The Heritage Foundation

Backgrounder #1321 on Federal Budget

September 8, 1999

September 8, 1999 | Backgrounder on Federal Budget

Breach of Faith: How Washington is Poised to Shatter the Budget Agreement and Squander the Surplus

Congress returns from its August recess with just 15 legislative days left before the end of fiscal year (FY) 1999 and the start of FY 2000.1 During those 15 days, Congress and the President must complete action on 13 appropriations bills, reach an agreement on a continuing resolution to fund the government, or face a government shutdown.

Although finishing all the appropriations bills in theory is not an impossible task, all the indications are that Congress, with the full support of the Administration, is ready to spend as much of the surplus as it can get away with spending. To do so, it appears that the creative accountants on Capitol Hill are devising a full range of book-keeping tricks to hide the truth from the American people. It is time for responsible lawmakers who believe in honest budgets and the sanctity of pledges to the American people to stand firm against this breach of faith.

This Congress began the FY 2000 appropriations process with a laudable level of fiscal discipline and commitment to the spending caps negotiated with the White House in the Balanced Budget Agreement of 1997,2 and Congress thus far has produced appropriations bills which largely (though not entirely) have met the spirit of the budget resolution. This has been critical to honoring its commitment to reserve 100 percent of the off-budget surplus to protect Social Security and use any on-budget surplus to provide tax relief for working Americans and pay down the national debt.

Unfortunately, as Congress left for its August recess, its will weakened and Members began to abandon their commitment to fiscal discipline. The House vote for a huge cap-busting boost in airport spending and the Senate's budget-busting passage of "emergency" farm aid both strongly suggest that Congress is not serious about holding the line on spending. Just days ago, senior Hill staff on the majority side were declaring that it would be impossible to abide by the caps when Congress takes up the remaining spending bills.

It is quite clear that Congress is now poised to shatter the budget agreement and renege on its commitment to protect and reform Social Security and return some of the surplus to hard-working middle-class taxpayers.

In a cynical maneuver, President Clinton and his advisers now say that it is possible to live within the spending caps and that it is just a matter of finding the right "mix" of spending priorities and tax cuts. They fail to mention that their definition of "right mix of spending priorities and tax cuts" includes raising existing user fees, creating new user fees, imposing surcharges (a tax on a fee), and several other revenue-raising methods best described as increasing taxes.

This was demonstrated earlier this year when President Clinton delivered an FY 2000 budget to Congress that shattered the spending caps by $30 billion, according to the Congressional Budget Office (CBO), which rejected the Administration's attempt to label revenue increases as "spending offsets."3 The CBO, unlike the White House, recognizes the difference between raising billions in hidden fees and holding spending in check.

If pledges to control spending are to be taken seriously by the American people, Congress must remain committed to holding to the multi-year budget caps agreed to in the last Congress. It must not open the spending floodgates and wash away any hope of eliminating waste and introducing long-overdue reforms. This means resisting the continuing deluge of new non-emergency "emergency" spending requested by the President, as well as refusing to engage in the Administration's strategy of creative accounting and budget trickery.

WHY CONGRESS HAS NO EXCUSE FOR BUSTING THE CAPS AND SQUANDERING THE SURPLUS

  1. Promises Made

Congress and the President negotiated the current budget caps in 1997 as part of the Balanced Budget Agreement (BBA). Although some analysts questioned whether the political willingness to limit spending in the out years really existed, congressional leaders and the President stoutly defended their commitment to maintain the spending caps through the entire five years of the agreement. The balanced budget agreement of 1997 contained very clear spending limits for FY 1998-FY 2002. These limits are relatively unchanged and have been public knowledge since they were proposed two years ago.

  1. Predictability of Presidential Action

Congress can hardly claim surprise that President Clinton sent them a budget document long on gimmicks and short on spending cuts.4 He had been in office for five years when they negotiated the BBA of 1997, and congressional leaders already had negotiated with him on several previous occasions, most notably with regard to the government shutdown of 1995.

Congressional leaders had more than sufficient experience with the President's manipulation of the English language to know that they could expect creative accounting in any budget he sent them. If they had any remaining doubts, he promptly dispelled them by submitting a budget proposal for FY 1999 which, according to the CBO, violated the agreement he had embraced less than six months earlier.5

  1. Strength of the Economy

The only event affecting the budget that could not have been anticipated in 1997 has been a remarkably strong economy that has generated the first federal budget surplus since 1969. Although the strong economy and the accompanying surplus were not predicted they can hardly be cited as grounds for increased government spending.

Intervention in Kosovo, the drought on the East Coast, and falling farm commodity prices, for example, all have been cited as reasons for emergency supplemental spending. Closer examination of these "emergencies" reveals that Kosovo has been paid for with FY 1999 funds and that the size of the farm emergency has been grossly exaggerated. There is nothing about the current economy that would justify increased federal government spending that violates the BBA.

  1. Rewards of Fiscal Responsibility

There are, however, some major rewards for preserving the surplus.

  • First, success would be so totally unexpected that it would attract a great deal of positive media commentary.

  • Second, restraining spending levels this year would make the budget process much easier next year when some Members of Congress may want to spend a little extra time in their districts.

  • Third, consolidating and eliminating redundant and obsolete programs would free financial and personnel resources that could be used for tax relief, debt reduction, and reallocation to new priorities of more current interest to their constituents.

  • Finally, fiscal discipline in spending decisions would send a strong pro-growth signal to the economy, and this could increase federal revenues next year, allowing for expanded tax reductions.

HOW CONGRESS IS READY TO BUST THE CAPS AND SQUANDER THE SURPLUS

  1. New Spending

Many Members of Congress already have stated that they are willing to ignore the commitments they made just two years ago and accept many of the President's proposals for spending beyond the level agreed to in the 1997 BBA. Proposals for spending the surplus include:6

  • "Emergency" Farm Assistance.7
    Although Congress provided over $5 billion in supplemental agricultural assistance at the end of 1998, many in the agribusiness community are back at the trough again for more, and the Senate has responded with a $7.6 billion assistance package.

  • President Clinton's Land Legacy Initiative. 8
    Despite a backlog of maintenance problems exceeding $12 billion and record levels of operational difficulties, the Clinton Administration is recommending the establishment of a $1.3 billion trust fund so the federal government can acquire more land to mismanage. The CBO, on the other hand, recommended in April that Congress place a moratorium on land acquisitions.

  • President Clinton's "New Markets" Initiative.
    President Clinton is proposing to expand empowerment zones and provide subsidized insurance to guarantee up to two-thirds of venture capital investments in areas considered "pockets of poverty." The GAO already has reported that similar programs administered by the Economic Development Agency have had little lasting impact.

  • Housing and Urban Development's "Community Builders" Program.
    The Department of Housing and Urban Development's Community Builder program spends over $85 million each year to hire, train, and equip over 769 "Community Builders" whose primary task would be to promote and organize grass-roots community development activities. Despite the obvious danger that these community builders could quickly cross the line into federally subsidized political activism, Congress has not put a stop to this program.

  • AIR-21.
    H.R. 1000, popularly known as AIR-21, is an attempt to hide pork-barrel aviation projects in "off-budget accounts." It would open a floodgate of pork-barrel spending on aviation programs by taking the Aviation Trust Fund "off budget." The Senate has an opportunity to stop the House-passed bill and maintain Congress's annual review and oversight of aviation programs.

  • Vice President Gore's "Livable Communities" Agenda. 9
    The Vice President is proposing to use federal funding as both carrot and stick to insert federal bureaucrats into local land use and development decisions. Many of these programs, such as federal mass transit subsidies, have been spectacularly unsuccessful in relieving traffic congestion or improving the quality of suburban life.

  • President Clinton's School Construction Program. 10
    President Clinton has proposed using tax credits to subsidize interest costs for up to $22 billion in local school construction. The Public Schools Partnership Act, introduced by Senator Bob Graham (D-FL) as S. 2397, accomplishes the same objectives without federal subsidies by allowing the use of tax exempt bonds for public/private partnerships to construct schools that could be used for private-sector activities during non-school hours.

  1. Old Spending

Although there is some limited hope that Congress may reject the creation of new spending programs, Members rarely, if ever, closely examine the need for existing programs. This is primarily the responsibility of the authorizing committees, which have failed consistently to exercise their oversight authority. Consequently, the taxpayer is burdened with:

  • Continued funding of redundant programs.
    Programs which duplicate activities, such as the four agencies--Bureau of Land Management, Fish and Wildlife Service, Forest Service, and National Park Service--that manage federal lands, should be combined to eliminate administrative costs.

  • Continued funding of obsolete programs.
    Programs that have achieved their objectives and are no longer needed, such as rural telephone subsidies, the Corporation for Public Broadcasting, and federal investments in water supply systems, should be discontinued.

Spending the surplus not only breaks faith with the American people, but also is bad policy and worse politics. The same prosperity that created the surplus also has made many federal programs obsolete.

  1. Budget Tricks

Although fiscal discipline will be important during the next 15 legislative days, fiscal honesty will be even more critical. If Members of Congress exceed the spending limits they agreed to respect in 1997, they will have to explain to their constituents why the programs they chose to fund are more important than preserving Social Security, reforming Medicare, reducing taxes, or paying down the national debt. If, however, Congress attempts to use accounting gimmicks such as "emergency" spending designations, shifting the date of federal payments, rosy scenario estimates, or backend loading accounts to hide a failure of fiscal discipline, they will quickly be unmasked.

Washington insiders have a number of accounting gimmicks they use to mislead the public about the true level of federal spending. Some of the favorite budget tricks expected this year include:

  • Changing paydays.
    Congress simply moves the last payday of the year from September 30 to October 1 in order to count the spending in the following fiscal year.

  • Underfunding accounts.
    This was developed first by large cities in the Northeast, which perennially zero funded their snow removal accounts and then hit the taxpayers with an "unforeseen" emergency in January. The federal government started to use this gimmick in the 1970s, and it has been well-known ever since.

  • Overfunding accounts.
    This is a slightly more subtle trick. Appropriators overfund a politically popular account when the budget is passed and then quietly transfer the funds to a special-interest account later in the year. A variation on this trick is to leave the funds in the initial account but have the popular program pick up all the overhead costs of the special-interest program.

  • Deferred obligations.
    This is an easy way to hide spending in two different years. Budget authority is given in the first year, but federal agencies are quietly told to defer obligating discretionary funds until near the end of the year. Since the government is notoriously slow to pay its bills, the outlay does not show up until the following year.

  • Leveraged spending.
    Direct lending and loan guarantee programs are often funded with only enough money to cover their administrative costs. The inevitable defaults are then counted later as "emergency" spending.

  • Annualized spending.
    This can actually be used to save money. By using a continuing resolution to fund a program at a lower rate during the beginning of the year, appropriators can approve a higher annualized rate during the remainder of the year, and the actual expenditures will be below the annualized level because the spending during the period of the continuing resolution was lower.

  • Black budget spending.
    This trick can be used only with agencies that have a "black" (top secret) budget, but it is highly effective. Simply move a program into the black area, and all information related to its size, expense, or purpose becomes classified information.

  • Creative accounting.
    By hiding variable costs in fixed cost accounts, the potential savings from limiting a program's activities can be made to seem trivial when in fact they would be substantial.

  • Emergency spending.
    This is by far the most popular budget trick used by government. City councils, legislatures, and Congress use this one every year, and it fools no one.

  • Rosy scenarios.
    This trick was developed originally as a way to overestimate revenues; it is used now to underestimate expenditures.

  • Pilot programs.
    Because it is started with a very small appropriation, a new program can gain acceptance and then be funded at a higher level in subsequent budgets.

  • Mandatory spending.
    Designating a program as "mandatory" does not mask its size or expense, but some legislators believe it allows them to dodge responsibility for it. The voters, of course, are only too well aware of who created the program and designated it as "mandatory."

  • Off-budget programs.
    Originally created to protect Social Security, "off-budget" designation has become the second step in a process that starts when a program is designated as mandatory. Washington seems to believe that once a program gains "off-budget" status, the voters will forget they are paying taxes to support it.

  • Offsetting receipts.
    This is a relatively new trick introduced by the Clinton Administration. The Administration has proposed to increase a broad variety of dedicated user fees and taxes and count them as "offsetting receipts," which reduce the level of spending. The Congressional Budget Office has rejected this trick and has scored the President's proposals as a $30 billion increase in spending.11

As Congress and the President prepare their final budget proposals, they should remember that their opponents, as well as the media and public, are all watching their actions closely. In the information age, fiscal honesty is not merely the best option; it is the only option.

CONCLUSION

What Congress does during the next few weeks will have profound consequences. Congressional leadership must refocus lawmakers' attention on the decisions they must make now to get spending under control. The spending caps should not be broken, and the BBA should not be violated. The only way lawmakers can preserve both the caps and the BBA, however, is by summoning the determination to hold down spending and challenging the President to make a clear decision: Either keep the bargain he made or veto fiscally responsible spending bills that stay within the caps and protect the Social Security surplus.

Congress can expect very little cooperation from the White House during the next 15 legislative days. President Clinton has continued to insist that the budget he sent to Congress in February "contains appropriate offsets to produce a balanced budget" and has stonewalled any attempt to start a realistic dialogue on genuine control of federal spending. As recently as September 1, "White House Chief of Staff John Podesta said that the administration has been fiscally responsible in preparing its budget plans, noting that the president had offered various proposals [tax increases] for financing spending that would otherwise bust the budget restrictions."12

The White House continues to insist that fiscal responsibility consists of matching increased spending with increased taxes. The President will not even consider restricting the growth of government, consolidating redundant agencies, or eliminating obsolete programs. Congress must force the President to reveal the truth about these policies to the public by presenting him with a clear alternative and challenging him to reject it.

Peter Sperry is a former Grover M. Hermann Fellow in Federal Budgetary Affairs in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.


1. For the legislative calendar of the Senate, see Thomas, the congressional Web site of the Library of Congress, at http://lott.senate.gov/calendar/sep.htm

2. For additional information, see Peter Sperry, "A Budget Resolution on the Right Track," Heritage Foundation Executive Memorandum No. 582, March 25, 1999.

3. Congressional Budget Office, An Analysis of the President's Budgetary Proposals for Fiscal Year 2000: A Preliminary Report, March 3, 1999, p. 6.

4. For additional information, see Peter Sperry, "Time for the President to Honor His Budget Pledge," Heritage Foundation Executive Memorandum No. 601, May 27, 1999.

5. Congressional Budget Office, An Analysis of the President's Budgetary Proposals for Fiscal Year 1999, available at http://www.cbo.gov/showdoc.cfm?index=387&sequence=0&from=1; viewed on September 3, 1999.

6. For additional information, see Peter Sperry, "Top Ten Ways to Avoid Wasting the Surplus," Heritage Foundation Backgrounder No. 1320, September 7, 1999.

7. For additional information, see Peter Sperry, "How `Emergency' Farm Spending Squanders the Surplus," Heritage Foundation Executive Memorandum No. 621, September 3, 1999.

8. For more information, see Alex Annett, "The Federal Government's Poor Management of America's Land Resources," Heritage Foundation Backgrounder No. 1282, May 17, 1999.

9. For more information, see Ronald D. Utt, "Al Gore's Livable Communities: A Program in Search of a Problem," Heritage Foundation Insider No. 256, February 1999, and Wendell Cox, "The President's New Sprawl Initiative: A Program in Search of a Problem," Heritage Foundation Backgrounder No. 1263, March 18, 1999.

10. For more information, see Ronald D. Utt, "How Public-Private Partnerships Can Facilitate Public School Construction," Heritage Foundation Backgrounder No. 1257, February, 23 1999.

11. Congressional Budget Office, An Analysis of the President's Budgetary Proposals for Fiscal Year 2000: A Preliminary Report, p. 6.

12. Eric Pianin and George Hager, "Clinton to Seek at Least $12 Billion More in Spending," The Washington Post, September 2, 1999, p. A8.

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