August 3, 2018

Dear Joint Committee members:

As you begin your deliberations on how to fix the Congressional budget process, please keep the following in mind.

It will have escaped no one’s notice that the federal Highway Trust Fund is insolvent. Congress has allowed the Trust Fund’s annual spending commitments to become so disconnected from its annual revenues that Congress has been forced to bail out the Trust Fund with $144 billion of special transfers from the general fund of the Treasury or other funds over the last ten years in order to prevent the flow of cash from the Department of Transportation to state governments to repay legally binding commitments from being interrupted.

However, you may not know that, through a series of historical accidents, 99 percent of the spending from the Highway Trust Fund is exempt from both statutory systems of budget discipline – the PAYGO process for mandatory spending, and the Budget Control Act spending caps for discretionary spending.[1] Thus, Highway Trust Fund spending is also exempt from sequestration – because sequestration is only a tool used to enforce the statutory systems of budget discipline. And you may also be surprised that the real dollar amount of permissible Trust Fund spending, set in the annual appropriations bills, is also exempt from the 1974 Budget Act’s system of spending allocations to Congressional committees.

If a program is exempt from all forms of budgetary discipline, it shouldn’t really surprise anyone that spending for that program grows to the point that it becomes problematic.

While Congress must maintain the ability to set its own priorities in the budget process and spend money as needed on whatever programs it desires, it seems to me that exemptions from budget discipline should only be the result of conscious decisions by Congress, not from historical accidents.

A little history lesson is in order.

Contract authority. Spending from the Highway Trust Fund, and for the Airport Improvement Program drawn from the Airport and Airway Trust Fund, is provided by Congress in the form of contract authority, a type of budget authority that allows the federal government to incur legally binding obligations prior to an appropriation. Contract authority was created by a historical accident.

After the Civil War, Congress allowed the authority to make appropriations to become fragmented amongst its committees. By the end of World War I, several committees in each chamber were allowed to report general appropriations bills. The recommendations of the Taft Commission in 1912, followed by the strain put on the public fisc by WWI, led to a successful effort to recentralize budgetary decisions – in the executive branch, by the creation of the Bureau of the Budget and of one centralized federal budget request submitted by the President, and in the legislative branch, by the re-centralization of appropriations authority into the Appropriations Committees.

The Budget and Accounting Act was signed into law by President Harding in 1921, but it was supposed to be enacted in 1920 (President Wilson’s veto in June 1920 surprised everyone). While this was going on, the House of Representatives voted to recentralize appropriations jurisdiction in the Appropriations Committee in May 1920 – but the Senate did not recentralize its own appropriations jurisdiction until March 1922.

So, for just one year, the House Appropriations Committee went to conference with several different Senate authorizing committees on the annual appropriations bills.

One of those was the Post Office appropriations bill for fiscal year 1923. The House Appropriations Committee reported, and the House passed, a bill that did not mention roads. But the bill was then referred to the Senate Post Office and Post Roads Committee, which reported it back with an amendment appropriating $50 million in 1923 for the roads program and authorizing two years of further appropriations after that.

In conference, the committees made the Solomonic decision to split the baby – by creating an authorization that behaved like an appropriation. Section 4 of the appropriations law allowed the authorization of funding for the road program to be apportioned to states and provided that any project approved under such authorization “shall be deemed a contractual obligation of the Federal Government…”

Contract authority continues to this day as a form of mandatory budget authority.

Obligation limitations. Presidents Eisenhower, Johnson and Nixon relied increasingly on presidential impoundment authority to hold back Highway Trust Fund contract authority apportioned to states from obligation. This allowed billions of dollars of balances of contract authority to build up in state coffers, unable to be obligated because of the ongoing impoundments.

When the Impoundment Control Act of 1974 took effect in 1975, a total of $15.7 billion in highway contract authority had been provided by Congress and was potentially available for obligation. But the “real” annual spending rate was far lower – a February 1975 deferral message withheld $9.1 billion of that amount, leaving only $6.6 billion as a target spending level for fiscal 1975.

The Senate voted in April 1975 to disapprove the deferral. And the floodgates opened – states obligated the money as fast as possible, and highway obligations rose from $5.3 billion in 1974 to $7.9 billion in 1975.

In response, the Ford Administration negotiated with Congress for a proviso in the fiscal 1976 appropriations act limiting the obligation of all highway contract authority – old balances held by states plus new authority provided in that year – to a fixed amount. Similar provisions have been enacted every year since.

But annual obligation limitations beg the question of whether or not contract authority is still “budget authority” (defined in the Budget Act as “the authority provided by Federal law to incur financial obligations”) – if contract authority on its own cannot be obligated without a corresponding amount of obligation limitation, is it “real money?”

Because obligations are now controlled by obligation limitations in annual appropriations bills, OMB and CBO since 1976 have scored the outlays from this contract authority as discretionary, not mandatory, since they are ultimately controlled by annual Appropriations Committee action. As a result, Highway Trust Fund programs and the Airport Improvement Program are the only programs in the federal budget where the budget authority is classified as mandatory but the outlays are classified as discretionary.

What this means. The annual obligation limitations on contract authority programs are the true Congressional decision point for the program spending levels. But the annual Congressional budget resolution does not allocate an aggregate amount of obligation limitations to the Appropriations Committee.

So, the annual budget resolution cannot force the Appropriations Committees to rein in spending from these programs, because the obligation limitations set by the Appropriations Committees are not included in the Appropriations 302(a) allocation and thus cannot be controlled by the annual budget resolution’s spending allocation process.

The Congressional budget resolution does allocate total amounts of mandatory budget authority, including contract authority, to the authorizing committees – but with the exception of the $739 million per year in truly mandatory highway contract authority, the budget resolution does not assign the authorizing committees any outlays from this contract authority.

This means that contract authority programs are immune from budget reconciliation directives– reconciliation bills can only be used to make changes in programs that result in changes in mandatory outlays, or revenues, or else the provisions will run afoul of the Senate’s Byrd Rule.

The statutory PAYGO process purports to limit the aggregate amount of new mandatory spending and revenue changes – but PAYGO only measures spending via mandatory outlays. Since the outlays from contract authority programs subject to limitation are classified as discretionary, contract authority programs are exempt from PAYGO.

The Budget Control Act caps on discretionary spending only apply to discretionary budget authority. (The old Budget Enforcement Act caps also referenced discretionary outlays, but the BCA caps do not.) So, because the budget authority for these programs is classified as mandatory but the outlays are classified as discretionary, contract authority programs are exempt from the Budget Control Act spending caps.

Sequestration is a tool used to enforce various budget enforcement regimes, including PAYGO and the spending caps. Since these programs are exempt from PAYGO and the spending caps, and since no other statutory budget enforcement regime is currently in effect, contract authority programs are exempt from sequestration as well.

Conclusion. The federal highway, mass transit, highway and motor carrier safety, and airport grant programs are very important. But the decision as to whether or not these programs are so important that they deserve to be exempted from all budgetary discipline – while federal spending on national defense, administration of justice, the environment, community development, science, and general government remains subject to such budgetary constraints – should be an intentional and transparent decision made by Congress after due deliberation, not one made via a long series of historical accidents and budget scorekeeping reclassifications.

[1]A total of $739 million per year in new highway contract authority is exempt from obligation limitations and is subject to regular budget restrictions. But this is only a little over 1 percent of total annual HTF contract authority.