The Balanced Budget Act of 1997 changed the BEA scoring rule for asset sales to allow the proceeds from asset sales to be scored as offsets to discretionary or PAYGO spending if the sale does not result in a net cost to the Government over the long term. Previously, the BEA prohibited scoring the proceeds from all asset sales, even if the Government broke even or made a profit by selling the assets. This created a disincentive to sell assets, because no credit was given for the sale proceeds and the loss of future receipts from income producing assets was scored as a cost. Under the new rule, the forgone receipts continue to be scored as costs, and if the asset sale meets the cost test, the sale proceeds are scored as offsets to outlays in the year of the sale.
This rule is only for scoring compliance with the discretionary caps and PAYGO requirements of the BEA. It is a test that determines whether or not BEA credit will be given for the assets sale, but it does not change the basis for recording receipts and outlays. In the budget, earnings on investments and proceeds from the sale of assets have always been and will continue to be recorded on a cash basis.
Background
Asset sales -- especially loan asset sales -- were used indiscriminately to meet the GRH deficit targets in 1986 and 1987 by increasing current receipts, even though the assets were often sold at fire sale prices that cost the Government over the long run. This helped to meet the budget year deficit target, but it increased deficits in subsequent years, and thus was widely seen as a gimmick. The budget committees ended this in the 1987 revision to GRH by including a provision in the Act that prohibited scoring savings for the proceeds from asset sales.
The scoring consequence of the 1987 revision was that sale proceeds would not count as savings, but the loss to the Government of future receipts from income producing assets would count as a cost. The cost had to be offset by enacting other spending reductions or by increasing receipts. As a result, committees tended not to include asset sale provisions in legislation.
The enactment of credit reform in 1990 eliminated the possibility of generating "savings" by selling loan assets at a loss. Under the present value calculation of cost for credit programs, selling loan assets at a loss would be scored as a cost in the budget and for BEA. Therefore, credit reform eliminated most of the problem that the asset sale scoring rule was supposed to address. After credit reform, the asset sale rule applied mostly to the sale of physical assets, such as the Elk Hills oil reserve.
1997 Rule Change
OMB, CBO, and the budget committees recognized in 1997 that the current rule no longer applied to most assets and that it provided perverse incentives. The rule was revised as part of the BEA amendments enacted in the Balanced Budget Act of 1997. Under the revised rule, a present value test is done for the sale of physical assets. The test is whether the present value of the sale proceeds exceeds the present value to the Government of continued ownership of the asset. To calculate the present value, an estimate of receipts and outlays is prepared for the remaining life of the asset, and these cash flows are discounted to the present. If the present value of the sale proceeds exceeds the present value of the future stream of net income (receipts less outlays), the sale proceeds are scored as an offset to spending, and the loss of future net income is scored as a cost in the years it would have been collected. If the present value of the sale proceeds is less than the present value of the future stream of net income, the previous scoring rule applies, and only the loss of the future stream of net income is scored.
The discount rate for calculating present value is the rate on a Treasury security of similar maturity to the remaining life of the asset plus 2 percentage points, to reflect the risk of continued ownership. The 2 percentage points are intended to handicap for private sector risk and taxes.
Note that the amounts that are scored are on a cash basis, even though the test is done on a present value basis. The cash basis for scoring is symmetric with budget scoring of the cost of asset acquisitions, which are recorded on a cash basis. The scorekeepers had no desire to change the cost basis of asset acquisitions and thus were unwilling to change the cost basis of asset sales.
Appendix
The asset scoring rule is as follows (see Appendix A of Circular A-11):
15. Asset sales --If the net financial cost to the government of an asset sale is zero or negative (a savings), the amount scored shall be the estimated change in receipts and mandatory outlays in each fiscal year on a cash basis. If the cost to the government is positive (a loss), the proceeds from the sale shall not be scored for purposes of the CBA or GRH.
The net financial cost to the federal government of an asset sale shall be the net present value of the cash flows from:
2. the net effect on federal revenues, if any, based on special tax treatments specified in the legislation;
3. the loss of future offsetting receipts that would otherwise be collected under continued government ownership (using baseline levels for the projection period and estimated levels thereafter); and
4. changes in future spending, both discretionary and mandatory, from levels that would otherwise occur under continued government ownership (using baseline levels for the projection period and at levels estimated to be necessary to operate and maintain the asset thereafter).