Transactions in cash-based accounting are recorded when payments are actually made or receipts collected. By contrast, accrual measures summarize in a single number the anticipated net financial effects at a specific point in time of a commitment that will affect federal cash flows many years into the future. That is, accrual methods record the estimated value of expenses and related receipts when the legal obligation is first made rather than when subsequent cash transactions occur.

Most of the federal budget uses cash-based accounting and always has. The federal deficit or surplus is measured by comparing the cash coming in the door (tax receipts, user fees, etc.) with the cash going out the door (outlays). The big exception, since 1990, is federal credit programs, where the eventual net total cost to the federal government of the loan, over 30 years (or however long the loan life is), is booked at the time the loan is made. When the federal government makes a TIFIA loan, for example, that nine-figure check written to a state or locality is not recorded as a federal outlay – only the estimated lifetime net cost of the loan gets recorded as an outlay.

(Interestingly, the 1967 President’s Commission on Budget Concepts recommended in its final report that the federal government switch over from cash accounting to accrual accounting for expenditures. The recommendations of the Commission are generally regarded as holy writ by CBO and OMB, but Presidents Johnson and Nixon delayed the implementation of accrual accounting because the Pentagon said they needed more time, what with the Vietnam war and all, and the issue was later dropped.)

The difference between the two types of accounting systems gets clearer when you look at spending commitments that take a long time to “spend out.” Under cash-based accounting, if Congress increases highway spending by $1 billion in 2018, only about $250 million of that money shows up as an expenditure (outlay) from the Highway Trust Fund in that year. The rest of that $1 billion can take six or seven years to “spend out” fully. But if the Trust Fund operated under accrual accounting, the full $1 billion would be booked in the Trust Fund in 2018 and would be measured against future scheduled Trust Fund tax revenues.

Cash versus accrual also makes a huge difference when conceptualizing the balance of a trust fund account. Cash based accounting looks at the cash balance of a trust fund at any given time. But accrual accounting looks at the unobligated, or uncommitted, balance. This is critically important – what looks like a huge cash balance can, in fact, be mostly or entirely obligated for specific programs and projects already and is simply awaiting outlay. Just because cash is sitting in a trust fund does not mean that the money is available to pay for new spending commitments.

Jimmy Carter and Brock Adams. The 1976 Presidential election sent Jimmy Carter to Washington, where his party would have control over a unified federal government for the first time in eight years. In the Congressional elections, Democrats won 292 seats in the House (just over two-thirds) and 61 seats in the Senate (enough to shut down filibusters). In terms of momentum and sheer numbers, the 95th Congress had the potential to be as game-changing as the Great Society Congress of 1965-1966.

For his Secretary of Transportation, Carter chose 12-year incumbent Congressman Brock Adams (D-WA). Adams had been a member of the Interstate and Foreign Commerce Committee and its Subcommittee on Transportation and Aeronautics, which had jurisdiction over railroads, the economic regulation of interstate trucking, and (until January 1975) over aviation as well. But also, from 1975-1977, Adams had been the first real chairman of the House Budget Committee. (Al Ullman (D-OR) had been chairman from August-December 1974 but the panel wasn’t really going then.) As such, Adams had been a key participant in the establishment of the new Congressional budget process and was one of the main advocates of giving the new Budget Committees an important role in forcing other Congressional committees to keep their spending within the bounds set by the budget resolution.

Adams took several Budget Committee staffers with him to USDOT, including Mort Downey, who had been the Budget Committee’s original transportation analyst and who became Assistant Secretary for Budget and Programs at USDOT.

The new Budget Act had also set a ticking time bomb counting down in surface transportation. Up until that point, both the federal highway and mass transit programs were funded by multi-year contract authority provided in authorization acts. The highway contract authority was paid from the Highway Trust Fund, and the mass transit contract authority was paid from the general fund. A key feature of the Budget Act of 1974 was its ban on new “backdoor spending,” which included general fund contract authority. After the Budget Act was signed into law (but before it took effect), Congress enacted a huge lump sum of mass transit contract authority from the general fund in November 1974 that was supposed to be enough to tide transit programs through 1979, but after that, the program fell off a cliff. The future outlook for multi-year mass transit funding was uncertain.

Transportation was far from the top of President Carter’s agenda (aside from a handwritten note he sent Adams two months after his inauguration suggesting that new subway systems were a waste of money). The energy crisis and the struggling economy were front and center. In a January 24, 1977 outline of the Carter Administration legislative agenda for its first year, here is all that was said about transportation (the handwritten emphases were put there by Carter himself):

Starting in April 1977, Adams developed a plan to use some of the new energy taxes being discussed as part of the President’s energy plan as a “pay-for” for mass transit and railroad (principally Amtrak) grant programs that were currently being funded out of the general fund, which were totaling about $4.5 billion. In a memo to the President on July 15, Adams proposed putting the receipts from the tax increase, along with the existing Highway Trust Fund taxes, into a new “National Transportation Account” to cover highways, transit, rail and airport grant programs.

Adams wrote that one big multi-modal fund would “generate a secure funding mechanism broad enough to support not merely the narrow interest of any single mode, but the competing interests of all transportation modes” and would “jointly evolve an approach whereby major programs could be reviewed systematically, allowing broad considerations of trade-offs, relative needs and basic program merits to be assessed, rather than looking at highways one year, UMTA another, and railroads still another.

Carter’s advisors opposed Adams’ plan. White House energy czar Jim Schlesinger and the Treasury Department said that diverting the energy taxes to a specific program would damage the energy plan, and Stu Eizenstat, Carter’s domestic policy chief, was against dedicating any specific taxes to specific programs, stating that “Our experience with the Highway Trust Fund illustrates that such earmarking creates a floor rather than a ceiling on these public works investments.”

The House decided in late July 1977 to bring the energy tax bill to the floor and, unusually, they allowed certain amendments to be offered to the tax title of the bill. House Highway Subcommittee chairman Jim Howard (D-NJ) offered an amendment to increase the gas tax from 4 cents per gallon to 9 cents per gallon in order to pay for a transportation bill he wanted to write the following year. The 5 c.p.g. increase would be split in half, with 2.5 cents to the Highway Trust Fund and the other 2.5 cents to a new mass transit fund. Brock Adams notified President Carter the following day that “This will be very difficult to pass because there is substantial opposition to a gasoline tax on the Hill. Clear support for the 5¢ tax from the Administration could be a critical factor. Unless you have further instructions, I intend to stress that the Administration does in fact favor the House leadership position.” But a diffident Carter wrote “I prefer more flexible use of the money” on Adams’s letter.

When the bill (H.R. 8444, 95^thCongress) reached the House floor (sans gas tax increases) in August, Howard offered the 5 c.p.g. gas tax increase split 50-50 between highways and transit (starting on page 26997 here).  President Carter gave a somewhat tepid endorsement: “While I initially recommended a standby gasoline tax which would provide a specific disincentive on the wasteful use of gasoline, or a gasoline tax with greater flexibility for use of the revenues, I recommend positive action on this proposed tax which is supported by the House leadership.”

But Howard’s amendment – a surface transportation user tax in the context of energy legislation, not transportation legislation, and therefore lacking any guarantees of additional transportation spending – failed by a huge 82 to 339 margin.  Then, Rep. Dan Rostenkowski (D-IL) offered another amendment that would have imposed a smaller, 4 cent per gallon gas tax increase, which failed by an even wider margin, 52 to 370.

By November 1977, Adams and DOT had developed a full-fledged highway and transit reauthorization proposal, which Adams forwarded to the Office of Management and Budget for clearance. By that time, Adams had abandoned his plan for one big multi-modal fund, but the unfunded nature of mass transit was still a problem, so Adams wrote to the President that:

I propose the establishment of a public transportation trust fund for transportation programs that would relieve the pressure on general revenues with user-related taxes on petroleum. A fund based on energy taxes would provide a firm financial basis for carrying out these transportation programs, and the revenues would offset the expenditures in order to remain within budget targets.

-Transportation Secretary Brock Adams, November 11, 1977

On balance, the no trust funds option is probably the most desirable, primarily because it both strengthens the policymaking role of the Congress and provides greater fiscal control.

-Congressional Budget Office, March 1978

Needless to say, the powerful highway lobby, on and off Capitol Hill, was not pleased.

House Public Works pushes for more money. On March 21, Secretary Adams met with House Highways Subcommittee chairman Jim Howard (D-NJ) and was informed that the bipartisan leaders of the Public Works Committee would shortly be introducing a bill that ignored the Carter Administration’s recommended budget totals and program reforms.  Adams told Howard that, in that case, he would recommend that President Carter veto the bill. Howard told Adams that he would not mind a veto threat at all.

The following day, Howard, his ranking minority member on the subcommittee Bud Shuster (R-PA), and other bipartisan members of the Public Works and Transportation Committee introduced H.R. 11733 (95th Congress), an ambitious four-year reauthorization bill.  The bill would have allowed a total of $44.5 billion in Highway Trust Fund contract authority over that period, an average of $3.1 billion per year more than the President’s request (40 percent above the President’s totals).  The goal was to “spend down” the $10.2 billion cash balance that was held in the Trust Fund at the start of fiscal year 1978.

When mass transit authorizations from the general fund were included, the differences between the Administration bill and the House bill were even greater.

Jim Howard told reporters that the bill was “undoubtedly the most significant piece of transportation ever to come before” Congress. Jack Schenendorf, who was a young minority counsel on Public Works at the time, recalls that Adams was so angry at how little of the Administration’s bill made it into the committee’s bill that he held an impromptu press conference in the hallway outside the committee room denouncing Howard.

The White House recoiled. OMB Director Jim McIntyre sent President Carter a memo on April 4 opposing H.R. 11733 based on its substantial spending increases over the Administration’s request and its lack of program reforms.  The memo recapped the Adams-Howard meeting of March 21 and said that “Administration relations with Mr. Howard and his committee have been severely strained…Chances of modifying H.R. 11733 in House Committee are dim. However, we concur with Secretary Adams’ position of trying to work with selected House Committee members who appear to be sympathetic to the Administration’s position.  A more vigorous effort can be made on the House floor and the Senate.”  The memo recommended a veto threat on H.R. 11733 from the White House.

White House staff secretary Rick Hutcheson forwarded the OMB memo to Carter with a recommendation from the White House domestic policy staff that the veto threat come through Adams, not the White House, and suggesting that Carter mention the highway bill as one of the big-spending bills opposed by the White House in a forthcoming Presidential speech on inflation. President Carter forwarded the OMB memo to DOT after handwriting “Brock – I’ll veto” on the front page and “Let Brock take lead, Frank [Moore, the White House legislative liaison] to help” on the decision box page.

Carter followed through on Hutcheson’s recommendations by making a note of the highway bill in an April 11 speech announcing the Administration’s anti-inflation policy: “Potential outlay increases in the 1979 budget which are now being considered seriously by congressional committees would add between $9 billion and $13 billion to spending levels next year. The price of some of these politically attractive programs would escalate rapidly in future years. I’m especially concerned about tuition tax credits, highway and urban transit programs, postal service financing, farm legislation, and defense spending. By every means at my disposal, I will resist these pressures and protect the integrity of the budget.”

Three days later, Jim Howard suffered a heart attack (his second) and the bill was put on hold for a time.

The push for accrual accounting. Although the Administration bill itself did not specifically reference accrual accounting, the general principle was on the mind of Secretary Adams when the bill was formulated. Adams made this clear when he testified before the House Ways and Means Committee on the proposed legislation on February 8, during which he said: “if everything works well, then the money coming in and the money that we have already authorized and already committed will just about balance.”  Adams submitted a table for the record showing that the HTF estimated cash-on-hand at the end of FY 1979 would equal $26.0 billion and that outstanding commitments through the end of FY 1979 (for the Interstate program) and 1978 for other programs would total $24.9 billion, leaving an uncommitted balance of just $1.1 billion.  Total HTF deposits for the FY 1980-1983 period were estimated to be $32.9 billion, and new authorizations in the Administration bill over the FY 1979-1983 period were $32.0 billion.

Mort Downey says that the accrual accounting concept was on his and Adams’s minds because of their shared experience on the Budget Committee in 1975, when New York City government ran out of money and needed a bailout. As part of the conditions that the Ford Administration (and Wall Street) set for the NYC bailout, an outside auditor (Arthur Andersen) had to come in and put the City’s liabilities on an accrual basis, instead of the mixed cash-and-accrual basis that was being used, so that the full size of the problem could be seen.

The Conable-Gibbons amendment. In its initial form, a May 16, 1978 draft of the Conable-Gibbons amendment to be offered in the Ways and Means markup recommended a form of accrual accounting, limiting total new authorizations to receipt levels. On May 17, the Secretary of Transportation, the Secretary of the Treasury, and the OMB Director wrote a joint letter to  Ways and Means chairman Ullman in opposition to the spending levels in H.R. 11733, saying that the bill “does substantial violence to the concept of keeping program levels within projected revenues over an identical time frame.”  The troika urged adoption of the Conable-Gibbons amendment, saying that “Without the Conable-Gibbons amendment, the Committee is faced with the unpalatable choice between imposing a 2 cent increase in the gas tax to generate the needed revenues or a depleted Trust Fund in the 1980’s.”

The letter also outlined the pivotal difference between the cash balance of the Trust Fund and the uncommitted balance.

As the scheduled May 18 Ways and Means markup of H.R. 11733 approached, it was abruptly postponed.  A contemporaneous news account (in CQ Weekly Report on May 27) said that by May 17, Public Works had transmitted no information to Ways and Means about the bill except one copy of the version ordered reported, and quoted an anonymous Ways and Means aide as saying that “They might have been able to slip it through if they’d at least sent over a copy of the report.”  The article then said that “Because no report language accompanied the bill, Gibbons and Conable asked Ways and Means chairman Al Ullman, D-Ore., to delay committee markup.”

On May 19, the chairman and ranking Republican of the full House Public Works Committee, Bizz Johnson (D-CA) and Bill Harsha (R-OH), wrote to Ullman to state their “firm opposition” to the Conable-Gibbons amendment, “which in our judgment would do considerable damage to the traditional and demonstrably productive relationship between the Highway Trust Fund and the Federal-Aid Highway Program.”  Johnson and Harsha asked to present the Public Works views to Ways and Means at the appropriate time.

Five days later,Ways and Means held a second hearing on Highway Trust Fund issues, this time in the Subcommittee on Oversight, which was chaired by Sam Gibbons.  The bill managers of H.R. 11733 from the Public Works Committee, subcommittee chair and ranking member Jim Howard (D-NJ) and Bud Shuster (R-PA), were invited to testify in person but sent a written statement instead. Transportation Secretary Adams and representatives from Treasury and OMB testified in person in favor of a version of the Conable-Gibbons amendment, as did the chairman of the House Budget Committee, Bob Giamo (D-CT).

The Director of the Congressional Budget Office, Alice Rivlin, testified:

The highway trust fund was established on the principle of pay as you go.  Through this principle, which is embodied in policy statements contained in the 1956 legislation, the Congress established a procedure for keeping highway expenditures in line with highway taxes. This balance would be destroyed if the Congress were to authorize substantial new programs without providing for their financing.  Within a few years, such a course of action would force the Congress either to raise highway taxes or to curtail programs sharply in order to rescue the highway trust fund.

-CBO Director Alice Rivlin, May 24, 1978

Later that day, the Public Works Committee issued a stinging press release attacking the Administration-backed Conable-Gibbons proposal as just another version of budget impoundment.

By May 31, the Public Works leaders were apparently regretting their no-show at the Ways and Means hearing. Chairman Johnson wrote to Ways and Means chairman Ullman saying that at the May 24 hearing, DOT, CBO and the Budget Committee “sufficiently confused the situation that it now becomes a necessity from my standpoint that the Committee on Public Works and Transportation come before your full Committee and present the factual situation surrounding our simple request for a Highway Trust Fund extension.”

Nothing happened immediately. On June 8, Gibbons’ subcommittee issued a report to the full Ways and Means Committee outlining the issues and summarizing the May 24 hearing, and laying out options for the full panel during its consideration of H.R. 11733. But no action was taken. By June 22, the Public Works leaders were getting antsy. Johnson, Harsha, Howard and Shuster sent another letter to Ways and Means chairman Ullman, this one saying that “We understand that Members of your Committee are being strongly urged to reject our financing approach in favor of a far-reaching restructuring of the Trust Fund mechanism. We therefore are writing now to urge you to avoid making a commitment to any such trust fund amendment until the Committee on Public Works and Transportation has had an opportunity to present its case.”

The letter was referring to the final version of the Conable-Gibbons amendment, which provided for automatic across-the-board reductions in highway apportionments if new Trust Fund authorizations were projected to exceed net receipts for the coming year.

The Ways and Means analysis of the amendment also drew a distinction between the existing Trust Fund self-sufficiency test (the “Byrd Amendment,” in place since 1956, which treated cash balances as being uncommitted) and the Conable-Gibbons proposal, which used the accrual accounting method of determining future liabilities:

The Byrd Amendment, which operates to keep the Fund out of a cash deficit position, would not become operative in time to effectively protect the fiscal soundness of the Trust Fund because the Fund presently has large cash balances. Although these balances are not “free” and in fact are already committed, these funds would be drawn down gradually to fund the higher program levels now proposed. This process would act to disguise the true condition of the Fund where commitments were outrunning available revenues by a substantial amount. Once this cash draw-down reached a point where it became obvious that the funds available were insufficient to finance the higher program levels, it would be too late to solve the problem except by a hurriedly enacted and massive tax increase or, in the alternative, by massive program cuts.

In order to prevent these drastic outcomes and unpleasant alternatives, it is necessary to maintain a reasonable balance between new authorizations and revenues available; this in turn will limit the amount of unfunded liabilities that can accumulate against the Trust Fund. The proposed amendment would provide these needed safeguards.

-Ways and Means staff analysis of Conable-Gibbons amendment, May 31, 1978.

On July 12, Public Works finally got its say, with Jim Howard testifying before a Ways and Means executive session in the morning. Howard got enough pushback so that he returned in the afternoon to announce that he would be amending H.R. 11733 on the House floor to reduce funding levels by $1 billion per year.  (There was a period where Howard left Public Works staff director Dick Sullivan alone to argue with the Ways and Means members for what seemed like several hours). Even with the spending reductions, the Public Works bill would still spend HTF balances down from $11 billion in 1978 to less than $1 billion in 1990 if spending levels were frozen in place (no inflation adjustment) in perpetuity after the expiration of the bill.

Ways and Means finally started its markup session on July 31. White House OMB Director James McIntyre wrote to Gibbons to say that “the Administration believes that the highway authorization levels in H.R. 11733, even assuming the proposed $1.0 billion annual reduction, are still unacceptably high…Therefore, I want to reiterate the Administration’s support for the Conable-Gibbons Amendment or for any other measure which would lower highway and transit authorizations to levels more closely approximating those proposed by the Administration.”  CBO also issued projections of HTF cash flow under the Conable-Gibbons amendment (on a cash flow basis, not an accrual basis) and under H.R. 11733 with the Howard amendment. But the votes did not appear to be there, and in the end, Conable and Gibbons did not offer their amendment during the committee markup. Ways and Means on August 1 approved a five-year extension of existing Highway Trust Fund taxes and expenditure authority, with no policy changes.

But the issue was not over – Conable and Gibbons would work with the chairman of the Budget Committee to offer an accrual accounting amendment to the highway bill on the House floor, in September 1978 (see part 2 of this article).

To be continued…