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Thursday, July 22, 2010

Federal Trust Funds and the Budget

Thomas L. Hungerford
Specialist in Public Finance

Federal trust funds are an important part of the budget. About 40% of all federal outlays are through trust funds and about 45% of all federal receipts come to trust funds. This importance is further highlighted by the considerable congressional interest in trust funds; as of July 1, 2010, over 580 bills had been introduced in the 111th Congress to create or modify federal trust funds.

A federal trust fund often represents a long-term commitment to use specific funds for a certain purpose. It has been argued that the creation of a trust fund is one way for Congress to "commit" future Congresses to fund a specific program or "to make long-term promises stick." Dedicated revenues are used to fund the program and the revenues usually come from the beneficiaries of the program.

There are about 200 federal trust funds, but most trust funds are relatively small with balances of less than $100 million. The 12 largest trust funds account for over 98% of income to all trust funds, outgo from all trust funds, and balances of all trust funds.

The trust funds surplus (i.e., revenues minus outgo) in FY2009 amounted to $127.3 billion. This surplus is mostly invested in government obligations and transferred to the general fund for spending. The federal funds deficit for FY2009 was $1,540.0 billion, but because of the trust funds surplus, the unified federal budget deficit (what is widely reported in the press) was $1,412.7 billion. Receipts in excess of outlays are added to the balance of the trust funds. By law, all trust funds except the Railroad Retirement fund must invest balances in government obligations. The government securities held by trust funds are part of federal debt that is subject to the statutory federal debt limit. At the end of FY2009, the trust funds held $4,013.8 billion in government securities.

From time to time, it is reported that one trust or another is on the verge of bankruptcy. In the context of trust funds the term "bankruptcy" is meaningless. It is true that a trust fund's outgo can be greater than its income and trust funds can have a zero balance, but the federal government is not in danger of "going out of business" or having its assets seized by creditors. Congress has often taken actions to increase a trust fund's revenues or reduce its outgo when it has faced imminent insolvency or exhaustion of its balances.

Some observers have argued that trust fund programs increase the federal deficit and reduce national saving. The evidence supports the claim that trust fund surpluses reduced the federal government deficit and increased public saving. This becomes important at the time when a trust fund revenues are less than its outgo and the Treasury securities held by the trust fund need to be redeemed to cover outgo. The Treasury securities in the trust fund are claims on the government and the government will to find real resources (by raising revenue, decreasing spending, or issuing more debt) to cover these claims when the obligations are redeemed.

Date of Report: July 20, 2010
Number of Pages: 18
Order Number: R41328
Price: $29.95

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