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THE BUDGET SYSTEM AND CONCEPTS

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26. THE BUDGET SYSTEM AND CONCEPTS

The budget system of the United States Governmentprovides the means for the President and Congress todecide how much money to spend, what to spend iton, and how to raise the money they have decided tospend. Through the budget system, they determine theallocation of resources among the agencies of the Fed-eral Government and between the Federal Governmentand the private sector. The budget system focuses pri-marily on dollars, but it also allocates other resources,such as Federal employment. The decisions made inthe budget process affect the nation as a whole, Stateand local governments, and individual Americans.Many budget decisions have worldwide significance.The Congress and the President enact budget decisionsinto law. The budget system ensures that these lawsare carried out.

This chapter provides an overview of the budget sys-tem and explains some of the more important budgetconcepts. It includes summary dollar amounts to illus-trate major concepts. Other chapters of the budget doc-

uments discuss these amounts and more detailedamounts in greater depth.The following section discusses the budget process,

covering formulation of the Presidents budget, Congres-sional action, and budget execution. The next sectionprovides information on budget coverage, including adiscussion of on-budget and off-budget amounts, func-tional classification, how budget data is arrayed, typesof funds, and full cost budgeting. Subsequent sectionsdiscuss the concepts of receipts and collections, budgetauthority, and outlays. These sections are followed bydiscussions of Federal credit; surpluses, deficits, andmeans of financing; Federal employment; and the basisfor the budget figures. A glossary of budget terms ap-pears at the end of the chapter.

Various laws, enacted to carry out requirements of the Constitution, govern the budget system. The chap-ter refers to the principal ones by title throughout thetext and gives complete citations in the section justpreceding the glossary.

THE BUDGET PROCESS

The budget process has three main phases, each of which is interrelated with the others:

(1) Formulation of the Presidents proposed budget;(2) Congressional action on the budget; and

(3) Budget execution.Formulation of the Presidents Budget

The Budget of the United States Government consistsof several volumes that set forth the Presidents finan-cial proposal with recommended priorities for the allo-cation of resources by the Government. The primaryfocus of the budget is on the budget yearthe nextfiscal year for which Congress needs to make appropria-tions, in this case 2007. (Fiscal year 2007 will beginon October 1, 2006 and end on September 30, 2007.)The budget also covers at least the four years followingthe budget year in order to reflect the effect of budgetdecisions over the longer term. It includes the fundinglevels provided for the current year, in this case 2006,so that the reader can compare the Presidents budgetproposals to the most recently enacted levels, and itincludes data on the most recently completed fiscalyear, in this case 2005, so that the reader can comparebudget estimates to actual accounting data.

The President begins the process of formulating thebudget by establishing general budget and fiscal policyguidelines, usually by the Spring of each year, at leastnine months before the President transmits the budgetto Congress and at least 18 months before the fiscalyear begins. (See the Budget Calendar below.) Based

on these guidelines, the Office of Management andBudget (OMB) works with the Federal agencies to es-tablish specific policy directions and planning levels forthe agencies, both for the budget year and for at least

the following four years, to guide the preparation of their budget requests.During the formulation of the budget, the President,

the Director of OMB, and other officials in the Execu-tive Office of the President continually exchange infor-mation, proposals, and evaluations bearing on policydecisions with the Secretaries of the departments andthe heads of the other Government agencies. Decisionsreflected in previously enacted budgets, including theone for the fiscal year in progress, reactions to thelast proposed budget (which Congress is consideringwhen the process of preparing the upcoming budgetbegins), and program performance influence decisionsconcerning the upcoming budget. So do projections of the economic outlook, prepared jointly by the Councilof Economic Advisers, OMB, and the Treasury Depart-ment.

In early Fall, agencies submit their budget requeststo OMB, where analysts review them and identifyissues that OMB officials need to discuss with the agen-cies. OMB and the agencies resolve many issues them-selves. Others require the involvement of the Presidentand White House policy officials. This decision-makingprocess is usually completed by late December. At thattime, the final stage of developing detailed budget dataand the preparation of the budget documents begins.

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378 ANALYTICAL PERSPECTIVES

1 For a fuller discussion of the congressional budget process, see Robert Keith and AllenSchick, Manual on the Federal Budget Process (Congressional Research Service Report98720 GOV) and Introduction to the Federal Budget Process (Congressional Research Serv-ice Report 98721 GOV).

The decision-makers must consider the effects of eco-nomic and technical assumptions on the budget esti-mates. Interest rates, economic growth, the rate of in-flation, the unemployment rate, and the number of peo-ple eligible for various benefit programs, among otherthings, affect Government spending and receipts. Small

changes in these assumptions can affect budget esti-mates by billions of dollars. (Chapter 12, Economic Assumptions, provides more information on this subject.)

Statutory limitations on changes in receipts and out-lays also influence budget decisions (see Budget En-forcement below).

Thus, the budget formulation process involves the si-multaneous consideration of the resource needs of indi-vidual programs, the allocation of resources among theagencies and functions of the Federal Government, thetotal outlays and receipts that are appropriate in rela-tion to current and prospective economic conditions, andstatutory constraints.

The law governing the Presidents budget specifiesthat the President is to transmit the budget to Congresson or after the first Monday in January but not laterthan the first Monday in February of each year forthe following fiscal year, which begins on October 1.The budget is routinely sent to Congress on the firstMonday in February, giving it eight months to act onthe budget before the fiscal year begins.

In some years, for various reasons, the President can-not adhere to the normal schedule. One reason is thatthe current law does not require an outgoing Presidentto transmit a budget, and it is impracticable for anincoming President to complete a budget within a few

days of taking office on January 20th. President Clin-ton, the first President subject to the current require-ment, submitted a report to Congress on February 17,1993, describing the comprehensive economic plan heproposed for the Nation and containing summary budg-et information. He transmitted the Budget of theUnited States for 1994 on April 8, 1993. PresidentGeorge W. Bush similarly submitted an initial docu-ment, A Blueprint for New BeginningsA Responsible

Budget for Americas Priorities , to Congress on Feb-ruary 28, 2001, and transmitted the Budget of theUnited States Government for Fiscal Year 2002 on

April 9, 2001.In some years, the late or pending enactment of ap-

propriations acts, other spending legislation, and taxlaws considered in the previous budget cycle have de-layed preparation and transmittal of complete budgets.For this reason, for example, President Reagan sub-mitted his budget for 1988 forty-five days after thedate specified in law. In other years, Presidents havesubmitted abbreviated budget documents on the duedate, sending the more detailed documents weeks later.For example, President Clinton transmitted an abbre-viated budget document to Congress on February 5,1996, because of uncertainty over 1996 appropriationsas well as possible changes in mandatory programs and

tax policy. He transmitted a budget supplement andother budget volumes in March 1996.

Congressional Action 1

Congress considers the Presidents budget proposalsand approves, modifies, or disapproves them. It can

change funding levels, eliminate programs, or add pro-grams not requested by the President. It can add oreliminate taxes and other sources of receipts, or makeother changes that affect the amount of receipts col-lected.

Congress does not enact a budget as such. Throughthe process of adopting a budget resolution (describedbelow), it agrees on levels for total spending and re-ceipts, the size of the deficit or surplus, and the debtlimit. The budget resolution then provides the frame-work within which congressional committees prepareappropriations bills and other spending and receiptslegislation. Congress provides spending authority forspecified purposes in appropriations acts each year. Italso enacts changes each year in other laws that affectspending and receipts. Both appropriations acts andthese other laws are discussed in the following para-graphs.

In making appropriations, Congress does not vote onthe level of outlays (spending) directly, but rather onbudget authority, which is the authority provided bylaw to incur financial obligations that will result inoutlays. In a separate process, prior to making appro-priations, Congress usually enacts legislation that au-thorizes an agency to carry out particular programsand, in some cases, limits the amount that can be ap-propriated for the programs. Some authorizing legisla-tion expires after one year, some expires after a speci-

fied number of years, and some is permanent. Congressmay enact appropriations for a program even thoughthere is no specific authorization for it.

Congress begins its work on the budget shortly afterit receives the Presidents budget. Under the proceduresestablished by the Congressional Budget Act of 1974,Congress decides on budget totals before completing ac-tion on individual appropriations. The Act requires eachstanding committee of the House and Senate to rec-ommend budget levels and report legislative plans con-cerning matters within the committees jurisdiction tothe Budget Committee in each body. The Budget Com-mittees then initiate the concurrent resolution on thebudget. The budget resolution sets levels for total re-

ceipts and for budget authority and outlays, both intotal and by functional category (see Functional Classi-fication below). It also sets levels for the budget deficitor surplus and debt.

In the report on the budget resolution, the BudgetCommittees allocate the total on-budget budget author-ity and outlays provided in the resolution to the Appro-priations Committees and the other committees thathave jurisdiction over spending. (See COVERAGE OF

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THE BUDGET, later in this chapter, for more informa-tion on on-budget and off-budget amounts.) The Appro-priations Committees are required, in turn, to dividetheir allocations of budget authority and outlays amongtheir respective subcommittees. The subcommitteesmay not exceed their allocations in drafting spending

bills. The other committees with jurisdiction overspending and receipts may make allocations amongtheir subcommittees but are not required to do so. TheBudget Committees reports may discuss assumptionsabout the level of funding for major programs. Whilethese assumptions do not bind the other committeesand subcommittees, they may influence their decisions.The budget resolution may contain reconciliation direc-tives (discussed below) to the committees responsiblefor tax laws and for spending not controlled by annualappropriation acts, in order to conform the level of re-ceipts and this type of spending to the levels specifiedin the budget resolution.

The congressional timetable calls for the whole Con-

gress to adopt the budget resolution by April 15 of each year, but Congress regularly misses this deadline.Once Congress passes a budget resolution, a memberof Congress can raise a point of order to block a billthat would exceed a committees allocation.

Since the concurrent resolution on the budget is nota law, it does not require the Presidents approval.However, Congress considers the Presidents views inpreparing budget resolutions, because legislation devel-oped to meet congressional budget allocations does re-quire the Presidents approval. In some years, the Presi-dent and the joint leadership of Congress have formallyagreed on plans to reduce the deficit or balance thebudget. These agreements were reflected in the budgetresolution and legislation passed for those years.

Once Congress approves the budget resolution, itturns its attention to enacting appropriations bills andauthorizing legislation. Appropriations bills are initi-ated in the House. They provide the budget authorityfor the majority of Federal programs. The Appropria-tions Committee in each body has jurisdiction over an-nual appropriations. These committees are divided intosubcommittees that hold hearings and review detailedbudget justification materials prepared by the agencieswithin the subcommittees jurisdiction. After a bill hasbeen drafted by a subcommittee, the committee andthe whole House, in turn, must approve the bill, usuallywith amendments to the original version. The Housethen forwards the bill to the Senate, where a similarreview follows. If the Senate disagrees with the Houseon particular matters in the bill, which is often thecase, the two bodies form a conference committee (con-sisting of Members of both bodies) to resolve the dif-ferences. The conference committee revises the bill andreturns it to both bodies for approval. When the revisedbill is agreed to, first in the House and then in theSenate, Congress sends it to the President for approvalor veto.

The President can only approve or veto an entirebill; he cannot approve or veto selected parts. In 1996,

Congress enacted the Line Item Veto Act, granting thePresident limited authority to cancel new spending andlimited tax benefits when he signs laws enacted bythe Congress. However, in 1998, the Supreme Courtdeclared this authority to be unconstitutional.

For 23 of the last 25 fiscal years, including 2006,

some or all of the appropriations bills were not enactedby the beginning of the year. When this occurs, Con-gress usually enacts a joint resolution called a con-tinuing resolution, which is an interim appropriationsbill, to provide authority for the affected agencies tocontinue operations at some specified level up to a spe-cific date or until the regular appropriations are en-acted. In some years, a continuing resolution has fund-ed a portion or all of the Government for the entireyear. Congress must present these resolutions to thePresident for approval or veto. In some cases, Presi-dents have rejected continuing resolutions because theycontained unacceptable provisions. Left without funds,Government agencies were required by law to shut

down operationswith exceptions for some activitiesuntil Congress passed a continuing resolution the Presi-dent would approve. Shutdowns have lasted for periodsof a day to several weeks.

As explained earlier, Congress also provides budgetauthority in laws other than appropriations acts. Infact, while annual appropriations acts control thespending for the majority of Federal programs, theycontrol about 40 percent of the total spending in atypical year. Permanent laws, called authorizing legisla-tion, control the rest of the spending. A distinctive fea-ture of these laws is that they provide agencies withthe authority to collect or to spend money without firstrequiring the Appropriations Committees to enact fund-ing. This category of spending includes interest theGovernment pays on the public debt and the spendingof several major programs, such as Social Security,Medicare and Medicaid, unemployment insurance, andFederal employee retirement. This chapter discussesthe control of budget authority and outlays in greaterdetail under BUDGET AUTHORITY AND OTHERBUDGETARY RESOURCES, OBLIGATIONS, ANDOUTLAYS.

Almost all taxes and most other receipts result frompermanent laws. Article I, Section 7, of the Constitutionprovides that all bills for raising revenue shall originatein the House of Representatives. In the House, theWays and Means Committee initiates tax bills; in theSenate, the Finance Committee has jurisdiction overtax laws.

The budget resolution often includes reconciliation di-rectives, which require authorizing committees tochange permanent laws that affect receipts and outlays.The budget resolution directs each designated com-mittee to report amendments to the laws under thecommittees jurisdiction that would achieve changes inthe levels of receipts and reductions in direct spendingcontrolled by the laws. The directives specify the dollaramount of changes that each designated committee isexpected to achieve, but do not specify which laws are

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to be changed or the changes to be made. However,the Budget Committees reports on the budget resolu-tion frequently discuss assumptions about how the lawswould be changed. Like other assumptions in the re-port, they do not bind the committees of jurisdictionbut may influence their decisions. A reconciliation in-

struction may also specify the total amount by whichthe statutory limit on the public debt is to be changed.The committees subject to reconciliation directives

draft the implementing legislation. Such legislationmay, for example, change the tax code, revise benefitformulas or eligibility requirements for benefit pro-grams, or authorize Government agencies to charge feesto cover some of their costs. Congress typically enactsan omnibus budget reconciliation act, which combinesthe amendments to implement reconciliation directivesin a single act.

Such a large and complicated bill would be difficultto enact under normal legislative procedures becauseit usually involves changes to tax rates or to popular

social programs in order to achieve budgetary savings.The Senate considers such omnibus reconciliation actsunder expedited procedures that limit total debate onthe bill. As a result, there are significant restrictionswith respect to the substantive content of the reconcili-ation measure itself, as well as amendments to themeasure. Any material in the bill or amendment tothe bill that is not germane, would add extraneousmaterial, would cause deficit levels to increase, or thatcontains changes to the Federal Old-Age and SurvivorsInsurance and the Federal Disability Insurance pro-grams are not in order under expedited reconciliationprocedures.

Reconciliation acts, together with appropriations acts

for the year, often implement agreements between thePresident and the Congress. They may include othermatters, such as laws providing the means for enforcingthese agreements, as described below.

Budget Enforcement

The Budget Enforcement Act (BEA), first enacted in1990 and extended in 1993 and 1997, significantlyamended the laws pertaining to the budget process,including the Congressional Budget Act, the BalancedBudget and Emergency Deficit Control Act, and thelaws pertaining to the Presidents budget (see PRIN-CIPAL BUDGET LAWS, later in the chapter). The BEAconstrained legislation enacted through 2002 thatwould increase spending or decrease spending.

The BEA divided spending into two types discre-tionary spending and direct spending . Discretionaryspending is controlled through annual appropriationsacts. Direct spending, which is more commonly referredto as mandatory spending , is controlled by permanentlaws. However, the BEA required budget authority pro-vided in annual appropriations acts for certain specifi-cally identified programs to be treated as mandatory.This is because the authorizing legislation in thesecases entitles beneficiaries to receive payment or other-wise obligates the Government to make payment, even

though the payments are funded by a subsequent ap-propriation. Since the authorizing legislation effectivelydetermines the amount of budget authority required,the BEA classified it as mandatory.

The BEA defined categories of discretionary spendingand specified dollar limits known as caps on the

amount of spending in each category. If the amountof budget authority or outlays provided in appropria-tions acts for a given year exceeded the cap for thatcategory, the BEA required a procedure, called seques-tration , for reducing the spending in the category.

The BEA did not cap mandatory spending. Instead,it required that all laws that affected mandatory spend-ing or receipts be enacted on a pay-as-you-go (PAYGO)basis. That meant that if such a law increased thedeficit or reduced a surplus in the budget year or anyof the four following years, another law had to be en-acted with an offsetting reduction in spending or in-crease in receipts for each year that was affected. Oth-erwise, a sequestration would be triggered in the fiscal

year in which the deficit would be increased.Chapter 24, Budget System and Concepts and Glos-sary, pages 460461 in the Analytical Perspectives vol-ume of the 2004 Budget, discusses the Budget Enforce-ment Act in more detail.

The BEA expired at the end of 2002. The Administra-tion proposes to extend the BEAs mechanisms for lim-iting discretionary spending and to establish mandatoryspending controls. The Administration also proposes toestablish a new mechanism to measure the FederalGovernments long-term unfunded obligations and toprohibit increases in those obligations. These proposalsare discussed in more detail in Chapter 15, BudgetReform Proposals, of this volume.

Budget Execution

Government agencies may not spend or obligate morethan Congress has appropriated, and they may usefunds only for purposes specified in law. The

Antideficiency Act prohibits them from spending or obli-gating the Government to spend in advance of an ap-propriation, unless specific authority to do so has beenprovided in law. Additionally, the Act requires thePresident to apportion the budgetary resources avail-able for most executive branch agencies. The Presidenthas delegated this authority to OMB. Some apportion-ments are by time periods (usually by quarter of thefiscal year), some are by projects or activities, and oth-ers are by a combination of both. Agencies may requestOMB to reapportion funds during the year to accommo-date changing circumstances. This system helps to en-sure that funds are available to cover operations forthe entire year.

During the budget execution phase, the Governmentsometimes finds that it needs to spend more moneythan Congress has appropriated for the fiscal year be-cause of unanticipated circumstances. For example,more money might be needed to respond to a severenatural disaster. Under such circumstances, Congressmay enact a supplemental appropriation.

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On the other hand, the President may initiate thewithholding of funds. Amounts that are withheld areapportioned as deferred or withheld pending rescis-sion on the OMB approved apportionment form. Agen-cies are instructed not to withhold funds without theprior approval of OMB. When OMB approves a with-

holding, the Impoundment Control Act requires thatthe President transmit a special message to the Con-gress. The historical reason for the special message isto inform Congress that the President has unilaterallywithheld funds that were enacted in regular appropria-tions acts. The notification allows the Congress to over-turn the deferral or proposed rescission. The last timethe President initiated the withholding of funds wasfive years ago.

By contrast, Congress often does not complete actionon regular appropriations bills prior to the beginningof the fiscal year and affected agencies operate undera continuing resolution. Most continuing resolutions in-

struct the Administration to take the most limited fund-ing action permitted by the CR, so as not to impingeon the final funding prerogatives of the Congress. Aseach regular appropriations act is subsequently en-acted, the Executive Branch agencies typically adoptoperating plans that allow the Congress to enact subse-

quent across-the-board reductions in the final appro-priations act. Every year since fiscal year 2002, theCongress has consistently taken actions in appropria-tions acts to cancel amounts appropriated in previouslaws. Typically, these subsequent reductions have beenenacted in the latest or last appropriation act. Some-times the last act has been a consolidated, omnibus,or supplemental appropriations act. For fiscal year2006, the across-the-board reduction was included inthe last enacted appropriations bill, which was the De-partment of Defense, Emergency Supplemental Appro-priations to Address Hurricanes in the Gulf of Mexico,and Pandemic Influenza Act, 2006.

Budget Calendar

The following timetable highlights the scheduled dates for significant budget events during the year:

Between the 1st Monday in January and the 1stMonday in February .................................................. President transmits the budget.

Six weeks later ............................................................... Congressional committees report budget estimates to Budget Committees. April 15 ........................................................................... Action to be completed on congressional budget resolution.May 15 ............................................................................ House consideration of annual appropriations bills may begin.June 15 ........................................................................... Action to be completed on reconciliation.June 30 ........................................................................... Action on appropriations to be completed by House.July 15 ............................................................................ President transmits Mid-Session Review of the Budget.October 1 ........................................................................ Fiscal year begins.

COVERAGE OF THE BUDGET

Federal Government and Budget Totals

Table 261. TOTALS FOR THE BUDGET AND THE FEDERAL GOVERNMENT (In billions of dollars)

2005actual

Estimate

2006 2007

Budget authorityUnified ..................................................... 2,583 2,758 2,739On-budget ................................................ 2,170 2,323 2,283

Off-budget ................................................ 413 435 456Receipts:

Unified ..................................................... 2,154 2,285 2,416On-budget ................................................ 1,576 1,676 1,774Off-budget ................................................ 577 610 642

Outlays:Unified ..................................................... 2,472 2,709 2,770On-budget ................................................ 2,070 2,278 2,317Off-budget ................................................ 402 431 453

Surplus:Unified ..................................................... 318 423 354On-budget ................................................ 494 602 543Off-budget ................................................ 175 179 189

The budget documents provide information on allFederal agencies and programs. However, because thelaws governing Social Security (the Federal Old-Ageand Survivors Insurance and the Federal Disability In-surance trust funds) and the Postal Service Fund ex-clude the receipts and outlays for those activities fromthe budget totals and from the calculation of the deficitor surplus, the budget presents on-budget and off-budg-et totals. The off-budget totals include the transactionsexcluded by law from the budget totals. The on-budgetand off-budget amounts are added together to derivethe totals for the Federal Government. These are some-times referred to as the unified or consolidated budgettotals.

It is not always obvious whether a transaction oractivity should be included in the budget. Where thereis a question, OMB normally follows the recommenda-tion of the 1967 Presidents Commission on BudgetConcepts to be comprehensive of the full range of Fed-eral agencies, programs, and activities. In recent years,for example, the budget has included the transactionsof the Universal Service Fund, the Public Company

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Accounting Oversight Board, Guaranty Agencies Re-serves, the National Railroad Retirement InvestmentTrust, the United Mine Workers Combined BenefitsFund, and the Telecommunications Development Fund.

The budget includes the transactions of Electric Reli-ability Organizations (EROs) established pursuant to

the Energy Policy Act of 2005. The Act authorizes theFederal Energy Regulatory Commission (FERC) to cer-tify an ERO to establish and enforce reliability stand-ards for the bulk-power system, subject to FERC reviewand approval. Even though the statute states that theERO is not a department, agency, or instrumentalityof the United States Government, its sources of fundingand activities are governmental in nature, and its poli-cies and operations are largely controlled by the FederalGovernment.

The budget also reclassifies the collections and spend-ing by the affordable housing program (AHP) fundscreated by the Financial Institutions Reform, Recovery,and Enforcement Act of 1989 (FIRREA) as govern-

mental and includes them in the budget totals. FIRREArequires each of the 12 Federal Home Loan Banks(FHLBs) to contribute at least 10 percent of its previousyears net earnings to an AHP fund to be used to sub-sidize owner-occupied and rental housing for low-in-come families and individuals and to provide assistanceto certain first-time homebuyers. Since 1990, theFHLBs have contributed $2.4 billion to the AHP funds,of which $1.7 billion has been spent. Although thefunds remain in the possession of the FHLBs, the de-posit of specific amounts into the AHP funds is compul-sory, and the expenditures are to meet specific govern-mental purposes.

In contrast, the budget excludes tribal trust funds

that are owned by Indian tribes and held and managedby the Government in a fiduciary capacity on the tribesbehalf. These funds are not owned by the Government,the Government is not the source of their capital, andthe Governments control is limited to the exercise of fiduciary duties. Similarly, the transactions of Govern-ment-sponsored enterprises, such as the FHLBs are notincluded in the on-budget or off-budget totals. Federallaws established these enterprises for public policy pur-poses, but they are privately owned and operated cor-porations. Because of their public charters, the budgetdiscusses them and reports summary financial data inthe budget Appendix and in some detailed tables.

The Appendix includes a presentation for the Board

of Governors of the Federal Reserve System for infor-mation only. The amounts are not included in eitherthe on-budget or off-budget totals because of the inde-pendent status of the System within the Government.However, the Federal Reserve System transfers its netearnings to the Treasury, and the budget records themas receipts.

Functional Classification

The functional classification arrays budget authority,outlays, and other budget data according to the majorpurpose served-such as agriculture, income security,

and national defense. There are nineteen major func-tions, most of which are divided into subfunctions. Forexample, the Agriculture function comprises the sub-functions Farm Income Stabilization and AgriculturalResearch and Services. The functional array meets theCongressional Budget Act requirement for a presen-

tation in the budget by national needs and agency mis-sions and programs.The following criteria are used in establishing func-

tional categories and assigning activities to them: A function encompasses activities with similar

purposes, emphasizing what the Federal Govern-ment seeks to accomplish rather than the meansof accomplishment, the objects purchased, the cli-entele or geographic area served, or the Federalagency conducting the activity (except in the caseof subfunction 051 in the National Defense func-tion, which is used only for defense activitiesunder the Department of DefenseMilitary).

A function must be of continuing national impor-

tance, and the amounts attributable to it mustbe significant. Each basic unit being classified (generally the ap-

propriation or fund account) usually is classifiedaccording to its primary purpose and assigned toonly one subfunction. However, some large ac-counts that serve more than one major purposeare subdivided into two or more subfunctions.

Detailed functional tables, which provide informationon government activities by function and subfunction,appear this year on the Analytical Perspectives CDROM as Table 27.

Agencies, Accounts, Programs, Projects, and Activities

Various summary tables in the Analytical Perspec-tives volume of the budget provide information on budg-et authority, outlays, and offsetting collections and re-ceipts arrayed by Federal agency. A table that listsbudget authority and outlays by budget account withineach agency and the totals for each agency of budgetauthority, outlays, and receipts that offset the agencyspending totals appears this year on the Analytical Per-

spectives CD ROM as Table 28. The Appendix providesbudgetary, financial, and descriptive information aboutprograms, projects, and activities by account withineach agency. The Appendix also presents the most re-cently enacted appropriation language for an accountand any changes that are proposed to be made forthe budget year.

Types of Funds

Agency activities are financed through Federal fundsand trust funds.

Federal funds comprise several types of funds. Re-ceipt accounts of the general fund , which is the great-er part of the budget, record receipts not earmarkedby law for a specific purpose, such as income tax re-ceipts. The general fund also includes the proceeds of general borrowing. General fund appropriation accounts

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record general fund expenditures. General fund appro-priations draw from general fund receipts and bor-rowing collectively and, therefore, are not specificallylinked to receipt accounts. Special funds consist of receipt accounts for Federal fund receipts that lawshave earmarked for specific purposes and the associated

appropriation accounts for the expenditure of those re-ceipts. Public enterprise funds are revolving fundsused for programs authorized by law to conduct a cycleof business-type operations, primarily with the public,in which outlays generate collections.

Intragovernmental funds are revolving funds thatconduct business-type operations primarily within andbetween Government agencies. The collections and theoutlays of revolving funds are recorded in the samebudget account.

Trust funds account for the receipt and expenditureof monies by the Government for carrying out specificpurposes and programs in accordance with the termsof a statute that designates the fund as a trust fund

(such as the Highway Trust Fund) or for carrying outthe stipulations of a trust where the Government itself is the beneficiary (such as any of several trust fundsfor gifts and donations for specific purposes). Trustrevolving funds are trust funds credited with collec-tions earmarked by law to carry out a cycle of business-type operations.

The Federal budget meaning of the term trust, asapplied to trust fund accounts, differs significantly fromits private sector usage. In the private sector, the bene-ficiary of a trust usually owns the trusts assets, whichare managed by a trustee who must follow the stipula-tions of the trust. In contrast, the Federal Governmentowns the assets of most Federal trust funds, and it

can raise or lower future trust fund collections andpayments, or change the purposes for which the collec-tions are used, by changing existing laws. There is nosubstantive difference between a trust fund and a spe-cial fund or between a trust revolving fund and a publicenterprise revolving fund. The Government does act asa true trustee of assets that are owned or held forthe benefit of others. For example, it maintains ac-counts on behalf of individual Federal employees inthe Thrift Savings Fund, investing them as directedby the individual employee. The Government accountsfor such funds in deposit funds , which are not in-cluded in the budget. (Chapter 22, Trust Funds andFederal Funds, provides more information on this sub-

ject.)Budgeting for Full Costs

A budget is a financial plan for allocating resources-deciding how much the Federal Government shouldspend in total, program by program, and for the partsof each program and deciding how to finance the spend-ing. The budgetary system provides a process for pro-posing policies, making decisions, implementing them,and reporting the results. The budget needs to measurecosts accurately so that decision makers can comparethe cost of a program with its benefit, the cost of one

program with another, and the cost of alternative meth-ods of reaching a specified goal. These costs need tobe fully included in the budget up front, when thespending decision is made, so that executive and con-gressional decision makers have the information andthe incentive to take the total costs into account for

setting priorities.The budget includes all types of spending, includingboth current operating expenditures and capital invest-ment, and to the extent possible, both are measuredon the basis of full cost. Questions are often raisedabout the measure of capital investment. The presentbudget provides policymakers the necessary informationregarding investment spending. It records investmenton a cash basis, and it requires Congress to providebudget authority before an agency can obligate the Gov-ernment to make a cash outlay. By these means, itcauses the total cost of capital investment to be com-pared up front in a rough and ready way with thetotal expected future net benefits. Since the budget

measures only cost, the benefits with which these costsare compared, based on policy makers judgment, mustbe presented in supplementary materials. Such a com-parison of total costs with benefits is consistent withthe formal method of cost-benefit analysis of capitalprojects in government, in which the full cost of a cap-ital asset as the cash is paid out is compared withthe full stream of future benefits (all in terms of present values). (Chapter 6 of this volume, FederalInvestment, provides more information on capital in-vestment.)

There have been a number of proposals to changethe basis for measuring capital investment in the budg-et. Many of these would undermine effective consider-

ation and control of costs by spreading the real costof the project over time and record as a current oper-ating expense the annual depreciation for each yearof an assets life. No depreciation would be recordeduntil after the asset was put into service. This couldbe several years after the initial expenditure, in whichcase the budget would record no expenses at all inthe budget year or several years thereafter, eventhough the Government is legally obligated to buy theasset, and the asset is being constructed or manufac-tured. Recording the annual depreciation in the budgeteach year would provide little control over the decisionabout whether to invest in the first place. Control canonly be exercised up front when the Government com-

mits itself to the full sunk cost. Spreading the costsover time would make the cost of a capital asset appearvery cheap when decisions were being made that com-pared it to alternative expenditures. As a result, theGovernment would have an incentive to purchase cap-ital assets with little regard for need, and also withlittle regard for the least-cost method of acquisition.Chapter 7, Federal Investment Spending and CapitalBudgeting, pages 157165 in the Analytical Perspec-tives volume of the 2004 Budget, discusses alternativecapital budget and capital expenditure presentations inmore detail.

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RECEIPTS, OFFSETTING COLLECTIONS, AND OFFSETTING RECEIPTS

In General

The budget records money collected by Governmentagencies two different ways. Depending on the natureof the activity generating the collection and the lawthat established the collection, they are recorded aseither:

Governmental receipts , which are compared intotal to outlays (net of offsetting collections andreceipts) in calculating the surplus or deficit; or

Offsetting collections or offsetting receipts ,which are deducted from gross outlays to calculatenet outlay figures.

Governmental receipts

Governmental receipts are collections that result fromthe Governments exercise of its sovereign power to taxor otherwise compel payment and from gifts of moneyto the Government. Sometimes they are called receipts,Federal receipts, or Federal revenues. They consistmostly of individual and corporation income taxes andsocial insurance taxes, but also include excise taxes,compulsory user charges, regulatory fees, customs du-ties, court fines, certain license fees, and deposits of earnings by the Federal Reserve System. Total receiptsfor the Federal Government include both on-budget andoff-budget receipts (see Table 261, Totals for theBudget and the Federal Government, which appearsearlier in this chapter.) Chapter 17, Federal Receipts,provides more information on receipts.

Offsetting Collections and Offsetting Receipts

Offsetting collections and offsetting receipts are re-corded as offsets to (deductions from) spending, not asadditions on the receipt side of the budget. As explainedbelow, they are recorded as offsets to spending so thatthe budget totals represent governmental rather thanmarket activity and reflect the Governments net trans-actions with the public. They are recorded in one of two ways, based on interpretation of laws and long-standing budget concepts and practice. They are offset-ting collections when the collections are authorized bylaw to be credited to expenditure accounts. Otherwise,they are deposited in receipt accounts and called offset-ting receipts.

Offsetting collections and offsetting receipts resultfrom one of the following types of transactions:

Business-like transactions or market-orientedactivities with the public collections from thepublic in exchange for goods or services, such asthe proceeds from the sale of postage stamps, thefees charged for admittance to recreation areas,and the proceeds from the sale of Government-owned land. The budget records these amountsas offsetting collections from non-Federal sources(for offsetting collections) or as proprietary receipts(for offsetting receipts). The amounts are deductedfrom gross budget authority and outlays, ratherthan added to receipts. This treatment produces

budget totals for receipts, budget authority, andoutlays that represent governmental rather thanmarket activity.

Intragovernmental transactions collections

from other Federal Government accounts. Thebudget records collections by one Government ac-count from another as offsetting collections from

Federal sources (for offsetting collections) or asintragovernmental receipts (for offsetting receipts).For example, the General Services Administrationrents office space to other Government agenciesand records their rental payments as offsettingcollections from Federal sources in the FederalBuildings Fund. These transactions are exactlyoffsetting and do not affect the surplus or deficit.However, they are an important accounting mech-anism for allocating costs to the programs andactivities that cause the Government to incur the

costs. Intragovernmental offsetting collections andreceipts are deducted from gross budget authorityand outlays so that the budget totals measure thetransactions of the Government with the public.

Offsetting governmental transactions collec-tions from the public that are governmental innature (e.g., tax receipts, regulatory fees, compul-sory user charges, custom duties, license fees) butrequired by law to be misclassified as offsetting.The budget records amounts from non-Federalsources that are governmental in nature as offset-ting governmental collections (for offsetting collec-tions) or as offsetting governmental receipts (foroffsetting receipts).

A table in Chapter 21 of this volume, Outlays tothe Public, Gross and Net, shows the effect of offset-ting collections and receipts on gross outlays for eachmajor Federal agency.

Offsetting Collections

Some laws authorize agencies to credit collections di-rectly to the account from which they will be spentand, usually, to spend the collections for the purposeof the account without further action by Congress. Mostrevolving funds operate with such authority. For exam-ple, a permanent law authorizes the Postal Service touse collections from the sale of stamps to finance itsoperations without a requirement for annual appropria-tions. The budget records these collections in the PostalService Fund (a revolving fund) and records budget au-thority in an amount equal to the collections. In addi-tion to revolving funds, some agencies are authorizedto charge fees to defray a portion of costs for a programthat are otherwise financed by appropriations from thegeneral fund and usually to spend the collections with-out further action by Congress. In such cases, the budg-et records the offsetting collections and resulting budgetauthority in the programs general fund expenditureaccount. Similarly, intragovernmental collections au-thorized by some laws may be recorded as offsetting

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collections and budget authority in revolving funds orin general fund expenditure accounts.

Sometimes appropriations acts or provisions in otherlaws limit the obligations that can be financed by offset-ting collections. In those cases, the budget records budg-et authority in the amount available to incur obliga-

tions, not in the amount of the collections.Offsetting collections credited to expenditure accountsautomatically offset the outlays at the expenditure ac-count level. Where accounts have offsetting collections,the budget shows the budget authority and outlays of the account both gross (before deducting offsetting col-lections) and net (after deducting offsetting collections).Totals for the agency, subfunction, and budget are netof offsetting collections.

Offsetting Receipts

Collections that are offset against gross outlays butare not authorized to be credited to expenditure ac-counts are credited to receipt accounts and are called

offsetting receipts. Offsetting receipts are deducted frombudget authority and outlays in arriving at total budgetauthority and outlays. However, unlike offsetting collec-tions credited to expenditure accounts, offsetting re-ceipts do not offset budget authority and outlays atthe account level. In most cases, they offset budgetauthority and outlays at the agency and subfunctionlevels.

Proprietary receipts from a few sources, however, arenot offset against any specific agency or function andare classified as undistributed offsetting receipts. Theyare deducted from the Government-wide totals for budg-et authority and outlays. For example, the collectionsof rents and royalties from outer continental shelf lands

are undistributed because the amounts are large andfor the most part are not related to the spending of the agency that administers the transactions and thesubfunction that records the administrative expenses.

Similarly, two kinds of intragovernmental trans-actionsagencies payments as employers into Federalemployee retirement trust funds and interest receivedby trust fundsare classified as undistributed offset-ting receipts. They appear instead as special deductionsin computing total budget authority and outlays for

the Government rather than as offsets at the agencylevel. This special treatment is necessary because theamounts are large and would distort measures of theagencys activities if they were attributed to the agency.

User Charges

User charges are fees assessed on individuals or orga-nizations for the provision of Government services andfor the sale or use of Government goods or resources.The payers of the user charge must be limited in theauthorizing legislation to those receiving special bene-fits from, or subject to regulation by, the program oractivity beyond the benefits received by the generalpublic or broad segments of the public (such as those

who pay income taxes or customs duties). Policy regard-ing user charges is established in OMB Circular A-25, User Charges (July 8, 1993). The term encom-passes proceeds from the sale or use of governmentgoods and services, including the sale of natural re-sources (such as timber, oil, and minerals) and proceedsfrom asset sales (such as property, plant, and equip-ment). User charges are not necessarily earmarked forthe activity they finance and may be credited to thegeneral fund of the Treasury.

The term user charge does not refer to a separatebudget category for collections. User charges are classi-fied in the budget as receipts, offsetting receipts, oroffsetting collections according to the principles ex-

plained above.See Chapter 18, User Charges and Other Collec-tions, for more information on the classification of usercharges.

BUDGET AUTHORITY AND OTHER BUDGETARY RESOURCES, OBLIGATIONS, AND OUTLAYS

Budget authority, obligations, and outlays are the pri-mary benchmarks and measures of the budget controlsystem. Congress enacts laws that provide agencieswith spending authority in the form of budget author-ity. Before agencies can use the resources, OMB mustapprove their spending plans. After the plans are ap-proved, agencies can enter into binding agreements topurchase items or services or to make grants or otherpayments. These agreements are recorded as obliga-tions of the United States and deducted from theamount of budgetary resources available to the agency.When payments are made, the obligations are liq-uidated and outlays recorded. These concepts are dis-cussed more fully below.

Budget Authority and Other BudgetaryResources

Budget authority is the authority provided in lawto enter into legal obligations that will result in imme-

diate or future outlays of the Government. In otherwords, it is the amount of money that agencies areallowed to commit to be spent in current or futureyears. Government officials may obligate the Govern-ment to make outlays only to the extent they havebeen granted budget authority.

The budget records new budget authority as a dollaramount in the year when it first becomes available.When permitted by law, unobligated balances of budgetauthority may be carried over and used in the nextyear. The budget does not record these balances asbudget authority again. They do, however, constitutea budgetary resource that is available for obligation.In some cases, a provision of law (such as a limitationon obligations or a benefit formula) precludes the obli-gation of funds that would otherwise be available forobligation. In such cases, the budget records budgetauthority equal to the amount of obligations that canbe incurred. A major exception to this rule is for the

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highway and mass transit programs financed by theHighway Trust Fund, where budget authority is meas-ured as the amount of contract authority (describedbelow) provided in authorizing statutes, even thoughthe obligation limitations enacted in annual appropria-tions acts restrict the amount of contract authority that

can be obligated.In deciding the amount of budget authority to requestfor a program, project, or activity, agency officials esti-mate the total amount of obligations they will needto incur to achieve desired goals and subtract the unob-ligated balances available for these purposes. Theamount of budget authority requested is influenced bythe nature of the programs, projects, or activities beingfinanced. For current operating expenditures, theamount requested usually covers the needs for the year.For major procurement programs and constructionprojects, agencies generally must request sufficientbudget authority in the first year to fully fund an eco-nomically useful segment of a procurement or project,

even though it may be obligated over several years.This full funding policy is intended to ensure that thedecision-makers take into account all costs and benefitsfully at the time decisions are made to provide re-sources. It also avoids sinking money into a procure-ment or project without being certain if or when futurefunding will be available to complete the procurementor project.

Budget authority takes several forms: Appropriations , provided in annual appropria-

tions acts or permanent laws, permit agencies toincur obligations and make payment;

Borrowing authority , usually provided in perma-nent laws, permits agencies to incur obligationsbut requires them to borrow funds, usually fromthe general fund of the Treasury, to make pay-ment;

Contract authority , usually provided in perma-nent law, permits agencies to incur obligations inadvance of a separate appropriation of the cashfor payment or in anticipation of the collectionof receipts that can be used for payment; and

Spending authority from offsetting collec-tions , usually provided in permanent law, permitsagencies to credit offsetting collections to an ex-penditure account, incur obligations, and makepayment using the offsetting collections.

Because offsetting collections and receipts are de-ducted from gross budget authority, they are referredto as negative budget authority for some purposes, suchas Congressional Budget Act provisions that pertainto budget authority.

Authorizing statutes usually determine the form of budget authority for a program. The authorizing statutemay authorize a particular type of budget authorityto be provided in annual appropriations acts, or it mayprovide one of the forms of budget authority directly,without the need for further appropriations.

An appropriation may make funds available from thegeneral fund, special funds, or trust funds, or authorize

the spending of offsetting collections credited to expend-iture accounts, including revolving funds. Borrowing au-thority is usually authorized for business-like activitieswhere the activity being financed is expected to produceincome over time with which to repay the borrowingwith interest. The use of contract authority is tradition-

ally limited to transportation programs.New budget authority for most Federal programs isnormally provided in annually enacted appropriationsacts. However, new budget authority for more than half of all outlays is made available through permanent ap-propriations under existing laws and does not requirecurrent action by Congress. Much of the permanentbudget authority is for trust funds, interest on the pub-lic debt, and the authority to spend offsetting collectionscredited to appropriation or fund accounts. For mosttrust funds, the budget authority is automatically ap-propriated under existing law from the available bal-ance of their receipts and equals the estimated annualobligations of the funds. For interest on the public debt,

budget authority is automatically provided under a per-manent appropriation enacted in 1847 and equals inter-est outlays.

Annual appropriations acts generally make budgetauthority available for obligation only during the fiscalyear to which the act applies. However, they frequentlyallow budget authority for a particular purpose to re-main available for obligation for a longer period or in-definitely (that is, until expended or until the programobjectives have been attained). Typically, budget au-thority for current operations is made available for onlyone year, and budget authority for construction andsome research projects is available for a specified num-ber of years or indefinitely. Budget authority providedin authorizing statutes, such as for most trust funds,is available indefinitely. Only another law can extenda limited period of availability (see Reappropriationbelow).

Budget authority that is available for more than oneyear and not obligated in the year it becomes availableis carried forward for obligation in a following year.In some cases, an account may carry forward unobli-gated budget authority from more than one year. Thesum of such amounts constitutes the accounts unobli-

gated balance . Most of this budget authority is ear-marked for specific uses and is not available for newprograms. A small part may never by obligated orspent, primarily amounts provided for contingenciesthat do not occur or reserves that never have to beused.

Budget authority that has been obligated but not paidconstitutes the accounts unpaid obligations . For ex-ample, in the case of salaries and wages, one to threeweeks elapse between the time of obligation and thetime of payment. In the case of major procurementand construction, payments may occur over a periodof several years after the obligation is made. Unpaidobligations net of the accounts receivable and unfilledcustomers orders are defined by law as the obligatedbalances . Obligated balances of budget authority at

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2 A separate report, Balances of Budget Authority, provides additional information onbalances. The National Technical Information Service, Department of Commerce makesthe report available shortly after the budget is transmitted.

the end of the year are carried forward until the obliga-tions are paid or the balances are canceled. (A generallaw cancels the obligated balances of budget authoritythat was made available for a definite period five yearsafter the end of the period, and then other resourcesmust be used to pay the obligations.) Due to such flows,

a change in the amount of budget authority availablein any one year may change the level of obligationsand outlays for several years to come. Conversely, achange in the amount of obligations incurred from oneyear to the next does not necessarily result from anequal change in the amount of budget authority avail-able for that year and will not necessarily result inan equal change in the level of outlays in that year. 2

Congress usually makes budget authority availableon the first day of the fiscal year for which the appro-priations act is passed. Occasionally, the appropriationslanguage specifies a different timing. The language mayprovide an advance appropriation budget authoritythat does not become available until one year or more

beyond the fiscal year for which the appropriations actis passed. Forward funding is budget authority thatis made available for obligation beginning in the lastquarter of the fiscal year (beginning on July 1st) forthe financing of ongoing grant programs during thenext fiscal year. This kind of funding is used mostlyfor education programs, so that obligations for grantscan be made prior to the beginning of the next schoolyear. For certain benefit programs funded by annualappropriations, the appropriation provides for advance

funding budget authority that is to be charged tothe appropriation in the succeeding year but which au-thorizes obligations to be incurred in the last quarterof the current fiscal year if necessary to meet benefitpayments in excess of the specific amount appropriatedfor the year. When such authority is used, an adjust-ment is made to increase the budget authority for thefiscal year in which it is used and to reduce the budgetauthority of the succeeding fiscal year.

Provisions of law that extend the availability of unob-ligated amounts that have expired or would otherwiseexpire are called reappropriations . Reappropriationsof expired balances that are newly available for obliga-tion in the current or budget year count as new budgetauthority in the fiscal year in which the balances be-come newly available. For example, if a 2006 appropria-tions act extends the availability of unobligated budgetauthority that expired at the end of 2005, new budgetauthority would be recorded for 2006.

For purposes of the Budget Enforcement Act (dis-cussed earlier under Budget Enforcement), the budgetclassifies budget authority as discretionary or man-datory . This classification indicates whether appropria-tions acts or authorizing legislation control the amountof budget authority that is available. Generally, budgetauthority is discretionary if provided in an annual ap-propriations act and mandatory if provided in author-

izing legislation. However, the BEA requires the budgetauthority provided in annual appropriations acts forcertain specifically identified programs to be classifiedas mandatory. This is because the authorizing legisla-tion for these programs entitles beneficiaries to receivepayment or otherwise obligates the Government to

make payment and effectively determines the amountof budget authority required, even though the paymentsare funded by a subsequent appropriation. Sometimes,budget authority is characterized as current or perma-nent. Current authority requires congressional appro-priations action on the request for new budget authorityfor the year involved. Permanent authority becomesavailable pursuant to standing provisions of law with-out further appropriations action by Congress aftertransmittal of the budget for the year involved. Gen-erally, budget authority is current if an annual appro-priations act provides it and permanent if authorizinglegislation provides it. By and large, the current/perma-nent distinction has been replaced by the discretionary/ mandatory distinction, which is similar, but not iden-tical. Outlays are also classified as discretionary ormandatory according to the classification of the budgetauthority from which they flow (see Outlays below).

The amount of budget authority recorded in the budg-et depends on whether the law provides a specificamount or specifies a variable factor that determinesthe amount. It is considered definite if the law speci-fies a dollar amount (which may be an amount notto be exceeded). It is considered indefinite if, insteadof specifying an amount, the law permits the amountto be determined by subsequent circumstances. For ex-ample, indefinite budget authority is provided for inter-

est on the public debt, payment of claims and judg-ments awarded by the courts against the U.S. andmany entitlement programs. Many of the laws that au-thorize collections to be credited to revolving, special,and trust funds make all of the collections availablefor expenditure for the authorized purposes of the fund,and such authority is considered to be indefinite budgetauthority.

Obligations Incurred

Following the enactment of budget authority and thecompletion of required apportionment action, Govern-ment agencies incur obligations to make payments (see

earlier discussion under Budget Execution). Agenciesmust record obligations when they enter into bindingagreements that will result in immediate or future out-lays. Such obligations include the current liabilities forsalaries, wages, and interest; and contracts for the pur-chase of supplies and equipment, construction, and theacquisition of office space, buildings, and land. For Fed-eral credit programs, obligations are recorded in anamount equal to the estimated subsidy cost of directloans and loan guarantees (see FEDERAL CREDITbelow).

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Outlays

Outlays are the measure of Government spending.They are payments that liquidate obligations (otherthan the repayment of debt). The budget records themwhen obligations are paid, in the amount that is paid.

Agency, function and subfunction, and Government-

wide outlay totals are stated net of offsetting collectionsand offsetting receipts for most budget presentations.(Offsetting receipts from a few sources do not offsetany specific function, subfunction, or agency, as ex-plained previously, but only offset Government-wide to-tals.) Outlay totals for accounts with offsetting collec-tions are stated both gross and net of the offsettingcollections credited to the account. However, the outlaytotals for special and trust funds with offsetting re-ceipts are not stated net of the offsetting receipts.

The Government usually makes outlays in the formof cash (currency, checks, or electronic fund transfers).However, in some cases agencies pay obligations with-out disbursing cash and the budget records outlays nev-

ertheless for the equivalent method. For example, thebudget records outlays for the full amount of Federalemployees salaries, even though the cash disbursed toemployees is net of Federal and state income taxeswithheld, retirement contributions, life and health in-surance premiums, and other deductions. (The budgetalso records receipts for the deductions of Federal in-come taxes and other payments to the Government.)When debt instruments (bonds, debentures, notes, ormonetary credits) are used in place of cash to pay obli-gations, the budget records outlays financed by an in-crease in agency debt. For example, the budget recordsthe acquisition of physical assets through certain typesof lease-purchase arrangements as though a cash dis-

bursement were made for an outright purchase. Thetransaction creates a Government debt, and the cashlease payments are treated as repayments of principaland interest.

The measurement of interest varies. The budgetrecords outlays for the interest on the public issuesof Treasury debt securities as the interest accrues, notwhen the cash is paid. A small portion of this debtconsists of inflation-indexed securities, which featuremonthly adjustments to principal for inflation and semi-annual payments of interest on the inflation-adjustedprincipal. As with fixed-rate securities, the budgetrecords interest outlays as the interest accrues. Themonthly adjustment to principal is recorded, simulta-

neously, as an increase in debt outstanding and anoutlay of interest.Most Treasury debt securities held by trust funds

and other Government accounts are in the Governmentaccount series (special issues). The budget normallystates the interest on these securities on a cash basis.When a Government account is invested in Federal debtsecurities, the purchase price is usually close or iden-tical to the par (face) value of the security. The budget

records the investment at par value and adjusts theinterest paid by Treasury and collected by the accountby the difference between purchase price and par, if any. However, two trust funds in the Department of Defense, the Military Retirement Trust Fund and theEducation Benefits Trust Fund, routinely have rel-

atively large differences between purchase price andpar. For these funds, the budget records the holdingsof debt at par but records the differences between pur-chase price and par as adjustments to the assets of the funds that are amortized over the life of the secu-rity. The budget records interest as the amortizationoccurs.

For Federal credit programs, outlays are equal tothe subsidy cost of direct loans and loan guaranteesand are recorded as the underlying loans are disbursed(see FEDERAL CREDIT below).

The budget records refunds of receipts that resultfrom overpayments (such as income taxes withheld inexcess of tax liabilities) as reductions of receipts, rather

than as outlays. However, the budget records paymentsto taxpayers for refundable tax credits (such as earnedincome tax credits) that exceed the taxpayers tax liabil-ity as outlays. Refunds of overpayments by the Govern-ment are recorded as offsetting collections or offsettingreceipts.

Not all of the new budget authority for 2007 willbe obligated or spent in 2007. Outlays during a fiscalyear may liquidate obligations incurred in the sameyear or in prior years. Obligations, in turn, may beincurred against budget authority provided in the sameyear or against unobligated balances of budget author-ity provided in prior years. Outlays, therefore, flow inpart from budget authority provided for the year inwhich the money is spent and in part from budgetauthority provided in prior years. The ratio of a givenyears outlays resulting from budget authority enactedin that or a prior year to the original amount of thatbudget authority is referred to as the spendout ratefor that year.

As shown in the following chart, $2,206 billion of outlays in 2007 (80 percent of the outlay total) willbe made from that years $2,739 billion total of pro-posed new budget authority (a first-year spendout rateof 81 percent). Thus, the remaining $564 billion of out-lays in 2007 (20 percent of the outlay total) will bemade from budget authority enacted in previous years.

At the same time, $534 billion of the new budget au-thority proposed for 2007 (19 percent of the totalamount proposed) will not lead to outlays until futureyears. In general, the total budget authority for a par-ticular year is not directly indicative of that years out-lays since it combines various types of budget authoritythat have different short-term and long-term implica-tions for budget obligations and outlays.

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3 Present value is a standard financial concept that allows for the time value of money,that is, for the fact that a given sum of money is worth more at present than in thefuture because interest can be earned on it.

As described earlier, the budget classifies budget au-thority and outlays as discretionary or mandatory forthe purposes of the BEA. This classification of outlaysmeasures the extent to which actual spending is con-trolled through the annual appropriations process. Typi-cally, only one-third ($968 billion in 2005) of total out-lays for a fiscal year are discretionary and the remain-ing two-thirds ($1,504 billion in 2005) are mandatoryspending and net interest. Such a large portion of totalspending is nondiscretionary because authorizing legis-lation determines net interest ($184 billion in 2005)and the spending for a few programs with largeamounts of spending each year, such as Social Security($519 billion in 2005) and Medicare ($294 billion in2005).

The bulk of mandatory outlays flows from an equalamount of budget authority recorded in the same fiscalyear. This is not the case for discretionary budget au-thority and outlays. For most major construction andprocurement projects and long-term contracts, for exam-ple, the budget authority covers the entire cost esti-mated when the projects are initiated even though thework will take place and outlays will be made overa period extending beyond the year for which the budg-et authority is enacted. Similarly, discretionary budgetauthority for most education and job training activitiesis appropriated for school or program years that beginin the fourth quarter of the fiscal year. Most of thesefunds result in outlays in the year after the appropria-tion.

FEDERAL CREDIT

Some Government programs make direct loans orloan guarantees. A direct loan is a disbursement of funds by the Government to a non-Federal borrowerunder a contract that requires repayment of such fundswith or without interest. The term includes equivalenttransactions such as selling a property on credit termsin lieu of receiving cash up front. A loan guaranteeis any guarantee, insurance, or other pledge with re-spect to the payment of all or a part of the principalor interest on any debt obligation of a non-Federal bor-rower to a non-Federal lender. The Federal Credit Re-form Act (FCRA) prescribes the budget treatment forFederal credit programs. Under this treatment, thebudget records the net cost to the Government (subsidycost) when the loans are disbursed, rather than thecash flows year-by-year over the term of the loan, sodirect loans and loan guarantees can be compared to

each other and to other methods of delivering benefits,such as grants, on an equivalent basis.

The cost of direct loans and loan guarantees, some-times called the subsidy cost, is estimated as thepresent value of expected disbursements over the termof the loan less the present value of expected collec-tions. 3 As for most other kinds of programs, agenciescan make loans or guarantee loans only if Congresshas appropriated funds sufficient to cover the subsidycosts or provided a limitation on the amount of directloans or loan guarantees that can be made in annualappropriations acts.

The budget records the estimated long-term cost tothe Government arising from direct loans and loan

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guarantees in credit program accounts . When a Fed-eral agency disburses a direct loan or when a non-Federal lender disburses a loan guaranteed by a Fed-eral agency, the program account outlays an amountequal to the cost to a non-budgetary credit financingaccount . The financing accounts record the actualtransactions with the public. For a few programs, theestimated cost is negative, because the present valueof expected collections exceeds the present value of ex-pected disbursements over the term of the loan. In suchcases, the financing account makes a payment to theprograms receipt account, where it is recorded as anoffsetting receipt. In a few cases, the receipts are ear-marked in a special fund established for the programand are available for appropriation for the program.

The agencies responsible for credit programs mustreestimate the cost of the outstanding direct loans andloan guarantees each year. If the estimated cost in-creases, the program account makes an additional pay-ment to the financing account. If the estimated costdecreases, the financing account makes a payment tothe programs receipt account, where it is recorded asan offsetting receipt. The FCRA provides permanentindefinite appropriations to pay for upward reestimates.

If the Government modifies the terms of an out-standing direct loan or loan guarantee in a way thatincreases the cost, as the result of a law or the exerciseof administrative discretion under existing law, the pro-gram account records obligations for an additionalamount equal to the increased cost and outlays theamount to the financing account. As with the originalcost, agencies may incur modification costs only if Con-gress has appropriated funds to cover them. A modifica-tion may also reduce costs, in which case the financing

account makes a payment to the programs receipt ac-count.

Credit financing accounts record all cash flows to andfrom the Government arising from direct loan obliga-tions and loan guarantee commitments. These cashflows consist mainly of direct loan disbursements and

repayments, loan guarantee default payments, fees andinterest from the public, the receipt of subsidy costpayments from program accounts, and interest paid toor received from Treasury. Separate financing accountsrecord the cash flows of direct loans and of loan guaran-tees for programs that provide both types of credit.The budget totals exclude the transactions of financingaccounts because they are not a cost to the Govern-ment. However, since financing accounts record cashflows to and from the Government, they affect themeans of financing a budget surplus or deficit (seeCredit Financing Accounts in the next section). Thebudget documents display the transactions of the fi-nancing accounts, together with the related programaccounts, for information and analytical purposes.

The FCRA, which was enacted in 1990, grandfathereddirect loan obligations and loan guarantee commitmentsmade prior to 1992. The budget records these on acash basis in credit liquidating accounts , the sameas they were recorded before FCRA was enacted. How-ever, this exception ceases to apply if the direct loansor loan guarantees are modified as described above.In that case, the budget records a modification subsidycost or savings, as appropriate, and begins to accountfor the associated transactions as the FCRA prescribesfor direct loan obligations and loan guarantee commit-ments made in 1992 or later.

BUDGET DEFICIT OR SURPLUS AND MEANS OF FINANCING

When outlays exceed receipts, the difference is a def-icit, which the Government finances primarily by bor-rowing. When receipts exceed outlays, the differenceis a surplus, and the Government uses the surplus pri-marily to reduce debt. The Governments debt (debtheld by the public) is approximately the cumulativeamount of borrowing to finance deficits, less repay-ments from surpluses. Borrowing is not exactly equalto the deficit, and debt repayment is not exactly equalto the surplus, because of the other means of financingsuch as those discussed under this heading. Some, suchas the net disbursements of the direct loan financingaccounts, normally increase the Governments bor-rowing needs or decrease its ability to repay debt; oth-ers, such as the loan guarantee financing accounts, nor-mally have the opposite effect or may be either positiveor negative. In some years, such as 2003, the net effectof the other means of financing is minor relative tothe borrowing or debt repayment; in other years, suchas 2002, the net effect may be significant.

Borrowing and Debt Repayment

The budget treats borrowing and debt repayment asa means of financing, not as receipts and outlays. If borrowing were defined as receipts and debt repaymentas outlays, the budget would be virtually balanced bydefinition. This rule applies both to borrowing in theform of Treasury securities and to specialized borrowingin the form of agency securities (including the issuanceof debt securities to liquidate an obligation and thesale of certificates representing participation in a pool

of loans).Two alternative financing methods employed by theTennessee Valley Authority (TVA) to finance the acqui-sition of TVA assets are considered to be agency debt.The budget records the cash proceeds from a contractto lease some recently-constructed power generators toprivate investors and simultaneously lease them backand the cash proceeds from prepayments for power thatTVA sells to its power distributors as a type of bor-rowing from the public. These transactions are dis-cussed in more detail in Chapter 16 of this volume,Federal Borrowing and Debt.

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In 2005, the Government borrowed $297 billion fromthe public. This financed nearly all of the $318 billiondeficit in that year. The rest of the deficit was financedby the net effect of the other means of financing, suchas changes in cash balances and other accounts dis-cussed below. At the end of 2005, the debt held by

the public was $4,592 billion.In addition to selling debt to the public, the TreasuryDepartment issues debt to Government accounts, pri-marily trust funds that are required by law to investin Treasury securities. Issuing and redeeming this debtdoes not affect the means of financing, because thesetransactions occur between one Government accountand another and thus do not raise or use any cashfor the Government as a whole.

(See Chapter 16 of this volume, Federal Borrowingand Debt, for a fuller discussion of this topic.)

Debt Buyback Premiums

From 2000 through April 2002, the Treasury Depart-ment bought back outstanding U.S. Treasury bonds aspart of its efforts to manage efficiently the publiclyheld debt. Because interest rates were lower than thecoupon rates on the bonds that Treasury bought back,the government had to pay a premium over the bookvalue of these securities. This buyback premium wasrecorded as a means of financing, not as outlays. Chap-ter 24, Budget System and Concepts and Glossary,pages 457458 in the Analytical Perspectives volumeof the 2001 Budget, discusses the basis for this treat-ment in more detail, including an examination of thealternatives that were considered.

Exercise of Monetary Power

Seigniorage is the profit from coining money. It isthe difference between the value of coins as moneyand their cost of production. Seigniorage adds to theGovernments cash balance, but unlike the payment of taxes or other receipts, it does not involve a transferof financial assets from the public. Instead, it arisesfrom the exercise of the Governments power to createmoney and the publics desire to hold financial assetsin the form of coins. Therefore, the budget excludesseigniorage from receipts and treats it as a means of financing other than borrowing from the public. Thebudget also treats profits resulting from the sale of gold as a means of financing, since the value of gold

is determined by its value as a monetary asset ratherthan as a commodity.

Credit Financing Accounts

The budget records the net cash flows of credit pro-grams in credit financing accounts. They are excludedfrom the budget because they are not allocations of resources by the Government (see FEDERAL CREDITabove). However, even though they do not affect thesurplus or deficit, they can either increase or decreasethe Governments need to borrow. Therefore, they arerecorded as a means of financing.

Financing account disbursements to the public in-crease the requirement for Treasury borrowing in thesame way as an increase in budget outlays. Financingaccount receipts from the public can be used to financethe payment of the Governments obligations and there-fore reduce the requirement for Treasury borrowing

from the public in the same way as an increase inbudget receipts.

Deposit Fund Account Balances

The Treasury uses non-budgetary accounts, called de-posit funds, to record cash held temporarily until own-ership is determined (for example, earnest money paidby bidders for mineral leases) or cash held by the Gov-ernment as agent for others (for example, State andlocal income taxes withheld from Federal employeessalaries and not yet paid to the State or local govern-ment or the Thrift Savings Fund, a defined contributionpension fund held and managed in a fiduciary capacityby the Government). Deposit fund balances may be held

in the form of either invested or uninvested balances.To the extent that they are not invested, changes inthe balances are available to finance expenditures andare recorded as a means of financing other than bor-rowing from the public. To the extent that they areinvested in Federal debt, changes in the balances arereflected as borrowing from the public in lieu of bor-rowing from other parts of the public and are not re-flected as a separate means of financing.

Exchanges with the International MonetaryFund (IMF)

Under the terms of its participation in the IMF, theU.S. transfers dollars to the IMF and receives SpecialDrawing Rights (SDRs) in return. The SDRs are inter-est-bearing monetary assets and may be exchanged forforeign currency at any time. These transfers are likebank deposits and withdrawals, where the governmentexchanges one type of financial asset (cash) for another(bank deposit), with no change in total financial assets.Following a recommendation of the 1967 PresidentsCommission on Budget Concepts, the budget excludesthese transfers from budget outlays or receipts. In con-trast, the budget records interest paid by the IMF onU.S. deposits as an offsetting receipt in the generalfund of the Treasury. It also records outlays for foreigncurrency exchanges to the extent there is a realizedloss in dollars terms and offsetting receipts to the ex-tent there is a realized gain in dollar terms.

Railroad Retirement Board Investments

Under longstanding rules, the budget treats invest-ments in non-Federal securities as a purchase of anasset, recording an obligation and an outlay in anamount equal to the purchase price in the year of thepurchase. Since investments in non-Federal securitiesconsume cash, fund balances (of funds available for obli-gation) normally exclude the value of non-Federal secu-rities. However, the Railroad Retirement and SurvivorsImprovement Act of 2001 (Public Law 10790) requires

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purchases or sales of non-Federal assets by the Na-tional Railroad Retirement Investment Trust to betreated as a means of financing in the budget.

Earnings on investments by the National RailroadRetirement Investment Trust in private assets posespecial challenges for budget projections. Equities and

private bonds earn a higher return on average thanthe Treasury rate, but that return is subject to greateruncertainty. Sound budgeting principles require thatestimates of future trust fund balances reflect both theaverage return and the cost of risk associated withthe uncertainty of that return. (The latter is particu-larly true in cases where individual beneficiaries havenot made a voluntary choice to assume additional risk.)Estimating both of these separately is quite difficult.While the additional returns that these assets havereceived in the past are known, it is quite possiblethat these premiums will differ in the future. Further-more, there is no existing procedure for the budgetto record separately the cost of risk from such an in-

vestment, even if it could be estimated accurately. Eco-nomic theory suggests, however, that the difference be-tween the expected return of a risky liquid asset and

the Treasury rate is equal to the cost of the assetsadditional risk as priced by the market. Followingthrough on this insight, the best way to project therate of return on the Funds balances is to use a Treas-ury rate. This will mean that assets with equal eco-nomic value as measured by market prices will be treat-

ed equivalently, avoiding the appearance that the budg-et could benefit if the Government bought private sectorassets.

The actual and estimated returns to private securitiesare recorded in subfunction 909, other investment in-come. The actual year returns include interest, divi-dends, and capital gains and losses on private equitiesand other securities. The Funds portfolio of these as-sets is revalued at market prices at the end of theactual year to determine capital gains or losses. Asa result, the Funds end-of-year balance reflects thecurrent market value of resources available to the Gov-ernment to finance benefits. Earnings for the currentand future years are estimated using the 10-year Treas-

ury rate and the value of the Funds portfolio at theend of the actual year. No estimates are made of gainsand losses for the current year or subsequent years.

FEDERAL EMPLOYMENT

The budget includes information on civilian and mili-tary employment. It also includes information on re-lated personnel compensation and benefits and on staff-ing requirements at overseas missions. Chapter 24 of this volume, Federal Employment and Compensation,provides two different measures of Federal employmentlevels-actual positions filled and full-time equivalents

(FTE). Agency FTEs are the measure of the total num-ber of hours worked by an agencys Federal employeesdivided by the total number of workhours in one fiscalyear. In the budget Appendix, only the FTE measureis used because it takes into account part-time employ-ment, temporary employment, and vacancies during theyear.

BASIS FOR BUDGET FIGURES

Data fo

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