President Bush created a stir this month with his fiscal year 2008 budget, which recommends increasing funding for the Pell Grant, the Academic Competitiveness Grant (ACG), and the National Science and Mathematics Access to Retain Talent (SMART) Grant programs by eliminating the Federal Supplemental Educational Opportunity Grant (FSEOG) and the Perkins Loan Program FCC, and by recalling Perkins Loan Reserves. Lenders and guarantors have also been called upon to bear an additional $19 billion in cuts to help support the grant increases.
Congress has signaled that it is ready to begin considering the president's proposed budget in the coming weeks. Given the excitement that the budget has caused, it is important to put the proposed budget in perspective by learning the budgeting process and understanding why this year's budget process will be different than other budget processes in recent history.
The Budget Process in a Nutshell
The budget process has two distinct goals. The first goal is to provide a financial measure of federal expenditures and revenues. The second is to provide a means to allocate federal resources to meet national objectives.
The basic components of the budget process can be divided into four parts: budget formulation, budget analysis, appropriations, and execution.
- Budget formulation (May - February): The official budget process begins in the Executive Branch with the president and his cabinet almost two years before the budget is supposed to be enacted. That means that the FY 08 budget was being formulated by the Bush administration in 2006. However, the formulation of the president's budget request ramps up during the May-February time period prior to actual submission date. The president works with the Office of Management and Budget (OMB) which, in turn works with all the federal departments and agencies to obtain cost estimates, formulate budgetary language, and make policy decisions. The president, by law, must submit the budget to Congress no later than the first Monday in February prior to the budget's enactment.
- Budget Resolution (March - April 15): Once Congress receives the president's budget, Congress holds congressional Appropriations and Budget committee hearings to give the Bush administration the opportunity to explain and justify the budget proposals. Congress works with the Congressional Budget Office (CBO) to obtain its own cost and revenue estimates and then develops a budget resolution that should be completed no later than April 15th. A budget resolution sets budget parameters for overall spending by specific budget categories such as education appropriations, overall tax expenditures, and for any "reconciliation" budget cuts or increased spending or tax cuts. If the budget resolution is not agreed to, then the House Appropriations Committee can bring appropriations bills to the House floor for debate and passage starting on May 15th.
- Appropriations (April - September 30): The budget resolution is not signed by the president and is not law, but it contains binding spending caps for the House and Senate Appropriations Committees that specify the total funds available for appropriation. The Appropriation Committees divide the available funds among the 12 subcommittees - including the House Subcommittee on Labor, Health, and Human Services and Education and the Senate Subcommittee on Labor, Health, and Human Services and Education.
After the House and the Senate have agreed on an appropriation's bill, it is sent to the president to be signed into law. The president may either sign the bill - implementing spending for the fiscal year - or veto the bill - sending it back to Congress for a possible congressional veto override or for modifications to meet the president's objections. If one or more appropriations bills have not been signed into law by the beginning of a fiscal year (Oct. 1), all federal spending related to those bills must be halted unless continuing resolutions are enacted by Congress and signed by the president, as was done for the FY 07 budget. The Congress only completed only two appropriations bills last year.
- Execution (October - September): Congressional appropriations bills that are signed by the president become binding for the respective fiscal year that begins on Oct. 1st and ends the following September 30th.
Authorization vs. Appropriation
Many people become confused by the terms authorization and appropriation. Authorization is the process that defines a program's elements - who it serves, who is eligible, the conditions of eligibility, and other program conditions - and authorizes a certain dollar amount to be spent on that program. It is important to understand that authorizing a program is not the same as actually funding a program.
Appropriation is the process that sets aside real dollars to fund a program. So while the Pell Grant Program may be authorized at a maximum $5,400 level, it may only be funded (i.e., appropriated) to function at a $4,310 level.
A simple way to think of the differences between authorization and appropriations is to think of an authorization as a hunting license to hunt for appropriations funding. Just because you have a hunting license doesn't mean you will always bag your prey.
Discretionary vs. Mandatory Spending
Certain "entitlement" programs and other U.S. obligations are automatically funded before any other dollars are appropriated by Congress. Some of these mandatory spending items include interest on U.S. debt, Medicaid and Medicare programs, and Social Security. Programs that are deemed mandatory spending programs are labeled as such by law. The Stafford Loan Program (both FFELP and DL) and the ACG and National SMART Grant Programs are the only Title IV student aid mandatory spending entitlement programs. Various tax benefit programs such as the HOPE and Lifetime Tax Credits, as well as the deduction for student loan interest paid by a borrower are examples of tax expenditure entitlement programs.
All other spending is discretionary spending and is appropriated through the budget process. According to OMB, for FY 2006 total discretionary spending made up about 35 percent of all U.S. spending, the other 65 percent was mandatory spending. The Department of Education only made up 2.7 percent of all spending in FY 06.
Isn't the Pell Grant a Mandatory Spending Program?
To make things even more confusing, the Pell Grant is actually a discretionary spending program that is run as a mandatory spending program. Many people believe the Pell Grant program is an "entitlement program." The Pell Grant program is an "entitlement" program in the sense that if a student is eligible for a grant, the student receives that grant. However, Pell Grants are a discretionary program since it is the Congress, through an appropriations bill, that sets the level of the maximum grant.
A true entitlement program mandates who is eligible for a benefit and under what terms and conditions and for how much of a benefit an eligible recipient gets.
PayGo Rules
PayGo rules that were in effect through the 1990s expired in 2002, but were reintroduced in the House of Representatives this past January. Under pay-as-you-go (PayGo) rules, all mandatory spending increases must be deficit neutral.
To use a recent example, in January, the House passed H.R. 5, which over a five-year period cuts subsidized undergraduate Stafford Loan interest rates in half. Since the House was operating under PayGo, offsetting budget cuts totaling approximately $6 billion were made to the student lending industry through decreased subsidies.
Under congressional PayGo budget rules, increases in an entitlement program can only be offset in one of three ways: reducing the overall cost of the program, reducing the cost of another entitlement program, or raising taxes to cover the increased costs.
For example, if Congress were to increase Stafford Loan limits, it could do one of the following to meet PayGo requirements:
- Reduce the cost of the overall program, as was done by the House in H.R. 5 that cut subsidies to FFEL lenders.
- Reduce the costs of some other entitlement program - for example, cut farm subsidies or reduce Social Security recipient benefits.
- Raise taxes to offset the cost of raising the loan programs annual limits.
PayGo rules only apply to mandatory spending programs. Since the Pell Grant program is really a discretionary spending program, it is not subject to PayGo rules. However, all discretionary spending programs, including the Pell Grant program, receive budgetary spending caps that limit the amount of money that can be spent on the respective program. In the case of the Pell Grant program, it is allowed to "bust" its spending cap to ensure that demand is always met.
PayGo rules are now in effect for both authorization and reconciliation bills.
Reconciliation Process
One of the budget tools the Congress sometimes uses is known as "reconciliation." A reconciliation bill - while rarely used at a national level - is one of the most powerful budget procedures the Congress uses to make large, wholesale changes in entitlement programs - usually in an attempt to reduce the deficit.
There are two other reasons Congress sometimes utilizes the reconciliation process. Sometime Congress will use reconciliation to introduce new spending legislation, as was done when Congress approved the president's 2001 massive tax cut legislation that increased the deficit. Why not just use the regular legislative process to enact those cuts? Because the reconciliation process has certain rules that are different from the way normal legislation is introduced and signed by Congress. For example, during the reconciliation process a majority vote could authorize those tax cuts without fear of filibuster that could otherwise be used.
The reconciliation process might also be used to introduce new entitlement programs, as was done last year when Congress passed the Higher Education Reconciliation Act (HERA) that reduced student loan costs by $13 billion but also created two entirely new grant programs: the Academic Competitiveness Grant (ACG) and the National Science and Math to Retain Talent (SMART) Grant.
FY 08 Budget Process Will Be Different
With the Democrats taking both the House and the Senate, the FY 08 budget process will be very different than previous years. When Republicans were a majority in Congress and held the presidency, the president's budget acted as a boilerplate for Congressional action.
Constitutionally, Congress has the authority to appropriate funds. Article I, section
5, clause 2 of the US Constitutions reads:
No money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law; and a regular Statement and account of Receipts and Expenditures of all public Money shall be published from time to time.
Now that Democrats control Congress, it is probable that Bush's FY 08 budget will see drastic changes; the Democrats have already expressed disapproval of the president's funding priorities.
The Constitution also gives Congress authority to develop all of the rules of the budget process. The process as we know it today is relatively new. In fact, it wasn't until the passage of the Budget Act in 1974 that the Congress began to have a more pronounced role in the Federal funding decision-making process. Many view the president's budget request as a policy statement more than a budgetary document. By outlining funding priorities, the Bush Administration is emphasizing where it believes money and resources should be spent.
In short, while the budgetary process is fairly straightforward, the environment in which it occurs is very political. The budgetary process is subject to the political maneuverings of House and Senate members as well as the president. The end product could be very different from what the president proposes in February.
When To Get Involved
Lawmakers are usually working on future budget proposals and simultaneously keeping track of current revenues and expenditures. For example, in May 2007, Congress will be working on the FY 08 budget but the Secretary of Education will already be taking preliminary steps to begin formulating the FY 09 budget.
Given the length of this process, financial aid administrators are encouraged to make their concerns about Title IV funding early and regularly. The federal student aid programs generally receive a lot of media coverage during the budgetary process. It is important for members to understand that student aid programs not only compete with each other for federal funding, but with all other federal funded programs as well. Decreases or increases in one student aid program do not necessarily mean an increase or decrease in another student aid program.
NASFAA continues to work with lawmakers to adequately fund programs to ensure the highest possible access to postsecondary education. NASFAA encourages financial aid administrators to contact us at GovtAffaris@nasfaa.org regarding your budgetary concerns and/or questions and to make your voices heard to your local Congressional leaders.
Additional Resources
By Justin Draeger
NASFAA Assistant Director for Communications
By Larry Zaglaniczny
NASFAA Director for Congressional Relations
Posted 03/01/07 to www.NASFAA.org. Redistribution to non-NASFAA institutions is prohibited. Please submit Web Site questions or comments to Web@NASFAA.org.
