President's requested 

subsidy appropriation for certain direct loan programs would be below 
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 111 

baseline levels. This request would have the largest impact on the 

emergency disaster loan program. Although the disaster loan limit is 

$600 million for 1991 and borrowers are expected to use $100 million of 

this authority, the budget includes a subsidy appropriation sufficient, 

by Administration estimates, to fund only $25 million in disaster loans 

in 1992. Including administrative expenses, Agricultural Credit Insurance Fund (ACIF) outlays would be below the baseline by $0.2 billion in 1992 and by $0.9 billion over the 1992-1996 period. 

Administrative Expenses for Crop Insurance. The President's budget 

would reduce budget authority for crop insurance administrative expenses from an estimated level of $340 million in 1991 to $298 million 

in 1992 and keep it about at that level in later years. Part of this reduction is related to the proposed cut in premium subsidies beginning 

with the 1992 crops, which is likely to reduce farmers' purchases of 

crop insurance. The government reimburses private insurance companies for selling and servicing crop insurance policies. With fewer 

purchases of crop insurance, reimbursements to companies would decrease. Overall, outlay savings for administrative expenses would 

total $32 million in 1992 and $412 million over the 1992-1996 period. 

Commodity Credit Corporation. The Administration proposes language in the supplemental appropriation bill that would effectively 

eliminate the current ceiling of $425 million on funding for the Export 

Enhancement Program (EEP). EEP subsidy payments are made to exporters, allowing them to sell U.S. commodities at prices below U.S. 

market prices. Such payments are normally made in the form of generic commodity certificates, which can be redeemed for commodities 

owned by the government. The Administration uses EEP subsidies to 

counter export subsidies of the European Community; this year the 

competition is mainly in wheat. Wheat prices have weakened considerably in recent months because bumper crops around the world 

have generated intense competition among exporters for sales. The 

Administration believes that $900 million in 1991 EEP subsidies is 

necessary to keep U.S. wheat exports competitive. 

Higher EEP subsidies would affect government expenditures on 

price supports in a number of ways. The additional $475 million in 

generic certificates would raise outlays, mainly in 1991, because CBO 
112 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

expects they would be redeemed for government-owned corn that 

would otherwise be sold for cash. Higher domestic wheat prices caused 

by higher subsidized exports would reduce wheat deficiency payments 

in 1992. However, deficiency payments would rise slightly in 1993 

because CBO expects the Secretary of Agriculture to reduce the size of 

future acreage reduction programs in response to lower domestic supplies of wheat. Taking all these effects into account, CBO estimates 

that this proposal would raise CCC outlays by about $120 million over 

the 1991-1993 period. 

Other Agriculture Programs. The Administration is requesting 1992 

budget authority for other agriculture programs at about the 1991 

level. The President's proposals would result in net outlay savings of 

about $0.1 billion in 1993, $0.2 billion in 1994, $0.3 billion in 1995, and 

$0.4 billion in 1996 compared with the CBO baseline. Areas slated for 

decreases relative to the baseline after 1992 include the Extension 

Service, the Agricultural Research Service, the Animal Plant and 

Health Inspection Service, and administrative expenses of the Emergency Food Assistance Program; increased funding is proposed for the 

Cooperative State Research Service. 

CBO REESTIMATES 

CBO outlay estimates for agriculture programs are virtually the same 

as the Administration's in 1991, but are significantly higher than the 

Administration's in most other years. In 1991, CBO estimates that the 

EEP funding proposal would raise CCC costs by $320 million, whereas 

the Administration asserts that it would have no budgetary impact. 

Downward reestimates for other aspects of CCC activities offset the 

EEP reestimate in 1991. 

CBO projects that agriculture outlays in 1992 and 1993 will be 

higher than those projected by the Administration, mainly because of 

higher expected outlays in CCC programs and the ACIF loan program. 

CBO's estimate of CCC outlays is about $1.0 billion higher in 1992, 

largely because CBO expects more farmers to participate in the 1991 

crop programs and thus deficiency payments to be higher than the 

Administration projects. CBO expects outlays for feed grains to be 
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 113 

about $0.6 billion higher in 1993 because of lower expected market 

prices. ACIF outlays are estimated to be $0.5 billion higher in 1992 

and $0.4 billion higher in 1993, primarily because CBO expects farmers' loan repayments to be lower than those the Administration projects. 

In 1994 through 1996, CBO projects higher spending in CCC and 

crop insurance programs and lower spending in ACIF than estimated 

by the Administration. The lower ACIF spending reflects CBO's lower 

expected interest payments to the Treasury. Because these interest 

payments are intragovernmental, the reestimates would be offset by 

corresponding entries in function 900 amounting to $0.3 billion in 

1994, $0.9 billion in 1995, and $1.2 billion in 1996. CBO projects CCC 

outlays to average $1.0 billion higher per year than those projected by 

the Administration because of weaker expected demand and prices for 

the major crops. Crop insurance outlays are projected to average $0.3 

billion per year higher during this period because CBO expects the historical loss ratio (the ratio of indemnity payments to total premiums) 

to continue rather than to improve sharply as the Administration projects. 
114 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

FUNCTION 370: COMMERCE AND HOUSING CREDIT 

PROPOSED MAJOR SPENDING CHANGES 

(By fiscal year, outlays in billions of dollars) 

CBO Baseline 112.8 104.8 55.8 29.4 -42.7 -37.6 

Proposed Changes 

Pay-As-You-Go 

Federal Housing 

Administrationh 0 -0.6 -0.7 -0.8 -0.9 -0.9 

Other 

Subtotal 

Discretionary 

Rural Housing Insurance 

Fund 0 a -0.2 -0.2 -0.3 -0.3 

Payment to the 

Postal Service 0 -0.3 -0.3 -0.3 -0.4 -0.4 

SBA business loans 0 -0.2 -0.2 -0.2 -0.2 -0.3 

. Other - 0 -0.4 -0.4 - -0.5 -0.6 -0.6 

Subtotal 0 -0.9 -1.1 -1.3 -1.5 -1.6 

Other Changes 

Postal Service (Off-budget) - 0 0.2 0.2 0.1 - 0 - 0 

Total 0 -1.4 -1.7 -2.1 -2.3 -2.5 

President's 1992 Budget 

as Estimated by CBO 112.8 103.4 54.1 27.3 -45.0 -40.1 

a. Less than $50 million. 

b. There are no net ~avings from thi8 proposal. These amount8 are exactly offset in function 900. 

PROPOSED POLICY CHANGES 

Under the Administration's budget, spending for commerce and housing credit programs would be below the baseline in each year during 

the 1992-1996 period. Savings would total $1.4 billion in 1992 and 

about $10 billion over the five years. Only about $6 billion would be 

real savings. The remainder represents changes in intragovernmental 

payments, which have no net effect on the federal deficit. 
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 115 

Under both baseline assumptions and Administration policy, total 

spending in this function is projected to plummet from $113 billion in 

1991 to less than $105 billion in 1992, to about $55 billion in 1993, and 

to net receipts of more than $40 billion in 1995 and 1996. This dramatic decline in outlays will occur primarily because spending for resolving failed savings and loans is expected to peak in 1992 at about 

$94 billion, and the government will then begin to collect increasing 

amounts of receipts from disposing of assets. CBO also estimates that 

net outlays of the Bank Insurance fund will decline substantially from 

the 1991 level of close to $13 billion. 

Pay-As-You-Go Policy Changes 

Federal Housing Administration (FHA). The Administration would 

cancel about $7 billion in outstanding debt owed to the Treasury by the 

FHA's General and Special Risk Insurance Funds because there is 

little likelihood that the funds will ever have the resources to retire the 

debt. This action would not change the federal deficit, nor would it 

have any net effect on pay-as-you-go scoring, since lower outlays in 

this function ($3.9 billion over five years) would be exactly offset by 

reduced interest receipts in function 900. 

Discretionary Policy Changes 

Rural Housing Insurance Fund (RHIF). The President's budget would 

significantly alter the means by which the Farmers Home Administration provides rural housing assistance. Currently, most of this 

assistance is in the form of subsidized direct mortgage loans to lowincome households or to developers of low-income rental housing. For 

1992, the President proposes to replace some of these direct loans with 

subsidized and unsubsidized guaranteed private loans. The budget 

includes a 1992 appropriation request of about $0.4 billion to cover 

RHIF subsidy costs, $0.3 billion less than the CBO baseline projection. 

The Administration intends the 1992 subsidy request to support about 

$1.6 billion in single-family and multifamily loans, of which $0.7 billion would be guaranteed loans. For 1991, the Congress provided 

about $1.9 billion for direct loans and $0.1 billion in guaranteed loans. 
116 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

The loan activity proposed by the President would provide singlefamily mortgage assistance to an estimated 23,000 households and 

fund about 8,500 rental units. By comparison, the 1991 budget could 

assist about 26,100 homeowners and finance 15,700 rental units. The 

program changes included in the 1992 rural housing budget are very 

similar to those proposed last year. 

Under the Administration's plan, low-income borrowers with 

guaranteed loans would receive federal subsidies that would reduce effective interest rates on their loans by an estimated four percentage 

points. Moderate-income borrowers with loan guarantees would receive no assistance beyond the guarantee. The President's RHIF proposals would reduce outlays by less than $0.1 billion in 1992 and by 

about $1.0 billion over the 1992-1996 period, relative to the baseline. 

The Administration also proposes a rental voucher program for 

rural areas. The program would be similar to that operated by the Department of Housing and Urban Development. The $190 million requested would support 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. 

Payment to the Postal Service. The President is proposing to terminate or restrict certain preferred postage rates, to increase the rates for 

most preferred mailers, and to eliminate the portion of the appropriated subsidy that covers these reduced postage rates. Relative to 

the CBO baseline, these changes would save more than $0.3 billion in 

1992 and more than $1.7 billion over the 1992-1996 period. 

Small Business Administration (SBA) Business Loans. About $1.1 

billion of the five-year savings relative to the CBO baseline is achieved 

through reduced loan subsidy appropriations for the SBA's business 

loan programs. The Administration 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 

several types of guaranteed loans. The 1992 subsidy appropriation 

would be $56 million, well below the CBO baseline level of $261 million. A total of $71 million in direct loan authority was provided for 

1991, and SBA's share of loan guarantees is estimated to be $4.1 billion 
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 117 

this year. The Administration's 1992 budget would allow for $5 million in direct loans and $3.8 billion in guaranteed loans. This proposal 

is similar to proposals included in previous budgets. 

Other. The budget includes additional fees for the registration of 

securities by the Securities and Exchange Commission (SEC) and for 

services provided by the Federal Communications Commission (FCC). 

The Administration would also establish a new transaction fee to be 

collected by the Commodity Futures Trading Commission. These three 

fees are expected to bring in about $0.2 billion a year in additional receipts, but some of this amount would be used to finance increased 

spending by these regulatory agencies. The Administration also proposes spending reductions below the baseline for periodic censuses, reflecting the normal phasing down from the decennial census, as well as 

for the Export Administration and SBA administrative expenses. 

Other Changes 

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 $0.2 billion annually and 

$1.0 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 total, the proposals in the budget affecting the Postal Service 

would result in reduced appropriations of $1.7 billion (in function 370) 

and increased receipts of $1.0 billion (in functions 950 and 550), or a 

net spending reduction of about $2.7 billion (on-budget) relative to the 

baseline over the five-year period. Covering the full cost of these proposals would necessitate an additional rate increase above the 12 percent hike that CBO assumes would occur in 1994. However, the Postal 
118 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

Service could not raise its rates to recover the additional costs for payments to the Civil Service Retirement and Federal Employees Health 

Benefits funds until the next overall rate increase, which CBO assumes would occur in February 1994. As a result, net outlays of the 

Postal Service would increase by $0.5 billion over the 1992-1994 

period. This amount would not be counted for pay-as-you-go scoring. 

CBO REESTIMATES 

CBO estimates that outlays for this function will be $6.7 billion less in 

1991, but $10.6 billion more in 1992 and $43 billion more over the 

1993-1996 period than the Administration projects. Most of these variations are attributable to differing estimates for spending by the Resolution Trust Corporation (RTC). 

Pay-As-You-Go Reestimates 

Federal Housing Administration. The Administration's budget estimates include savings of $0.6 billion in 1992 and almost $5 billion over 

the 1992-1996 period for the liquidating account of the General and 

Special Risk Insurance Funds, The Administration asserts that increased appropriations for administrative expenses and for programs 

of the Flexible Subsidy Fund that provide subsidies to troubled FHAinsured projects would reduce defaults covered by these funds. CBO's 

reestimate includes no savings because the relationship between the 

amount appropriated for these programs and the amount saved by 

FHA is very speculative. Even if there were savings, CBO believes it 

would be inappropriate to count them for pay-as-you-go purposes because they would be indirect effects of discretionary appropriations and 

not the result of changes in direct spending legislation. 

Other Reestimates 

Resolution Trust Corporation. CBO expects that about 500 more savings and loan institutions will become insolvent through 1995 than the 

Administration estimates. Under CBO's baseline projections, the 
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 119 

RTC's cumulative losses will be about $155 billion, compared with the 

Administration's estimate of about $130 billion. Both the Administration and CBO treat the funds necessary to meet the government's 

commitment to insure deposits as mandatory, and both assume that 

sufficient funds will be provided to allow the RTC to resolve the inventory of failed thrifts. CBO expects that the RTC will need to continue closing or merging sick thrifts through 1994, rather than completing its caseload by 1993, as does the Administration. As a result, 

the most significant difference in outlays over the 1992-1996 period occurs in 1994, when CBO expects that net outlays will exceed the Administration's estimate by $74 billion. 

CBO's estimates for net outlays in 1992 and 1993 are higher than 

those estimated in the President's budget by $14 billion and $13 billion, respectively, largely as a result of the RTC's need to acquire more 

assets when closing failed thrifts. This additional spending for working capital is expected to generate future offsetting collections for the 

agency, when assets are sold. Thus, CBO's estimate of net outlays in 

1995 and 1996 is lower than the Administration's by $2 billion and $11 

billion, respectively. 

FSLIC Resolution Fund. This fund is charged with paying off the 

obligations incurred by the Federal Savings and Loan Insurance 

Corporation. Disbursements from the fund mostly cover interest and 

principal payments on notes, and cash to maintain yields or pay capital 

losses on assets purchased from failed thrifts. The Congress appropriated $22 billion in 1991 for the fund to renegotiate the assistance 

agreements that were issued before 1989 in an effort to reduce the 

government's long-term costs. CBO's outlay estimates are higher than 

the Administration's by $1.1 billion over the 1991-1996 period, largely 

reflecting differing assumptions about the size and timing of payments 

for past losses, which are highly uncertain. 

Bank Insurance Fund (BIF). CBO's estimate of outlays from the fund 

is lower than the Administration's by $5.6 billion for 1992 and by $37.9 

billion over the 1992-1996 period. These differences result from varying assumptions about losses that will be incurred by the fund and 

about actions that will be taken by the Federal Deposit Insurance 

Corporation (FDIC), which administers the fund. The Administration 
120 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

projects that the fund will experience unprecedented losses throughout 

the five-year period, thereby incurring substantial outlays for resolving failing banks. In contrast, CBO projects that losses will decline, 

beginning in 1994, to levels experienced in the late 1980s. CBO also 

assumes that the FDIC will steadily increase the rate of premiums 

assessed on bank deposits to 30 cents per $100 of assessable deposits by 

January 1993. These higher premiums would partially offset outlays. 

Federal Housing Administration. CBO estimates that outlays in the 

liquidating account of the General and Special Risk Insurance Funds 

will be lower than the Administration estimates in 1992 and each of 

the following years. These differences result primarily from varying 

estimates of claims from insurance commitments issued before 1992. 

In contrast, CBO's estimate of outlays in the Mutual Mortgage Insurance Fund is higher than the Administration's in each year. These 

reestimates stem mostly from CBO's lower estimate of receipts from 

the sale of FHA-owned property. Over the 1992-1996 period, CBO's 

estimate of FHA outlays is $1.3 billion lower than the Administration's. 

Postal Service. CBO estimates of Postal Service outlays are different 

from the Administration's primarily because the budget does not 

reflect the large year-to-year swings in net operating income that result from periodic rate increases, and because CBO's assumptions regarding the wage contract are different from the Administration's. 

CBO's estimate of Postal Service outlays is about $0.9 billion higher 

than the Administration's in 1992 and about $1.2 billion lower over the 

1992-1996 period. 

Other. The remaining reestimates in this function result primarily 

from lower projected outlays for RHIF (reflecting lower interest payments to the Treasury), lower outlays for the Government National 

Mortgage Association (reflecting differing subsidy estimates), and 

higher outlays for the Savings Association Insurance Fund (reflecting 

projected 1995 and 1996 losses at historical levels). 
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 121 

CBO REESTIMATES OF PROPOSED SPENDING IN FUNCTION 370 

OF THE PRESIDENT'S BUDGET (By fiscal year, outlays in billions of dollars) 

President's 1992 Budget 

CBO Reestimates 

Pay-As-You-Go Proposals 

Federal Housing 

Administration 

Other 

Subtotal 

Other 

Resolution Trust 

Corporation 

FSLIC Resolution Fund 

Bank Insurance Fund 

Federal Housing 

Administration 

Postal Service (Off-budget) 

Other 

Subtotal 

Total 

President's 1992 Budget 

as Estimated by CBO - -- 

a. Leas than $50 million. 
122 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990 

FUNCTION 400: TRANSPORTATION 

PROPOSED SPENDING CHANGES 

(By fiscal year, outlays in billions of dollars) 

CBO Baseline 31.3 33.7 35.0 36.4 38.0 39.6 

Proposed Changes 

Pay -As-You-Go 0 0 0 0 0 0 

Discretionary 

Federal-aid highways a -0.1 -0.4 -0.8 -0.9 -0.3 

Miscellaneous highway 

demonstration projects 0 -0.1 -0.2 -0.4 -0.4 -0.5 

Mass transit programs 0 -0.3 -0.3 -0.2 -0.1 -0.1 

Grants to Amtrak 0 -0.2 -0.1 -0.2 -0.3 -0.3 

Northeast Corridor 

Improvement Program 0 a -0.1 -0.2 -0.2 -0.2 

FAA operations 0 0.1 -0.1 -0.3 -0.4 -0.7 

FAA facilities and equipment 0 0.1 0.3 0.4 0.3 0.2 

USCG operating expenses 0 0.3 0.3 0.2 0.1 a 

Other - 0 a - a a - - -0.1 - -0.3 

Total a -0.3 -0.7 -1.4 -2.0 -2.2 

President's 1992 Budget 

as Estimated by CBO 31.3 33.4 34.3 35.0 35.9 37.5 

President's 1992 Budget 31.5 32.7 34.7 35.4 35.5 37.1 

CBO Reestimates -0.2 0.7 -0.3 -0.4 0.4 0.3 

a. Less than $50 million. 

PROPOSED POLICY CHANGES 

Outlays for transportation programs under the Administration's 

policies would be $0.3 billion lower than the CBO baseline in 1992, 

even though the proposed budget authority for the function is $1.4 billion above the baseline. Proposed changes in this function would 

achieve savings by holding down obligations for the highway programs 

and by shifting resources among ground transportation programs to 

those with slower rates of spending. These savings would be only 

partially offset by spending increases for aviation and Coast Guard 

programs. There are no pay-as-you-go proposals in this function. 
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 123 

Ground Transportation. Reductions in spending for ground transportation, particularly for highway programs, would account for most of 

the savings in this function. The budget includes the contract authority and obligation limitations that the Administration proposed for 

inclusion in the highway reauthorization bill, which will cover fiscal 

years 1992 through 1996. CBO estimates that outlays for federal-aid 

highways during this period would total about $81.7 billion, compared 

with $84.2 billion under the baseline-a savings of $2.5 billion. Although the budget includes obligation ceilings for federal-aid highways that are above the CBO baseline in each of the five years, savings 

would still accrue because the budget eliminates most programs that 

are currently exempt from the ceiling. 

The Administration's reauthorization proposal includes a number 

of changes in federal highway policy. These include creating new categories of programs, changing the share of costs the federal government 

pays, allowing more toll roads, and expanding the research program. 

Under the Administration's proposal, total obligations for federalaid highways in 1992 would be $16.5 billion--$0.3 billion above the 

estimated 1991 level, but $0.2 billion below the CBO baseline. Total 

obligations would remain below the baseline in each of the five years 

except 1996. Outlay savings, relative to the CBO baseline, would increase from $0.1 billion in 1992 to $0.9 billion in 1995 before declining 

to $0.3 billion in 1996. In addition, the elimination of miscellaneous 

appropriated highway demonstration projects would reduce 1992 budget authority by $0.5 billion--saving $0.1 billion in outlays in that year 

and $1.6 billion through 1996. 

The Administration also requests language in a supplemental appropriation for fiscal year 1991 that would allow the Department of 

Transportation to restrict the redistribution of obligational authority 

for federal-aid highways in the last two months of this year, thereby 

reducing 1991 obligations by about $0.2 billion. This action would contribute significantly to the outlay savings noted above for this program 

in 1992. 

The requested 1992 budget authority for mass transit programs is 

$3.3 billion--about the same as the 1991 level, but $0.1 billion below 
124 ANALYSIS OF THE PRESIDENT'S BUDGET March l9W 

the CBO baseline. The budget includes substantial changes to the 

structure of federal mass transit programs, including shifts in funding 

from operating to capital assistance and from discretionary to formula 

grants. In addition, the Administration would finance most transit 

spending from the transit account of the Highway Trust Fund. In 

total, these proposals would result in outlay savings relative to the 

baseline of $0.3 billion, or about 7 percent, in 1992 and $1 billion over 

the 1992-1996 period. 

Another proposal would reduce funding for Amtrak subsidies by 

$0.2 billion below the baseline in 1992 and would delay the availability 

of 1992 capital assistance until July of that year, thus reducing 1992 

outlays by $0.2 billion below the baseline. This proposal contrasts with 

all recent Presidential budgets, which have sought to eliminate these 

subsidies. The Administration also would eliminate the Northeast 

Corridor Improvement Program, which provides funds for Amtrak 

capital improvements ($0.2 billion in 1991), thereby further reducing 

outlays by $37 million below the baseline in 1992. Over the 1992-1996 

period, cuts in these rail programs would reduce outlays by $2 billion 

relative to the baseline. 

Air Transportation. Aviation is once again targeted for significant 

funding increases. The President's proposed spending authority for the 

Federal Aviation Administration (FAA) in 1992 is $1.1 billion, or 14 

percent, above the 1991 level and $0.6 billion (7 percent) above the 

CBO baseline. The proposed funding increases would lift FAA outlays 

above the baseline by $0.2 billion in 1992. Most of this increase would 

be used to continue modernizing and improving the air traffic control 

system. Spending authority for FAA facilities and equipment would be 

increased from $2.1 billion in 1991 to $2.7 billion in 1992, an increase 

of almost 30 percent and more than $500 million above the CBO 

baseline. In addition, proposed increases for FAA operations would be 

used to hire more air traffic controllers, aviation safety inspectors, civil 

aviation security specialists, and field maintenance technicians. The 

Administration proposes to derive 75 percent of the funds for the FAA 

from the Airport and Airway Trust Fund over the 1992-1996 period, 

the same share as in 1991. 
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 125 

Water Transportation. The President proposes 1992 appropriations for 

discretionary water transportation programs of $3.2 billion, or nearly 

$520 million (20 percent) above the 1991 level. The proposed funding 

level is $355 million (about 13 percent) above the $2.8 billion for water 

transportation in the CBO baseline and would result in additional 

1992 outlays of $301 million. 

Most of the requested increase reflects a shift of funding for U.S. 

Coast Guard (USCG) operations from other budget functions. Specifically, the President's proposed increase in budget authority for USCG 

operating expenses is about $380 million (18 percent) over the baseline. This increase would be partially offset by eliminating funds made 

available from Department of Defense appropriations-4295 million in 

1991--as well as by significantly reducing the share of operating expenses appropriated from the Oil Spill Liability Trust Fund. Taking 

into account these other financing sources, the proposed 1992 budget 

authority for USCG operations is $49 million (2 percent) above the 

CBO baseline and $205 million (9 percent) larger than the 1991 appropriation. 

CBO REESTIMATES 

CBO estimates that spending under the President's policies will be 

$0.2 billion lower than the Administration estimates in 1991 and $0.7 

billion higher in 1992. In the case of federal-aid highways, CBO estimates that 1991 obligations for programs exempt from the obligation 

ceiling will be $0.5 billion greater than estimated by the Administration. Most of the impact of this difference on outlays occurs in 1992. In 

addition, CBO estimates that a greater proportion of federal-aid highways obligations under the 1992 ceiling will occur in the first part of 

the year, resulting in higher estimated outlays in that year but lower 

outlays in the following two years. Other reestimates are relatively 

small and generally result from different assumptions about spending 

rates. 
126 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990 

FUNCTION 450: COMMUNITY hVD REGIONAL DEVELOPMENT 

PROPOSED SPENDING CHANGES 

(By fiscal year, outlays in billions of dollars) 

CBO Baseline 

Proposed Changes 

Pay-As-You-Go 

Discretionary 

Community development 

Area and regional 

development 

Disaster relief and insurance 

Total 

President's 1992 Budget 

as Estimated by CBO 

President's 1992 Budget 

CBO Reestimates 

a. Less than $50 million. 

PROPOSED POLICY CHANGES 

The 1992 budget proposes a number of reductions relative to the CBO 

baseline in community and regional development programs. Budget 

authority would be below the baseline by 10.5 percent in 1992. Outlays would remain close to the baseline in 1992 but fall below it by 12 

percent over the 1992-1996 period. Spending in this function will decline from 1991 levels by about $1 billion in 1992, even under baseline 

assumptions, largely because of the substantial 1991 outlays for disaster assistance related to the Loma Prieta earthquake and Hurricane 

Hugo. There are no pay-as-you-go proposals in this function. 

Community Development. The community development programs 

focus primarily on housing and economic development in urban areas. 

The Administration's proposals for these programs would reduce 

outlays relative to the baseline by $75 million (or 2 percent) in 1992 
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 127 

and $2.25 billion (11 percent) over the next five years. Many of the 

proposed savings would result from program cuts similar to those recommended in previous budgets. 

The Administration proposes to reduce funding for the Community Development Block Grant program. Appropriations would 

drop from $3.2 billion in 1991 to $2.9 billion per year thereafter. Because the program spends funds at a relatively slow rate in the first 

year, the proposed reduction would not have a significant impact on 

outlays in 1992, but the total savings in outlays over five years would 

be $1.9 billion. 

Additional savings would result from discontinuing funding for 

several programs that were not reauthorized in the Cranston-Gonzalez 

National Affordable Housing Act. The act terminates the urban homesteading program, rental rehabilitation grants, and the Section 312 

rehabilitation loan fund as of Octobe'r 1, 1991. Resulting reductions in 

spending for these programs would amount to nearly $650 over the 

1992-1996 period. In addition, the President proposes to rescind the 

1991 appropriations and unobligated balances for these programs, and 

to eliminate the community development loan guarantee program and 

the emergency community water assistance grants program. 

These reductions are partially offset by Presidential proposals that 

increase spending both in 1992 and over a five-year period. The President proposes to restructure the funding for the Supplemental Assistance for Facilities to Assist the Homeless (SAFAH) program by transferring the 1991 appropriation of $11.3 million to another program (the 

Shelter Plus Care: Homeless Rental Housing Assistance program) and 

consolidating in the SAFAH program funding previously provided to 

programs for the homeless in the Departments of Health and Human 

Services, Education, and Labor. This restructuring would result in an 

increase in spending authority for SAFAH of $57 million for 1992, to 

be used for innovative programs for meeting both short- and long-term 

needs of homeless individuals and families. This increase is almost entirely offset by reductions in requests for the homeless programs from 

which the funding is drawn; the net increase is only $5 million above 

the baseline. 
128 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990 

Area and Regional Development. Area and regional development programs primarily provide funding for rural economic development. As 

in the past, the President has proposed eliminating some of the programs and reducing funding levels for others. These proposed changes 

would result in outlays close to baseline levels in 1992 and outlay savings of $2.2 billion over the 1992-1996 period. 

The President has again proposed to eliminate Economic Development Administration programs, which would save about $30 million in 

1992 and $840 million over the next five years relative to the CBO 

baseline. The budget also includes reduced funding for the Appalachian Regional Commission and for the regional development programs of the Tennessee Valley Authority, which would reduce outlays 

below the baseline by $16 million in 1992 and $400 million over the 

1992-1996 period. 

Administration proposals would reduce the authorized amount of 

direct loans for the Rural Telephone Bank and increase the interest 

rate charged to borrowers. These changes would result in savings of 

less than $1 million in 1992. Direct loans would be replaced by a new 

guaranteed loan program. Also, the President proposes to reduce the 

authorized loan level for both guaranteed and direct loans under the 

Rural Development Insurance Fund (RDIF) and to discontinue RDIF 

guaranteed loans for water and waste disposal systems. 

The President seeks to reduce appropriations for the rural water 

and waste disposal grants and to eliminate rural community fire protection grants. As a result, budget authority would be $91 million below the baseline in 1992, and outlay savings would total $233 million 

over five years. 

The proposed reduction in spending for Indian programs would 

result in net outlay savings of about $40 million for 1992. Appropriations for construction and operation of Indian programs would be 

reduced by $140 million relative to the baseline, resulting in outlay 

savings of $53 million. These savings would be partially offset by new 

spending for construction, rehabilitation, and repair of Indian 

educational facilities and for Indian settlement payments. 
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 129 

Disaster Relief and Insurance. Outlays for these programs under the 

Administration's budget are above the baseline in all years, largely 

because the budget includes funding of $184 million in 1992 and subsequent years for disaster relief. There was no appropriation for this 

program in 1991, because unobligated balances were available from 

the large 1990 appropriation. 

The Administration also proposes to revise the terms of the Small 

Business Administration's (SBA's) Disaster Loan Program. The proposal would reduce the amount of loans disbursed by limiting participation to only those people who cannot obtain credit elsewhere; it also 

would increase the interest rate paid by eligible borrowers. CBO estimates that these program changes would save $26 million in 1992 and 

about $240 million during the 1992-1996 period. 

CBO REESTIMATES 

CBO's estimates of outlays for function 450 are very close to the 

Administration's, differing primarily because of assumptions about 

spending rates. 
130 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990 

FUNCTION 500: EDUCATION. TRAINING, EMPLOYMENT, 

AND SOCIAL SERVICES 

PROPOSED SPENDING CHANGES 

(By fiscal year, outlays in billions of dollars) 

CBO Baseline 43.1 47.1 48.8 49.1 50.1 47.6 

Proposed Changes 

Pay-As-You-Go 

Stafford Student 

Loans 

Foster Care 

Other 

Subtotal 

Discretionary 

Elementary and 

secondary education 0 -0.2 -0.1 -0.5 -1.0 -1.6 

Student financial 

assistance 0 -0.2 -0.3 -0.6 -0.9 -1.2 

Training and employment 0 0.1 -0.1 -0.5 -0.7 -1.1 

Social services 0 -0.6 -0.9 -0.7 -0.7 -0.8 

Other -2 - a - a -0.2 -0.3 -0.4 

Subtotal 0 -0.9 -1.4 -2.4 -3.5 -5.0 

Total 0 -2.1 -1.8 -2.9 -4.1 -5.6 

President's 1992 Budget 

as Estimated by CBO 43.1 45.0 47.0 46.2 46.1 42.0 

a. Less than $50 million. 

PROPOSED POLICY CHANGES 

The President's proposals for education, job training, employment, and 

social services would reduce spending by $2.1 billion--or more than 4 

percent--below CBO baseline projections in 1992. By 1996, spending 

would fall $5.6 billion (or about 12 percent) below the baseline. In 

1992, $1.2 billion (55 percent) of the spending reductions result from 

pay-as-you-go proposals in the two largest entitlement programs, the 

Stafford Student Loan program and the Foster Care program. Most of 

this cut, however, is caused 'by extending the Internal Revenue Ser- 
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 131 

vice's (IRS's) ability to retain tax refunds of defaulters in the Stafford 

Student Loan program. Retention of these refunds reduces defaults 

and federal loan spending. By 1996, spending reductions from pay-asyou-go proposals account for only 10 percent of the total reduction, or 

$0.6 billion; the remaining 90 percent, or $5.0 billion, comes in discretionary spending cuts. With a few exceptions for some elementary and 

secondary education programs and the Head Start program, virtually 

all of the discretionary programs are held below baseline levels in 1992 

and frozen at the President's 1992 request level in 1993 through 1996. 

Pay-As-You-Go Policy Changes 

Stafford Student Loan Program. The President's 1992 budget calls for 

a number of changes to the Stafford Student Loan program that would - - 

reduce spending cy $1.0 billion in 1992 but leave spending thereafter 

essentially unchanged. Most of this 1992 reduction is caused by the 

President's extension of the provision to retain tax refunds of defaulters, which expires on January 10, 1994. The fact that the effects 

of extending this provision are shown in 1992 reflects the new principles of credit reform required by the Budget Enforcement Act of 1990. 

Under the act, budget outlays associated with new loans (issued in 

1992 and later years) are shown as the present value of long-term costs 

in the year of the loan disbursements. Furthermore, consistent with 

the act, CBO shows the President's proposals that affect pre-1992 loans 

as the present value of expected changes in long-term costs in the year 

of the change, or in 1992 in the case of the IRS provision. 

For years after 1992, budgetary effects of the President's proposals 

are largely offsetting. Outlays would rise because annual borrowing 

limits in both the Stafford and supplemental loan programs would be 

increased by amounts ranging from $875 to $6,000 for most students, 

depending on the year the student is in school and the type of the loan. 

Approximately 1.4 million borrowers are expected to increase their 

borrowing an average of $875 in 1992, raising loan volume by 9 percent. Outlays would decline, however, because the President also proposes to expand recent legislative efforts to reduce federal default 

costs. Thus, the budget includes several provisions that could prevent 

defaults, increase default collections, or lower federal default costs by 
132 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990 

sharing costs with state governments and lenders. Any federal savings 

from these changes would be small because the Omnibus Budget. 

Reconciliation Act of 1990 (OBRA) eliminated schools with high defaults from the program as of 1992. 

Foster Care. The President proposes to slow the rapid growth in outlays for foster care by tightening the definition of allowable administrative activities. The proposal would reduce outlays by $0.2 billion 

below baseline projections in 1992, with savings rising to $0.5 billion 

in 1996. The proposed definition appears to exclude from federal reimbursement preplacement services for children who have not yet been 

placed in foster care and any administrative activities for children who 

receive state-funded rather than federally funded foster care payments. As a result, the proposal is estimated to reduce federal expenditures for administration and services by 25 percent each year. This 

proposal would overturn a Departmental Appeals Board interpretation 

of allowable administrative activities and would target federal funds 

more directly on the low-income children (those eligible for Aid to 

Families with Dependent Children) who receive federally funded benefits. Costs would be shifted to the states, which might react by reducing services to children. Some of the loss in federal funding would 

be offset by a proposed increase of $0.1 billion annually for child welfare services and research, discussed below. Details of the new definition of allowable administrative activities have not yet been specified, 

and so CBO has been unable to provide an independent estimate of the 

Administration's assumption that administrative costs would be reduced by 25 percent. 

Other. As in recent years, the President proposes to eliminate the 

Trade Adjustment Assistance training programs (as well as cash payments in function 600). This proposal would affect approximately 

20,000 people, and save $0.1 billion a year after 1992. Savings in 1992 

are smaller than in later years because people training during the 

week of September 30,1991, would continue to receive services. 
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 133 

Discretionary Policy Changes 

Elementary and Secondary Education. The President's funding request for 1992 is $0.2 billion, or 3 percent, above CBO baseline projections. This increase accommodates two new initiatives--part of an 

Educational Excellence Act--that would increase 1992 funding by a 

total of $690 million. The first initiative funds parental choice programs primarily for school districts serving high portions of children 

from low-income families; the second funds a variety of programs designed to improve elementary and secondary education. Special education grants, math and science grants, emergency drug grants, concentration aid to areas with high proportions of low-income children, and 

Indian education grants all receive funding increases. Impact aid "b" 

grants are eliminated, however, and the basic Chapter 1 grants to 

school districts are frozen at the 1991 level of $5.0 billion. Other grant 

programs receive increases that do not cover inflation, are frozen at 

1991 levels, or are eliminated. 

The $0.2 billion reduction in 1992 outlays results from the projection methodology required by the Balanced Budget Act and followed by 

CBO. The Indian education grants received a one-time double funding 

in 1991 to put the program on a forward-funded basis. CBO baseline 

methodology inflates the 1991 appropriation level, thus continuing 

this double funding for five years, while the President's request does 

not. As a result, the President's budget ou.tlays are lower than baseline 

projections in each year. Without this difference for Indian education, 

outlays for elementary and secondary education in the President's 

request would be at baseline levels in 1992 and $0.2 billion higher than 

the baseline in 1993. 

Student Financial Assistance. The President's budget freezes federal 

funding for student financial assistance programs at the 1991 level of 

$6.7 billion--$0.3 billion, or 4 percent, below the baseline. Within the 

fixed funding, the President proposes to reallocate funds among student aid programs. In the Pell grant program, the maximum Pell 

grant is increased by $1,300 to $3,700. Proposed, too, is a new $170 

million Presidential Achievement Scholarship program for Pell grant 

recipients who excel in their studies. These program increases are partially offset by provisions that channel Pell grant funds to the neediest 
134 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990 

students, thus eliminating approximately 400,000 current recipients 

from the program. Student aid costs are further reduced by substantial 

cuts in supplemental grants, work-study, and Perkins loans, and by 

eliminating state student incentive grants. 

Training and Employment. Policy changes in 1992 are minor in training and employment programs, although after 1992 most programs are 

frozen at the 1992 or 1993 level. In addition, the Administration proposes to target funds for the Job Training Partnership Act (JTPA) 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 grant program--Youth 

Opportunities Unlimited--is proposed for fiscal years 1992 through 

1994 to provide comprehensive services to youth living in high-poverty 

areas. The President does not propose any additional funding for these 

changes. (Outlays increase slightly in 1992, in part because the switch 

from a summer to a year-round program moves spending forward in 

time.) 

Social Services. The President's budget proposes to end two programs: 

State Legalization Impact Assistance Grants (SLIAG) and Community 

Services Block Grants. Other changes are modest. 

All remaining funding for SLIAG--budget authority of $1.1 billion 

in 1992--is proposed for elimination, resulting in estimated outlay savings of $0.4 billion in 1992. These grants, available beginning in 1988 

and ending in 1992, go to states to pay for certain costs of the legalization of undocumented aliens required by the Immigration Reform and 

Control Act of 1986. Rescinding the 1992 budget authority would reduce funding by 28 percent over the life of the program. 

Once again, the President proposes eliminating the Community 

Services Block Grant program, reducing spending by $0.3 billion in 

1992. 

The President requests a $0.1 billion increase above the CBO baseline for child welfare services and research in 1992 and subsequent 

years. Also, the President has continued to highlight the Head Start 

program by requesting $2.1 billion in funding for 1992, a $0.1 billion 
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 135 

increase from 199 1. After accounting for inflation, however, this funding level would only support services to about 600,000 children, virtually the same number served in 1991. 

CBO REESTIMATES 

Pay-As-You-Go Reestim-. The CBO reestimates of the President's 

budget are almost entirely in the Stafford Student Loan program, 

which follows the credit reform principles discussed earlier. The Office 

of Management and Budget has not consistently followed these principles, but instead has estimated the effects on pre-1992 loans as the 

annual change expected in the associated cash flows. These different 

estimating methodologies account for much of the CBO reestimates of 

the Stafford Student Loan proposals in the President's budget. 

Unlike the Administration, CBO in its baseline projections did not 

assume the extension of the provision to retain tax refunds of defaulters. Extending this provision is expected to reduce 1992 outlays 

by $0.8 billion. In addition, CBO estimates 1992 savings to be $0.1 

billion higher than the Administration's for the President's additional 

proposals to enhance the collection of defaults. CBO savings are lower 

than the Administration's in all remaining years because of the differences in estimating methodologies discussed above. 

For many of the President's proposed changes, specific details 

needed for analysis were not available. Once legislative language is 

received, the estimates of the proposals could change substantially. 

Other Reestimates. A major portion of the CBO reestimates is the 

result of different projections of economic variables. The economic reestimates raise spending by $0.4 billion to $0.5 billion a year in 1992 

through 1994, with the reestimates declining to $0.1 billion in 1996. 

CBO projects higher short-term and long-term interest rates than the 

Administration and thus higher interest subsidies in the Stafford 

Student Loan program. 
136 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990 

The remaining differences, technical in nature, lower spending by 

$0.1 billion in 1992 but raise spending by $0.7 billion in 1996. The 

Stafford Student Loan program accounts for some of the technical reestimates, which are negligible in 1992 and $0.2 billion in 1996. The 

largest source of these reestimates is that, unlike the Administration's 

current services projections, CBO's baseline does not include default 

collections from the IRS tax refund program because the program expires in January 1994. Another major source of technical reestimates 

is the Foster Care program, for which spending is $0.2 billion higher 

than Administration estimates in 1992, with the difference increasing 

to $0.5 billion in 1996. The largest source of difference is that CBO 

assumes higher growth in maintenance payments for room and board 

costs for children in foster care, based on historic trends. 

CBO REESTIMATES OF PROPOSED SPENDING IN FUNCTION 500 OF 

THE PRESIDENT'S BUDGET (By fiscal year, outlays in billions of dollars) 

President's 1992 Budget 

CBO Reestimates 

Pay-As-You-Go Proposals 

(Technical) 

Stafford Student Loans 

and other programs 

Other 

Economic 

Stafford Student Loans 

Technical 

Stafford Student Loans 

Foster Care 

Other 

Subtotal 

Total 

President's 1992 Budget 

as Estimated by CBO 

a. Less than $50 million. 
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 137 

FUNCTION 550: HEALTH 

PROPOSED SPENDING CHANGES 

(By fiscal year, outlays in billions of dollars) 

- - 

CBO Baseline 

Proposed Changes 

Pay-As-You-Go 

Medicaid 

Federal Employees Health 

Benefits Fund 

Other 

Subtotal 

Discretionary 

Public Health Service 

Other 

Subtotal 

Total 

PHs Retired Officers Fund 

(Transfer to Function 600) 

President's 1992 Budget 

as Estimated by CBO 

a. Less than $50 million. 

PROPOSED POLICY CHANGES 

The President's 1992 budget proposes modest spending cuts compared 

with the CBO baseline, reducing health expenditures by $0.5 billion in 

1992 and by $2.8 billion in 1996. The largest reductions are for the 

Public Health Service. All of the pay-as-you-go changes are relatively 

small in each year. 

Pay-As-You-Go Policy Changes 

Medicaid. The Administration's 1992 budget plan includes three payas-you-go Medicaid proposals (as shown below in the table). The net 
138 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990 

effect of these proposals would increase Medicaid spending by $65 million in 1992, and by $150 million in 1996. 

Medicaid Pay-As-You-Go Proposals 

(By fiscal year, outlays in millions of dollars) 

Medical Support 

Enforcement - 5 - 5 -10 -10 -1 5 

Income Limit for 

Medically Needy 

Pregnant Women 

and Children 20 3 0 40 40 45 

Impact of Medicare 

Proposals - 50 - 80 - 90 105 120 

Total 65 105 120 135 150 

The President's 1992 Medicaid budget plan would enhance state 

authority to collect medical support payments through the Child Support Enforcement Agency and would also allow custodial parents to file 

directly with the noncustodial parent's insurer for reimbursement for a 

child's medical payments. This proposal also appeared in the Administration's 1991 budget plan. CBO estimates that this proposal would 

save $5 million in 1992 and $45 million over five years. 

The Administration has proposed to expand access to Medicaid for 

certain "medically needy" pregnant women and children. The medically needy qualify for Medicaid because their medical expenses reduce 

their income to the program's eligibility level. Currently, the income 

standards used to determine Medicaid eligibility for most pregnant 

women and children are above the income standards used for those 

who are "medically needy." The Administration's proposal would raise 

the income standards used for "medically needy" pregnant women and 

children to the levels used for other pregnant women and children. 

The CBO estimates an additional 35,000 Medicaid participants would 
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 139 

result from this policy, adding outlays of $20 million in 1992 and $175 

million over five years. 

A proposal to add a coinsurance payment to clinical lab services 

under the Medicare program would raise Medicaid outlays by an estimated $445 million over five years. Because the Medicaid program 

pays Medicare premiums, deductibles, and coinsurance for approximately 15 percent of the Medicare population, Medicaid outlays would 

increase if Medicare coinsurance is increased. 

Federal Employees Health Benefits Fund. The President's budget for 

the Federal Employees Health Benefits (FEHB) program would reduce 

federal spending for annuitants' health benefits by requiring the 

Postal Service to reimburse the government for a certain portion of 

past federal health benefits payments for Postal Service annuitants. 

In a series of changes since 1986, the Congress has sought to reduce the 

government's liability for paying the government portion of FEHB 

premiums for these annuitants. The Omnibus Budget Reconciliation 

Act of 1990 (OBRA) established the principle that the Postal Service 

should pay the government portion of health benefit premiums of any 

annuitant who retired after the Postal Service was created in 1972, 

prorated to reflect the Postal Service's portion of the annuitant's total 

federal government service. OBRA required the Postal Service to 

make five annual lump-sum payments for 1991 through 1995. However, these and past payments would not fully reimburse the government for the Postal Service's portion of what the government has 

already paid for Postal Service annuitants' health benefits. The President's budget proposal would require the Postal Service to pay the remaining amount due from the Postal Service through five annual payments of $66 million beginning in 1992 and ending in 1996. 

Other. The Administration proposes to reduce federal costs by $50 million annually beginning in 1992, by requiring industry to pay half of 

the costs of inspections by the Food Safety and Inspection Service conducted during second shifts. 

As in previous budgets, the President also plans to phase out the 

Health Education Assistance Loan (HEAL) program. The Administration proposes to reduce the dollar limitation for loans that the govern- 
140 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990 

ment would guarantee each year through 1994, and would not guarantee any loans after that time. Savings from this proposal, calculated 

on a subsidy basis, would be less than $50 million each year, 1992 

through 1996. 

Discretionary Policy Changes 

Public Health Service. The Administration would slow the growth of 

funding for the discretionary programs of the Public Health Service 

(PHs) to between 1 percent and 2 percent in 1992 through 1994, and 

then maintain the approximate 1994 funding level in 1995 and 1996. 

Slowing the growth rate would hold spending for these discretionary 

health programs below the CBO baseline by $0.2 billion in 1992 and by 

$2.4 billion in 1996. 

Within the PHs, the Administration would hold funding for most 

of the programs of the Health Resources and Services Administration 

(HRSA) at 1991 levels. As in previous budgets, the Administration 

also proposes to eliminate most of HRSA's health professions grant 

programs. Savings, compared with the CBO baseline, would grow from 

$0.1 billion in 1992 to $0.5 billion in 1996. 

As in the last nine budgets, the Administration plans to eliminate 

almost all funding for the construction of Indian health facilities, reducing overall funding for the Indian Health Service (IHS) in 1992 approximately 10 percent from 1991 levels. Under the President's request, IHS spending would fall $0.5 billion below the baseline in 1996. 

While the Administration also intends to reduce federal funding 

for the Food and Drug Administration (FDA), it would institute user 

fees for certain FDA activities, including product reviews and registration, so that overall FDA funding would actually increase above 1991 

levels. Under the proposal for user fees, which was also in last year's 

budget, federal funding would be reduced by 17 percent in 1992, resulting in savings that would increase from $0.2 billion in 1992 to $0.3 

billion in 1996. 
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 141 

In contrast to the overall PHs funding policy, the Administration 

requests a 6 percent increase in funding for research at the National 

Institutes of Health (NIH) in 1992. The requested funding level is 2 

percent, or $0.1 billion, above baseline levels for 1992, and would stay 

above baseline levels through 1994. Because of the funding increase, 

spending would be $0.1 billion above the baseline in each year, 1992 

through 1994. However, because funding would not increase above the 

1994 level under the Administration's proposal, spending for NIH 

would be $0.5 billion below the baseline in 1996. 

Other. The President's budget for Medicaid would reduce federal 

spending for survey and certification of providers by funding the activities through user fees to be collected from service providers and deposited in a revolving fund. CBO estimates that this proposal, which 

was included in the President's 1991 budget, will save $92 million in 

3.992 and $356 million through 1996. 

CBO REESTIMATES 

CBO has not significantly reestimated any of the pay-as-you-go proposals in function 550. All reestimates of these proposals are technical, 

and total less than $50 million in each year. 

Medicaid. CBO has reestimated the President's budget for Medicaid 

downward by $0.7 billion in 1991, and by $5.1 billion in 1996. Two 

factors account for most of the downward reestimate. First, while both 

the Administration and CBO adjust state forecasts of Medicaid expenditures in developing their Medicaid baselines, CBO makes a 

smaller upward adjustment than the Administration. Secondly, CBO 

and the Administration have different expectations regarding the 

length of the current surge in Medicaid expenditures, which grew almost 19 percent in 1990 and are projected to grow an additional 24 percent in 1991. These rates compare with an annual average growth of 

about 9 percent during the 1980s. This recent rapid growth, combined 

with tight state budgets, has already forced some states to cut their 

programs. Although estimates in the out-years are very uncertain, 

CBO expects states to respond more quickly to the rapid growth than 

does the Administration, and so projects lower growth. 
142 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990 

Federal Employees Health Benefits Fund. CBO's reestimate of the 

President's budget for the FEHB program results in higher projections 

of total outlays for the annuitants' health benefits payments account 

and the FEHB trust fund account. The main differences stem from 

CBO's assumption of a higher growth rate for the average FEHB premium and, more important, that the government will pay a higher 

share of the premium. The Administration and CBO have adopted 

very different assumptions about the level of the government's share of 

the premium. A temporary provision of the Omnibus Budget Reconciliation Act of 1990 specified that a "proxy" premium be used in place 

of the (now defunct) Aetna high-option premium for the purpose of 

calculating the government's maximum premium payment. Because 

this provision expires in 1993, the Administration has assumed that 

current law will thereafter require the use of a different formula for 

this calculation--one that considerably lowers the premium payment. 

This assumption causes the government's average share to drop to 68 

percent in 1994 and beyond, down from the 72 percent the Administration assumes in 1993. In contrast, CBO believes that the Congress will 

need to authorize whatever formula is used in 1994 if FEHB offers no 

new indemnity plan. Because new legislation will be required to 

authorize any particular formula, CBO's baseline projections assume 

that the government's current premium share of 74 percent will remain constant throughout the projection period. 

Public Health Service. CBO's estimate of outlays for the PHs programs exceeds the Administration's estimate by $0.2 billion in 1991, 

$1.0 billion in 1992, and an average of $0.7 in each year 1993 to 1995, 

mainly because of different estimates of the Vaccine Injury Compensation program administered by the Health Resources and Services Administration. Under this program, people injured by certain vaccines 

administered before October 1, 1988, had to file their claims with the 

United States Claims Court before February 1, 1991, to be eligible for 

compensation from the federal government. In the final weeks before 

the deadline, HRSA received over 3,000 claims, compared with only 

146 claims in all of 1989. Based on the tremendous surge in claims, the 

number of claims that have been awarded, and the average award payment, CBO estimates that compensating victims injured before October 1, 1988, and who have valid claims will cost about $2.7 billion from 

1991 through 1995. The Administration, however, has not yet pro- 
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 143 

vided any additional funding beyond the 1991 appropriation of $63 

million to pay the awards for qualifying victims. Other differences in 

PHs outlay estimates are based on different spending assumptions, 

but are very minor. 

Child Health Insurance Credit. This program provides refundable tax 

credits to qualifying low-income families who pay for health insurance 

for their children. CBO's estimate of outlays for this program, which 

are the refunded portion of the credit, was provided by the Joint Committee on Taxation and exceeds the Administration's estimate by $0.1 

billion in 1991, increasing to $0.6 billion by 1996. 

CBO REESTIMATES OF PROPOSED SPENDING IN FUNCTION 550 OF 

THE PRESIDENT'S BUDGET (By fiscal year, outlays in billions of dollars) 

President's 1992 Budget 71.2 81.3 91.3 

CBO Reestimates 

Pay-As-You-Go Proposals 0 a a 

Other 

Medicaid -0.7 -1.2 -2.3 

Federal Employees Health 

Benefit Fund 0.6 1.0 1.2 

Public Health Service 0.2 1 .O 0.9 

Child Health 

Insurance Credit 0.1 0.5 0.5 

Other 

Subtotal 

Total 0.2 1.3 0.3 

President's 1992 Budget 

as Estimated by CBO 71.4 82.6 91.6 

a. Less than $50 million. 
144 ANALYSIS OF THE PRCSIDENT'S BUDGET March 1990 

FUNCTION 570: MEDICARE 

PROPOSED SPENDING CHANGES 

(By fiscal year, outlays in billions of dollars) 

CBO Baseline 104.8 116.9 128.3 142.1 157.7 176.7 

Proposed Changes 

Pay-As-You-Go 

Reductions in payments 

to providers 

Hospitals 0 -1.6 -2.2 -2.9 -3.3 -3.5 

Physicians 0 -0.1 -0.4 -0.5 -0.5 -0.6 

Other providers - 0 -0.2 -0.3 -0.4 -0.4 -0.5 

Subtotal 0 -2.0 -2.9 -3.7 -4.3 -4.6 

Increases in beneficiary 

copayments 

Lab coinsurance 0 -0.6 -0.9 -1.1 -1.2 -1.4 

Reduced federal subsidy 

for high-income 

beneficiaries 0 - a -0.1 -0.2 -0.3 -0.4 

Subtotal 0 -0.6 -1.1 -1.3 -1.5 -1.8 

Other 

Medicare secondary payer 0 -0.1 -0.1 -0.1 -0.1 -0.2 -- - Coordinated care 

Subtotal 

Total, 

Pay-As-Y ou-Go 0 -2.6 -3.8 -4.8 -5.6 -6.0 

Discretionary 

Medicare contractors and 

HCFA administration - 0 -0.3 -0.5 -0.7 -0.8 -1.0 

Subtotal 0 -0.3 -0.5 -0.7 -0.8 -1.0 

Total, Changes 0 -2.9 -4.3 -5.5 -6.4 -7.0 

President's 1992 Budget 

as Estimated by CBO 104.8 113.9 124.0 136.6 151.3 169.7 

a. Lees than $50 million. 
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 145 

PROPOSED POLICY CHANGES 

The President's budget proposes to reduce the projected growth in the 

Medicare program by $2.9 billion in 1992 and by $7.0 billion in 1996. 

These proposed reductions, however, are smaller than those included 

in recent budgets. These cuts account for 45 percent of the total payas-you-go reductions proposed for 1992. While most of the proposed 

savings in Medicare would come from reductions in payments to providers, nearly one-quarter of the proposed savings would come from increased coinsurance and premiums paid by beneficiaries. 

Pay-As-Y ou-Go Policy Changes 

Payments to Hospitals. The President's budget proposes to reduce payments to teaching hospitals for the direct and indirect costs of hospitalbased training of physicians, to delay the application of the update factor in hospital payment rates by three months in every year, and to reduce payments to hospitals for outpatient services. 

Medicare reimburses teaching hospitals for the indirect costs they 

incur for the resources used in training physicians. About 1,000 hospitals, or 20 percent of all Medicare hospitals, are teaching hospitals. 

Most of these hospitals are large, urban facilities, and they receive 

about 50 percent of the payments from Medicare's prospective payment 

system (PPS). Under current law, a teaching hospital receives an additional payment equal to 7.65 percent of its basic PPS payments for 

every 10 percent increase in the size of its teaching program. Recent 

studies by the Prospective Payment Assessment Commission and by 

CBO have shown that this adjustment is higher than that called for by 

the actual additional overhead costs that hospitals incur in their training activities. The President's budget would reduce the adjustment 

factor from the current 7.65 percent to 4.4 percent in 1992, and then 

reduce it by about 0.3 percentage points per year, to 3.2 percent in 

1996. This proposal would reduce indirect teaching reimbursements to 

teaching hospitals to about $1.8 billion annually. The savings would 

be about $1.0 billion in 1992 and rise to $2.3 billion in 1996, reducing 

payments for indirect medical education by over 50 percent. 
146 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990 

Payments to teaching hospitals would be further reduced by a proposal to change the formula used to calculate payment for the direct 

costs of medical education. Medicare makes direct payments to hospitals for the salary and related overhead costs of hospital residents 

based on the hospital's average allowable costs per resident in 1984 

indexed to the consumer price index. The proposed new formula would 

reimburse hospitals for each qualified resident based on the national 

average salary per resident, the resident's specialty, and whether the 

resident was in or beyond the initial residency period. Primary care 

specialists would be reimbursed 2.4 times the average salary; nonprimary care specialists in their initial residency periods would be reimbursed 1.4 times the average salary; and nonprimary care residents 

beyond their initial periods would be reimbursed only for the average 

salary amount. This proposal would save $120 million in 1992 and 

$155 million in 1996, or about 15 percent of the projected costs of direct 

medical education payments. 

All hospitals would be affected by the proposal to delay the update 

in hospital payment rates from October 1 to January 1 every year. 

CBO estimates that this change would reduce outlays by $0.4 million 

in 1992, and about $0.9 billion in 1996. This change would reduce hospital reimbursements under Medicare by about 1 percent a year. 

The President's budget also includes two proposals aimed at 

achieving savings from outpatient hospital services. The first proposal 

would extend the diagnosis-related group payment for 15 days. 

Medicare would not pay separately for outpatient services related to a 

hospital admission within 15 days of discharge. This proposal would 

save $30 million in 1992 and $60 million in 1996. The second proposal 

would reform payments for outpatient department (OPD) services. 

The intent of the reform is to develop prospective rates for services to 

replace the current cost-based reimbursement system, and to make 

these rates uniform regardless of whether the service is provided in an 

OPD, an ambulatory surgery center, or a physician's office. The reform 

also would reduce beneficiary costs by basing the coinsurance amount 

on Medicare's allowed payment rate, rather than on the hospital's 

charge for the service. Because the prospective rates have not been 

released, no independent estimate of this proposal is possible. The 

Administration's estimate is treated as a savings target. Savings from 
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 147 

this proposal would be $50 million in 1992, rising to $175 million in 

1996. 

Payments to Physicians. The budget includes several proposals that 

would reduce payments to physicians by $0.1 billion in 1992 and by 

$0.6 billion in 1996. The proposals would eliminate duplicate payments and make payments more consistent across both settings and 

providers. 

All physicians would be affected by two of the President's proposals. The first proposal would reduce the 1993 update for physician 

services by 0.9 percentage points. In 1993, savings would be $0.1 billion, rising to $0.2 billion in 1996. The second proposal would revise 

the Medicare Economic Index formula to incorporate better data 

sources and a revised methodology. Until actual data are available, it 

is impossible to predict whether these changes would cost or save 

money. 

The Administration includes four proposals that would reduce fees 

for specific services. Reimbursement for anesthesia services would be 

paid at a single fee regardless of whether the service is provided by an 

anesthesiologist working alone or an anesthesiologist supervising a 

certified registered nurse anesthetist (CRNA). The amount paid to the 

supervising anesthesiologist would be the difference between the fee 

paid to an anesthesiologist working alone and the amount paid to the 

CRNA. In addition, the proposal repeals the payment increase that 

CRNA's received last year in the Omnibus Budget Reconciliation Act 

of 1990 (OBRA). This proposal would save $0.1 billion in 1992 and $0.2 

billion in 1996. 

The President also proposes to pay a single amount for surgery, 

whether or not an assistant is used. Currently, a separate payment is 

made to the primary surgeon and an assistant-at-surgery. The payment made to the primary surgeon would be the difference between the 

fee paid to the assistant and the fee established for the surgery. Savings from this proposal would be $35 million in 1992, increasing to $75 

million in 1996. 
148 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990 

The remaining two proposals regarding physicians would reduce 

reimbursement for tests. The Administration proposes to adjust Medicare payments for radiology and diagnostic tests based on an "efficient 

rate." Data would be collected during 1992 to determine this efficient 

level of operation. Until data are collected and new rates are set, this 

proposal cannot be estimated independently. The Administration's 

estimated savings of $65 million between 1993 and 1996 is treated as a 

savings target. The final proposal would eliminate the fee paid for 

drawing and handling specimens for lab tests performed in physicians' 

offices. This proposal would save $100 million over the five-year period 

from 1992 through 1996. 

Pavments to Other Medical Providers. Several proposals in the President's budget would reduce payments to other medical providers by 

$0.2 billion in 1992 and $0.5 billion in 1996. These providers include 

skilled nursing facilities, home health agencies, suppliers of durable 

medical equipment, laboratories, and other nonphysician providers. 

The President's budget calls for legislation to alter the way Medicare reimburses certain skilled nursing facilities (SNFs). Proprietary 

SNFs, which receive about half of all SNF reimbursements, can now be 

reimbursed for return-on-equity payments as an allowable cost. Proprietary hospitals, however, no longer receive such payments. If the 

Congress legislated a similar exclusion for proprietary SNFs, CBO 

estimates that Medicare could reduce payments to SNFs by $45 million 

in 1992 and by $70 million in 1996, or about 2 percent of total projected 

payments to SNFs in that year. 

The budget would also limit reimbursements to home health agencies. Under current law, reimbursements are subject to aggregate cost 

limits without regard to the type of provider (for example, skilled nursing facilities, speech or physical therapists) billing for services. The 

President's proposal would replace these aggregate cost limits with 

limits for each type of provider. CBO estimates that this proposal 

would save $90 million in 1992 and $145 million in 1996, or just under 

3 percent of total reimbursements to home health agencies. 

Four changes in payments to suppliers of durable medical equipment (DME) are proposed in the budget. The first proposal would 
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 149 

amend last year's OBRA to phase in the national fee schedule using 

the national median, rather than the national weighted average, as 

the basis for payment. This proposal would result in greater savings 

when the fee schedule is fully phased in. The second proposal would reduce the oxygen fee schedule by 5 percent, reflecting the shift in current treatment from liquid and gaseous systems to oxygen concentrators. The third DME proposal would establish a national fee schedule 

for orthotic and prosthetic devices that is consistent with the DME fee 

schedule. Finally, the President proposes to include certain feeding 

nutrients and supplies under the national DME fee schedule. Savings 

from these four proposals would be $55 million in 1992, increasing to 

$155 million in 1996. 

Three other proposals would change Medicare reimbursements for 

labs, physical and respiratory therapy, and outpatient drugs. The update factor for laboratory fees that are above the fee schedule cap set by 

OBRA would be eliminated in 1992 and 1993. The 1992 savings would 

be $20 million, increasing to $85 million in 1996. Payments for physical and respiratory therapy would be restructured to incorporate 

actual rather than projected inflation. This proposal would save $10 

million in 1992 and $20 million in 1996. Beginning in 1992, Medicarecovered drugs would be reimbursed at the average wholesale price less 

15 percent and indexed in future years to the consumer price index. 

This proposal would save the Medicare program an estimated $80 million over five years. 

The next two proposals, considered but rejected during the budget 

negotiations of 1990, are included in the President's 1992 budget. 

These proposals would increase the coinsurance and premiums paid by 

beneficiaries, rather than reduce payments made to providers. Savings achieved by increasing beneficiary coinsurance and premiums 

would be $0.6 billion in 1992 and would rise to $1.8 billion in 1996. 

20 Percent Lab Coinsurance. Medicare currently pays 100 percent of 

the fee schedule amount for clinical laboratory services, and providers 

must accept that fee as full payment for the service. The President 

would impose 20 percent coinsurance for laboratory services furnished 

in all settings. This proposal would make Medicare's coinsurance 

structure more consistent, since all other provider services currently 
150 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990 

have 20 percent coinsurance. The Medicare savings from this proposal 

would be $0.6 billion in 1991 and would increase to $1.4 billion in 1996. 

Because Medicaid pays coinsurance amounts for certain Medicare 

beneficiaries, Medicaid costs would be increased by $50 million in 1992 

and $120 million in 1996 (see function 550). 

Reduce Federal Medicare Subsidy for High-Income Beneficiaries. 

Another proposal rejected during the 1990 budget negotiations would 

reduce the subsidy value of Supplementary Medical Insurance (SMI) 

for high-income beneficiaries through the SMI premium. The current 

monthly premium, set in law by OBRA, equals approximately 25 percent of program costs. The remaining 75 percent of SMI program costs 

are financed from general revenues. The President proposes to increase the SMI premium to equal 75 percent of program costs for beneficiaries with adjusted gross incomes greater than $125,000 for single 

beneficiaries, and $150,000 for couples. The monthly premium paid by 

these higher-income enrollees would be $92.50 in 1992 compared with 

$31.80 under current law. Approximately 400,000 beneficiaries are 

assumed to pay the higher premium by 1996. These estimates are subject to considerable uncertainty because the enforcement mechanisms 

have not yet been specified. Gross savings from this proposal would be 

$77 million in 1992 and would increase to $460 million in 1996. The 

costs of administering this proposal, however, are estimated to be $50 

million in each year, yielding net savings of $27 million in 1992 and 

$410 million in 1996. 

Medicare Secondary Payer. The President proposes to revise the 

Medicare secondary payer (MSP) provisions for disabled beneficiaries 

and those with end-stage renal disease to make the provisions consistent with those affecting elderly enrollees who work. In addition, 

the President proposes to clarify that disabled individuals would be 

subject to the MSP provision only by reason of current employment or 

the employment of a family member. These proposals would save $80 

million in 1992 and $150 million in 1996. 

Coordinated Care. The President's budget includes costs of $40 million 

in 1992, rising to $490 million in 1996, to expand the role of health 

maintenance organizations and preferred provider organizations in 

Medicare. This proposal was not developed in sufficient detail to allow 
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 151 

an independent estimate, so the Administration's estimate is treated 

as a spending target. 

Discretionary Policy Changes 

The President's request for Medicare administrative funds is $0.3 

billion lower than the CBO baseline in 1992. Part of the difference 

stems from the Administration's proposal to fund survey and certification activities through user fees. The request covers the administration of Medicare contractors and management of programs within the 

Health Care Financing Administration. 

CBO REESTIMATES 

Pay-As-You-Go Reestimates. The CBO estimate of the President's proposals has lower savings than the Administration's estimate. These 

iower savings result, ihpart, from CBO's lower economic assumptions 

for the market-basket update for hospital services. 

Technical differences in the pay-as-you-go proposals result from 

different estimating assumptions and different program spending 

levels. CBO's estimated savings for the medical education proposals 

are lower because CBO projects lower spending for medical education, 

particularly in the out-years. 

Other Reestimates. CBO's economic reestimates of the Medicare program are lower than the Administration's estimates in 1992 through 

1996, in part because of CBO's lower projections of the market-basket 

update for hospital services and the increase in the Medicare Economic 

Index for physician services. These updates are heavily weighted 

toward wage growth, which CBO projects to be lower than does the 

Administration. If the Administration's update factors were used, the 

CBO baseline would be higher by $0.6 billion in 1992 and $5.1 billion 

in 1996. Most of this difference occurs in the Hospital Insurance (HI) 

program. 
152 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990 

The remaining differences result mostly from technical differences 

in the estimates. In the HI program, CBO uses higher growth in the 

case-mix index for PPS hospitals than does the Administration. This 

difference accounts for $0.3 billion of the $0.4 billion technical difference for HI in 1992. In the SMI program, the technical differences 

stem from lower estimated growth in the use of physician and laboratory services. 

CBO REESTIMATES OF PROPOSED SPENDING IN FUNCTION 570 OF 

THE PRESIDENT'S BUDGET (By fiscal year, outlays in billions of dollars) 

1991 

President's 1992 Budget 104.4 

CBO Reestimates 

Pay-as-You-Go Proposals 

Economic 

Hospital Insurance 0 

Technical 

Hospital Insurance 0 

Supplementary Medical 

Insurance 3 

Subtotal 0 

Other 

Economic 

Hospital Insurance 0 

Supplementary Medical 

Insurance 0 

Technical 

Hospital Insurance -0.1 

Supplementary Medical 

Insurance 0.4 

Other a 

Subtotal 0.3 

Total 0.3 

President's 1992 Budget 

as Estimated by CBO 104.7 

a. Less than $50 million. 
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 153 

FUNCTION 600: INCOME SECURITY 

PROPOSED SPENDING CHANGES 

(By fiscal year, outlays in billions of dollars) 

CBO Baseline 169.7 179.9 187.7 199.1 209.6 

Proposed Changes 

Pay-As-You-Go 

Supplemental Security 

Income 0 -0.1 -0.2 -0.2 -0.3 

Family Support Payments 0 -0.1 -0.1 -0.1 -0.2 

Trade Adjustment 

Assistance 0 -0.1 -0.1 -0.1 -0.1 

Other - a 0.1 - 0.1 - 0.1 0.1 

Subtotal a -0.2 -0.3 -0.4 -0.5 

Discretionary 

Low-income energy assistance 0 -0.6 -0.8 -1.1 -1.4 

Housing assistance a 0.2 0.3 0.5 0.2 

Administration of unemployment compensation 0.1 0.5 0.4 0.3 0.2 

other 

Subtotal 

Other 0 a a a a 

Total 0.2 -0.3 -0.5 -0.9 -1.8 

PHs Retired Officers Fund 

(Transfer from Function 500) 0 0.1 0.1 0.1 0.1 

President's 1992 Budget 

as Estimated by CBO 169.9 179.8 187.3 198.4 207.9 

a. Less than $50 million. 

PROPOSED POLICY CHANGES 

The changes proposed for income security programs are much smaller 

than those in last year's budget. If enacted, these proposals would 

reduce outlays below the CBO baseline by $0.3 billion in 1992 and by 

$2.2 billion in 1996. Changes in outlays would be 1 percent or less in 

any year. Pay-as-you-go policy changes are relatively minor and few 

in number. Most of the proposed changes are in discretionary pro- 
154 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990 

grams, particularly the Low-Income Home Energy Assistance program 

and housing programs. 

Pay-As-You-Go Policy Changes 

Supplemental Security Income. The Administration proposes two 

policy changes that would reduce projected Supplemental Security Income (SSI) outlays by a combined $0.1 billion in 1992 and $0.3 billion 

in 1996. The first proposal, repeated from last year's budget, would 

require states to pay a fee to the Social Security Administration if they 

elect to have their state supplemental payments federally administered. The fees would be phased in over three years, reaching 5 percent 

of the amount of a state's supplemental payments in 1994. CBO estimates that the Social Security Administration would collect $65 million in fees in 1992 and $240 million in 1996. Fees would be collected 

from 17 states and the District of Columbia; over two-thirds of the 

monies would be collected from California. 

The Administration also proposes to collect overpayments to SSI 

recipients by reducing the recipients' Social Security payments. CBO 

estimates that $32 million would be collected from 115,000 SSI recipients in 1992 and that $21 million would be collected from 60,000 in 

1996. More SSI recipients would be affected in 1992 than in 1996 because of an existing backlog of uncollected overpayments. 

Family Support Payments to States. The President's proposed savings 

in this account are modest, totaling $0.1 billion to $0.2 billion a year 

relative to the CBO baseline and accounting for 1 percent or less of outlays. Again this year, most of the changes occur in the Child Support 

Enforcement (CSE) program. No policy changes are proposed for the 

Aid to Families with Dependent Children (AFDC) program or for the 

several child care programs within the account. 

A new proposal would modify CSE incentive payments, which are 

payments to states based on the ratios of their collections of child support to their administrative costs. The new incentive system--estimated to save $0.1 billion a year--would cut these current-law incentives in half, and distribute most of the resulting savings to states 
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 155 

through additional incentive payments. The nature of these additional 

incentives has not yet been fully developed, but they would probably be 

based on performance factors such as the establishment of paternity or 

child support obligations. Such a reform would reduce the incentives 

states now have to service the easiest cases first in order to maximize 

their cost-effectiveness ratios, and would give them an incentive to 

deal with the more difficult cases. 

The Administration again proposes to require states to charge 

higher fees for CSE services for non-AFDC families, saving an estimated $0.1 billion a year. States would have to charge an application 

fee of $25 and an annual service fee of $25 for all non-AFDC cases with 

child support collections. Approximately 2.7 million CSE cases estimated to open in 1992 could be affected by the proposal, as could 1.7 

million cases estimated to have collections. States would be given considerable flexibility in managing the fees, including options to absorb 

part or all of the fee and to charge a higher $50 fee to only those 

families with incomes above 185 percent of the poverty threshold. 

These fees would help to offset the federal government's rising net 

costs for the CSE program, although they could also discourage some 

families--particularly those with low incomes--from using the program. In addition, beginning in 1994, families receiving food stamps 

would be required to cooperate with CSE personnel in establishing 

child support, as is currently the case for AFDC families. An estimated 

500,000 families would initially be brought into the CSE program as a 

result. Based on CBO estimates, this proposal, which was also included in last year's budget, would save $0.1 billion in food stamp 

payments and cost $0.1 billion in child support administration, for a 

tiny net savings in 1995, the first year of full operation. 

Trade Adjustment Assistance. As it has in recent years, the President's budget proposes to eliminate the Trade Adjustment Assistance 

program for workers who lose their jobs because of competition from 

foreign imports. The proposal would save an estimated $0.1 billion annually and would eliminate benefits for approximately 24,000 workers 

in 1992. 

Other. The only other pay-as-you-go policy changes affect railroad 

retirement and nutrition programs. The President has proposed two 
156 ANALYSIS OF THE PRESIDENT'S BUDGET March 199U 

pay-as-you-go policy changes in the Railroad Retirement account. One 

proposal would change the financing of certain windfall benefit payments, resulting in an increase in funding from a pay-as-you-go account, an offsetting decrease in a discretionary account, and no change 

in benefits for railroad retirees. The second proposal would extend coverage for certain dependent benefits, resulting in a net outlay of less 

than $0.1 billion annually. This outlay would appear in Social Security 

in 1992 and in the Railroad Retirement account in the subsequent 

years, because of a one-year lag in the system of financial transfers between these accounts. 

The Administration proposes a series of largely offsetting policy 

changes in child nutrition programs in order to shift more benefits to 

lower-income children. One proposal would increase subsidies for 

school lunches and breakfasts served to children from families with incomes between 130 percent and 185 percent of the poverty level by 25 

cents and 20 cents, respectively. The increase would be offset by a proposed reduction in subsidies for meals served to children from families 

with incomes above 185 percent of poverty--a reduction of 6 cents for 

lunches and 3.75 cents for breakfasts. 

As estimated by CBO, the child nutrition proposal saves $11 million in fiscal year 1992 and a total of $87 million over the 1992-1996 

period. Increasing the lunch and breakfast subsidies for children from 

families with incomes between 130 percent and 185 percent of poverty 

is estimated to cost $116 million in 1992, of which $63 million represents direct costs for the higher subsidies and $53 million results from 

increases in participation induced by the lower prices. Reducing the 

subsidy to children from families with incomes above 185 percent of 

poverty saves $127 million in 1992. Of these savings, $113 million results from lower subsidies and $14 million from estimated participation decreases spurred by the higher prices charged to students. The 

Administration shows net costs of approximately $10 million annually 

because it assumes greater participation by children from families 

with incomes between 130 percent and 185 percent of poverty. 

Finally, the President proposes two other small changes--the collection of user fees for certain marketing agreements and orders, and a 
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 157 

1996 level of funding for Nutrition Assistance for Puerto Rico that is 

slightly below CBO baseline levels. 

Discretionary Policy Changes 

Low-Income Home Enerm Assistance. The Administration requests 

$1.0 billion for the Low-Income Home Energy Assistance Program 

(LIHEAP) in 1992. Of this amount, $0.1 billion would become available only if the price of home heating oil in December, January, or 

~ebruari exceeds the national average price of home heating oil of the 

past four years by 20 percent. Under CBO economic assumptions, the 

monies would become available. 

The total funding request for 1992 is $0.6 billion below the 1991 

appropriation and is also $0.6 billion below the CBO baseline for 1992. 

The Administration proposes further reductions in this program in 

subsequent years, reducing it to $0.4 billion in 1996, which is $1.6 billion, or 81 percent, below the CBO baseline. 

First funded in 1981, LIHEAP received a peak appropriation of 

$2.5 billion in 1985 and has received declining funding levels since. 

Heating assistance benefits, the program's largest component, were 

provided to 6.6 million households in 1985 but to only 5.5 million 

households in 1990. 

Housing Assistance. For 1992, the President requests $21.5 billion for 

the various housing assistance programs operated by the Department 

of Housing and Urban Development (HUD) and the Farmers Home 

Administration (FmHA). Although this request is $1.3 billion above 

the baseline, outlays would increase by only $0.2 billion in the first 

year, because of the multiyear nature of many housing programs. 

Over the 1992-1996 period, outlays from the President's proposed budget would increase $1.4 billion above baseline outlay projections. 

The President's request would shift funds among the various housing programs. Only $10.7 billion would be allocated to HUD's Section 

8, public housing, and elderly and handicapped assistance programs, 

an 11 percent decline from the $12.0 billion CBO baseline for these 
158 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990 

programs. The funding proposed for 1992 could assist up to 110,000 

units, approximately 80,000 of which could be receiving rental 

assistance for the first time. Only 2,000 of these 110,000 units would 

be housing for the elderly or handicapped, compared with over 10,000 

units in the CBO baseline. The budget request does, however, contain 

funds for leasing 3,000 private units for this purpose. New funding for 

public and Indian housing in the budget is limited to funds for 

modernizing existing projects and amending current contracts. No 

funds are proposed for construction of new public housing. 

The Administration's budget also includes $2.5 billion to implement three programs that were newly authorized in the CranstonGonzalez National Affordable Housing Act. No funds have yet been 

appropriated for these programs, and so they are not built into CBO 

baseline projections. About $0.9 billion of the $2.5 billion is earmarked 

for HOPE (Homeownership and Opportunity for People Everywhere) 

grants to be used to enable some residents of public housing and other 

low-income families to purchase their residences. Funding for the 

Home Investment Partnerships Block Grant program is set at $1.0 

billion. This money would be made available to participating state and 

local jurisdictions to increase, in various ways, the availability of 

affordable housing. The remaining funds--just under $0.7 billion--are 

for a third new program that would allow HUD to offer various inducements to owners of low-income housing to maintain the low-income 

tenancy. 

Administration of Unemployment Compensation. The President requests a $0.1 billion supplemental appropriation in 1991 for administrative expenses related to unemployment compensation, and an 

amount that is $0.5 billion above the CBO baseline projection for 1992. 

Some of the difference in 1992 is simply an extension of the $0.1 billion 

difference in 1991. However, much of the difference occurs because 

CBO followed the new rules of the Budget Enforcement Act of 1990 and 

adjusted its baseline for projected changes in the number of unemployment recipients, as well as for inflation. Under these rules and CBO 

economic assumptions of declining unemployment rates, the CBO 

baseline for 1992 fell $0.2 billion below the 1991 appropriation. In 

contrast, the President's request for 1992 is $0.2 billion higher than 

the 1991 request, reflecting anticipated increases in work load. In 
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 159 

subsequent years, the President's requests are between $0.2 billion 

and $0.4 billion above the CBO baseline. 

Other. The President also requests a 1991 supplemental appropriation 

for administrative expenses for the Supplemental Security Income program, and amounts that are above the CBO baseline in 1992 through 

1996. These requests would increase outlays by $0.1 billion to $0.2 

billion in 1991 through 1996. The supplemental appropriation is requested to cover the expected administrative costs of reviewing cases 

affected by the Supreme Court's February 1990 decision in Sullivan v. 

Zebley. The only other program with proposed increases of $0.1 billion 

or more is the Special Supplemental Food Program for Women, Infants 

and Children (WIC). The President's request is $0.1 billion above the 

baseline in 1992 through 1994, but is frozen at 1994 levels and falls 

below the baseline by 1996. 

The President proposes to freeze a number of other discretionary 

programs at their 1991 level, producing a growing stream of outlay 

savings relative to the CBO baseline. Programs frozen at the 1991 

level include the Child Care and Development Block Grant, Refugees 

Assistance, the Commodity Supplemental Food Program, and Commodities for Soup Kitchens. Funding for the Emergency Food and Shelter Program is also frozen between 1992 and 1996, but at a level 25 percent below the 1991 appropriations. 

In addition to proposing flat funding levels for the Child Care and 

Development Block Grant, the President proposes to continue in every 

year the 1991 funding restriction that prohibits states from obligating 

funds before the last weeks of September. This restriction would delay 

spending, and, combined with the freeze in funding levels, would 

reduce child care outlays below baseline projections by $0.3 billion in 

1992, $0.2 billion in 1993, and $0.1 billion in 1994 through 1996. 

Other Policy Changes 

The Administration is expected to issue a regulation limiting a 

family's long-term use of the Emergency Assistance program, which 

provides emergency aid to AFDC families. The program is part of the 
160 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990 

Family Support Payments account. Details of the regulation are not 

available, but the budget's current-law projections of Emergency 

Assistance include savings of around $40 million a year for the effects 

of the regulation. 

The final change in function 600 would be a transfer of about $0.1 

billion annually from function 550 for payment of retirement benefits 

for officers of the Public Health Service (PHs) commissioned corps. 

Financing of the fund would be changed from a pay-as-you-go system 

to an accrual-basis system, but there would be no change in benefit 

levels and no net change in outlays. 

CBO REESTIMATES 

Pay-As-You-Go Reestimates. CBO's reestimate of the President's child 

nutrition proposal shows small savings, in contrast to the Administration's estimate of small costs. The major difference is that CBO does 

not assume as large an increase in participation among low-income 

children as does the Administration. The only other significant reestimate is for the President's proposal to extend coverage of certain dependent benefits under Railroad Retirement. CBO estimates are $66 

million lower than the Administration's in 1992 only, because of a oneyear lag in the financial interchange between Social Security and 

Railroad Retirement that was not included in the Administration's 

estimate. Other reestimates are minor. In the case of the Child Support Enforcement proposal for families receiving food stamps, CBO's 

reestimates show larger food stamp savings and larger CSE costs, but 

little net change; reestimates for other CSE proposals are small. 

Other Reestimates. CBO economic reestimates lower spending in all 

years, because CBO projects lower COLAS and inflation. The economic 

reestimates decrease in size after 1993 because of the partially offsetting effects of CBO's economic assumptions for un-employment 

rates, which are below the Administration's in 1992 and 1993, but 

above them in 1994 through 1996. 

Estimates of the number of people receiving unemployment compensation, food'stamps, and AFDC--three programs particularly sensi- 
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 161 

tive to changes in unemployment rates--are quite uncertain this year, 

because of recent unexplained increases in participation, and uncertainties regarding the length and severity of the current economic 

downturn. CBO reestimates reduce outlays in unemployment compensation by $3.5 billion in 1992, primarily because CBO's estimate of 8.0 

million beneficiaries in 1992 is 2.1 million people less than the Administration's estimate, even after adjusting for economic differences. 

Downward reestimates in food stamp outlays--averaging about $0.2 

billion annually--also result primarily from lower participation estimates. 

Spending in a number of the programs in the Family Support Payments account will be subject to some of the same uncertainties as unemployment compensation and food stamps. In AFDC, the economic 

downturn drove caseloads up sharply in 1990--by about 200,000 cases 

to a level of 4.0 million cases, compared with a virtually unchanged 

caseload on average over the previous five years. AFDC caseloads are 

expected to grow sharply again in 1991, and somewhat slower in 1992, 

reaching an estimated caseload of 4.4 million. Spending projections for 

the AFDC-Unemployed Parent program are also quite uncertain because all states are mandated to have such a program beginning in 

1991; CBO's 1992 baseline includes 60,000 AFDC-UP families in the 

states affected by the mandate. Most of CBO's reestimate in this 

account reflects somewhat lower AFDC caseloads and benefit levels 

per case in the next few years, but slightly higher caseloads and benefit 

levels per case beginning in 1994 or 1995. There is also a downward 

estimate of $0.1 billion to $0.2 billion a year in outlays for three child 

care programs added to this account in 1988 and 1990 legislation. 

Because these programs are quite new, their spending levels are uncertain. Finally, CBO's estimated outlays for a related account, the 

Job Opportunities and Basic Skills Training Program (JOBS), also 

range from about $0.1 billion to $0.2 billion below the Administration's. CBO estimates that the current fiscal situation will make it 

hard for some states to provide matching funds to use their full share of 

the capped entitlement, resulting in lower outlays than in the Administration's estimates. 

CBO estimates of outlays from refunds of the earned income tax 

credit (EITC) are $0.4 billion lower than Administration estimates in 
162 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990 

1992 and $2.3 billion lower in 1996. This reestimate results from different methodologies for adjusting the data for changes between 1988 

and 1996. 

CBO's technical reestimates of Civil Service Retirement reduce 

program outlays by $0.3 billion in 1991 and $0.8 billion in 1996. The 

1991 difference stems mainly from different assumptions about the 

effect of recent legislation eliminating lump-sum payments for most 

retirees beginning December 2, 1990. CBO assumes that lump-sum 

payments will total $1.5 billion in 1991; the Administration assumes 

they will total $1.6 billion, because the Administration assumes that 

more employees elected the lump-sum option. In addition, the Administration assumes higher retiree and survivor benefits than CBO 

in each year. 

CBO's technical reestimate of the Supplemental Security Income 

program raises outlays by $0.2 billion in 1992 but lowers them by $0.8 

billion in 1996. Most of the SSI reestimate results from differing assumptions about the number of beneficiaries. CBO assumes a slightly 

higher number of beneficiaries in both the aged and the blindldisabled 

categories in 1992. For 1996, however, the Administration assumes 

that the number of blindtdisabled SSI recipients will be about 4 percent 

higher than in CBO estimates, primarily because of differing estimates 

of the number of additional disabled children who will become SSI 

recipients as a consequence of the Supreme Court's decision in Sullivan 

v. Zebley, announced in February 1990. 

Reestimates in outlays for child nutrition programs result primarily from lower participation in the school lunch program and the 

child care food program. Remaining differences in estimates include 

positive reestimates in the Black Lung Disability Trust Fund and 

positive and negative reestimates in Military Retirement and housing 

programs. 
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 163 

CBO REESTIMATES OF PROPOSED SPENDING IN FUNCTION 600 OF 

THE PRESIDENT'S BUDGET (By fiscal year, outlays in billions of dollars) 

1991 1992 1993 1994 1995 1996 

President's 1992 Budget 

CBO Reestimates 

Pay-As-You-Go Proposals 

(Technical) 

Other 

Economic 

Technical 

Unemployment 

compensation 

Food Stamps 

Family support 

payments and JOBS 

Earned income tax 

credit 

Civil Service 

Retirement 

Supplemental 

Security Income 

Child nutrition 

Other 

Subtotal 

Total 

President's 1992 Budget 

as Estimated by CBO 

a. Less than $50 million. 
164 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990 

FUNCTION 650: SOCIAL SECURITY 

PROPOSED SPENDING CHANGES 

(By fiscal year, outlays in billions of dollars) 

CBO Baseline 268.2 286.8 303.7 320.6 338.2 356.7 

Proposed Changes 

Discretionary 

Administrative expenses 0 0.1 0.1 a -0.2 -0.4 

Other Changesb 

Increased exempt earnings 

limit for recipients 

ages 65-69 0 0.1 0.1 a 0 0 

Benefits for certain 

people ineligible for 

such benefits under the 

Railroad Retirement Act 0 0.1 a a a a 

Other 

Subtotal 

Total 0 0.3 0.2 0.1 -0.2 -0.4 

President's 1992 Budget 

as Estimated by CBO 268.2 287.1 303.8 320.6 338.1 356.3 

a. Less than $50 million 

b. Changes in Social Security benefits and revenues are not included under the general pay-as-you-go 

restrictions, but instead are subject to separate rules in the Senate and House. 

PROPOSED POLICY CHANGES 

The President's 1992 budget offers only minor changes in Social 

Security spending. The cumulative 1992-1996 outlay effects of the proposed changes are less than $50 million compared with baseline spending for the period of $1.6 trillion. 

Administrative Costs. The Administration proposes increases for 1992 

and 1993 in the administrative expenses of the Social Security Administration. Outlays for these expenses, which the Office of Management and Budget (OMB) has included under the domestic discretionary caps, are projected to be above the baseline by $90 million in 
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 166 

1992 and $54 million in 1993, but to fall below baseline projections in 

1995 and 1996 by $163 million and $375 million, respectively. 

Benefit Payments. The Administration also proposes to increase the 

exempt earnings limit for beneficiaries ages 65 to 69 and to provide 

Social Security benefits to certain Railroad Retirement recipients not 

eligible under the Railroad Retirement Act for particular dependent 

benefits. If these proposals were made in most benefit programs, they 

would have been subject to the pay-as-you-go requirements. Social 

Security benefit payments, however, are not subject to the pay-asyou-go requirements under the Budget Enforcement Act of 1990 and 

are not to be included in budget totals. Instead, legislative changes 

face separate rules in the House of Representatives and in the Senate, 

designed to constrain efforts to reduce the surpluses in the Social 

Security trust funds. The House establishes a maximum of $250 million in the five-year costs for legislation for which the rule does not 

apply; the Senate requires a 60 percent vote for any change that would 

reduce the projected surplus in the trust funds. 

The proposed changes appear to have been designed to stay within 

the $250 million limitation imposed in the House rule. CBO estimates 

that the proposals would cost more than $250 million, however, with 

the proposed increase in exempt earnings alone costing $260 million 

during fiscal years 1992 through 1994, with no estimated costs in other 

years. Under CBO assumptions, the proposed $800 increase in 1992 

and $200 rise in 1993, would produce exempt earnings levels of 

$1 1,000 and $10,880, respectively. Although the budget indicates that 

the proposal to pay dependent benefits to certain Railroad Retirement 

beneficiaries would not affect Social Security outlays because of the 

existing financial interchange arrangement with the Railroad Retirement Board, CBO estimates that net Social Security outlays--after the 

financial interchange--would rise by $60 million in 1992 but fall by 

about $4 million annually thereafter. Because the payments to the 

Railroad Retirement Board would fall under this proposal, outlays in 

function 600 (income security) would increase, and this increase would 

be subject to the pay-as-you-go rules. (See Function 600 for further 

details.) 
166 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990 

CBO REESTIMATES 

CBO has reestimated the President's budget request downward by 

about $0.7 billion in 1991 and about $8.5 billion over the 1992-1996 

period. CBO's projections of lower inflation and the resulting smaller 

cost-of-living adjustments (COLAS) reduce outlays by about $11.0 

billion through 1996, offset by about $1.7 billion in technical reestimates. 

Social Security Cost-of-Living Adjustments 

Assumed by CBO and the Administration 

(In percent) 

CBO 4.8 3.5 3.6 3.6 3.6 

Administration 5.2 4.0 3.7 3.5 3.4 

CBO's technical reestimates lower outlays through 1993, but increase them thereafter. CBO's projections of retired-worker beneficiaries are lower than the Administration's by about 90,000 in 1991, 

with this differential diminishing after 1994. In addition, CBO projects slightly slower growth in real average monthly benefits (that is, 

after accounting for COLAs) during 1991 and 1992, but faster growth 

after 1992. CBO's estimates also reflect higher retroactive benefit payments than do the Administration's. 
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 167 

CBO REESTIMATES OF PROPOSED SPENDING IN FUNCTION 650 OF 

THE PRESIDENT'S BUDGET (By fiscal year, outlays in billions of dollars) 

1991 1992 1993 1994 1995 1996 

President's 1992 Budget 269.0 

CBO Reestimates 

Economic (Cost-ofliving adjustments) 0 

Technical 

Number of beneficiaries -0.7 

Average benefit adjusted 

for inflation -0.2 

Retroactive benefits 0.1 

Other 0.1 

Subtotal -0.7 

Total -0.7 

President's 1992 Budget 

as Estimated by CBO 268.3 

a. Leas than $50 million. 
168 ANALYSIS OF THE PRESIDENT'S BUDGET March I990 

FUNCTION 700: VETERANS BENEFITS AND SERVICES 

PROPOSED SPENDING CHANGES 

(By fiscal year, outlays in billions of dollars) 

CBO Baseline 31.2 34.1 35.5 38.2 37.9 37.6 

Proposed Changes 

Pay-As-You-Go 

Guaranty and Indemnity 

program 0.0 -0.4 -0.3 -0.3 -0.3 -0.3 

Loan Guaranty program 0.0 -0.8 a a a a 

Pensions 0.0 a -0.1 -0.2 -0.2 -0.2 

Compensation 0.0 a -0.1 -0.1 -0.1 a 

Reimbursements, 

medical care 0.0 0.0 0.0 -0.1 -0.1 -0.1 

Readjustment benefits - 0.0 - a - a - a - a a 

Subtotal 0.0 - 1.3 -0.6 -0.7 -0.7 -0.6 

Discretionary 

Medical care 0.0 -0.1 0.3 a -0.1 -0.2 

Reimbursements, 

medical care 0.0 -0.1 -0.1 -0.1 -0.1 -0.2 

General operating 

expenses 0.0 a -0.1 -0.1 -0.2 -0.2 

0the; 

Subtotal 

Total 0.0 -1.5 -0.6 -1.0 -1.2 -1.4 

President's 1992 Budget 

as Estimated by CBO 31.2 32.6 34.9 37.2 36.8 36.2 

a. Less than $50 million. 

PROPOSED POLICY CHANGES 

The President's 1992 budget includes more than 20' legislative proposals for veterans' benefits and services. The combined effect of these 

proposals would reduce function 700 spending relative to the CBO 

baseline by $5.6 billion (or by 3.1 percent) through 1996. 
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 169 

Pay-As-You-Go Policy Change! 

Guaranty and Indemnity Program and Loan Guaranty Program. The 

President proposes several changes in the Department of Veterans 

Affairs (VA) programs that guarantee home loans to veterans. In the 

Guaranty and Indemnity program, greater restrictions would be 

placed on the multiple use of the loan guarantee benefit. Currently, a 

veteran who has paid off a guaranteed loan can receive a second loan 

on the same basis as the first. The President's proposal would require a 

10 percent down payment and a 2.5 percent origination fee for any 

subsequent use of the entitlement. (Under current law, the fee for 1992 

and future years ranges from 0.5 percent to 1.25 percent depending on 

the loan-to-value ratio.) A second proposal would permanently authorize the temporary increase in the origination fees for home loans provided by the Omnibus Budget Reconciliation Act of 1990 (OBRA). The 

higher fee levels are currently scheduled to expire on September 30, 

1991. 

Approximately 16 percent of VA mortgage guarantees are used by 

individuals who have had their entitlement restored after paying off 

an earlier guaranteed loan. Thus, around 32,000 potential homebuyers would be affected by the first proposal. Of these, about 6,500 

(20 percent) would obtain financing from non-VA sources, should the 

proposal be enacted. An additional 3,500 borrowers would be expected 

to pass up the VA guarantee each year if' the temporary fee increase 

were extended. The requirement of a 10 percent down payment on 

second-use guarantees would be expected to reduce the overall foreclosure rate for the affected loans by approximately 30 percent. 

Two other proposals would affect both the Guaranty and Indemnity program and the Loan Guaranty program. The President proposes to have the VA cover all losses on defaulted VA loans that are 

held in the portfolio of the Government National Mortgage Association 

(GNMA). Currently, some of the loss may be passed through to the 

loan holder, which in this instance would be GNMA. The President 

also proposes to add the average net loss on defaulted loans to the net 

value calculation that is used to determine the agency's procedure on 

foreclosures. While the first proposal would reduce the no-bid rate 

(that is, the percentage of foreclosures in which the VA pays the 
170 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990 

guarantee rather than the full loss on the loan) by approximately 20 

percent, this reduction would be more than offset by the increase in the 

rate that would result from the second proposal. A net increase in the 

no-bid rate of 60 percent would be expected from the two options 

combined. 

The combined budgetary effect of these proposals would reduce 

outlays by around $300 million a year under the reformed system of 

credit accounting. In addition to the reduction in loan volume discussed above, loan subsidies would be decreased by the change in the 

no-bid procedure and the higher fee rates. Since the new no-bid procedures would apply to all defaults, the cost of loans guaranteed before 

the start of credit reform would also be reduced. 

Pensions. The President proposes eliminating the sunset clauses in 

two provisions enacted as part of OBRA. The first provision authorizes 

VA access to Internal Revenue Service data for the purpose of verifying 

the income reported by VA pensioners. Under current law this 

authority would expire on September 30, 1992. The extending of this 

authority would save an estimated $80 million from 1993 through 

1996. A second proposal would eliminate the September 30,1992, sunset date on a provision that sets a $90 pension cap for any veteran without a spouse or child who is receiving Medicaid coverage in a Medicaid-approved nursing home. This change would affect about 40,000 

veterans a year and would save $547 million through 1996. 

Finally, the President proposes changing the military service requirement for pension eligibility to 180 days of wartime service. Under current law, a veteran must have 90 days of active-duty service, at 

least one of which must be during a period of war. This requirement 

would save an estimated $61 million over five years and would make 

around 870 veterans and surviving spouses ineligible for pension benefits each year. 

The combined effects of these three proposals would reduce pension outlays by between $150 million and $200 million each year from 

1993 through 1996. 
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 171 

Compensation. The compensation program is not indexed to inflation 

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. 

The President also proposes to pay benefits to all new dependency 

and indemnity compensation (DIC) cases at a flat rate. Under current 

law, survivor benefits are based on the veteran's military rank. The 

proposed single benefit rate would be equal to the current rate for the 

E-6 pay grade. In addition, DIC benefits to all current E-1 through E-5 

cases would be gradually increased to the E-6 level over a five-year 

period. All E-7 through E-10 beneficiaries now on the rolls would continue to receive benefits at the current levels. If effective at the start of 

1992, this legislation would increase outlays by an estimated $325 million over the next five years and would affect the DIC benefits of approximately 219,000 survivors. 

Finally, the President proposes to eliminate the sunset clause on a 

law that limits compensation benefits in the case of incompetent 

veterans (veterans who lack the mental capacity to manage their own 

affairs). Under current law, benefits to incompetent veterans with no 

dependents are discontinued when the assets of the veteran reach 

$25,000. This provision, which affects about 13,500 veterans, would 

expire on October 1, 1992. Continuing the limit would result in savings of $678 million in 1993 through 1996. 

The net effect of the latter two compensation proposals would be a 

reduction in outlays of about $150 million in 1993, falling to a savings 

of only around $40 million by 1996. 

Reimbursements for Medical Care. The President's budget proposes to 

repeal the sunset date on another provision of OBRA related to billing 

for services provided in VA medical facilities. The VA's authority to 

bill health insurers for the care of non-service-connected conditions 

provided to insured service-disabled veterans expires under current 

law on September 30, 1993. Extending this authority through 1996 
172 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990 

would bring in an estimated $90 million in additional insurance reimbursements per year. 

Read,iustment Benefits. The Administration proposes to limit vocational rehabilitation benefits to veterans with service-connected disabilities rated 30 percent or higher. This would make approximately 

5,600 veterans with disabilities rated at 20 percent ineligible each year 

and is expected to save about $115 million through 1996. A second proposal would disqualify an estimated 1,500 stepchildren from participation in the dependents' educational assistance program at a savings of 

$18 million over five years. Together, these proposals would reduce 

spending by more than $30 million a year through 1994. 

Other Policy Changes 

Medical Care. The President is requesting 1992 appropriation language that would delay the availability of $338 million in funds in the 

medical care appropriation for equipment, land, and structures until 

August 1, 1992. A similar obligation delay was included in the 1990 

and 1991 appropriations. This proposal is expected to shift $200 million in outlays from 1992 to 1993. 

Two programmatic amendments are also found in the budget for 

VA medical care. Under the first proposal, only veterans living more 

than 50 miles from a VA facility would be reimbursed for travel expenses to and from VA hospitals. This would generate savings of 

around $40 million annually. A second proposal, to increase the special pay provided to VA physicians and dentists, would cost approximately $40 million annually. 

Finally., the out-year budget requests for medical care fail to cover 

the anticipated inflation assumed in the CBO baseline. By 1996, a 

short,fall of over $150 million is anticipated. 

Reimbursements for Medical Care. The President is proposing a 

change in this offsetting receipt account to be effected through language in the 1992 appropriation. The amendment would repeal the 

September 30,1991, sunset date on the OBRA increase in copayments 
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 173 

for VA medical care. The higher charges would be levied against an estimated 50,000 admissions and 700,000 outpatient visits each year. 

Extending the higher copayments would increase receipts by an estimated $89 million in 1992, rising to a savings of $155 million in 1996. 

General Operating Expenses. The President's requested spending 

levels for the administration of veterans' benefits fall below the 

inflation-adjusted levels in the CBO baseline by increasing amounts 

between 1993 and 1996. By 1996, a shortfall of $232 million, more 

than 20 percent of the baseline total, is expected. 

CBO REESTIMATES 

Pay-As-You-Go Reestimates. The CBO estimate of the savings in 1992 

from the President's legislative proposals in the VA housing programs 

exceeds the Office of Management and Budget (OMB) estimate by 

nearly $1 billion. This discrepancy is almost entirely the result of different scoring methods used by the two agencies for changes in laws affecting loans made before credit reform was established. Following the 

direction of the Budget Enforcement Act, CBO has estimated these 

changes under credit reform rules--that is, as the net present value of 

expected changes in the cash flow from pre-1992 loans displayed in the 

year of the change. The OMB has not followed this practice. Rather, it 

has estimated the effects on pre-1992 loans as the annual change in the 

associated cash flows. 

The out-year differences in the two estimates of these proposals result from differing estimates of loan volume. The CBO baseline reflects a higher anticipated loan volume than the Administration's budget. Because of this higher loan volume, -the CBO estimate of the savings from the President's proposals to increase fees on all loans and require down payments on some loans is higher than the OMB estimate. 

Other Reestimates. Differences in economic assumptions cause CBO's 

estimates of compensation and pension outlays to be $48 million below 

the President's estimates in 1992, with the difference growing to $158 

million in 1996. The difference results from lower COLAS underlying 
174 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990 

CBO's estimates. (See function 650 for CBO and Administration 

COLA assumptions.) 

As mentioned above, the CBO estimate of future loan volume in 

the VA home loan programs is significantly higher than the Administration's estimate. This difference not only results in a higher CBO 

estimate of savings from the proposed legislation, but it also causes 

CBO's estimate of current-law outlays to exceed OMB's estimate by 

$1.6 billion between 1992 and 1996. The Administration is projecting 

a drop in loan originations of between 5 percent and 20 percent a year. 

CBO's analysis of recent trends and of the demographics of the veteran 

population indicates that a relatively stable level of originations is 

more likely. 

The CBO estimate of medical care spending is approximately $200 

million higher than the President's estimate each year from 1992 

through 1996. The medical care appropriations for 1990 and 1991 contained language delaying the availability of certain funds for obligation until August 1. These provisions reduced the first-year outlay 

rate in both years. The OMB baseline spend-out rate for the account 

appears to have been lowered in response to the slower spending in 

1990 and 1991, even though the phenomenon was the result of legislation rather than changes in program activity. The effects of the Administration's proposal to delay obligations again in 1992 were then 

applied by OMB to this incorrectly reduced baseline rate. 

The CBO outlay estimate for the Montgomery GI Bill program exceeds OMB's estimate for 1992 by $123 million, but by 1996 the CBO 

estimate is $67 million below OMB's. This occurs because CBO projects a higher rate of benefit use in the early years and a slightly lower 

rate in the out-years. Since this is a relatively new program, very little 

data on actual use of benefits exist. The VA estimate of participants is 

based largely on the experience of the old GI Bill, while the CBO estimate reflects a combination of the old GI Bill experience and that of the 

post-Vietnam veterans program. 
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 175 

CBO REESTIMATES OF PROPOSED SPENDING IN FUNCTION 700 OF 

THE PRESIDENT'S BUDGET (By fiscal year, outlays in billions of dollars) 

President's 1992 Budget 31.5 33.0 33.9 36.6 36.1 35.7 

CBO Reestimates 

Pay-As-You-Go Proposals 

Housing programs 0.0 -1.0 a -0.1 -0.1 -0.2 

Other u? - a - 0.1 - 0.3 - 0.3 - 0.3 

Subtotal 0.0 -1.0 0.1 0.2 0.1 0.1 

Other 

Economic 

Compensation and 

pensions 0.0 a -0.1 -0.2 -0.2 -0.1 

Technical 

Housing programs -0.2 0.1 0.3 0.4 0.4 0.4 

Medical care -0.1 0.2 0.3 0.1 0.2 0.2 

Readiustment benefits 0.1 0.2 0.1 a a -0.1 

other 

Subtotal 

Total -0.3 -0.4 1.0 0.7 0.6 0.5 

President's 1992 Budget 

as Estimated by CBO 31.2 32.6 34.9 37.2 36.8 36.2 

a. Less than $50 million. 
176 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990 

FUNCTION 750: ADMINISTRATION OF JUSTICE 

PROPOSED SPENDING CHANGES 

(By fiscal year, outlays in billions of dollars) 

CBO Baseline 12.3 13.7 14.3 14.9 

Proposed Changes 

Pay-As-You-Go 0 0 0 0 

Discretionary 

Federal Bureau of 

Investigation 0 0.2 0.3 0.3 

Organized Crime Drug 

Enforcement 0 a 0.1 0.1 

The Judiciary 0.1 0.4 0.4 0.5 

Federal Prison System a 0.3 0.3 0.3 

Justice Assistance 0 a -0.1 -0.1 

Other - a 0.3 0.1 -0.1 

Total 0.1 1.1 1.2 1.0 

President's 1992 Budget 

as Estimated by CBO 12.3 14.8 15.6 15.9 

President's 1992 Budget 12.6 14.5 15.2 15.4 

CBO Reestimates -0.2 0.3 0.4 0.5 

a. Lees than $50 million. 

PROPOSED POLICY CHANGES 

The President's budget includes $14.8 billion in spending authority for 

administration of justice in 1992, a $2 billion (16 percent) increase over 

the 1991 appropriations. The President's proposals would result in net 

outlays that are $1.1 billion (8 percent) above the CBO baseline for 

1992, and $4.2 billion, or 6 percent, above the baseline for the 1992- 

1996 period. There are no pay-as-you-go proposals in this function. 

Law Enforcement Promams. Law enforcement spending would increase significantly under the proposals contained in the President's 

budget. The total budget authority for the law enforcement subfunction would be nearly $850 million (14 percent) higher in 1992 than in 
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 177 

1991. The Federal Bureau of Investigation (FBI) and the Organized 

Crime Drug Enforcement program would receive 20 percent increases 

over the 1991 level. The FBI's increase would support improvements 

in its field programs and the National Crime Information Center. 

The Judiciary. Spending by the Judiciary also would increase significantly under the President's proposals. Spending authority for 1992 

would total $2.5 billion, compared with $2.0 billion in 1991, a 25 percent increase. Most of this increase would be for the courts of appeals, 

district courts, and other judicial services. Under the President's budget, spending by the Judiciary would be $400 million, or 19 percent, 

above the CBO baseline for 1992, and $2.3 billion, or 20 percent, above 

the baseline over the 1992-1996 period. 

Federal Prison System. The President's proposals would increase 

spending authority for the federal prison system by more than $450 

million (27 percent) in 1992; this level is almost $350 million above the 

CBO baseline. Outlays in 1992 would be more than $250 million, or 12 

percent, above the CBO baseline. Most of this increase is for operating 

expenses, primarily associated with staffing new facilities. 

Justice Assistance. Under the President's proposals, spending for justice assistance would be below the baseline each year. The amount 

requested by the President for the Office of Justice Programs would be 

$80 million (12 percent) below the 1991 amount. The decrease would 

come almost entirely from juvenile justice grants, while spending for 

drug grants would remain at the 1991 level. 

Other. A number of programs would be targeted for significant increases in 1992, and then held constant over the 1993-1996 period. 

These programs include general legal activities, the Antitrust Division, U.S. Attorneys, the Community Relations Service, and the U.S. 

trustees system fund. The President would hold budget authority for 

the Legal Services Corporation (LSC) constant at the 1991 level, resulting in a reduction in spending of almost $200 million relative to the 

CBO baseline from 1992 through 1996. The President's 1991 budget 

also proposed holding LSC budget authority constant at the current 

year's level. 
178 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990 

CBO REESTIMATES 

CBO estimates that spending under the Administration's policies 

would be higher in 1992 and over the five-year period than estimated 

in the budget. In general, these reestimates result from differences in 

estimated spending from prior-year appropriations. 
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 179 

FUNCTION 800: GENERAL GOVERNMENT 

PROPOSED SPENDING CHANGES 

(By fiscal year, outlays in billions of dollars) 

CBO Baseline 11.1 13.3 14.2 14.6 15.0 16.0 

Proposed Changes 

Pay-As-Y ou-Go 0 a a a a a 

Discretionary 

Federal Buildings Fund 0 -0.3 -0.4 -0.7 -1.4 -1.5 

Internal Revenue Service 0 0.1 0.3 0.5 0.5 0.5 

Legislative branch 0 0.3 0.2 0.1 a -0.1 

Federal payment to the 

District of Columbia 0 -0.1 -0.1 -0.1 -0.1 -0.2 

Mineral leasing payments 0 a -0.1 -0.1 -0.1 -0.1 

Other - 0 -0.1 -0.2 - -0.3 -0.4 -0.5 

Total 0 -0.1 -0.2 -0.5 -1.5 -1.8 

President's 1992 Budget 

as Estimated by CBO 11.1 13.3 14.0 14.1 13.6 14.2 

President's 1992 Budget 11.2 13.2 14.1 14.2 13.4 14.2 

CBO Reestimates -0.1 0.1 -0.2 a 0.2 a 

a. Less than $50 million. 

PROPOSED POLICY CHANGES 

The President's budget would provide baseline levels of spending for 

general government activities in 1992, but would reduce spending by 

$3.6 billion below baseline levels over the following four years. Almost 

all of the President's proposals apply to discretionary programs. 

Pay-As-You-Go Policy Changes 

The President's proposal to charge new recreation user fees for the 

Forest Service (discussed in function 300) would require that payments 

be made to states from the proceeds. These payments would total $2.5 

million per year beginning in 1992. 
180 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990 

Discretionary Policy Changes 

The President's budget would provide significant increases in spending 

for several general government programs, but such increases would be 

more than offset by cuts throughout the rest of the function. 

Federal Buildings Fund. The largest change relative to the CBO baseline would result from reducing the number of new projects involving 

federal buildings operated by the General Services Administration 

(GSA). In 1991, the GSA received an unusually large appropriation, 

amounting to $2.5 billion, for the design, construction, and repair of 

border stations and more than 20 backlogged federal office buildings. 

Because the baseline for 1992 and beyond simply inflates the 1991 appropriation, the baseline includes sufficient funds to continue construction and repairs at the high 1991 levels for each year. The President is 

requesting $1.2 billion for these purposes, including only seven new 

buildings, cutting new project authority approximately in half. In 

1992, this request would reduce spending by $0.3 billion below baseline levels. 

Internal Revenue Service. The President is requesting 1992 appropriations of $6.7 billion for the Internal Revenue Service (IRS), an increase of 10 percent over the 1991 funding. Part of this increase is for 

improving the computer systems of the IRS, which would raise outlays 

by $0.2 billion above the baseline in 1992. In addition, the budget includes an IRS initiative aimed at increasing revenue collections. This 

proposal, similar to but smaller than those in recent years, would involve hiring 765 new employees in 1992. This initiative would require 

$40 million in increased spending in the first year. Chapter I11 provides further details on the IRS revenue initiatives and CBOfs analysis 

of their revenue effects. 

Other. The other large spending increase proposed for this function is 

for the legislative branch. The budget includes 1992 funding of $0.3 

billion above the baseline. About half of this increase would be for the 

House of Representatives, and the remaining funding boosts would go 

primarily to the General Accounting Office, Congressional printing, 

and Architect of the Capitol projects. Offsetting these spending increases are many programs slated for funding below the CBO baseline. 
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 181 

Among these is a proposal, similar to last year's, to reduce payments to 

the District of Columbia from $568 million in 1991 to $536 million in 

1992 and subsequent years. The President also proposes to deduct 75 

percent of the administrative costs for minerals management before 

distributing mineral leasing payments to states. This proposal, recommended in previous budgets and enacted only for 1991, would save $0.3 

billion over the 1992-1996 period. 

CBO REESTIMATES 

CBO's estimates of outlays for most general government programs are 

based on historical spending patterns and differ only slightly from the 

Administration's estimates. The largest differences occur in the Federal Buildings Fund, with lower outlays than estimated in the budget, 

and the Internal Revenue Service, for which CBO projects higher 

outlays than in the budget. 
182 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990 

FUNCTION 900: NET INTEREST 

PROPOSED MAJOR SPENDING CHANGES 

(By fiscal year, outlays in billions of dollars) 

CBO Baselines 198.9 209.8 222.1 231.7 236.1 240.0 

Proposed Changes 

Debt service b -0.2 -0.4 -0.3 -0.1 -0.3 

FHA forgiveness 0 - 0.6 - 0.7 - 0.8 - 0.9 - 0.9 

Total b 0.4 0.3 0.5 0.8 0.6 

President's 1992 Budget 

as Estimated by CBO 198.9 210.2 222.4 232.2 236.9 240.6 

ppppp - 

a. Assumes compliance with discretionary spending caps. 

b. Less than 850 million. 

PROPOSED POLICY CHANGES 

Net interest outlays cannot be controlled directly, but are determined 

by the government's deficit and by interest rates. As explained in 

Chapter I, the Administration's spending and revenue proposals create 

relatively little deficit reduction beyond what is required to comply 

with the discretionary spending caps. Further debt service savings 

from the President's proposals are modest, ranging between $100 million and $400 million per year. 

While net interest primarily represents the government's cost of 

financing its debt, a variety of other interest payments and collections 

is also included. In particular, this category of spending reflects interest income collected by the government from loans or similar transactions. The only significant proposal in this area affects intragovernmental interest payments from the Federal Housing Administration 

(FHA) to the Treasury. By forgiving approximately $7.0 billion of 

FHA debt to the Treasury, the President's program would reduce Treasury interest income by $0.6 billion in 1992 and $0.9 billion in 1996. 
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 183 

This income reduction offsets lowered interest payments by the FHA 

that appear on the pay-as-you-go scorecard in function 370. 

FEDERAL DEBT 

The growth of federal debt should taper off markedly in the next five 

years under either the CBO baseline assuming discretionary caps or 

the President's budget. CBO projections of federal debt are shown in 

the table below. Debt held by the public is expected to top $3.5 trillion 

at the end of 1996, up from $2.7 trillion at the end of 1991. The pace of 

borrowing, though, slows sharply after 1992, as temporary factors 

(including the recession, Operation Desert Storm, and huge outlays for 

deposit insurance) fade in importance. Even though the amount of 

debt continues to grow, the ratio of debt to gross national product falls. 

CBO PROJECTIONS OF FEDERAL DEBT HELD 

BY THE PUBLIC (By fiscal year) 

In Billions of Dollars 

Baseline, Assuming Compliance 

with Discretionary Caps 2,704 2,992 3,211 3,379 3,451 3,520 

President's Proposed Budget 

as Reestimated by CBO 2,7032,9883,2063,3793,4533,512 

Difference - 1 -5 - 5 a 2 - 7 

As a Percentage of GNP 

Baseline, Assuming Compliance 

with Discretionary Caps 48.1 49.8 50.1 49.6 47.6 45.7 

President's Proposed Budget 

as Reestimated by CBO 48.1 49.8 50.1 49.6 47.7 45.6 

SOURCE: Congresaional Budget Ofice. 

a. Less than $500 million. 
184 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990 

CBO REESTIMATES 

Reestimates of the Administration's net interest spending total $1.9 

billion in 1991, $3.9 billion in 1992, and $29.6 billion in 1996. 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 $5.0 billion 

in 1992 (when CBO's short-term interest rate projections are 0.8 percentage points above the Administration's, and longer-term maturities 

are 0.4 percentage points higher) to $15.4 billion in 1996 (when the 

interest rate differentials are 0.4 percentage points and 0.9 percentage 

points, respectively). Contrasting interest rate assumptions lead to 

relatively small differences in other interest. 

Technical reestimates to net interest on the public debt add about 

$2 billion per year to outlays. These reestimates stem from a variety of 

factors, including differing assumptions about the composition and 

timing of Treasury debt issuance, means of financing the deficit outside of Treasury borrowing, the debt holdings of trust and other funds 

receiving Treasury interest, and other minor differences. Technical reestimates to other interest programs reduce outlays by $2.4 billion in 

1992 and by $4.2 billion in 1996. These reestimates primarily reflect 

interest receipts the Federal Financing Bank (FFB) earns on its loans 

to the Resolution Trust Corporation and the Bank Insurance Fund. 

CBO anticipates much larger borrowing from the FFB by these agencies, and thus has larger receipts of interest earnings for the FFB. 

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 to the deficit under the Administration's plan spurt from $9 billion in 1992 to $112 billion in 1994, before 

subsiding, and total nearly $300 billion over the 1992-1996 period. Increased interest costs from the additional borrowing required to finance these higher deficits grow to $16.9 billion in 1996. 
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 185 

CBO REESTIMATES OF PROPOSED SPENDING IN FUNCTION 900 OF 

THE PRESIDENT'S BUDGET (By fiscal year, outlays in billions of dollars) 

1991 1992 1993 1994 1995 1996 

President's 1992 Budget 197.0 206.3 212.0 215.5 213.8 211.0 

CBO Reestimates 

Economic (Interest rates) 

Net interest on the 

uublic debt 0.9 5.0 11.8 14.1 15.3 15.4 

0tLer interest 

Subtotal 

Technical 

Net interest on the 

public debt 2.3 1.9 2.2 2.3 1.9 1.7 

Receipts from deposit 

insurance agencies -0.7 -2.3 -4.6 -5.5 -6.4 -4.4 

Other interest -0.2 - -0.1 - 0.4 - 0.1 - 0.3 - 0.2 

Subtotal 1.3 -0.5 -2.1 -3.1 -4.1 -2.5 

Debt Service 

Economic 

Technical 

Subtotal 

Total 1.9 3.9 10.4 16.7 23.1 29.6 

President's 1992 Budget 

as Estimated by CBO 198.9 210.2 222.4 232.2 236.9 240.6 

a. Less than $50 million. 
186 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990 

FUNCTION 920: ALLOWANCES 

PROPOSED MAJOR SPENDING CHANGES 

(By fiscal year, outlays in billions of dollars) 

CBO Baselines 8.2 4.6 0.8 0.4 0 0 

Proposed Changes 

Government contributions 

for Public Health 

Service Retirement 0 0.1 0.1 0.1 0.1 0.1 

President's 1992 Budget as 

Estimated by CBO 8.2 4.7 0.9 0.5 0.1 0.1 

President's 1992 Budget 8.2 4.7 0.9 0.5 0.1 0.1 

CBO Reestimates 0 0 0 0 0 0 

a. Placeholder estimate for the budgetary costs of Operations Desert Shield and Desert Storm. 

Function 920 has traditionally been used to hold 'money that, for various reasons, cannot easily be allocated by function or agency elsewhere 

in the budget. 

In its baseline, CBO has copied the President's placeholder estimate for the extra budgetary costs of Operation Desert Storm in this 

function, a treatment that highlights their special nature. The budget 

was prepared just before the outbreak of hostilities; even now, as 

armed conflict has come to an end, the budgetary costs remain conjectural. The President's budget assumed that Operation Desert Storm 

would cost a total of $29 billion over several years, and that allied contributions would total $15 billion. The resulting net cost of $14 billion 

is concentrated in fiscal years 1991 and 1992, with small amounts in 

later years. CBO has adopted these same assumptions for its baseline, 

as shown above. These expenditures have yet to be appropriated, and a 

supplemental appropriation request (eligible for special treatment 

under the Budget Enforcement Act) is now before the Congress. More 

discussion of the costs of Operation Desert Storm appears in Chapter IV on the defense budget. 
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 187 

Because CBO has adopted the President's assumptions about Operation Desert Storm, the only remaining policy change in this function is a small one. The President proposes new, accrual-based rules 

for agency contributions to Public Health Service Retirement, akin to 

the arrangement for many other federal staff retirement plans. The 

proposal would require additional contributions by several agencies on 

behalf of their workers, amounting to about $100 million a year. The 

extra contributions are placed in this function; the offsetting receipts 

are in function 950 of the budget. 

CBO has no reestimates to the President's proposals for function 

920. 
188 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990 

FUNCTION 950: UNDISTRIBUTED OFFSETTING RECEIPTS 

PROPOSED SPENDING CHANGES 

(By fiscal year, outlays in billions of dollars) 

CBO Baselines -39.6 -38.8 -39.8 -40.9 -41.9 -43.1 

Proposed Changes 

Pay -As-You-Go 

Employer's share of 

employee retirement 0 -0.2 -0.2 2.8 2.5 2.3 

Discretionary 

Spectrum auction 

Other Changes 

Lease of Arctic National 

Wildlife Refuge 0 0 0 -1.6 c -0.9 

Lease of naval petroleum 

reservesb --~ -~ 0 -1.0 -0.3 -0.3 -0.3 -0.3 

Sale of Alaska PMAb 

Subtotal 

Total 0 -1.3 -0.5 0.1 1.0 0.6 

President's 1992 Budget 

as Estimated by CBO -39.6 -40.1 -40.3 -40.7 -40.9 -42.5 

President's 1992 Budget -39.1 -40.8 -43.7 -41.4 -44.8 -44.9 

a. A~usted to reflect reductions in Department of Defense civilian and military employment related to 

the discretionary caps. 

b. The receipts from the proposed lease of the naval petroleum reserves and the proposed sale of the 

Alaska Power Marketing Administration (PMA) 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. 

c. Less than $50 million. 

PROPOSED POLICY CHANGES 

The budget includes measures that would increase undistributed offsetting receipts by $1.3 billion in 1992. The President proposes to sell 

the rights to oil and gas production at the naval petroleum reserve 

(NPR) at Elk Hills, the Alaska Power Marketing Administration 

(PMA), and oil and gas exploration and development rights for the 

Arctic National Wildlife Refuge (ANWR). The budget also includes 
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 189 

proposed fees for the rights to use communications frequencies. Finally, a number of proposals would affect the amounts agencies contribute 

for employee retirement, which appear as receipts in this function. 

Most of these proposals are similar or identical to ones that appeared in 

previous budgets. 

Pay-As-You-Go Policy Changes 

The President's budget proposes to make the Postal Service pay for any 

remaining unfunded liability resulting from pre-1991 cost-of-living adjustments (COLAS). These payments would increase offsetting receipts by $132 million in each year, 1992 through 1996. 

Another proposal would establish an accrual-based retirement system for Public Health Service (PHs) commissioned corps officers. Currently, retired pay and survivor annuities for PHs retired officers and 

their survivors are funded through a pay-as-you-go system. Increased 

employer contributions to the retirement system would raise offsetting 

receipts by $97 million in 1992 and $530 million over the 1992-1996 

period. 

The President proposes to change the method used to calculate the 

Department of Defense's contribution for military retirement beginning in 1994. This change would lower the department's payment by a 

total of about $8.4 billion over the 1994-1996 period. 

Discretionary Policy Changes 

Spectrum Auction. The President proposes to free up 30 megahertz of 

the electromagnetic spectrum for competitive bidding and assignment 

by the Federal Communications Commission (FCC) during the 1994- 

1996 period. Under the proposal, current commercial and federal government users would be moved from their existing frequencies, and the 

FCC would auction the freed-up frequencies for new commercial users. 

The Administration estimates that the sale of the frequencies would 

generate additional receipts of about $4.5 billion over the three-year 

period; these gross receipts would be reduced by about $2 billion in 
190 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990 

costs to replace the equipment of displaced government users. The Administration estimates that net proceeds to the federal government 

would be $0.8 billion in 1994, $1.2 billion in 1995, and $0.5 billion in 

1996. CBO believes that these estimates are reasonable. 

Other Policy Changes 

CBO considers the proposed sale of rights to produce petroleum products at the Elk Hills oilfield and to explore for and develop oil and gas 

on the ANWR to be asset sales. The government owns lands and minerals that are considered a physical asset. When the government 

leases such an asset to a nonfederal entity for the purposes of depleting 

that asset (by extracting the mineral resources), the asset that would 

be returned to the federal government at the expiration of the lease is 

different and of lesser value (the land minus the minerals). CBO 

believes that the value lost equals an asset sold. The monies received 

by the federal government are equivalent to the purchase price for 

those assets and should not be counted as receipts for the purposes of 

deficit reduction. 

Naval Petroleum Reserves. The President proposes to sell the rights to 

produce petroleum products at the government's Elk Hills, California, 

oilfield (NPR-1) through a long-term lease. The buyer(s) of these 

rights would pay the government $1 billion in 1992 and additional 

amounts over the 1993-1996 period. Over a seven-year period, the 

State of California would receive 7 percent of these bonus payments. 

The federal government and California would share equally in royalties on future production, which would be paid at a rate of 12.5 percent. 

CBO estimates that the federal share of NPR-1 royalties and bonus 

payments would total $2.2 billion over the 1992-1996 period. These 

receipts would be partially offset (in function 270) by a loss of about 

$1.5 billion in net income that the government would otherwise receive 

over the five-year period from selling NPR-1 products. The government would forgo additional net income in years after 1996 as well. 

The President also proposes to use some of the royalty and bonus payment receipts to establish a defense petroleum inventory (DPI) of 10 

million barrel,^. Expenditures for the proposed DPI are included in 

function 270. They would total about $150 million over the 1992-1996 

period and an additional $150 million after 1996. 
CHAPTER V THE ADMINISTRATION'S DOMESTIC PROPOSALS 191 

Sale of Power Marketing Administrations. The President proposes to 

sell the Alaska PMA at the end of 1992. CBO believes that the Alaska 

PMA could be sold in 1992, with proceeds totaling $85 million. This income would be partially offset by the loss of income that the government would receive if it kept the PMA. This loss would appear in 

function 270 and would amount to $33 million over the 1993-1996 

period and more in subsequent years. 

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 lease sales would occur instead in 1994 and 1996, with receipts from bonus bids totaling $1.6 billion and $0.9 billion, respectively. 

CBO REESTIMATES 

CBO estimates that outlays in this function would be above the Administration's estimate by $0.7 billion in 1992 and by $11.1 billion 

over the 1992-1996 period. Reestimates of receipts from agencies' contributions for employee retirement and from ANWR lease sales account for most of the reestimates. 

Employer's Share of Employee Retirement. CBO's estimates of employer contributions to civil service retirement and Social Security reflect the budget's proposed reductions in the size of the military forces 

and in the number of civilians working for the Department of Defense. 

The Administration does not include these reductions in its estimates 

of employer contributions to these accounts. As a result, CBO's estimate of offsetting receipts is lower by about $330 million in 1992 and 

$5.6 billion over five years. 

The remaining difference in agency payments to civil service retirement--$5.1 billion over five years--stems largely from different assumptions about how quickly the work force is moving out of the Civil 

Service Retirement System (CSRS) and into the Federal Employees' 

Retirement System (FERS). Employers contribute 7 percent for CSRS 

employees and 13 percent for FERS employees. 
192 ANALYSIS OF THE PRESIDENT'S BUDGET March 1990 

Arctic National Wildlife Refuge. The President proposes to open the 

ANWR to oil and gas exploration and development. Assuming that 

legislation would be enacted by June 1991, lease sales would be held on 

a 24-month cycle, with the first two sales occurring in fiscal years 1993 

and 1995. CBO assumes that any action by the Congress is likely to 

occur later--by early in fiscal year 1992--and that the first two lease 

sales could not occur until 1994 and 1996. CBO also projects that 

bonus bids from competitive bidding would be about $600 million lower 

than estimated by the Administration over the 1992-1996 period. 

Outer Continental Shelf. CBO's estimate of receipts from Outer Continental Shelf leasing is higher than the President's primarily because 

CBO assumes higher oil prices. 

CBO REESTIMATES OF PROPOSED SPENDING IN FUNCTION 950 

OF THE PRESIDENT'S BUDGET (By fiscal year, outlays in billions of dollars) 

President's 1992 Budget -39.1 -40.8 -43.7 -41.4 -44.8 -44.9 

CBO Reestimates 

Pay-As-You-Go Proposals 0 0 0 0 0 0 

Other 

Employer's share of employee 

retirement -0.6 0.9 1.6 2.2 2.8 3.2 

Lease of Arctic National 

Wildlife Refuge 0 0 1.9 -1.6 1.2 -0.9 

Lease of naval petroleum 

reserves 0 0.2 0.1 0.1 0.1 0.1 

Outer Continental Shelf - 0.1 -0.4 -0.2 -0.1 -0.2 - 0.1 

Total -0.5 0.7 3.4 0.7 3.9 2.4 

President's 1992 Budget 

as Estimated by CBO -39.6 -40.1 -40.3 -40.7 -40.9 -42.5 
APPENDIXES 

APPENDIX A 

BASELINE BUDGET PROJECTIONS 

Throughout this volume, the Administration's proposals are compared 

and contrasted with the CBO baseline estimates of the budget. The 

baseline shows the path of revenues and spending if current laws and 

policies remain unchanged. It is not a forecast of budget outcomes, 

since policymakers will certainly adopt many changes in policies and 

priorities. But the baseline is a valuable benchmark for highlighting 

the potential impacts of proposed changes, such as those advocated in 

the President's budget. 

The baseline projections follow familiar rules. For revenues and 

entitlement programs (such as Social Security and Medicare), as well 

as offsetting receipts, the baseline represents the best estimate of what 

would happen under current laws. Expiring provisions of law are 

assumed to expire as scheduled, with two important exceptions. The 

baseline assumes that excise taxes dedicated to trust funds (such as the 

Highway Trust Fund) and any large entitlement programs will continue past their current expirations--two assumptions that are explicitly stated in law. 

For defense and nondefense discretionary programs, the baseline 

simply adopts the fiscal year 1991 appropriation, adjusted in future 

years to keep pace with inflation. This practice, which amounts to 

preserving the real resources of such programs, is long-established in 

convention and law. The discretionary spending caps contained in the 

Budget Enforcement Act, though, complicate the baseline's meaning 

for such programs. Growth in the caps falls short of projected inflation, 

especially in the defense area. Thus, policymakers must decide how 

they will comply with the caps. Because the caps will force trade-offs 

among many programs, there are literally thousands of possible ways 

to comply with them. CBO cannot present projections of how particular programs or functions will fare under the caps, but it can depict the 

implications of the caps for budget aggregates. 
196 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

CBO's report, The Economic and Budget Outlook: Fiscal Years 

1992-1 996 (January 1991), described the baseline projections in detail. 

Since then, CBO has made modest revisions to its baseline projections, 

largely to reflect information that became available with the release of 

the President's budget in early February. Changes in the CBO baseline estimates are summarized in Table A-1. 

An executive order in late January and subsequent legislation 

triggered and then expanded special income tax provisions for service 

TABLE A- 1. REVISIONS TO THE CBO BASELINE 

(By fiscal year, in billions of dollars) 

1991 1992 1993 1994 1995 1996 

CBO January 1991 

Baseline Deficita 298 284 215 160 5 7 56 

Revisions 

Revenuesb 1 c c c 1 1 

Desert ShieldIDesert Storm 8 5 1 c 0 0 

Sallie Mae repayments c c c c c -4 

Medicaid 2 2 3 3 4 5 

Employer's share of employee 

retirement 0 1 2 3 5 5 

Net interestd -1 1 1 2 3 4 

Other outlays - 1 - 1 - c - c - -1 - - 1 

Total 11 10 6 9 12 9 

CBO March 1991 Revised 

Baseline Deficita 309 294 221 169 69 66 

SOURCE: Congressional Budget Office. 

a. Assumes compliance with discretionary spending caps. 

b. Revenue reductions are shown as positive because they raise the deficit. 

c. Less than $500 million. 

d. Excludes the reclassification of certain payments as net interest, which does not affect budget totals. 
APPENDIX A BASELINE BUDGET PROJECTIONS 197 

members in the Persian Gulf combat zone. Other changes in the revenue projections are minor. On the outlay side, CBO has incorporated 

new estimates of the budgetary impact of Operation Desert Storm. The 

budgetary costs of the conflict and the amounts that allied nations will 

contribute remain highly uncertain. As a result, CBO has simply 

adopted the same placeholder estimates as the Administration in an 

effort to reduce confusion in the meantime. Desert Storm's costs 

qualify for special treatment under the Budget Enforcement Act and 

will be addressed in a supplemental appropriation, which is wending 

its way through the legislative process. Other revisions reflect the expected repayment of some Student Loan Marketing Association (Sallie 

Mae) debt, mainly in 1996; higher anticipated Medicaid spending; and 

shrunken contributions to employee retirement plans as a consequence 

of assumed defense cutbacks (discussed further below). Finally, net interest outlays are raised consistent with the other revisions. 

The caps on discretionary spending imply significant savings from 

the conventional, inflation-adjusted baseline. In 1992 and 1993, the 

caps essentially freeze defense budget authority at 1991 dollar levels, 

requiring large reductions from the inflation-adjusted path. (Again, 

costs associated with Operation Desert Storm lie outside the coverage 

of the defense caps.) Smaller savings would be required in the domestic discretionary area, and hardly any savings at all in international 

discretionary spending. After 1993, a single cap applies to the three 

categories--defense, international, and domestic--combined. These implications of the caps are depicted in Table A-2. 

Complying with the caps will inevitably imply cutbacks in the 

armed forces and in civilian employment at the Department of Defense 

(DoD). In fact, last year's defense authorization bill set a specific target for the number serving in the armed forces at the end of 1995. The 

DoD will save money on retirement contributions as a result. However, since such payments are intrabudgetary, this particular DoD 

saving does not lead to lower deficits. Table A-2 shows the loss in such 

retirement contributions associated with the defense savings. Ultimately, of course, the defense cutbacks will lead to genuine savings in 

future benefit payments by military retirement and other programs, 

but this effect lies largely beyond the five-year projection horizon. 
198 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 -~ 

Finally, complying with the caps will yield large and growing savings 

in federal government's debt service costs. 

Federal revenues, spending, and the deficit assuming compliance 

with the caps are recapitulated in Table A-3. The federal deficit is exTABLE A-2. SAVINGS REQUIRED TO COMPLY WITH 

THE DISCRETIONARY SPENDING CAPS 

(By fiscal year, in billions of dollars) 

CBO Baseline Deficit, 

Without Caps 309 307 2 42 217 134 137 

Further Reductions 

Defense discretionary 0 -10 -19 a a a 

International discretionary 0 b b a a a 

Domestic discretionary - 0 - -4 - - 3 - a - a - a 

Subtotal 0 -13 -22 -4 7 -61 -63 

Employer's share of employee 

retirement 0 1 2 3 5 5 

Debt service - 0 - -1 - -2 -4 - -8 - -13 

Total 0 -13 -21 -48 -65 -71 

CBO Baseline Deficit, 

With Caps 309 294 221 169 69 66 

Memoranda: 

Deficit Excluding Deposit 

Insurance 205 197 174 145 116 108 

Deficit Excluding Social 

Security and Postal Service 

(On-Budget Deficit) 369 364 301 266 181 194 

SOURCE: Congressional Budget Office. 

a. h single cap appliee to the three categories of discretionary spending--defense, international, and 

domestic--in 1994 and 1995. The assumed cap for fiscal year 1996 represents a CEO extrapolation. 

b. Less than $500 million. 
APPENDIX A BASELTNE BUDGET PROJECTIONS 199 

TABLE A-3. CBO BASELINE BUDGET PROJECTIONS, ASSUMING 

COMPLIANCE WITH DISCRETIONARY SPENDING CAPS 

(By fiscal year) 

Revenues 

Individual income 

Corporate income 

Social insurance 

Other 

Total 

Outlays 

Defense discretionary 

International discretionary 

Domestic discretionary 

Subtotal 

Desert Storm 

Mandatoryc 

Deposit insurance 

Net interest 

Total 

Deficit 

Revenues 

Individual income 

Corporate income 

Social insurance 

Other 

Total 

Outlays 

Defense discretionary 

International discretionary 

Domestic discretionary 

Subtotal 

Desert Storm 

Mandatoryc 

Deposit insurance 

Net interest 

Total 

Deficit 

In Billions of Dollars 

As a Percentage of GNP 

SOURCE: Congressional Budget Office. 

NOTE: The projections include Social Security and the Postal Service, which are off-budget. 

a. A single cap applies to the three categories of discretionary spending--defense, international, and 

domestic--in 1993 through 1995. The assumed cap for fiscal year 1996 represents a CBO extrapolation. 

b. Less than $500 million. 

c. Includes entitlement and mandatory spending and offsetting receipts. 

d. Less than 0.05 percent of GNP. 
200 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

pected to hover around the $300 billion mark in 1991 and 1992. These 

record-breaking deficits, however, partly reflect temporary factors: the 

recession, which holds down revenues and boosts spending; the current 

hemorrhage of spending on deposit insurance; and the assumed budgetary impacts of Operation Desert Storm. If policymakers comply 

with the pay-as-you-go rules and the discretionary spending caps contained in last fall's agreement, the outlook is for a steadily declining 

deficit--amounting to $66 billion, or just 0.9 percent of GNP, by 1996. 
APPENDIX B 

MAJOR CONTRIBUTORS TO THE 

REVENUE AND SPENDING PROJECTIONS 

The following analysts prepared the revenue and spending projections 

in this report: 

Revenue Projections 

Mark Booth 

Leonard Burman 

Maureen Griffin 

Jon Hakken 

Katherine Johnson 

Richard Kasten 

Kathleen O'Connell 

Larry Ozanne 

Linda Radey 

Pearl Richardson 

Frank Sammartino 

John Stell 

Corporate income taxes, 

Federal Reserve System earnings 

Individual income taxes 

Social insurance contributions, 

excise taxes, estate and gift taxes 

Corporate income taxes 

Excise taxes, NIPA receipts 

Individual income taxes 

Individual income taxes 

Individual income taxes 

Individual income taxes, excise taxes 

Individual and corporate 

income taxes 

Individual income taxes 

Customs duties, 

miscellaneous receipts 

Spending Proiec tions 

Defense and International Affairs 

Eugene Bryton Defense 

Kent Christensen International affairs 

Raymond Hall Defense 

Barbara Hollinshead Defense 
202 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

Spending Projections (continued) 

Defense and International Affairs (continued) 

William Myers 

Amy Plapp 

Lisa Siege1 

Joseph Whitehill 

Human Resources 

Diane Celuch 

Sandra Clark 

Paul Cullinan 

Cathy Ellman 

Alan Fairbank 

Karen Graham 

Scott Harrison 

Holly Harvey 

Jean Hearne 

Lori Housman 

Julia Isaacs 

Deborah Kalcevic 

Cory Oltman 

Janice Peskin 

Pat Purcell 

Kathleen Shepherd 

Natural and Physical Resources 

Defense 

Defense 

Defense 

International affairs 

Philip Bartholomew 

Laura Carter 

Social service programs, Head Start 

Child nutrition, veterans' 

compensation and pensions 

Social Security 

Civil Service Retirement, Railroad 

Retirement 

Hospital Insurance 

Public Health Service 

Medicare 

Supplementary Medical Insurance 

Medicaid 

Medicare 

Food stamps, foster care, child care 

Education 

Unemployment insurance, training 

programs, veterans' education 

Aid to Families with Dependent 

Children, child support 

enforcement 

Supplemental Security Income, 

Medicaid 

Veterans' benefits 

Deposit insurance 

Commerce, deposit insurance 
APPENDM B MAJOR CONTRIBUTORS 203 

Spending Projections (continued) 

Natural and Physical Resources (continued) 

Kim Cawley 

Patricia Conroy 

Peter Fontaine 

Theresa Gullo 

James Hearn 

David Hull 

Thomas Lutton 

Mary Maginniss 

Eileen Manfredi 

Marjorie Miller 

Andrew Morton 

Deborah Reis 

Mitchell Rosenfeld 

Brent Shipp 

Michael Sieverts 

Other 

Janet Airis 

Edward Blau 

David Elkes 

Betty Embrey 

Kenneth Farris 

Danila Girerd 

Glen Goodnow 

Energy, pollution control and 

abatement 

Community and regional 

development, general 

government 

Energy 

Water resources, conservation, and 

land management 

General government, Agricultural 

Credit Insurance Fund, Outer 

Continental Shelf receipts 

Agriculture 

Deposit insurance 

Deposit insurance 

Agriculture 

Transportation, Federal Housing 

Administration 

Agriculture 

Recreation, water transportation 

Air transportation, justice, 

Postal Service 

Housing and mortgage credit 

Science and space, justice, 

natural resources 

Appropriation bills 

Appropriation bills 

National income and product 

accounts, other interest 

Appropriation bills 

Computer support 

Credit budget 

Authorization bills 
204 ANALYSIS OF THE PRESIDENT'S BUDGET March 1991 

Spending Projections (continued) 

Other (continued) 

Alice Grant 

Vernon Hammett 

Sandra Hoffman 

Richard Krop 

Fritz Maier 

Rodney Rasmussen 

Kathy Ruffing 

Robert Sempsey 

Jeff Swersey 

Rick Williams 

Appropriation bills 

Computer support 

Computer support 

Civilian agency pay, historical data 

Computer support 

Net interest on the public debt 

Treasury borrowing, 

interest, and debt 

Appropriation bills 

Computer support 

Computer support