57

of a capital budget, the fluidity and objectives and how does that
play in or out?

Mr. SHERIDAN, Well, in an honest setting, the objectives, the mis-
sion statement is clearly recited at the outset and unless there is
a reason to change that mission statement, it continues with the
asset for its life. And during that period of time, should the mission
be diminished, the life either physically or effectively be reduced,
then the value of that asset is contracted. I would submit that un-
less there is some reason within the political process that the objec-
tives for the assets change that they would be still valid.

That is not to say that there would not be changes in mission
and changes in objectives over time, but if they are clearly enun-
ciated at the outset and are clearly put forward with the appropria-
tion and with the ongoing requirements, that is one way that you
can go back and track and say do we need this asset and is it justi-
fied in its current life.

Mr. FLANAGAN. Maybe if I give you a “for instance,” I can explain
this a little better.

We started I guess about 20 years ago now and will go on until
I am old and gray and my children are old and gray digging some-
thing in Chicago called the deep tunnel. It is an enormous and
wonderful hole in the ground that employs lots of local folks and
costs the Federal Government of the United States bazillions annu-
ally. The efficacy for that originally was to take storm water from
the Chicago area and help out the sewage system. The underlying
need for it, it was a wonderful experiment in actually having an
unstated role of being shelters in the event of perhaps a nuclear
holocaust.

Our objectives have changed there. Chicago is no longer deeply
worried about that, but yet the problem goes on because of the in-
ertia it has built up on its own. That would be certainly familiar
under the rubric of a capital expenditure, this sort of project, I
would imagine, by whatever definition and qualifications by the ex-
cellent question raised by Mr. Chu.

If we had such a capital budget in here and we have had a fluid-
ity in objectives, we have a different mission, yet we have an enor-
mous expenditure in this already and, not to mention, an oper-
ational cost that is quite high as well, how would business in its
experience deal with this problem?

Mr. SHERIDAN. Well, they shut down the Edsel plant and if the
product does not sell and if it has no useful means, those assets
in the future appropriations and expenditures would be diverted to
some other project. It would be written off and you would start
with a new slate. That may be more difficult to do within a politi-
cal environment, but that’s what we'd do.

Mr. FLANAGAN. Thank you. I yield back, Mr. Chairman.

Mr. Horn. Thank you. The gentleman from New Hampshire, Mr.
Bass.

Mr. Bass. Thank you very much, Mr. Chairman.

A question for you, Mr. Chu. In your testimony you mentioned
on page 2 that a thorough examination needs to be made of the
roots of this opposition, meaning opposition to capital budget.
Could you just briefly list what the roots of this opposition are?


121

Part Two
(Case Studies in Selected States

Using formulas to establish permanent renovation pools and setting up
special appropriations to maintain, repair, and replace roofs, and for
heating and air conditioning systems.

Placing responsibility for maintenance outside of the state by leasing
space.

In the overall maintenance program there is the need to establish a lst
of projects with legitimate cost estimates and a reasonable schedule
including realistic priorities. Maintenance needs based on facts are
‘more easily appropriated, whereas programs rooted in ratios, historical
‘expenditure patterns, educated guesses, and similar subjective processes
are often left without funds.

‘The failure to understand the total assets and condition of property can
be traced to two primary causes:

» Asset information is collected for financial/accounting purposes.
and not for budgeting purposes.

» In.an attempt to centralize the process, efforts are made to
standardize a system that cannot meet the legitimate and different
needs of agencies. For example, higher education facilities are
analyzed for their ability to provide adequate education and lab
space and may not relate to mechanical or equipment or
circulation space. Deparment of Corrections may need
extremely detailed maintenance programs to facilitate performing
‘maintenance through the use of untrained inmate labor.

‘The key to successful maintenance programs is to identify common
‘elements of information that all systems should provide, gather only that
information electronically from agency capital management programs on
a periodic basis, and let the agencies move forward to procure systems
‘Of use common systems in a way that facilitates their individual needs,
‘What is needed is to find more efficient ways to identify maintenance
needs, establish costs, and evaluate priorities first at an agency level and
then ata statewide level. Armed with this data, capital analysts can
equitably evaluate bow to allocate available resources.

Page Capital Budgeting in the States: Paths to Success


23

bonds will not exceed 10 percent of total general fund disburse-
ments in any fiscal year.

I have attached a copy of those 10 principles to the testimony we
are providing today for your information and reference.

Over the years, firm adherence has been achieved to these finan-
cial principles and financial decisionmaking has allowed the county
to maintain its triple A rating through two recessions, including
the most severe recession and has established the county as a
model of sound financial management.

Mr. Davis has already mentioned that Fairfax County was re-
cently named the best fiscally managed county in the Nation.

Second, we believe the Fairfax County capital budgeting process
focuses attention and promotes consensus on community goals and
needs. The very process of annually identifying, evaluating,
prioritizing, and Programming public facility needs over a 5-year
period helps match the expectations of the community with the re-
alities of economic situation at hand.

A case in point, the recession in the early nineties from which
we are still Tecovering had a significant impact on Fairfax County
and its ability to fund capital project construction. Faced with the
declining revenue base and associated expenditure reductions, the
capital budget had to be downsized to fit the economic cloth.

ecause the board established limits on debt service as a per-
centage of the total operating budget, a total of $220 million in
bond funded capital projects had to be deferred. The board and the
community worked to establish priorities, including public edu-
cation, an adult detention center, and completion of a major road-
way in Fairfax County, the Fairfax County Parkway. Those all re-
mained in the capital program as we moved forward. Other projects
simply had to be deferred.

In addition, the reduction in county resources required eliminat-
ing only the most critical emergency repair and maintenance
projects from the pay-down capital program. As the county revenue
base recovers in reaction to the current economy, our ability to in-
crease operating expenses to incur additional debt service, addi-
tional resources are becoming available for the restoration of col-
lected capital projects. These restorations are program based on
continued reprioritization of community goals and facility needs.

Third, the Fairfax capital budgeting process encourages more ef-
ficient government administration. The county capital improvement
program promotes coordination among governmental agencies and
provides a check on potential overlapping or conflicting projects.
Decisions related to site selection and the timing of construction ac-
tivity can be made in relation to improvements planned by other
county agencies, a variety of the county agencies.

For example, our planned roadway construction projects are
closely coordinated with State roadway construction to minimize
community disruption, to reduce county costs where possible, and
to maximize the impact of improvements in any given area by pro-
viding a more efficient roadway network all at the same time.

Fourth and last, the county capital budgeting process fosters a
sound and stable financial program. Through the 5-year capital
planning process, the need for bonds or other financing mecha-


COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT
WILLIAM F. CLINGER, JR., Pennsylvania, Chairman

BENJAMIN A. GILMAN, New York CARDISS COLLINS, Minois
DAN BURTON, Indiana HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland ‘TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut ROBERT E. WISE, Jn., West Virginia
STEVEN SCHIFF, New Mexico MAJOR R. OWENS, New York

ILEANA ROS-LEHTINEN, Florida EDOLPHUS TOWNS, New York
WILLIAM H. ZELIFF, JR, New Hampshire JOHN M. SPRATT, JR., South Carolina
JOHN M. McHUGH, New York LOUISE MCINTOSH SLAUGHTER, New
STEPHEN HORN, California York

JOHN L. MICA, Florida PAUL E. KANJORSKI, Pennsylvania
PETER BLUTE, Massachusetts GARY A. CONDIT, California

‘THOMAS M. DAVIS, Virginia COLLIN C. PETERSON, Minnesota
DAVID M, MCINTOSH, Indiana KAREN L. THURMAN, Florida

JON D. FOX, Pennaylvania CAROLYN B. MALONEY, New York
RANDY TATE, Washington THOMAS M. BARRETT, Wisconsin
DICK CHRYSLER, Michigan GENE TAYLOR, Mississippi

GIL GUTKNECHT, Minnesota BARBARA-ROSE COLLINS, Michigan

MARK E. SOUDER, Inc

1a ELEANOR HOLMES NORTON, District of

WILLIAM J. MARTINI, New Jersey Columbia
JOE SCARBOROUGH, Florida JAMES P. MORAN, Virginia
JOHN B. SHADEGG, Arizona GENE GREEN, Texas
MICHAEL PATRICK FLANAGAN, Illinois CARRIE P. MEEK, Florida
CHARLES F. BASS, New Hampshire FRANK MASCARA, Pennaylvani
STEVEN C. LATOURETTE, Ohio CHAKA FATTAH, Penneylvan
MARSHALL “MARK” SANFORD, South —

Carvlina BERNARD SANDERS, Vermont
ROBERT L. EHRLICH, JR., Maryland (Independent)

JAMES L. CLARKE, Staff Director
KEVIN M. SABO, General Counsel
JUDITH MCCoy, Chief Clerk
Bup MYERS, Minority Sta/f Director

GOVERNMENT MANAGEMENT, INFORMATION, AND TECHNOLOGY SUBCOMMITTEE.

STEPHEN HORN, California, Chairman
MICHAEL PATRICK FLANAGAN, Illinois = CAROLYN B. MALONEY, New York

PETER BLUTE, Massachusetts MAJOR R. OWENS, New York
THOMAS M. DAVIS, Virginia FRANK MASCARA, Pennsylvania

JON D. FOX, Pennsylvania ROBERT E. WISE, JR., Weat Virginia
RANDY TATE, Washington JOHN M. SPRATT, JR., South Carolina
JOE SCARBOROUGH, Florida PAUL E. KANJORSKI, Pennsylvania

CHARLES F. BASS, New Hampshire
EX OFFICIO

WILLIAM F. CLINGER, JR., Pennsylvania = CARDISS COLLINS, Illinois
J. RUSSELL GEORGE, Staff Director
MARK BRASHER, Professional Staff Member
ANNA D. GOWANS YOUNG, Professional Staff Member
ANDREW G. RICHARDSON, Clerk

qa


17

Part Two
Case Studies in Selected States

Decisions whether to lease or purchase are made mostly on the basis of
long-term cost comparisons. Recent decisions have been made to
purchase facilites that for some years had been leased. The rising cost
‘of continuing the lease simply made it financially prudent to consider
purchase of the facilities.

Maryland ‘Maryland has a formal process established in law for setting the amount
of G.O. debt to be authorized each year. The law establishes a Capital
Debt Affordability Comminee, chaired by the State Treasurer and
including the Comptroller, the Budget Secretary, the Transportation
Secretary, and a public member.

{In making its determinations, the Commitee strives to account for the
same factors used by rating agencies in determining the state's bood
‘ating. In particular, the Commitee seeks to keep state tax-support debt
outstanding under 3.2 percent of state personal income and to keep debt
service under 8 percent of available revenues.

‘State tax-supported debt in Maryland includes G.O. debt, revenue bond
debt of the Department of Transportation, the Maryland Stadium
‘Authority, and capital leases. Until recently, the debt affordability
process took the planned level of transportation revenue debt and other
types of tax-supported debt as a “given,” and G.O. debt was planned
within the remaining capacity. More recently there has been concern
about the transportation program and other calls on state resources
“crowding out” the traditional G.O. bond program.

‘The amount recommended by the Committee becomes the ceiling for
the Governor's proposed budget and for the General Assembly's
authorization.

State general funds are used for items where the use of tax-exempt
funds are restricted by federal tax laws. This principally means loan
programs for housing, economic development, and certain
eavironmenaal loan funds. If funds are available, general funds also are
used for state construction projects and capital grants in exactly the
‘same way as bond proceeds. The amount depends entirely on the
amount available in the annual budget process, The state strives to use
annual surpluses and other “one-time” revenues for capital projects and
other “one-time” expendicures.

Non tax-supported revenue debt (primarily in higher education,

environmental programs, and other loan programs) are budgeted and
issued according to the need and capacity of the issuing agency.

Page 56 ‘Capital Budgeting in the States: Paths to Succem


66

STATE ADMINISTRATIVE MANUAL
CAPITAL OUTLAY

INTRODUCTION (New 9/91) oy

‘This ronal ares be requirments tom the prspecve of ost dpe, te he whch mu
fhe Department of General Sevics to cary out ‘capital projects. For hseiee prs beeniniiene std

i
2
HH
H
fe

of cach fiscal year.

DISTINCTION BETWEEN STATE OPERATIONS, LOCAL ASSISTANCE
AND CAPITAL OUTLAY (New 9/91)

6528
‘Acruisiton of real propety; Purciass rental, leasing and construction of facilities and stroctures; repeir,

repalr, maintesance, ead smaccate rplecemeat (othr than sracturs) oe considered » cost of conducting
surety ein bans nd ofr ay tied Sto Opens. Aaya Property scevittion or
new construction, extension, of boltermeal (imcloding interior

capital outlay because they ere necamry to sccocumodale program change, Beat or baw cots of faces 9

(Capital outlay construction project) is. srareriaty bee ax expla ontay cae a ene, complatn
the project. (See 8AM Section 6520, Iihustration 1.)

TLE 6501 (Cont. DECEMBER 1991


17

Table 4
Organization of the Capital

Let Whe Makes Documents
State Authority Requests _ Produced

‘Alabama ‘Stanite A ‘Governor's Execuuve Budget

Alaska Sune A Project Description and Justification

Arizona Sunae AE Capua tmprovement Plan

Arkansas ‘Approprisuions by Agency/Project A Biennial Budget Manual

Cabfornia Annval Budget Acts AE Budget Change Proposals Budget Estimates
Colorado ‘Sutuie rn Proyect Request. Pronued Summary (0 ¥F
‘Connecticut Statues, Special & Public Ace A. Annual Capiat Budget

Delaware Sue Code AE CIP Project Desenption. Operaung Budget
Flonda Sutue A ‘Agency Capi Improvement Prg Gov Capsal inp Ps
Georgia Sure Code A Govemor's Annual Budget Report. Amended
Hosea Revised Suatwes AE Muli ¥r Program Financia! Plan, Execute Boopr
tdaho Sue Code A 16 Yr. Plan Produced by Division of Publis Warts
unos AAppropnations & Bond Auth Bills A 8.E Capita! Budget

Tegiane Sanue AW Sue Budget Commitice Recommendations

Towa, Sure Code a Operating Budget

Kansas ‘No requirement for Govemor A Governor # Budget Report

Kentucky State Revised Satutes a Executive Branch Budget,

Louisiane Sure AE Capual Outlay Actand $ ye Budget Plan

Maine Annual Budget Acts a Capua Budget

Marvtand, ‘Sute Law and Approprutions AEP Budget & $ Yr Capital Improvement Program
Mastachuseas No response No response No response

Michigan ‘Anaual Appropriations AW ‘Annual Budget Document

Minnesota Surwe AHE Capual Budget Recommendations

Misssippt No response A Governor's 5 y¢. Capua Improvement Pin
Missoun Sate A Governor s Executive Budget

Montana ‘State Code AK ‘Capual Construction Program. Mayor Mainienance Paz
Nebraska ‘Sunue AH Governor's Executive Budget

Nevada No response No response No response

New Hampshire Statute a Governor's Executive Budget

New Jersey ‘State Budget Law AP. Governor's Budget Rec & Capial Improvement Pian
New Mexico Statue AEH ‘Capual improvement Plan and Forms

New York ‘State Finance Law APA Capua Projects Bul. $ ¥¢ Capua Plan

North Carolina Appropriation A Capua! Improvement Document

North Dakota A Capual Construction Form

bio AEP Governor s 6 Year Capsal Improvement P30
‘Oklahoma A” Sue Finance Forms

Oregon A Budget Overview, &Ys Plan, Project Dessnptva
Pennsylvania A Governor » Exeeuive Budget

Rhode Istand A Capual Development Budgeu Operating Burger
South Carolina No overall authority A Annual Permanent Improvement Plans

South Dakows —_ledividual bule a ‘No capual budget

Tennessee Division of Budget a Budget. Project Descrption, Project Summary
Texas Part of appropriations process A Budget Requests-Conuiruction Schedules

uh Suunue A Budge Documents, $F Plan

Vermont Suanee A Capit Budget Ree:

Vueina “Appropraion AS nN ‘Budget Bul & Budget Document

Washington a CCapual 6 yr Program. Appropration Bul

West Virgina Suatute/Case by case a No reaponse

Waconia Sunse a Capua Budget Recommendations

Wromng Statute A Capua Outay Budget Request

pe Home Rule Act AE Capeal Budget & Capral Improvement Pian

Key Ax Agencies B= Boards E=Electe Officials H «Higher Esacavon P= Proate Organuations PA=Public Autores
Page 1S Capital Budgeting in the States: Pats w Saves


13

“(iii) Operating surplus/deficit before interfund transfers.

“(iv) Interfund transfers.

“w) Operating surplus/deficit.

“(vi) Federal expenditures financing the operating expenses of State and
local governments,

“(B) For the investment budget:

“(i) For federally-owned capital: the office buildings, equipment, and other
assets that are owned by the Government for use in its operations together
with a showing how such assets will improve the efficiency and effective-
ness with which government agencies carry out their missions.

“(ii) For developmental investments (including grants and loans to non-
Federal entities for improving physical infrastructure, research and devel-
opment, and investment in human capital through education and training):

e amounts to be invested together with a projection of how such invest-
ments will improve the prospects for higher rates of economic growth on the

future.
“2) For oth categories of investment budgets, the following information will be
ted:
aie?) Investment funds together with investment revenues.
“(B) Financing requirements before interfund transfers.
“(C) Interfund transfers.
“(D) Projected effects upon economic growth.

(3) The investment budget shall represent only the major activities, projects, and
programs which support the acquisition, construction, alteration, and rehabilitation
of such investment assets and the major programs and activities which support non-
military research and development, education, and job training. All other activities,
projects, and programs shall be represented in the operating budget.”.

%b) CLERICAL AMENDMENT.—The table of sections for chapter Tot title 31, United
States Code, is amended by inserting after the item relating to section 1105 the fol-
lowing new item:

“1105A. Capital and operating budgets.”

Mr. Horn. Thank you. very much, Representative Thornton.

I would like to ask Chairman Clinger if he would like to begin
the questioning.

Mr. CLINGER. Thank you very much, Mr. Chairman.

I thank both of our witnesses for their very fine testimony and
for their understanding of what we are trying to accomplish with
this legislation. As I mentioned in my opening statement, we have
always had difficulty convincing Directors of the Office of Manage-
ment and Budget of the wisdom of this approach. I should point out
at the outset we are not talking about a separate and distinct cap-
ital budget, we are talking about a capital budget within the uni-
fied budget so we are not losing what we see as a raid upon the
unified budget concept.

The thing I wonder if you could respond to is that the argument
that is made, whether it is Mr. Schules or David Stockman or Dick
Darman or Alice Rivlen, is that you are going to fence off a whole
segment of spending here and you are going to build a constituency
and it is just going to be a device to use to hype more increased
spending on these sorts of things. You are going to insulate this
whole thing and it is going to be very difficult to make the kind
of cuts that are necessary.

Do you think that is a valid criticism of the concept of capital

budgeting?
ir. MINETA. Well, from my perspective, Mr. Chairman, it is not.
Of course, I think part of it because I also bring a prejudiced view
about it. When I think about a capital budget, I think of physical
capital, fixed assets.

Now, we on our committee deal with physical assets that are
funded by trust funds, so how can it be any different than, let’s


126

ital Budget Reform
goal of the capital budget process is
to make informed investment decisions
according to a fait, open and objecnve
process and vo effecrvely manage both
DPhvsieal and tinanesal ses

a the past, Minnesota's capital budger-
ing process was characterced by dueling,
wish lists and hele projec analvis. The
governor and legislacve leaders vowed co
‘hange ths situation in order to umprove
the public’ conndence vn state government,
and policy official’ confidence that
professional analysis would win our over
labbring

A central element of capital budget
tform so pronde greater empatis on
strategic planning over a six-year planning
horizon. Agencies most clearly deni
their roles snd responsibiles, long-range
‘strategic plans and six-vear c: budget
plans, and then
apital requests ro thew strategic plans
‘This disciplined process allows more
intelligent investment decisions to be made
ater consideration of requests in their
Stuatepc context and on the basis of
uniform and systematic proyec planning,
data.

Th addition, the department of finance
developed a computerized debe capacity
‘model that tracks multvear eequests and

ips manage capital decinions within the
state's debe capacity at al poses in the sx
peatarce ‘This ensures consitent funding
sharp peaks in capital budget author:
‘von which might otherwise lock the state
into unfavorable cash flows and lon
debe service commitments, thus consuming
financing capacity in future years.

in combination with a svx-veat debt
capacity model, agency strategie planning
produces rolling long-term plans. Based on
theve strategie plans agencies present
requests tora sie-¥ear peri. Action on
some items 1 cequested inthe immediate
biennium, Other projects are merely.
sdentited tor considecation in the out
‘eats, Al requests, however, ae plugged
ineo the debt capacity model which predicts.
future debe service and available bonding
‘capacity within che socvear ame frame,

‘Overtime, the longceem plans are
updated. Projets not funded in one
‘ennium can be reconsidered in a tucuce
brennium. along wich new cequests.

“The concept Of a sequential sens OF
redesign, design and consteuction
Sppropriavions was tre introduced ia the

1594 Session. The idea 0 spend. lle

1
CAPITAL PROJECT SCORING CRITERIA
Crnerte, Ratings ‘Venwe Maximum core
* Fea tales Yn
emergency 700 70
(Ceticel log aby YN 700 70
Per cameramen YN 700 70
‘Maximum crticel core 70
1 oretegic
Gadey cota cas oaumaies tae
~ onaa amr 108
‘Aqua 2607SI00 100
(User and nonatse Rrancing o100% ‘0-100 100
2000 ©
Carmine i owt exer ian ‘500 0
‘aera srenags| 70
‘taxiemum soore (ol crteria) 7.0

foc predengn aces before spending
more for design and betore spending a
considerable sum for vonstraction
[Agencies are expected to sequence thei
‘requests over multiple brennan this
‘manner. By small investment inthe tront
end of a project chrough this leveraging,
technique, decision makers receive substan:
tial information early an the ite ot a project
before commiting substantial resources

‘Other significant improvements include
the comprehensive assessment ot the
‘condition and surtabiiey ot ‘apial

eewurses tor the

inrtoduc:
tena to evaluate agency
requests on a statewide basis More
accurate project cost eximates are pro-
vided, and the long-term sansequences of
‘capital budget deciwions na agency
‘operating budgets are sarctully examined,
6 well

Improved cost estimating not only applies
co capital expenditures but to sperating
‘outs, a5 well, All capueal requests must he

resented with full denifcation of anens
pated cost umpacts on agency nperanna

5. These estimates are known as
“facie notes” and serve asthe basis tot
subsequent operating budget adjustments
the capreal projects approsed

Each capital budget request » sited bs
2 team trom the departments of inane
and administration. The 1994 seywein wa
the first time scoring was incorporated ister
the seats caprtal budget. The soning
system 1s designed to measure bath the
overall need tor the project and the relative
urgency for an ammediate appropeat

Scoring s based on statewide s+
that ate grouped into one ot ran stew
‘es—eeincal or strategic. a8 depicted 0
Exhibit 1. Ceitwal cetera determine tthe
project 5 urgent. unavoidable and regustes
ction ia the wurrent lepislanve session
Lite-satery emergencies. legal abuts and
binding cormmutments tall sats this «a
egory. A project evaluated he sine the
crincal cetera receives a cure tm one
‘maximum possible wore.

Seratepe criteria measure cash priest
straregic need and value to the state Por
example. how closely 1s the privet inaed
to the agency's scatepic mswon”
the scarewide signtticance ofthe prs
Seratepic criteria also evaluate the 42m
of nonstate ninancing brouxh tte
project, operating savings achieved 4d
whether the project reduces achiesed 4m
whether the project reduces the wate ~

masntenance needs. Varianie
Scoring uted tor these criterias ai 7»

ean oes 199 # Geanasanes Base Ric .


72

Table 1
Defining Capital Expenditures

Suate How De You Define Capital Expenditures?
‘Alabama Renovations, repairs, major maintenance, new construction, land purchases. and equipment

Alaska ‘Asset with an anticipated life exceeding one year and a cost exceeding $25,000

Araona Building renewal, land acquisition. infrastructure, and capital projects

Arkansas No specific definition

Cabfornia Facies improvements Includes related planning and fixed equipment cosis

Colorase Purchase of land: purchase, consiruction or demotion of buildings. purchase and wsailavan al equiprrent
Connecticut Expenditures that result in acquisiion or addons to fixed assess.

Deuware Includes major equipment xcquustons if a east 10 years

Fronds Real propeny. including addons, replacements, major repaurs. and renovations which extends uselul le
Georg Purchases of and. construction of new facsluy replacemen/major renovation. and ale umprovemenis
Hawa Permanent, non-recurring expendiivres on new of umprovements fo existing faciives

Nano Construction, remodeling. and maunienance of buldings and other structures

Huwnow Repair, maintenance, renovauon, remodeling, rehabiblation of existing facives: consirusiion of new files
Induna ‘Construcuon, rehabiliation, repair. purchase and sale of lind, equipment, and grants 0 municipaives
fous Construction, renovation. of improvement of bulkiygs oF grounds exceeding $0 000

Kanwe New construcuon, remodeling, zing. rehabiilalion. ond repay.

Kenucky Capit construction above $200,000 ane major equipment above $50,000.

Lousiana Acquiring land. buildings. equipment or for permanent umprovement

Mane Renovations, repair, major maintenance new consiruction, land purchases and equipment

Maryland ‘Acguittions wath a 15 year life excluding vehicles and supplies

Massachosens No response.

Planning, ecquistion, construction of buddings and equipment and remodeling. repair
‘Acquutiion, construction. original furshungs and equipment, renovations, and mayor eepa

Includes planning. design, land/building acquunwion. demoliion, new construction. furnshings. equipment
Includes construction. acquisiton of real propery, demolinon, restoration. rehabilMation_ equipment purchase
Building and construction defined wa saute

No specific defintion

Nevada, No response
New Hampshire Assets with useful life of § years and cost exceeding $30,000

New Jeney ‘Acquisition of land, construction. repairs_ equipment shove $50,000, long term leases

New Mexo ‘Renovation and repairs, new construction, land acquuion, vehicles, and equipment

New York ‘Acquisition, construction, demolition of fixed asset mayor repatirenovation, preliminary studies and equipment
Nonh Carolina Renovations, major repairs, deferred maintenance, new construction, land, and major equipment

Sonn Dakouw No specific defintion

Ono Renovations. new construction. land purchases and equipment

Okiahome Purchase of land and buildings. Consirucuon of major repair. major purchase of equipment

Oregon Improvements which prolong the Le or add value to the property

Penntylvania Construction, renovations, amprovements, equipment, uemishings, and acquittion Estimates lie above

Rhode island, Construction, renovation, repair, ehabutalion. land acquisiion, buddangs an equipment

Souh Caroline Capua e fea over $25,000 according 19 GAAP definition

South Dako ‘Ne specific defintion

Tennessee Renovation, mauntenance of certain size, addons, new faculties

Teas Renovation, major repairs, new construction. land. equipment purchases

van Long-term asset costing more than $1,000

Vermont New constrvcion, land scquitition, majot mauenance and repasss above $25,000,

Vagina Real propeny acquisition, improvements of $250,000 =. new construction of $250,000 stand alone equ pme=
Washington Design, construction, renovation, and acquuiion of long-ierm asteus

Weat Virgina Includes buildings and/or land wath appropnation effect for 3 years

Wisconsin Includes lind. buildings, faciiner, equipment, as well as remodeling. reconstruction, and maintenance
Wyoming New consiruction. acquisition of land, reconsinacton mayor unprovements above $10,000 for 10 years

oc Permanent improvement to « fixed asset with useful Ufe excending 3 yeary

Page 10 Capital Budgeting io the States: Paths to Success


30

The alternative to a formal capital budget is the back door method of creating a
capital budget through the use of more “off-budget” agencies, categories and
projects. While this back door approach works toward the goal of correcting the tim-
ing mismatch between outlays and benefits it also reduces accountability and does
little to improve public understanding.

We believe that New York City has an excellent capital budget process—what we
lack is funding. In fiscal year 1995 federal aid will provide New York City with only
5 percent of its capital needs. Further, the budget reductions contemplated in the
“Contract With America” will have a negative impact on both the capital and the
operating budget of New York City. For example, under provisions found in the Con-
tract With America, The Metropolitan Transit Authority (MTA) will lose $44 million
in funding starting in fiscal year 1996, rising to $200 million in fiscal year 2002.
If this portion of the Contract becomes part of the federal budget, The MTA will
be forced to curtail its’ current level of needed capital improvements and, in the long
run, pay the higher costs associated with the maintenance of deteriorated tracks
and equipment. The Contract will also have a negative impact on the upgrading of
sewage treatment facilities and public housing.

We hope that the creation of a federal capital budget will help expand the na-
tional capital program and provide assistance to local governments that need to re-
build their infrastructure.

Mr. Horn. Well, thank you very much. I think all of you have
given excellent testimony.

Let me just ask you, Mr. McMahon, because I am curious: on the
5-year life standard, do some of the buildings which you put in the
capital budget include extensive scientific equipment or computer
systems that come with that initial construction of the building?

Mr. McMaAuon, Yes.

b Mr. Fionn. And if so, do you include those as part of the capital
udget?

Mr. McMaHow. Yes.

Mr. Horn. You are assuming more than a 5-year life?

Mr. McMAHOoNn. Yes.

Mr. Horn. OK. Because that creates a major problem as to how
you sort the equipment that comes with the building to make it
functional.

Mr. McManon. Right. As part of the infrastructure that is nec-
essary to maintain that building, we believe that should be part of
the budget. And the bonds that are issued associated with that
project will reflect the period of usefulness of the asset. So that if
the asset only has a 10-year life, the bond that is issued with that
would have that 10-year expiration date.

Mr. Horn. OK. Let me call on Chairman Clinger. I will hold my
other questions until later.

Mr. CLINGER. Just very briefly, one of the things that I feel a
capital budget at the Federal level could be very useful, and it is
a planning device, as a planning tool: which would enable us to do
the sorts of things you are able to do, which is to take a look 10
years out? What is our needs, 10 years out, 4 years out, I think
you said, and then 1 year out?

Recognizing the Federal Government is no longer the provider of
all good things, but nevertheless, there still is a need for an inter-
face between the Federal Government and the State government
and the local government in terms of infrastructure planning, the
fact that the Federal Government does not have a Federal capital
budget and, therefore, there tends to be a stop-go kind of funding
for a lot of the infrastructure programs, whether it is highways,
airports, water and sewer systems, or whatever.


101

Part Two
Case Studies in Selected States

Rhode Island ‘Repairs and renovations have usually been in the capital budget, with
‘only minor repairs and preventive maintenance financed in the operating
‘budget. This policy resulted in postponing many repairs until they
approached crisis proportions. Repairs at this stage became more costly
and diverted attention from establishing an ongoing inventory of repair
needs. Furthermore, with bond funds being project specific the state
ddid not have the capacity to address emerging maintenance problems.
Instead, items would generally be placed on bold for a subsequent bond
issue.

In recognition of this problem. asset protection legislation was enacted
that dedicated a portion of loaery receipts for asset protection activities.
‘While reserving operating revenues for ongoing asset protection was a
giant step forward, rwo issues plagued the program: (1) the lack of an
inventory on the general condition of state assets precluded any needs
evaluation process; and (2) the pressure to include remodelling which
exceeded normal asset protection as an eligible activity. The asset
‘protection program, which took effect July 1, 1986, survived until FY
1991 when, with a $250 million state deficit. the reserved funding for
asset protection was suspended

Coincidentally, this state was in the midst of the FY 1991-2 biennial
capital budget process. In recognition of both asset protection
‘requirements identified by. agencies in their capital budget requests and
the suspension of asset protection funding over the two ensuring years,
$19.5 million two-year bonded asset protection program was
resented to and approved by the voters in November 1990. As
‘opposed to previous bonded maintenance, this issue is not project
specific and therefore provides flexibility to intervene in unanticipated,
priority situations.

‘At this juncture, maintenance/asset protection activities will continue to
bbe proposed for bonding. Accordingly, state agencies are required to
identify their current and proyected asset protection needs as a distinct
element of the FY 1993-4 biennial capital budget. Along with seing
Priorities, maintenance needs must be identified as: (1) backlog
Tequirements - needs as of FY 1992 and, (2) prospective requirements -
needs projected yearly from FY 1993 to FY 1997.

In summary, in an anempt to provide a continuous stream of operating
funds for repair and renovations, statutory language was established
specifying the proportion of receipts to be available for asset protection,
This stanutory language has been suspended, and to fill the financing
void asset protection has been financed with general obligation bonds.

Latited Capital Budgeting in the States: Pasha to Success


37

Mr. FLANAGAN. The interstate highway system is not a local
bridge across the north branch of the Chicago River. The interstate
commerce system is not a downtown transit system. That is not
interstate commerce.

Mr. McMAuon. But that bridge is part of the interstate network.

Mr. FLANAGAN. What is interstate commerce? If we are going to
extrapolate it that far, then anything that provides a mode of
transportation across a road or pavement somewhere is interstate
commerce, then we will just take over the transportation budget
here of the Federal Government.

I don’t mean to be purposely contrary with you and I am doing
this purposely to make a point, and that is, would it not be better
to withdraw from projects like these, to withdraw from having to
put expenditures into things like this, turn it back to the States
and get the Federal Government out of these businesses entirely,
consequently having—balancing the budget along the way, provid-
ing general economic health and permitting the State revenues to
increase proportionately with the decrease of the Federal revenues?
Shouldn’t that be our long-term goal, to let Illinois or New York,
whatever the case may be, to make their own decisions as they
need best where they are?

Mr. McMAuon. Under a very thoughtful strategy for fiscal fed-
eralism where each branch of government had responsibilities for
those specific charges and those are articulated, I think that would
be an excellent approach, but with that would also have to come
the release of the tax dollars that are necessary to fund those very
important initiatives, and it is a difficult area, difficult question.

T agree with you. I don’t think there are easy answers, but at
this current point in time, I don’t know that local governments
have the wherewithal to make the massive investments that are
necessary to rebuild the infrastructure of this country and be com-
petitive on their own.

Mr. FLANAGAN. I would tell you on the scale on which you are
talking, the Federal Government running hundreds of billions in
debt every year, I am not sure that we have the wherewithal at
the Federal level with our current structure to be able to do it at
al

The Federal Reserve prints the money and we kind of collect it
up and kind of pass it out and with some rhyme or reason occasion-
ally, but I question seriously perpetuating the system that does a
job this badly. And maybe some of the other panel members have
a comment on that.

Ms. HANLEY. I would be—thinking, for example, of this region
where we have WMATA, which is a tri—a multijurisdiction and
the only one in the country of three jurisdictions, the District, Vir-

inia, and Maryland, there are certainly some national interests in

aving the economy of this region be strong. I think there are some
national interests, particularly in transportation, of the economic
benefits of transportation, whether or not it be just in one particu-
lar jurisdiction, or the bridge may be in one area, but a lot of other
people may go over it, and I think there are some national interests
there in keeping the infrastructure strong so that the economies of
our cities and States can be strong.


62

We are grateful to the National Academy of Public Administra-
tion for being present here, and we appreciate the expertise that
both of you have provided from the various experiences you have
had in government.

Since we are continually trying to get any administration to do
justice to the Chief Financial Officers Act, I am sure that we will

e talking with you, Mr. Sheridan, as to how we could improve that
system and are the chief financial officers doing what they ought
to be doing? We had an excellent series of hearings last year that
Mr. Spratt’s subcommittee had, and we intend to pursue that every
year until we are all satisfied that the agencies finally have proper
financial statements that reflect their activities.

So thank you all for coming. It has been very helpful. We will
be reviewing the documents. There might be some questions that
I will send to you on behalf of the staff. Mrs. Maloney may well
have some questions from her side. And we would like to include
all those in the record.

And saying to the reporter that as is our usual procedure, we will
put the statement in the record after the individual is introduced
unless they read the whole statement. I think only one witness did
that and so we won’t repeat it if he did it.

But we will get every bit of information you have and you would
like to send us we would appreciate it. So thank you again for com-
ing and thanks to the committee for sticking it out until 5 o'clock
on Thursday afternoon. We appreciate it. The meeting is ad-
journed.

(Whereupon, at 4:56 p.m., the subcommittee adjourned, to recon-
vene subject to the call of the Chair.]

(Additional material submitted for the record follows:]


33

Ms. HaNLEY. Yes.

Mrs. MALONEY. And you noted in your testimony, and congratu-
lations, that since 1975, Fairfax County has had a triple A rating
from both Standard and Poors and Moody’s Investment Services,
the Nation’s leading rating agencies. You estimate that since 1978,
the rating has saved your county $110 million in debt service costs
on general obligation balance.

Can you tell us more about the process by which the rating serv-
ices evaluate your local bond offerings? And I would like to ask Mr.
McMahon the same question, and what are your ratings right now?

Ms. HANLEY. I will let Mr. Leidinger go into the process in detail.

Mr. LEIDINGER. First of all, we stay in regular contact with the
folks at the rating agencies and we do that on a regular basis. We
do that on the telephone. They come to visit us and spend time
with us prior to each bond sale we have. We spend probably a day
in Fairfax with them discussing the projects included in the bond
issue, take them on a tour of the county, helping them appreciate
the understanding and dynamics of the credit, if you would, and
underlying issues and strengths that are in that credit. They know
us very, very well.

We share financial information with them regularly and com-
pletely and as financial issues arise, it is not beyond us to pick up
the phone and just talk with them and tell them what we are
thinking about.

Mrs. MALONEY. Do you believe it is your strict emphasis on cap-
ital budgeting that you have that enables you to have this fine rat-
ing?

Mr. LEIDINGER. Yes. They are very happy that we have that, and
more particularly, since it is self-imposed and it has been self-im-
posed and maintained over an extended period of time.

Mrs. MALONEY. And could you answer the same question? What
is New York City’s bond rating now?

Mr. MCMAHON. Well, unfortunately, we don’t have as good a
bond rating as Fairfax. We are significantly below that, Standard
and Poors has us at A-minus, Moody’s has us as BBB-plus. Even
though we have a rigorous process in New York City, the pressures
on the expense side of the budget have given us that rating much
lower than we would like to be at.

As the mayor and the city controller who have responsibility for
negotiating those ratings with the agencies, although the city coun-
cil, we also spend time with them and try to comfort them in the
fact that we ultimately will do what we can to balance the city’s
budget, but as you know, there are tremendous pressures on the
city’s budget from a host of areas, not the least of which is that the
city of New York, with 7 million people, we have over a million peo-
ple on welfare and that cost, which is shared by the local govern-
ment in New York State, which most States don’t. New York State
pays 25 percent of the cost of Medicaid, welfare, and other social
programs.

So that there is tremendous pressure on the expense side of the
budget which I believe has led to the lower rating, although since
1977, we have balanced every year’s budget and it is an interesting
thing. Rating agencies, you know, they look at city bonds, but as


65

STATE ADMINISTRATIVE MANUAL
CAPITAL OUTLAY

inupact oa support costs well in advance of the need for project fading.

A nxcessful capital ‘program bogine with effective facliity management sod program planning. Tt is stato
pote a all ol ly pr wl to bead ex pina hs of ens ce tt prey enol

and Management (OPDM) and the Stato Architect (OMA), uleo ta Department of Genera! Services, eupecvise the
design und construction process for most state agencies.


Section 2

Organization of * Summary

the Capital A capital budget begins with the state budget office preparing

Planning Pr uidelines, forms, instructions, and procedures that are then provided to

lanning Process the individual state agencies to complete. State agencies request the

capital improvement and construction budget for their agencies
‘Whether the capital budget 1s for only the budget period or if itis a six
to ten year plan, the list of capital needs is generated at the state agency
level. Generally speaking. a capital budget is done separately from the
operating budget. Some states, however, submit both the operating and
capital budget to the legislanure at he same time while others actually
submit the two budgets to the legislature at different times.

Capital budgets include both renovations to existing buildings and new
‘construction. New construction and improvements to existing buildings
are usually all part of the same priority listing. Some states require
agencies to plan fifteen years down the road although a shorter plan is
actually submited to the state budget office. Generally, state's with
annual sessions look at needs five years down the road: those with
biennial budgets look at three biennia or six years total.

In states where substantial planning is done, long-range plans do guide
funure years significanuy. In states where documentation for the years
outside the budget process is minimal, plans generally do not guide the
funure. States with well-established capital budgets require thorough
documentation on the program need of the building, the use of the
building, size, and structure

Some of the elements that make capital budgets work include a clear
‘understanding of the philosophy and the principles that are the
framework of a capital budget. Without a clear understanding of the
Principles, the process becomes haphazard and much more political
‘Thorough documentation. planning, and needs analysis are a must. This
includes taking a tough stance of requiring agencies to document the
need for the project. Expertise on capital construction is also needed.
Whether the expertise of engineers, architects, and cost estimators is a
part of the budget office. part uf a general services department, or
‘contracted out, it is a necessary element of success. The expertise to
‘evaluate projects and set priorities for the capital budget must be
available to the budget office

Page 41 Capital Budgeting in the States: Paths to Succew


124

Operating and Capital Budget Reform
in Minnesota: Managing Public Finances
Like the Future Matters

Minnesota's performance budgeting clearly relates the budget to the citizen's
needs and to well-defined statewide policy objectives developed within a public
process. A scoring system uses critical and strategic criteria to measure the
need for and urgency of each capital budget request.

Editor's note: Each year the Government
Finance Orficers Association awards its
prestigious Award for Excellence to
‘recognize outstanding contributions in the
tield of government frnance. This article
describes the 1994 winmng entry m the
‘budgeting und frnancial planning policies
sand procedures category.

hen Governor Arne H. Carlson first

took office four years ago, he
inherited the worst financial crisis on
Minnesota's history. In order to forge 2
lasting solution to the state’ chronic fiscal
problems, Governor Carlson directed chat
‘operating and capital budgeting reforms be
‘enacted to ensure accountability and long
term planning.

‘The governor understands that the
public does nor look upon government as 2
‘model of efficiency. Citizens believe that
state and local government is distant and
Lntesponsive to theie needs. To address this
problem. Minnesota developed
‘mance-based budget and ceporting system.

‘year planning horizon was incated tor
projects ro encourage long-range planning,
centeria for project ranking were
introduced to provide an objective analye-
cal context for decisions, and an inventory
of fixed assers i being developed. All ot the
apical budget planning now occurs within
the context of six-year, debt management

in Minnesota's 1994-95 brennal budget
‘The immediate goal was hesghcened
management and legislate awareness of
the concepts of program outcome den
tion and measurement. The longer-term
igoal would have funding decisions based.
(00 agreed-upon expected outcomes and

results rather than on historwal etlors and.

financial statements which smpeave both

wath a focus on ef and account
Ability of state services.

"The new performance-based budget and MINNESOTA'S PERFORMANCE
reporting sistem i based on three prin- REPORTING PROGRAM
sls. 1! government must be driven by the KEY COMPONENTS
pubs goals and mason athe chan oe
's rules and 5.2) the . a we

[Sxpaver will pay tor ese eather than pane
efforts and 3) government must be able to Feseagn of bag
measure and communicate progress toward | Trang and esueurce nr epercea |
both goals and results. + Annual agency

Svgntcant reform aso was introduced | Asa ofpartamanes !

sro the caprtal budgeting process. A six-

beans any 1995 4 Gowvasanst Fisasee RISiHE

By Laura M. King

the readability and understanding of state
budget materials has guided recent efforts
The concept of pertormance budgeting
‘was woven through Minnesota's 1994-95
executive budget process and bus
documents. The object was to clearly
relate the budget to real citizens” needs
and well-defined statewide policy obec
tives developed within a public proven.

The key t0 success rests withthe
commitment of the governor and legisla
tte ro articulate program policy objectives
and agree upon outcome measurements nt
‘success. State agencies now are required t0)
define the results they will accomplish and
are held accountable by elected otticals
land the public tor their performance

Histoncally, government has done 3
poor job of measuring result. It dney an
excellent job of measuring how much
acuity occurs—how much money is spent
hhow many forms are filed. how mans
reports are prepared, how many perms
are issued. But governments less sussess
{at measuring the results of those activin
fand eltorts—whether they resulted in
‘aero cleaner environment ve a hertt
tor Minnesota's ciizens.

tis not a martet of how hard woseen
ment tes but whether makes a uitter
‘ence. Focusing on outcomes will enable
action and elimination of things that have
‘marginal value in order to consentrate
Fesources on activities known eo mabe 4
Sitterence

The state's performance budget and
reporting process had ro primary
‘objectives, both based fundamentally



43

Mr. Davis [continuing]. That your capital budget is, to a large ex-
tent, driven by the fact that 10 percent in Fairfax, or whatever it
is in New York, you have a certain amount you are budgeting to
capital expenditures through your debt service and that, to a large
extent, drives your capital budget. You may have some other oper-
ating budget revenues you. could put into capital, and that is, I take
it, a good financial control.

Ms. HANLEY. Yes.

Mr. McMauon. Yes. I mean, our limitation is 10 percent of the
average of assessed property over the prior 5 years, and another
thing that is driving it in New York Git as I imagine in many
of the older cities in this country, is the deterioration of the infra-
structure. Our water system is well over 100 years old. The transit
system is almost 100 years old and these are all needs that require
attention because if you don’t make that investment, it will cost
you more in the long run.

Mr. Davis. The other followup is that when the revenues go
down, as the chairman said, you can be left with empty buildings
if you don’t project out ahead of time. Has it been your experience,
as revenues go down, you can go into capital like roads and bridges
that don’t take people and operating expense and would move in
that direction as opposed to libraries and schools which may be
more intense, and if there is any comment on that?

Ms. HANLEY. You can if you don’t have specific authorization in
a bond, certainly. I mean, if you have the flexibility to do those
things that don’t require that much operating.

Mr. Davis. My next question is, I take it both of you are
overauthorized, you have plenty of authorization out there and
then you can only spend down a certain amount a year?

Ms. HANLEY. I never like to think of myself as being
overauthorized, but I guess, yes.

Mr. Davis. How about in New York?

Mr. McMauHon. New York is now bumping up against the State
constitutional limit on the amount of debt that it can have issued,
and the reason being that there has been a significant drop-off in
the value of Property in the city of New York, and some people
argue that is ye ical and it will come back up, but it is a problem
that we are addressing right now by scaling back our capital.

Mr. Davis. Fairfax has to have a bond issue for a specific project.
To borrow, you need to get the permission of the voters. Does New
York City have that? Cities in Virginia don’t have that to the same
extent.

Mr. McMaHON. No, It is not—there is no voter approval required
for the city of New York general obligation debt issuance. It is es-
sentially approved by the council as part of the annual——

Mr. Davis. So you wouldn’t have an authorization problem. I
guess in Virginia, you would have to be authorized by the voters
and then you would spend it down to the extent your budget allows
you to. Ms. Hanley?

Ms. HANLEY. Yes, unless you are a city or unless you have some
kind of authority or revenue bond situation where you had the rev-
enue stream identified.

Mr. Davis. Like for waste water treatment or burning trash?

Ms. HANLEY. Water authority, Metro garages at Vienna.


85

Table 10
Estimating Project Cost
Suite How Do You Estimate The Cost Of Capital Projerts?
‘Aber By agencies wath asistnce of arches and engineers
Ansa Based upon past hitory andlor engineering eximates
Anzona ‘Agencies prepare estimates and Facity Management Division verifies cons using reports and standards
‘Arkansas Com eximates submited by agencies and reviewed by Building Services Agency and Budget Office
Californ Cont eauates based on ue and mates and are updated ater preliminary plans and denwings
Color Ually square fot eximates wah pereniages for fes, contingency ee
Connectiewt Cou extinates a prepared bythe Deparment of Pube Works and the requesting agency
Delaware Esuated both a8 onetime appropnation aad phased abated on size/unque aspects of project.
Fonds Determined by agency bated on national figures and revised by recommendations by Dept Gexzzal Serv
Geoegut Euiiates prepared by agencies, by Buizest managers or archecengineer Jepending on prvect
Hawa By user agency
taaho uumates from agency wall often fom x study prepares by architect pr ty budget request
Wino Cental contruction agency makes etn!
Indiana Prmanly by entities ubmiting project requests
fowa ‘Quote from ousise source
Kansas By agencies, architect and Division of Arctestural Services Og Tad materal indice
Kenweky Division of Engincenng projecta mom cons
Lousiana By wa arcsec and engineer
Maine By sll and Deparment of Adminstration archiect ang engineers
Mariand Depanment of General Services reviews and modifies agency esimate based on comparsle provcts
Massuchuseia No response
Michigan ‘Ass function of average square foot costs the planning phase based on arch planning documents
Minnesou Requesting agency euher house of by contutans
Mistsnpg By using sandard dustry nance procedures
Miser Agency engineers and arches use sundart nduteyextunating procedures Div of Design & Constnint “ent
Cox guides generally provide the cost bans Esurates vary om und con 9 ure foot coats
Somat By agencies, with antisance of consutants fneceaary
Nevada No response
[New Hampthire Governor selects project to be formally existed
New Jenev Mos agencies develop eximates with Division of Budding and Consrution of trough own sat
New Mexico By agencies, assisted by com estimator, srehiecs and engineers,
New York Design-construction agencies provide prelimunary extumates based on surveys and review of facilities
Nonh Carolina Office of State Constrvcuon esumes mut accompany al request
North Dako. ‘Agencies prepare esumates with archuees and engueen
Ohio Inually by agencies wih input (rom Divsnon of Pub: Works and archuects
‘Okiahome Tnually by agencies, potential vendor, archiee, engiecrs Reviewed by connie aif and Sue Fisarce
Oregon By contultant professional cox esumsiors
Pennsylvania Using apencis use various methods such as com sundards and agency arehiectengineers waft
Rhode Island ‘Mont agencies develop estumates tnrough own sua/T
South Carolina ___By agency with assistance of architects and engureert
‘South Dakou By architectural and engineering esinaies of project,
Tennesser: By departments, consultants, capital projects and Funance and Administration staff
Texas Requesting agencies submit projet analyies to tegaiatve and execuuve budget offices
van Professional conmuhants project costs
Vemont By sate engineer and consult engy
Vics Requesting agency develops the eximate and Deparoncra of Budge and Gener Services renew
Washingon Life eyete cox analyns/valu engineering bat for emurateiprofetnona extars
West Virgin nd specu propre
Wiscoosin Eimatea based on historia data on past projects atonal exumaing gues
Wyoming Eaimates prepared both w-house und entemaly
pe By cos eiators and he Deperinent of Pub Works

-Page 23 Capital Budgeting in the States: Paths to Succes


6

will be needed each year for modernization and replacement of the Nation’s locks
and dams to meet the demands of the inland waterway system.

Our environmental infrastructure is also facing severe deterioration because of
substantial underfunding. More than 20 yeara after the passage of the Federal
Water Pollution Control Act of 1972, our wastewater treatment infrastructure re-
mains inadequate to the task of cleaning up the Nation’s waters.

The Nation's total sewage treatment needs are estimated to be a minimum of
$137 billion, and a shortfall of $62 billion in unmet needs is projected by the end
of the decade. The needs are especially urgent for metropolitan areas trying to rem-
edy the problem of combined sewer overflows and smal! communities lacking inde-
pendent financing ability.

To pay for certain infrastructure improvements, the Transportation and Infra-
structure Committee, over time, has established a series of trust funds to collect
user fees and then spend those funds on capitel improvements, Specifically, the
funds are the Highway Trust Fund, the Airport and Airways Trust Fund, the Inland
Waterways Trust Fund, and the Harbor Maintenance Trust Fund.

Each of these trust funds was established with # specific contract between the

vernment and the user. This contract specified that certain user fees would be lev-
ied on the users of highways, airports, inland waterways, and ports. In return, the
government pledged to use the receipts to build transportation infrastructure for the

tax) rs use.

Unfortunately, the Federal government has violated this contract with transpor-
tation users. Each of the four trust funds carries a large cash balance. These bal-
ances represent taxes paid by users that are being held by the Federal government
to mask the true size of the deficit.

For the Highway Trust Fund, the balance of unspent funds is nearly $20 billion.
The Aviation Trust Fund cash balance is over $12 billion; the Inland Waterways
balance is $220 million; and the Harbor Maintenance balance is $450 million. These
surpluses show that the current budget process does not recognize the unique na-
ture of these funds and the value of capital investments.

Despite the fiduciary responsibility the Federal government has undertaken in es-
tablishing these trust funds, large balances have built up because spending out of
the funds is artificially held down to mask the size of the operating deficit. In effect,
these deficit Proof, pay-as-you-go programs are cut back to finance other programs,
funded out of { general revenues, that are the true cause of the deficit.

To rectify this breach of promise with the American taxpayer, the leadership of
the Transportation and Infrastructure Committee has introduced H.R. 842, the
Truth in Budgeting Act. H.R. 842 would remove the four transportation trust funds
from the unified budget and free up available balances to meet our infrastructure
needs.

In considering capital budget proposals, I urge this Committee to consider the
unique nature of the transportation trust funds. While the focus of H.R. 842 is to
take the trust funds off-budget, various capital budgeting proposals are compatible
with the goal of H.R. 842—which is to spend the earmarked taxes collected to pay
for infrastructure improvements.

As this Committee is well aware, last session of Congress the Transportation and
Infrastructure Committee held two days of hearings on capital budgeting and re-
ported a capital budget proposal, based on the bill introduced by Chairman Clinger,
to the floor as part of H.R. 3400, the Penny-Kasich budget bill. The Committee’s
provision was eventually stripped out of the omnibus bill in the Rules Committee.

In conclusion, as I noted previously, the Transportation and Infrastructure Com-
mittee currently has placed a priority on taking the transportation trust funds off-
budget. The goals of this off-budget legislation are similar to those expressed by cap-
ital budget proponents and I recommend that the Government Reform and Over-
sight Committee look favorably upon H.R, 842. I support the concept of capital
budgeting and I look forward to working with the Government Reform and Over-
sight Committee to achieve a capital budget, without adversely affecting the deficit.

Mr. Horn. Thank you very much.

Over four-and-a-half decades ago in 1949, as most of us know,
the first Hoover Commission on reorganizing the executive branch
of the Federal Government recommended the adoption of capital
budgeting.

Applying the capital budgeting techniques widely practiced by
State and local governments, universities, and the private sector
would enable the Federal Government to better target its scarce


CONTENTS

Hearing held on March 8, 1995 ....
Statement of:

Hanley, Katherine K., chairwoman, Fairfax County, VA, board of super-
visors; William J. Leidinger, county executive, Fairfax County, IA;
and Thomas L. McMahon, director, finance division, New York City

‘ouneil ..

Mineta, Hon. Norman Y., a Representative in Congress from the State
of California

Sheridan, Ted, id: ge
nancial Executives Institute; and David S.C. Chu,’ fellow, National
Academy of Public Administration, senior fellow, Rand Corp

Thornton, Hon. Ray, a Representative in Congress from thé
Arkansas .. +

Letters, statements, etc., submitted for y:

Chu, David S.C., fellow, National Academy of Public Administration,
senior fellow, Rand Corp., prepared statement of .. oe

Collins, Hon. Cardiss, a Representative in Congress from the State of
Illinois, prepared statement of ..

Flanagan, Hon. Michael P., a Representative in
of Illinois, prepared statement of ....

Leidinger, county executive, Fairfax County, VA, prepared statement of .

Maloney, Hon. Carolyn B., a Representative in Congress from the State
of New York, prepared statement of .

McMahon, Thomas L., director, finance division, New York City Council,
prepared statement of .

Sheridan, Ted, president, Sheridan Management Corp., on behalf of Fi
nancial Executives Institute, prepared statement of ....

Shuster, Hon. Bud, a Representative in Congress from the State of Penn-
sylvania, prepared statement of se

Thornton, Hone Ray, a Representative in Congress from the State of
Arkansas, prepared statement of

wise, Hon, ‘Robert B., dr., a Repres
of West Virginia, prepared statement of

Congress from the State

ay


40

And it is a tool that, as I say, is difficult to measure, but once
we figure it out, I think it will be a very important tool to link the
two, Because, ultimately, they are linked.

Mr. Horn. Now, Robert Moses was one of the great czars of pub-
lic works of New York. He worked, as I remember, for about five
decades on behalf of both the Governor of New York, regardless of
party, and for the mayor of New York City, regardless of party. Did
he operate under that capital budget or did he just have an inde-
pendent budget that nobody had any control over?

Mr. McMauon. Right. Robert Moses is going—there is a bit of
revisionism going on in New York City as regards Robert Moses be-
cause people are starting to realize that the last major public
works project was done under Robert Moses and nothing has been
done since.

He used something different. He operated under—the State
under a local capital process until he found it wasn’t working for
them and then he did something, which was to create an authority.
And in New York City, he created a number of authorities.

First, at the State level, a parks authority, which enabled them
to build Robert Moses Park on the south shore of Long Island,
which is—which includes some of the finest beaches, we like to
think, in the country, Jones Beach being one of them. And he also
created something called the Triborough Bridge and Tunnel Au-
thority which is in New York City and it is separate from the city’s
capital budget and it is supported by the tolls on the various
bridges and tunnels, and that was used to buildup this—the city’s
infrastructure for bridge and tunnels. And there are other exam-
ples of authorities in the city that are separate——

Mr. Horn. Did he create the airport and harbor authorities also?

Mr. McMauon. The Port Authority was created by State law be-
fore Robert Moses. That was before his time. I think that was in
1925, and they also have a separate operating and capital budget
as well, and——

Mrs. MALONEY. Can I ask a question?

Mr. Horn. Sure, please.

Mrs. MALONEY. Were his authorities on budget or off budget?

Mr. McMauon. Off budget. So still in New York City, the TBTA
is off budget. It is subsumed into part of the overall—the MTA. It
is a subsidiary of the MTA and it is off budget.

Mr. Horn. Are the bridge fees pertaining to that authority solely
used for maintenance, operation, reconstruction of the bridges, or
do they slide into the city budget?

Mr. McMauHon. They only slide into the mass transit system.
They support mass transit in New York City.

Mr. Horn. And did that take a separate action of the city council
and the State legislature or the authority board?

Mr. MCMaHon. The State legislature.

Mr. Horn. State legislature?

Mr. McManon. Right. And the initial intent of issuing the bonds
was that they would be retired once the bridge was paid for. In
most cases, very few tolls have been rescinded because there has
been a reissuance of the debt and the proceeds of the tolls have
been used to support mass transit.


1

Part One

Capital Budgeting In the States

Section 1

Defining Capital Almost all states define the types of expenditures allowed in capital
Expenditures and budgets. As Table | shows, most definitions are broad and include such
5 ‘items as construction, improvements, land acquisinon, site
Protecting improvements, and major renovations. Some definitions specify the
Maintenance anticipated useful life of a project while others include certain
n - equipment purchases. Table 2 shows that most states include capital

Funds: Tables 1-3 puting acoviieswihin tes capnal budgets. About half the sats
have a minimum expenditure requirement for their capital budgets. The
minimums range from a low of $1,000 to a high of $250,000 with
$25,000 being the most frequent minimum for capital budget
expenditures.

‘Treatment of maintenance expenditures in capital budgets also varies
across states as illustrated in Table 3. In about half the states,
‘maintenance is included in the operating budget. Other states, including
Alaska, Colorado, and Ohio, differentiate between deferred
‘maintenance as a capital expenditure and ongoing maintenance as an
operating expenditure. Other approaches used by states include
appropriating a reserve maintenance fund in Virginia, authorizing a
formula for building renewal funds in Arizona, and appropriating a
portion of a building's value for maintenance in Idaho.

Good Practices ‘* Establish a clear definition of expenditures within the capital budget.
In developing or refining capital expendinure definitions, suites should
consider the implications of minimum requirements and types of
expenditures such as equipment and planning studies. Certain activities.
such as leasing, may fall within the operating budget though be viewed
as debt by rating agencies in their credit analysis.

‘Define maintenance expenditures and provide for adequate funding
of maintenance in statute.
Maintenance funds are often sacrificed for budget balancing purposes.
Some approaches to preserving maintenance funds look good in theory,
but not in practice. States use approaches such as budgeting a
percentage of the building valuaion for critical maintenance as in Idaho
‘and conducting an annual inventory of maintenance needs in Florida. A
more detailed account of how a few states attempt to preserve
maintenance funds is discussed in Section | of the case studies in this
report,

Page 9 Capital Budgeting in the States: Paths to Succes


Part Ove
‘Capital Budgeting in the States

Section 3

Capital Project
Selection, Cost
Estimating, and
Project Tracking:
Tables 7-13

‘A central component of the capital budgeting process is establishing
priorities within the extensive array of proposed projects. With scarce
resources and limits on financing options in many states, establishing a
set of priorities is a crucial task. Some states first look at the capacity
for financing projects from either debt or cash limits over a several year
time period and then set priorities
‘As Table 7 shows, more than one-third of the states set priorities on a
functional basis, such as higher education, natural resources, and local
assistance. Other states use an approach based on
emergency, legal, and health reasons. Prionties are ranked by
categories such as health and safery, critical maintenance,
improvements, and new construction in states such as Virginia, New
Hampshire, and Montana, Arizona specifies the use of a formal
ranking system to establish priorities in addition to viewing the projects
within the political and economic context.

‘Other approaches to serting priorities include approving projects with a
cost savings component as presented in Table 8. When projects are
approved with a cost-savings component, often the monitoring of the
‘cost savings is informal. About two-thirds of the states include
emergency requests within the capital budget process.

‘After establishing priorities, states are interested in ensuring that
program objectives are met through the project requests. Table 9 shows
how some states formalize the review through audits and writen
justifications, such as in New Jersey, while other reviews are ongoing
‘though less formal.

In carrying out the priorities established in the capital plan, z successful
‘outcome often rests upon the accuracy of cost estimates. Table 10
lustrates the variety of methods states use to develop cost estimates.
Architects, engineers. and consultants often provide cost data. In most
cases, either the requesting agency or a general services or public works
agency is responsible for the review and/or development of the
estimates. Techniques include value engineering, life-cycle cost
analysis, construction and material indices, and square footage
estimates, Almost all states use cost standards according to a particular
type of building and space utilization standards to estimate costs as
displayed in Table 11, In about half the states, cost options and
life-cycle costs are used in cost estumating

Page 18 Capital Budgeting in the States: Pathe to Secress


CAPITAL BUDGETING

HEARING

BEFORE THE

SUBCOMMITTEE ON GOVERNMENT
MANAGEMENT, INFORMATION,
AND TECHNOLOGY

OF THE

COMMITTEE ON GOVERNMENT
REFORM AND OVERSIGHT
HOUSE OF REPRESENTATIVES

ONE HUNDRED FOURTH CONGRESS
FIRST SESSION

MARCH 8, 1995

Printed for the use of the Committee on Government Reform and Oversight

Es

U.S. GOVERNMENT PRINTING OFFICE
90-206 CC WASHINGTON : 1995

For sale by the U.S. Government Printing Office
‘Superintendent of Documents, Congressional Sales Office, Washington, DC 20402

ISBN 0-16-047295-4
Dp



Question: What are the elements in your process that make it work?

Kansas

The system works primarily because of the working relationships of the
participants and not because any specific set of procedures are followed
Iti uncertain to what extent the system needs to be made more formal
As discussed elsewhere, the review of projects in greater depth probably
is of mote concern.

Maryland

‘The process needs to begin with the debe affordability process. There is
a Debt Affordability Committee that has built up credibuity over time
and determines how much bonding can be expected in the next five
years. The State takes the five-year plan seriously. In other words. it
sticks to it unless there is a compelling reason to deviate from it. The
Governor backs the long-range plan which gives the plan additional
integrity.

‘The state requires agencies to document the proposed project - what itis
for, how big itis, why it is needed: descriptions and jusnfications are
required, even for those not scheduled to be built for five years. By the
time the project moves up to the year it might be built, there should be a
full program description, including architectural specifications and other
justification to ensure that itis indeed a necessary renovation of
construction project. By the time it is moving into being on line as a
Project, everyone should have a clear idea of the project needs. Enough
‘work needs to have been done by the state agency so a very accurate
cost estimate can be made.

Minnesota

‘There is a need to distinguish between the political aspects of capital
budgeting and the managerial aspects of capital budgeting. In the state
of Minnesota, a 60 percent majority vote is required in order to bond.
Since it is very rare for one party to control a 60 percent majority in
both the House and Senate, projects are traded for votes. Therefore, 1
is very difficult to take politics out of the capital budget. However, the
budget office is considering an approach to get more background
information on capital projects by requiring that a study be done before
a project can be considered Analysis of what the facility is needed for,
‘who it would be used by, and us function would allow for more equity
and less politics in the decision process. The Executive Branch is
increasing its attention on preserving existing capital assets outside the
politics of the bonding bul

Page 45




Virginia

‘A substantial amount of planning goes into a project before it becomes
part of the Governor's recommendation and is submitted to the
legislarure. ‘That planning is done at the program level to determine
how that particular renovation or construction would serve the needs of
the clients and what the project will cos.

‘The Department of Planning and Budget is responsible for puting
together all the Governor's recommendations for a budge, including
capital construction. The Department of General Services is the agency
that is responsible for cost estimating. The two departments work very
closely together to coordinate and project costs that are then included in
any budget recommendation

Virginia isin a state of flux. Before, the cost of estimating and budget
analysis was based more on how much it would cost to build a
particular building requested by an agency. ‘The analysis is moving to a
more analytical approach. The first determination will be ifthe building
is needed; and if a building is needed, what type of building would be
‘most suitable rather than focusing on cost estimates for whatever type of
building had been requested.

There are a number of budget sections; for example, one on education,
cone on human services. and one on general government. The budget
analyses who deal wih the operations of the deparument within their
section also deal with the capital budget. The education analyst, for
example, would coordinate all the capital construction projects that were
in education budgets. Budget analysts can call on the Department of
General Services for experuse in the technical issues about the project.
Once each section has prepared its capital construction list, he budget
analysts recommend statewide priorities.

Question: What are the elements you would like to change?

Maryland

Rapid growth and changes have made the development of a long-range
plan for prison and juvenile facilities difficult. There has been
improvement, however, in projecting needs in the corrections area.

One improvement to the process would be to make a more critical
analysis of the projects planned for four and five years out, rather than
waiting until the projects are in the budget year. More justification in
the plan 2t an earlier stage would improve the plan and would minimize
the changes.

Page 46 Capital Budgeting in the States: Paths to Success


28

it offers, and a national capital budget would give local govern-
ments and regions of this country the ability to integrate their stra-
tegic plans with the plans of the Federal Government in a way that
right now we don’t have available and it is something that we
think is seriously needed.

In New York City, we have had a separate expense and capital
budget for many years. It was the fiscal crisis that forced us to ad-
dress the need to deal with those two documents in a serious way,
and what the capital budget provides us with the opportunity for
the purchase of property, for the purchase of infrastructure needs
for which there is a long-term benefit, and there is a strict stand-
ard by which we allow items to come into our capital budget, and
that is called PPUs.

There must be a period of probable usefulness of more than 5
years and those standards are determined by both State legisla-
tion, local legislation, and the advice of bond counsel, and it is an
important standard that I think you may want to consider intro-
ducing into any legislation that comes forward.

The city of New York essentially has a three-tiered capital budg-
et process. We have a 10-year strategy, which is the long-term vi-
sion of where we are going. We have a 4-year strategy which is
more up front where you really have to make some real decisions
on where your resources will be dedicated. Then there is an annual
capital budget for which you must appropriate money. The pay-
ments for that come out of an annual commitment plan, which is
of a significant magnitude in the city of New York, approximately
$4 billion a year that we commit to capital needs.

In the preparation of that document, there is significant input
from local communities, from city agencies, and from the consider-
ation of resources that are available to fund all the needs that exist
in New York City. New York City is a little bit bigger than Fairfax
County. Our overall budget approaches $33 billion on the expense
side and annually $5-$4.5 billion on the capital side. And we in the
city of New York have found it, as I said, as an important tool and
believe that the Federal Government should seriously think of in-
corporating that as a budgeting tool into the national budget.

Thank you.

{The prepared statement of Mr. McMahon follows:]

PREPARED STATEMENT OF THOMAS L. MCMAHON, DIRECTOR, FINANCE Division, New
York Crry Councit

Good afternoon Mr. Chairman. My name is Thomas L. McMahon and I am the
Director of the Finance Division of the City Council of New York. I would like to
thank the Chairman for inviting testimony on the creation of a federal capital budg-
et. I believe that the separation of capital expenditures from current operating ex-
penses will improve the federal budget process, and promote a long term capital
strategy that will help to rebuild the country’s badly deteriorated infrastructure.

While the federal government has not had a balanced budget since 19691, in the
same time period the rate of increase for public capital stock has declined. Between
1980 and 1990 federal spending on infrastructure fell from 4.7 percent of all federal
expenditures to only 2.5 percent, helping to lower the ratio of public to private cap-
ital stock from .61 to .44 over the last thirty years.

Many economists believe that there is a positive relationship between the govern-
ment’s investments in infrastructure and the private sectors investment’s in the

4 Although the modest deficit of 1973 might be more accurately termed a balanced budget.


87

Table 12
Cost Estimating Methods: Part 2
‘What Are The Methods Used To Estimate Costs?

i

Project Future
Sune peri Cons

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Page 25 Capital Budgeting in the States: Paths uy Suces


82

Table 7
Setting Project Priorities
Suate Do You Set Priorities on » Functional Basis?
‘Auburn ‘Needs arsessment
usa Functional areas,
‘Anzona Based on an evahustion system
Arkansas Proriized by law and then according 1 need
Calforma Ucgency- fire & hfe safety code violations health sues
Colorado ‘Needs assessment, proect by proyect,
Connecticut Functional areas
Delwware Functional areas. gubernatonal sues funding avaiabibty
Frond Functional areas
George Funcuonal areas,
Functional areas
According tu need
No

Project by project bane
Functional areas

‘Wihin dedicated funds for each Funcuonal area

Life safety projects and maintenance receive proniy over new construcuon
Functional areas

‘According to need

Functional areas

No response

Functional areas

Project by project in the context of review guidelines

Functional areas
Missoun [Each project evaluated on meris_Agenciet with dedicated funds have more leeway

Montana ‘Heath & safety, crtical maintenance, general maintenance, renovauont, unprovemenis, new consinucion
Nebraska ‘Agencies and universities set ponies

Nevada No response

[New Hampshire Pronty eategonet are health and safety, sniical maunlenance, maimenance, and new construction

New Jersey Functional areas Agencies set proniues 9 requests Governor 3 policiet uted a6 guideline

New Mexico Priontes based on urgency - fe & safety and <nucal maumenance

New York ‘Budget Division analysis of cruical eas

Nomh Carolina Budget office anslyuis and review, governor

Nonh Dabow By ba ffs

v,lfe-health-saf
Pont toca by iepuliver decries provass

Funcuonal areas

Functional areas

Feneuonal areas, health and safety. ano puiey saT input

Project by projector immediate need

No response.

Project by project, prior years’ funsing and planning conndered

Requesting agency seu prionties wihin us request Legulature determines prionuies between agencies
No.

Assess based on merit financial returns_and aatutory mandates
Major repairs, legaV/judicial mandates, ble safety codes, enprovements, Aew construction, Expansions

Washington Functional reas Histoncal spending andor sdenufied needs
West Virginia No response

Wisconsin Evaluation of needs

wyoming Perceived need

pe Functional arean

Page 20 ‘Capital Budgeting in the States: Paths 0 Success


10

And I want to commend my colleague, Mr. Mineta, for his splen-
did presentation. He mentioned that all States—virtually all, 49. I
don’t know about the other one. I know it is not Arkansas because
we have a form of capital budgeting in Arkansas that allows us to
borrow money for the construction of hospitals and for higher edu-
cation and public schools and for highways and other improve-
ments both in human and physical infrastructure, human and
physical capital. And we distinguish between that and the operat-
ing expenses of salaries.

There is a difference, Mr. Chairman, between the money for a
new engineering laboratory that cost several million dollars and
the payment of salaries to staff to clean the laboratory. One is op-
erations. The other is an investment. It would be terrible if you had
to take out of this year’s operating funds your investment for tech-
nology that would be useful for many years in the future. And this
distortion has really wrecked havoc upon making wise choices as
we go into the very difficult task of setting priorities for our Na-
tion.

May I ask that my formal remarks be made a part of the record?

Mr. Horn. Absolutely.

Mr. THORNTON. I am just free wheeling here.

Mr. Horn. I turned the light on when I noticed you were taking
off there, Ray. We are delighted to put the full statement in, so go
ahead. Don’t interrupt yourself. You are on a roll there.

Mr. THORNTON. Well, I think it is just critically important to rec-
ognize that we are in a competitive world. That this country is not
an island existing by itself, that we are in competition with
formidle economic adversaries and we need to make wise choices
to make sure that we maintain our strength for the future and in
recent years our investments in future productivity have been de-
clining as a share of our Nation’s budget. And that I think is lead-
ing to difficulty in maintaining our capability to act competitively
with other nations.

The thing that we need to try to do is to understand clearly the
choices we are making. My granddad told me the story that I have
shared with my friend Bob Wise that a family that is head over
heels in debt can’t borrow their way out of debt. But neither can
they starve their way out of debt. His remark was you had to work
your way out of debt.

The way you work your way out of debt is by making wise
choices: investing in plants if you were a corporation. If you are a
family, you don’t borrow money for an ice cream cone or for grocer-
ies or for day-to-day expenses, but you don’t hesitate to borrow
money for a new home, to take a mortgage out on that home as
long as you can pay the amortization of it. You don’t hesitate to
borrow money to educate your children.

The experience of this country following World War II was that
for every $1 we spent on the GI bill, the United States of America
realized in increased taxes on the income that those educated serv-
icemen and women earned a return minimum of $7 per $1 in-
vested.

There are some figures that indicate it may have been as high
as $12. The most conservative is $7 return for every $1 spent on


by4

about. But it seems to be such quickly changing technologies, not
permanent items a lot of times. The minute we finish with the F-
15, it is the F-16 and probably next year it will be the F-18.

How do you feel about defense? Would you define that as a cap-
ital budget item or an operation budget item?

Mr. Cuu. I should emphasize that this is my personal view, and
obviously it is a bit biased because I served in the Department of
Defense for a number of years. But in my judgment, many of the
items—physical items acquired by defense—are the quintessence of
capital items. They are long-lived. The Department for many years
pul lished a balance sheet, which included a valuation of the capital
stock.

There is an obvious problem that Mr. Horn identifies: the con-
troversy associated with and the practical political issues entailed
by treating some of these items as capital items. But in my pea a
ment they clearly are, on the simple basis that they are long-live:
they provide services to the country over a long period of time.

‘rom the perspective of Mr. Clinger’s bill, if the reason—the
principal reason—for capital budgeting is to assist planning, it is
ultimately that planning function that such a budget presentation
for defense would support. I am struck that especially at the cur-
rent papeture in history, the sitting Secretary of Defense has sig-
naled that he feels the investment portion of his budget is below
the rate that in the steady state would be needed to sustain the
structure of the forces the United States currently possesses. So it
is a live issue in the planning context in that cabinet department,
whether or not we show it as a capital budget item.

Mrs. MALONEY. Thank you.

Mr. SHERIDAN. In that regard, and I concur with your thinking,
we should remember that whether the asset—asset purchase or
procurement process is motivated by dictates beyond the realm of
certain committees, that it should be understood that the $229 bil-
lion capital expenditures for capital for the defense procurement
are going to take the largest measure and I think they should be
very carefully looked at, judged on their merits for their mission
support, and be viewed as an important element. To somehow push
them off the table, I think would defeat the purpose of budgetary
process in the capital area.

Mrs. MALONEY. And Mr. Chu, you mentioned in areas that we
would have to look at the degree to which you would be allowed
to borrow. Again, it has been tried on State and city levels and
they have certain Principles that we heard, 10 percent debt service,
but how would you see the limits on borrowing for the Federal Gov-
ernment so that you keep some type of control?

Mr. CuHu. I think one of the principles that was identified has
considerable merit, at least in the long run; whether you follow it
from year to year is another matter. That is, the borrowing instru-
ment used should not substantially exceed the life of the item that
it supports, nor your ability during that period of time to repay the
principal and carry the interest on the debt that is thereby in-
curred.

Now, the important linking element in all of this, which is
touched upon in Mr. Clinger’s bill, of course, is the consumption
charge. What will show up in the operating budget of the cabinet


Table 17
Debt Management

Policy to Limit Policy to Limit Moody's
Sate Debt Service Authorized Debt GO. Rating
‘Aubema N nN
Asha Based on oul revenues N
Anion N G0. deb limit of $350,000
Arsaniat 8 N
Catisma N N

No general obligation debt alowed No GO. debi alowed

N N

15% of genera fund 5% of revenue

N 30% of ux revenue preceding 2 yr

y ¥

15M ot revenues Y

N N

N N

N No. G0. debt allowed

” 0 bond lin of $250,000
Kensst N ‘1 mlbon lit wo voters
Kentucky ny 0 bonds $00,000
Lousiana 109 of3 yr. av revenues Bond & Redempt Fund 2 tames 3 ye. bond revenues & redempt funds
Maine N NiGenerat Fund\$i0 millon on revenue bonds
Man le revenues GO debt 3.28 of income
Matiachuseas No response No response
Nshigan N Cap on bonds
Minnetoua 3% of general fund unresincted receipes N
Muasanippr 348 1S times ig revenue preceding 4 yt
Mistoun N State constution and sate
Moniana N N
Netra N N No G0 ten
Nevada No response No response
ew Hampshire Nelnformal 10% of genera fund revenue
Sew Jersey s MIG 0 YMevenves based on usuing suthoniy
Now Mensco 1% of wxable property subjen to propeny ak v
Sew York N ‘Stanuory lms G.0. bonds
Nomh Carolina ON Veter approval
Nowh Dakow ON N
Gru 5% of annual gener fund expenditures Legpslative approval
Oklahoma N N
Oregon N Desermined by Treasure/Legulature
Peanssivana ON ry
Rhode liland —N 0 bonds must be approved by voter,
South Carolina $9 of prior year's revenves Funcvon of debt service
‘South Dakots NVA NA No GO sen
Tennestee Y 150% of revenues from previous year a
Teus N No response a
Uuh N Based on total assessed value of property aA
Vermont a Det Affordable Comminge reviews debt
Virgin N 115% umes average annual revenues au
Washington 7% of revenues _ Legalauve approval a
Wen Varma ON " a
Wisconsin 30 4% of revenves y A
Wyomang 1% of sscaned value of usable propery 1 of amessad valu of uxable propery No GO sew
pc us " bu
Source Moody # Municipal Credit Report. November 12,1991

Page 32 Capital Budgeting in the States: Pathe to Success


‘Alaska
‘Ancona

California

Es

3

Table 2

Capital Versus Operating Budgets

Minieut
For Capital

Colondo
Connecticut
Delaware

‘Over capa oullay ae
N

N

Hawes

N

515.000
$25,000
N

N
$50,000

5:00.00

3

{

No response
$59.00
s

$140 000

Fg
é
z

Bade z<Blzz<<zezz<<|e<<<<jezz<

Renyet $2500
S35 000

No reaponse
330.000
$0 000

100 600
‘
$50 000

x

Constenst $100 000
‘5:00 900

pceeapencnaieceadead

Mawes $100 900

$1 000
$25 900

3
2|

<4 <<2zK«

yes

Page 11

$$ 900
Y

Capital Budgeting in the States: Paths to Success


34

soon as city bonds go out, they get bought, and it is—the last offer-
ing was actually oversubscribed.

d so while it is a process that you have to deal with and it
is an important process, there are many who believe that perhaps
the rating industry, the process by which bonds are rated, should
also be looked at.

Mrs. MALONEY. Very briefly, if you could share with the commit-
tee members the problems in our budgeting process that led to the
crisis and how they were corrected. Maybe that could help us in
loolsing at this capital.

Mr. McMauon. As one of the prior witnesses testified, the Beam
shuffle, it wasn’t a Beam shuffle; it was the Lindsey shuffle and
Wagner shuffle and many shuffles before that in the city of New
York There was a history of essentially mixing your capital and
expense programs, and so what often happened was that the reve-
nues that were raised for a capital program were used up front to
pay the expense side of the budget because there wasn’t a clear dis-
tinction between the two, and that is fine.

It works perfectly as long as you have cash, and what happened
in the fiscal crisis was people saw what was going on. And when
the city went to borrow on the capital side, people—the banks said
no, that it has to stop, and it did stop and then precipitated a se-
ries of reforms which we think have served the city well, looking
back over the past 20 years now.

Mrs. MALONEY. Thank you. My time is up.

Mr. Horn. I think that is a convenient place to take a break. We
have about 10 minutes in which to get over to vote. If you don’t
mind waiting, we would like to ask you a few more questions.

Thank you very much. We will be back to you in about 15 min-
utes.

[Recess.]

Mr. Horn, We can resume the hearing. The hearing is resumed
at roughly 3:39 p.m., and the gentleman from Virginia, Mr. Davis,
will begin the questioning.

Mr. Davis. Mr. Chairman, thank you very much. I have got some
questions for each of you.

Mr. Leidinger, let me ask, I know the Fairfax County budget,
which I have some familiarity, is a complex document. As I under-
stand it, you have your budget and then you have your debt service
as an item in that budget that can’t exceed 10 percent under your
10 commandments?

Mr. LEIDINGER. That is correct. Debt service cannot exceed 10
percent of combined general fund disbursements, that is direct
county expenditures as well as the amount of money we transfer
to the school system each year for its operation.

Mr. Davis. But you can use additional county dollars for capital
improvements; you just don’t go in debt for it?

Mr. LEIDINGER. We do. That is cash pay down, pay-as-you-go.

Mr. Davis. What is the current debt roughly of the county? You
have a balanced budget but you still have a debt that we service
each year. What would the total debt be?

Mr. LEIDINGER. The total debt is around $1 billion.

Mr. Davis. What about the trust funds? Can you talk about how
we use trust funds at the local level?


46

positive net present value are employed to determine the relative
value of completing—competing projects and to make the critical
priority decisions.

Once this process is complete and the decision to move ahead
with capital investment is made, a system must be put in place
that periodically tracks the progress of investments to ensure that
the project is meeting its stated objectives.

In the private sector, the financial reporting system is used to
monitor the progress of such capital budgets produced on a month-
ly, quarterly, and annual basis. Safeguards such as periodic audits
are performed regularly to ensure accuracy of the financial report-
ing system. and accomplishment of objectives. In condensed
‘orm——-

Mr. Horn. Let me say that we are going to be running short of
time. We do put your whole statement in the record. You don’t
have to read it, so feel free to just summarize.

Mr. SHERIDAN. Right. The point that I was trying to make and
why I would like to finish this very last thought is in a condensed
form, these reports are reviewed by board of directors to evaluate
the effectiveness of the strategic plan and the underlying capital
investments.

The board of directors uses this information as the basis for ap-

roving the strategic plan for the ensuing 5 years, where the cycle
Begins again. We would propose such a process, we, FEI, and this
review and approval will be done at the Federal level by the Con-
gress through an oversight committee such as this one.

So we are trying to bring into the cycle an approval process that
is very much like the very successful one used within the corporate
environment and we feel that. this committee is one that could have
that oversight under your new charter.

Thank you, I would be pleased to address any questions.

Mr. Horn. Well, I see that you have advocated here a pilot pro-
gram so why don’t you just summarize the idea there.

Mr. SHERIDAN. Well, I spent half an hour with your collea;
Chris Shays before this meeting trying to explain these thoughts
in less time than you allotted to me, because that’s Chris’ way and
it became clear to me that the enormity of the subject matter, the
complexity of the definitions and the means to address it were so,
so huge that in our view we would do what we would do in the pri-
vate sector, is to find relative projects on which we could try out
these notions in such a way that they could be given under-the-mi-
croscope scrutiny by this committee and others. And we would pro-
pose to do that in three areas that we think are relevant within
a very narrow definition of assets in the capital budget.

[The prepared statement of Mr. Sheridan follows:]

PREPARED STATEMENT OF TED SHERIDAN, PRESIDENT, SHERIDAN MANAGEMENT
CorP., ON BEHALF OF FINANCIAL EXECUTIVES INSTITUTE

Good afternoon, my name is Ted Sheridan. I am President of Sheridan Manage-
ment Corporation and a member of Financial Executives Institute’s (FBI) Commit-
tee on Government Liaison. FBI is a professional association of 14,000 chief finan-
cial officers, treasurers, and controllers from_some 8,000 major corporations
throughout the United States and Canada. The Committee on Government Liaison
formulates positions on economic and regulatory issues of concern to American busi-
nesses.


115

Pant Two
Case Studies in Selected States

‘The state has a Special Account for Capital Outlays (SAFCO) which is
funded from offshore oil royalties. This account is used to fund “one
time” capital expenditures such as upgrades to aging state hospitals.
flood control, and water projects. The account is not generally used for
‘general state facilities such as universities and prisons. A modest
‘amount of general funds is budgeted for deferred maintenance and small
capital projects under $500,000. The state has a wide variety of special
funds available for capital expendinures.

In addition, California has a ease revenue bond program. Higher
education facilities, prisons, state office buildings, and courts are
financed by revenue bonds, backed up by lease payments of the using
agencies. The state does not consider these obligations part of its debt
burden, since rental would have to be paid whether it is being paid 10
the state or to a private landlord. Authorizations of lease revenue bonds
require legislative approval, but do not go before the voters. Projects
are budgeted on an ad-hoc basis, and the total program is generally
much smaller than the general obligation (G.O.) bond program.

In 1990, nearly $10 billion in G.O. bond issues appeared on the ballox.
about one-third of it through initiative, Although only $900 million for
school construction passed, this level of proposals caused some alarm
within the legislamre and the administration. As a result. the
Department of Finance has prepared a ten-year study of capital
resources and needs. The study proposes a ten-year capital spending
plan limiting debt service to 5 percent of general funds. Taking other
available revenues into account, this resulted in a recommended $50
billion program over the ten years. In tandem with this
recommendation is a proposal to transfer responsibility for $10 billion
‘of schoo! and jail construction to local governments.

Kentucky Kentucky's capital program is financed from current revenues and
revenue debt of special authorities. The state has not issued state
{Zeneral obligation debt since 1965 (the constitution gives the sate G.O
debt authority, but requires any authorization of GO. debt over
$500,000 to go to the voters). ‘The cash-funded portion of the capital
budget increases incrementally from year to year as part of the biennual
budget process. It is used primarily to finance maintenance,
renovations, and small projects.

Page 54 Capital Budgeting in the States: Pathe to Suce


51

If this Committee and this Congress are to be successful in coming to grips with
the capital budgeting problem, a thorough examination needs to be made of the
roots of this opposition as well as the many—and there are many—good arguments
for capital budgeting, What I wish to do this afternoon is to outiine some of the is-
sues that need to be explored in that examination.

‘Those that favor capital budgets make persuasive arguments:

‘* Many states and localities are using capital budgeting auccessfully.

« The use of long range planning and cost benefit analysis which are important
to capital investment decisions would be enhanced by a capital budget.

* By clearly identifying expenditures associated with capital, a capital budget
would discourage, or eliminate, borrowing for operating expenditures.

Each of these arguments deserves consideration by of the Congress.

In addition there are a number of more technical issues to be explored:

What are the range and boundaries of capital budgeting? There is little question
that investment in research and development, and in education and training, are
investments in the future of great importance to the nation. They are included as
part of federal investment in the President’s budget. However, their inclusion in a
capital budget would greatly enlarge its potential scope.

It is possible to separate so-called hard capital investment into projects directly
enhancing the private sectors long-term productivity (such as roads, and water man-
agement facilities) and those required to conduct government managed activities
(such as veterans hospitals, postal facilities and federal courthouses and prisons).
Would both groups of projects be included in a capital budget?

To what extent would capital equipment programs be part of a capital budget?
‘This includes both military equipment, and civilian equipment such as air traffic
control hardware, and some that 1s in-between, such as the multi-billion dollar glob-
al positioning system started to meet a military objective, but now with burgeoning
civilian applications.

Federal government financing of capital investment is not all through direct ap-
propriations. The $75 billion subsidy for housing is funded through income tax
ductions, so called “tax expenditures”. Also, there are multi-billion dollar loan and
credit programs for housing delivered through federal departments, corporations,
and government sponsored enterprises. While few would argue that these should be
part of a capital budget, their role is harder to ignore when considering the role of
the federal government in promoting federal investment in future infrastructure.

Within the Congress, the adop of a capital budget would pose a number of pro-
cedural issues in the Congress. I will aly mention a few:

* How would decisions be made on the “appropriate” level of investment?

. Would investment allocations be made to congressional committees and, if so,
ow?

+ Would trade-offs be allowed between discretionary spending, for investment

and mandatory programs that support consumption to permit Congress to shift

resources from consumption to investment?

Finally, the relationship of a capital budget to government borrowing needs to be
determined. A popular viewpoint is that borrowing would be acceptable for capital
investment, but not for operating Programs. ‘This is the view of many states in their
budget operations. At the moment, federal borrowing is determined by the cash flow
needs of the Treasury, without reference to the type of program Tequiring the funds.

Mr. Chairman, you are undertaking a major task and a difficult one. The concept
of capital budgeting wouldn't have been around for more than 30 years without final
action if it were easy. But the stakes are high; deciding wisely the level and content
of federal capital investment, in the face of many competing demands, is of great
importance to the nation’s future. We at the Academy will follow your progress with
great interest and stand ready to assist you wherever possible.

Thank you for the opportunity to share our views on this important issue.

Mr. Horn. We thank you, Dr. Chu.

Representative Maloney.

Mrs. MALONEY. Well, I think a big issue is how do you define the
capital budget. From the other panel, it is very clear on the local
government, I guess we have been dealing with it so long, and ev-
eryone agrees it is the bridges and the roads and most of the States
and cities do.

T would like to ask both of you where would you put defense?

See, in the city and State government in which I served, we
didn’t have defense and so it was not an area that I even thought



47

Mr. Chairman, we appreciate the opportunity to present the views of FBI before
this subcommittee and are always willing to provide our technical assistance to you,
the Ranking Member Carolyn Maloney and your respective staffs.

Why Capital Budgeting

Over the past 15 years, the private sector has gone through a wrenching process
of re-engineering and downsizing. Virtually every business has had to reassess its
mission, priorities, and the ability to deliver a required level of goods and services
at a lower cost and with greater efficiency. Those of us in the corporate financial
community know how critical and painful this process can be. We had to do it be-
cause of the efficient laws of survival in the global marketplace. In this current en-
vironment of multi jon dollar deficits, we strongly recommend that the Federal
government emulate the private sector experience.

Central to private sector re-engineering has been employment of a highly dis-
ciplined mission definition and capital allocation process conducted on a prescribed
cycle schedule. Pivotal to this is the commitment to long term fixed assets which
will drive much of the operating budgets of future years.

The importance of capital budgeting in the private sector cannot be overempha-
sized. Capital budgeting forces companies to develop long term strategies on
most efficiently to accomplish their business objectives and to link cost to the fulfill-
ment of that mission. By doing so, it subjects the process to serious analysis for set-
ting. priorities and allocating scarce resources.

riven the impact on long term mission accomplishment and the financial commit-
ments embodied in the capital budget it is imperative that it be analyzed, approved
and accounted for in a process totally separate from that for current operation. To
lump them together as is currently done in the Federal unified budget is to obscure
and frustrate the role it should play.

It must be understood that the presentations accompanying the approved Federal
budgets that break out capital appropri ‘ions for fixed assets and other “invest-
ments” are done after the fact and are not separately considered in the decision
making process. Doing so makes it virtually impossible to adopt the disciplined ap-
proach of the private sector to mission definition and capital allocation.

The Mission Definition & Capital Allocation Cycle

Capital budgeting forces companies to develop a long-term (usually 5 years) stra-
tegic plan to fulfill stated goals and objectives. In developing the strategic plan, com-
panies first determine what their capital asset requirement needs will be to accom-
plish the mission. Once completed, the costs to fund the capital assets will be cal-
culated.

Determining the ability to fund capital projects requires companies to prioritize
projects in order to accomplish the stated objectives and best fulfill the overall mis-
sion within funding constraints. In the private sector, analysis using investment cri-
teria such as a positive net present value are employed to determine the relative
value of competing projects and to make the critical priority decisions.

Once this process is complete and the decision to move ahead with the capital in-
vestment is made, a system must be put in place that periodically tracks the
progress of the investment to ensure that the project is meeting its stated objectives.

In the private sector, the financial reporting system is used to monitor the

ogress of such capital projects—produced on a monthly, quarterly, and annual
asis. Safeguards such as periodic audits are performed regularly to ensure accuracy
of the financial reporting system and accomplishment of objectives.

In condensed form these reports are then reviewed by a board of directors to
evaluate the effectiveness of strategic plan and the underlying capital invest-
ments. The board of directors use this information as the basis for approving the
strategic plan for the ensuing five years, where the cycle begins again.

If the process is adopted as FBI proposes, this review and approval would be done
at the federal level by Congress through oversight committees such as this one.
Definition of Capital Assets

Within the Mission Definition and Capital Allocation process, decisions must be
made on the present and future de] layment of various categories of capital invest-
ment which support mission ‘accompli ment.

‘To embrace all of the definition of investment applied to all federal programs
within the current conceptual framework would obviously overwhelm the effort. FBI
has chosen to narrow the definition initially to tangible fixed assets and to address
a limited number of program types. This would include:

* Defense system procurement,
. Buildings, equipment and information systems to support agency operations,
an



16

Part One
Capital Budgeting in the States

Good Practices ‘* Include specific operating costs for each capital project.
Although most states require that operating costs accompany capital
Project requests, there should be an enforcement mechanism that
requires agencies to develop operating cost estimates over several years
‘The agencies’ operating budget request should reflect the impact of the
capital projects over the several year period.

Ensure that effective legislative involvement occurs throughout the
capital budgeting process.

Some states have established specific oversight boards to help foster
communication between the legislative and executive branches. In other
states, such as Maryland, state officials informally maintain good
‘communication channels with the legislanre.

‘© Strengthen the review of the years beyond the budget year in
long-range capital plans.
Although most states have long-range capital plans, the years beyond
the budget year are often scrutinized much less than the budget year.
More scrutiny of long-range costs would help to assess the financial
‘commitments on both the operating and capital budgets.

Page 14 Capital Budgeting in the States: Pathe to Success


86

Table tt
Cost Estimating Methods
What Are The Methods Used To Estimate Costs?

Mesbods Used:
Cost Standards Cost LifeCyete
Building Type Options Coats
Y ¥ Y
Y y Y
Y Y
‘Agencies my use ‘Agencies may use ‘Agencies may ute s
y ¥ y ¥
3 ¥ Sometimes Required St Ere
y y Y y
Y y y y
Y y N y
y v Sometimes y
¥ ¥ N TN
Y y N ¥
Y y Sometumes y
N y Y N
y. y v x
6 ¥ ¥ ¥
Y y N N
y Y Y Y
y y y Y
¥ v ¥ N
Wo responie Worespone No response No vespomie
Y Y Y
x y s N
Mussesppt Y Y Y N
Mussoun y y, y ¥
Monuane ¥ N 6 8
Nebraska Y N N x
Nevada No response No response No response No response
New Hampshire Y Y Y Y
New Jersey ¥ ¥. ¥ x
New Mexico Y ¥ Someumes Someumer
Rew York y Y Y N
North Carona Y Y Y Y
Nonh Dakow ‘Agencies may use Agencies may use Usually not ”
Oro ¥ y x
Oxlabome Y Y Y YN
Oregon Y Y Y Y
Pennsylvania Y Y Y Sometimes
Rhode Island N y N S
South Carolina, N s N ¥
“Sout Dakow Nx Y NK Na
Y Y Y Y
Y Y Y y
Y Y Y ¥
y ¥ ¥ x
Y ¥ ¥ Y
nN Y N Y
N N N N
Y Y Y Y
Y Y Y N
oc Y Y y
vet ye vars

Page 4 Capital Budgeting im the States: Paths 10 Success


4l

Mr. Horn. Let me ask you one last question. It has to do with
public psychology and employee psychology. In California, as some
of you have read, we had a major budget crisis over the last few

ears where the generally $60 billion State budget had a $15 bil-
ion deficit, an amount unheard of in modern times. Before that, we
only had a $1 billion deficit in 1983, which we solved within 45
minutes of Governor Deukmejian taking the oath of office through
cutting the State budget 2.5 percent for the year. We had gone
through half the year, so we had to cut our budget by 5 percent.
We did it and that solved that problem.

A little more difficult to solve, is $15 billion, especially since the
University of California, the California State University and the
California community colleges, three separate statewide entities
and boards, all appointed by the Governor, have authority to issue
bonds under the State of California. Those bonds go before the vot-
ers, and until recently, those bonds for capital projects were ap-
proved.

So you find, when you are trying to grapple with a $15 billion
deficit as Governor, that you could wipe out the whole traditional
State government, corrections, mental health, public health, all the
rest, and the three university systems, all that is traditional, and
yu wouldn’t close the gap. In other words, you couldn’t get the $15

illion even if you wiped out the whole traditional State govern-
ment, because it is entitlements that were running the deficit up.

So you face the irony where you had to take huge chunks of per-
sonnel out of State government. When people wake up in the morn-
ing and they get the pink slip at the end of the day, then they look
around them, and here are beautiful facilities being erected, this
science building, that psychology building, this jail, this prison,
whatever, all of which, funded by bond authority several years be-
fore, now appears where people are being led off by the thousands.

Obviously employees wonder why that disconnect is. Well, it is
because the capital budget is funded in a different way than the
operational budget; in other words, through bonds rather than
taxes. Have you had to experience that, and what do you do about
it under those circumstances? Nobody in Fairfax County ever has
a problem with what the board does?

Mr. Davis. The library.

Ms. HANLEY. I was thinking more of the new government center.

Mr. Horn. The Taj Mahal, you mean, for the county executives
and board.

Ms. HANLEY. There are times, I guess, when I wish we were a
little further away from——

Mr. Horn. The television cameras are not here.

Ms. HANLEY. Small favors. Thank you very much.

That does happen occasionally, but in Fairfax, more when it is
funded other ways than by general fund dollars. In fact, the psy-
chology recently in Fairfax is the reverse. We voted for these
projects and you haven’t built them yet. Why not? Because we sup-
ported them and we think they ought to be in place, and you all
are just being stingy and just won’t do it. And it is harder to ex-
plain that the operating funds aren’t there and the debt capacity
isn’t there. That is partly because the debt capacity is tied to the
general fund.


127

. ‘THE MINNESOTA FY1996-2001 CAPITAL BUOGET PROCESS.

erway 1995 “The capital budget instruction manvel is aeued and etrbuted
agro.

May 1905 Prafminary agency capt budget requests ae due to te
i epanment of france.

| ne 1085,

1995 The

Preumnary agency capa budget request are forwarded to
‘he logan.

1 prove

oF foance and: screen
project econng and meet wif affected agencies

{© prow relevant feacbeck. Lopalaive ane tours begh

Ceraber 1905,

Final agency capital budget requests are due to the department of
‘france

1905 Dap

February 1096

dleed

of face and ron
sconng of agency requests. Suite revenue and debt capacity
forecasts are wsued.

‘Governor submits FY 1996-2001 Strategie Captal Budget Plan tothe
fogatanure

fea coview ane

‘Legislature adopts and the governor approves the 1296 bonding bl

being the maximum possible score, as it
say tor the critical group.

The postive results of che state's capital
‘puget retorm ettort were clearly demon:
strated tor the first ume inthe 1994
Teyuslace session. Agency requests were
substantially improved through the new
Seater, Project costs were prepared 2
more rigorous manner. The objective
tanking system as used to identity critical
sapual budget decisions, resources were
Commuted to the most important cecal
Investments. and the opportunity costs of
\ommitting scarce resources to the wrong,
pprinects were avoided. Linkage of the
financial ettects of capital decisions on
zeny operating budgets also were fully
Integrated into the decision-making
preaess

‘Mulions of dollars were saved through
use of the new process, and mallions mace
are being spent better than using the
‘radiional approaches co capa proyect
allewations of the past. Overall, the new
[process has substantaly improved the
tntormation available to the governor and.
legsslarure tor making capital proyect
decisions and has thus improved the state's
allocation of capral resources.

‘The general concepts employed in
Minnesota's capwtal budget process are
twansterable ro anv state or local govern:
ment. The application of Minnesota's
approach addresses removing consideration
‘of capital proyects trom the one-shot

10

political arena and the pork-barrel

ston-making process commonly
associated with capital budgets. The
‘tanking criteria used to evaluate projects
across agencies and the database steuceure
tor he tai sventry maybe used in
any jurisdicuon

Multiyear Horizons

Capital and operating budget reforms
adopted n Minnesora im the pat four
‘ears have ignibcandy advanced the sates
Iinancial management, Both efiorts have
‘muluyear horitons whch encourage
decision making on behalt of tomorrow's
taxpayers as well as todav's. Operating and
capital budgets now are debated on the
basis of prions araculated and adopted
by the executive and legislative branches
The processes have been redesigned s0 that
reporting on the results of ettorts to
Schieve the adopted proces will he 3
routine part of each vear’s legislative
session and provide the basis tor additional
financial support.

‘onmons forte Ct ot Mea on

1995 Gone se Fisancr REIEE

FLEXIBLE
BENEFIT
PLANS |

———
CL

Flexible benefit plans expand em:
ployee benefit choices wiheu!
increasing employer costs. Flexible
benefit plans are a versaule option
for a changmg workforce and war
be efleciive for emplovers wih as
few as 20 employees.

This primer on flexible benehs was
wniter t0 help public empiovers
understand flexible benefit arran

ments and to make informed de.
‘ons about establishing such plans

Through this Public Emplover
Benefit Report. the GFOA coniin
tues (0 provide benef manas
wath the most current informanon
available

‘Copies of Flexible Benet Plans
are avallable for $15 each
to GFOA members
«S18 cach to nonmembers:

To Order GFOA

j 180 N. Michigan Ave
| Sune 800
‘Chicago. IL 60601.-747r

31297-9700



Six Year Pian

‘The six year plan covers a period of three biennia (currently: 1992-94,
1994-96, 1996-98). This listing summarizes the agency's needs for the
next three biennia in priority order within each biennia.

Maintenance Reserve Plan

‘The maintenance reserve plan identifies all maintenance projects,
‘regardless of anticipated funding source, for the biennium.
Maintenance projects cost berween $25.000 and $500,000 and are aimed
‘at maintaining or extending the useful life of an existing facility. They
are not intended to enhance, upgrade or otherwise improve plant,
property or equipment, unless such work is incidental to the main
Purpose of the project.

‘The maintenance reserve review has two steps. The first step is for the
Department of General Services to validate that requested projects meet
the criteria for maintenance reserve projects, as previously specified.
At this step, the Department of Planning and Budget only provides input
‘on an exception basis, after the Department of General Services’
determination of valid maintenance projects.

‘The second step is to develop funding recommendations for maintenance
reserve accounts. Agencies’ maintenance reserve needs are almost
always greater than the amount of funds available and in some cases,
these needs exceed the agency's ability to effectively address them
within a given biennium. Therefore, maintenance reserve funding is
usually allocated by formula. The Department of Planning and Budget
is responsible for developing the maintenance reserve funding
allocations for non-higher education agencies, while the State Council
for Higher Education in Virginia 1s responsible for the instiutons of
higher education.

Final maintenance reserve funding recommendations are based on these
formula allocations and on the input of the individual budget sections in
the Deparment of Planning and Budget. In some cases, adjustments are
made to the formula allocanons to take unique needs into consideration.
In addition, individual projects are prioritized within the maintenance
reserve plan so that agencies can stay within funding constraints.

Page 50 Capital Budgeting in the States: Paths to Success


120

Part Two
Case Studies in Selected States

Illinois

Mtinois appropriates a small amount of general funds for shorttived
projects. Bondability guidelines require bond-funded projects to have a
Useful life atleast equal to the life of the bond (15-20 years), to increase
the value of a property, and to cost at least $25,000. Bond funds are
used for acquisition, construction, design, and new equipment.

Maryland

‘The decision to use current revenues or bond proceeds depends mastly
‘on the availability of general funds in a given year. If general funds are
available, the state strives to use current revenues for facility renewal
and capital maintenance, capital equipment, and smaller projects.

The state adheres strictly to bondability guidelines which are intended to
assure that assets purchased with bond proceeds have a useful life equal
10 at least the 15-year life of the bonds.

Virginia

Virginia has traditionally retied on current revenues for most capital
spending. The capital plan is just now being formulated so it is too
‘early w» know the exact magnimude of the dollars involved. However,
the overall size of the plan will surely consider Virginia's dete capacty
and ability to issue tax supported debt.

Washington

‘Washington currently has no guidelines or criteria for the use of bond
funds. Bond proceeds are sometimes used for salaries and small
projects (i.e. in the thousands of dollars).

Section 5

Asset
Management

‘Summary
Maintenance of facilites is a difficult issue. Buildings are often
constructed with limited budgets and have materials and systems that
demand considerable attenuion and resources. Maintenance needs are
often in competition for funds otherwise needed to meet an agency's
mission. Determining the right amount of funds to be dedicated to
maintenance of facilities is made even more difficult by the lack of
information regarding the suze and quantity of space owned and leased
by state agencies, not to mention issues of age, condition, and
maintenance history.

States have attempted to identify needs by:

Establishing separate capital and maintenance requests in the budget
process.

Developing dedicated resources to support maintenance.

Page 9


125

i PERFORMANCE TERMS
| Progra gals are te gararaeowar wich agences Sect hae scot, They are

(Saesnes ons Oy sas ply sescn, Thay ar Don guanre
ot queried. Goal shou address the agency's messin. m8 actons and prontes.

hee wo carro for pc acto n cova ogo ech a rod, pera
sores ot and hme based

Yr an agency o ‘Aout

and quantiiabe but

tacos ae sot
of accomplanment oF outcome. Objectives should be aerved Grecty Mom the
\Sreys eae gone stu mona pray fr taorce Socanon

‘quantifiable and direerly related co state
‘objectives. Each type has a different focus
inthe time series; outcomes look to che

governor
in January 1995. As
cia uppeenas oe 195698
adopted be plain w fomaly
enaceed requiring preparasion of annual
Patera ear 20 he wes

cont afecverses
{er comparing actual
ter tot
‘cbyectives and goats. The

Provide a quantitate
Sica menus wpe care use “tny prove 8 anne
intended impacts. Ouputs,eficiency and cosi-etectveness

big ee A tae Maar ars
other three fypee promde cos! benctarts

yor

fea cooperative ole, Minnssce'
legislative auditor will evaluate agency
performance reports for reasonableness and
validity of information and data. The

improved communication skills. Foremost
seas te describe the Budget in terms that
emphasized the link becween seae dollars
And direst services in a fashion that bath
the legslarure and the general public could
easily understand. This information 1s then.
‘used 10 communicate important budget
‘decisions, improve the quality of informa:
tion avatlable in the legislative process, and
provide the framework for improved
‘Revernment accountability and continuous
pertormance reporting

Both detailed and summary-level budget
presentations have been redesigned to
deemphasuze accounting and micromanage
‘ment ot state agencies’ operations. [a che
place ot detailed accounting informa
relation to statewide goals, measurement of
results and productiviey measures have
been emphasized

Development of the state's first perfor
mance hudger involved a massive, concen

ated etfort be all sate agencies. Rather
than gradvalls phase in the new program
‘ver several years, Minnesota decided on
‘the Big Bang approach. Concerned that 4
phased approach would subject different
‘agencies C0 different sets of rules for budger
review, and thar the project would lose
momentum during the transition, Minne-
sora elected to bring every agency on line at
‘the same time with the expectation
fehinements would be necessary dus
future years.

To assist agencies with developing and
improving their performance measures.
the depaciment of finanve developed 2

simple guide. Intensive training and
assistance also was provided throughout
the process. More than 800 ourcome
indicators and 1,000

know if they are gerune their money's
‘worth trom ther tax dollars
There ate rae basa steps involved in
performance measurement
‘define specitin objectives tor agency
activites from the perspective of the
‘customers being served and
‘establish clear standards to measure
progress toward meeting the objectives.
‘The definition of cleat acrvity objectives it
the single most important step an the
performance meavurement process. As the
Cheshire Cat said to Alice: “If vou don't
much care where vou go then s doesn’
feally matter which ws sou g0.7
‘Objectives are nut merely descriptions of
To minimize tata accidents” is
fot an acceptable ohyeceve, Objectives are
quantifiable statements of intended results.
This is an acceptable obyectse: "To
decrease the number ot Yatal accidents per
passenger mie raced by percent dung
Performance measures provide a
auannableaseusmen of outcomes,
‘ourputs, efficiency oF vu: ettectvents,
Each 1s useful t conserved, designed and
applied properly: Shated soxabulary is key
to successtal applicatiin—alecide carly and.
repeat often what each term means
organization, Measures are hs definition

reports will be completed by
1 of each year to comple
‘the state’ budget cycle. In this manne,

re are rae
fon a regular, prior |
beginning of ech annual lepslanve session.
‘As part ofthe new system, agencies are
required to develop annual performance
‘spor forthe operations in advance of
mde! tobe usr friendly and must
* descriptions of how their customer base is
expected ro change
imple. declarative statements ofthe
Ben mision goals and obec and
benchmarks for accomplishment that are
spec enough so ctzens can esse
simul progres
‘Adoption of Minnesota's fist perfor-

policy officials will have che necessary

information to effectively asses progrets

toward hared sof oul Performance
inde th a re

to che people’ prories and usp

their proties with ewe onan ‘and

badge pecs Perform

‘were adopted in the derailed agency
budget plans so that Minnesotans will

BFaaacany 1995 © Govtasaess France Revie

IMPROVED COMMUNICATIONS | and more result-onented. Minnesou's
performance budgeting effort intended to

+ Financial sataments ar ctzer- me nto a more exible
‘rere ‘arena. It aims at reforming the way sete
+ Budget inks state coarse Sroct government does business in order 0
‘ervces teahance accountability. The
+ Lopelaire recevee nigh cushy sncroduced inthe capital budget process

y measures .nramaton fee so frused onthe ned fo improve he
‘overnment sccourtabaty ittcue play fageee


104th Conors: i
Conorgss HEARING Ist Session

SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
INFORMATION, AND TECHNOLOGY

OF THE

COMMITTEE ON GOVERNMENT REFORM AND
OVERSIGHT
U.S. HOUSE OF REPRESENTATIVES

CAPITAL BUDGETING

ERRATUM

On both the Tite Page and the Contents Page—Change “March 8, 1995” to
“March 2, 1995”.



Part Two
(Case Studies im Selected States

Virginia A list of capital projects is generated by soliciting request forms from al!
state ageacies and institutions of higher education.

* Question: Are capital improvement to exiting building separated
from new construction needs?

Maryland ‘Major renovations are handled the same as new construction. A
separate facility renewal item in the capital budget handles projeos,
between $100,000 and $1,000,000.

Minnesota Improvements and new construction needs compete for the same capital
‘expenditure dollars.

Virginia ‘They are evaluated in the same manner based on the programmatic
merit. Renovations compete with new construction for funding in the
‘same plan.

‘+ Question: How does your state approach multi-year planning for
major capital improvernents and new construction?

Maryland ‘The agency's request includes its needs or anticipated needs over the
next five years. The plan the agency submits reflects the way it would
Jike to see renovations and new construction handled for their agency.
That may oot necessarily be what the Capital Budget Office
recommends; some projects may be moved up, some may be moved
back,

Minnesota ‘While state agencies do submit a six-year plan, the out-years (those
years beyond the actual budgeting period), are really only “wish” lists
and are not based on solid needs and thorough analysis.

Virginia ‘Agencies are required to be thinking of construction and renovation
plans ten to fifteen years hence, though they submit a six-year plan to
the state budget office. The sare of Virginia is on a biennial budget, so
the six-year plan covers three bienrua. Although the plans beyond six
years are not submitted to the budget office, budget analyses visit each
agency and talk about what the agency is looking at seven to fifteen
years down the road. Every two years the six-year plan is updated by
the state agency.

Page 3 Capital Budgeting in the States: Paths to Succe


Capital Outlay 3

Terms:

Definitions

Scope Language Uaualy Incuded Ia the enna! supplomanial report ofthe bucgot

ck. Deecrbos the scope, schedule, and cost (by phase) of al
major capt outay projects as approved by the Legislature.

‘State Publ
‘Works Board

“Three-person board conalating of the Directors of the Departments
of Finance, General Services, and Transportation. Reeponsible for
‘review and approval of (1) stale acquisition of land, (2} completed

‘Three members of the Senale and the Assembly are 90 ap-
palited to the board in an advisory capacity. The Treasurer and
‘fhe Controler are aso members of the board whes the board
Considers matiors related to the Isauance of lease-revenue bonds.

capt ony propa by 9 © 20 pened fe er ope

we

sity beluga, toe ee eh
edRional appropriation by the Legislature.) For augmentations

baton 10 pect andl 20 prcar. fw Deco of Franca

Legislative Anaigst—Col Gulde


50

Do we include items that are financed through credit guarantees,
or by government enterprises, which is important activity in the
housing sector?

Do we go so far to include items that are required as a result
of Federal mandates of one sort or another?

A third major issue, in my judgment, is the question of how we
decide the aggregate level of capital investment for the Federal
Government. Should it be mechanistically linked, as in the Fairfax
County example, to a particular aggregate index like Federal reve-
nues, or should it be determined in some other way, including a
tradeoff of consumption versus investment?

A fourth obvious issue, is how any decision about the aggregate
level investment should be apportioned among the bodies in the
Congress who would make decisions on its specific allocation and
on specific projects.

And a final issue, obviously, is the relationship of the capital
budget to borrowing limits for the Federal Government as a whole.

As I indicated in my opening comment, capital budgeting pre-
sents a difficult but important challenge. If there were easy an-
swers to this challenge, the capital budget idea would have been
adopted at the Federal level years ago. The decisions associated
with this challenge—with Federal investment—are obviously criti-
cal to the country’s future, and thus important to us all.

Thank you, Mr. Chairman.

[The prepared statement of Mr. Chu follows:]

PREPARED STATEMENT OF DaviD S.C. CHu, FELLOW, NATIONAL ACADEMY OF PUBLIC
ADMINISTRATION

Mr. Chairman and Members of the Subcommittee:

My name is David Chu and I am pleased to testify this afternoon at your invita-
tion on behalf of the National Academy of Public Administration (NAPA). The views
expressed are my own and not those of the Academy as an institution. However,
they are based on work by a NAPA panel on capital budgeting of which I was a
member and associated staff research. The work was done at the request of the
Corps of Engincers as part of a major project on the nation’s infrastructure strategy.
One result of our work was to co-sponser a Capitol Hill Summit conference on Fed-
eral Capital Budgeting with the Advisory Commission on Intergovernmental Rela-
tions here in the Rayburn building in March of last year.

‘As you know, the Academy is a Congressionally chartered organization which was
formed more than twenty-seven years ago to improve fayermance and public man-
agement. It has a membership of about 400 Academy Fellows who have spent their
professional lives actively concerned with government and its problems.

My purpose this aftcrnoon is not to testify on particular legislation although we
have scen Chairman Clinger’s bill, H.R. 767, which is proposing a capital budget
and an o| rating budget within a unified federal budget. Regardless of the specifics
of that bill, which we look forward to studying further, it addresses a problem about
which there is general agreement. How should the federal government budget for
capital investments especially in periods of fiscal stringency? We believe this is, and
should be, a major concern of the Congress and therefore a good choice for investiga-
tion and review by this committee.

As you all know, this is not a new subject. Almost 30 years ago, in October 1967,
the President’s Commission on Budget Concepts stated that:

The Commission finds little merit in proposals to exclude outlays for cap-
ital goods from the total of budget expenditures that is used to compute the
budget surplus or deficit. It strongly recommends against a capital budget
in this sense,

There has been consistent and strong opposition to a capital budget ever since,
strong enough to prevent success of the persistent attempts to incorporate this con-
cept into the federal budget process.


Part Two
‘Case Studies in Selected States

Indiana

Capital budgess include preventive maintenance, repair and
‘rehabilitation, and construction. Preventive maimenance is defined as
‘expenditures for the normal/routine upkeep of existing structures.
Repair and rehabilitation refers to infrequent upkeep or upgrading
existing structures which may result in a change in the function of an
asset. Construction refers to expendinures resulting in a new fixed
asset.

Kansas

‘There are four main capital improvement categories: rehabilitation and
Tepair, remodeling, new construction, and razing. Debs service,
regardless of the nanure of the project, is treated as a separate category
Rehabilitation and repair includes all maintenance (major and
emergency), restoration, replacement of fixed equipment, energy
conservation, code compliance, re-roofing, and program requirements.
Remodeling includes all major projects that substantially change the
structure and use of existing facilities. New construction includes all
new construction and building additions. Razing includes the
demolition of existing facilities. Debt service, consistent with GAAP
‘accounting principles, includes only the principal portion of the debt
service payment for a project.

Rhode Island

Maintenance is defined as all repair and renovation activities that do not
alter the asset's original purpose or expected useful life, while capital is
defined as all activities associated with construction. Capita includes
renovations and repairs which alter the asset's original intended use or
useful life.

Question: Most budget officials recognize the need for repair and
maintenance activities, Often, however, funds get diverted to other
‘operating expenses or to remodeling, renovations, or construction
projects. Have you addressed this issue in your state? To what
effect?

Arizona

Many of our facilities have structural and mechanical problems which
cannot be addressed due to the lack of renewal and maintenance funds.
To a large extent, preventive maintenance is not done on a routine
basis. All of our available funds are used to fix problems once they
‘become emergencies. The “building renewal” formula was an attempt
to address the concerns of budget officials and facility managers in the
area of maintenance and repair, however, funds were not provided.
‘The state's facility managers have done an outstanding job in fixing the
building inventory on “less than shoestring budgets” in the last five
years.

Page 38 Capital Budgeting in the States: Pathe to Succes


24

nisms could be projected and programmed so that emergency fi-
nancing measures are not required.

In addition, the operating costs of new and expanded public fa-
cilities can be included in forecasts of county disbursements re-
quirements and appropriate actions can be planned to provide re-
sources to staff the facility when complete. For example, we will be
constructing a 750-bed expansion to our adult detention center, the
additional annual operating costs which will be more than $14 mil-
lion a year.

Budget decisions of the board for the current budget year and the
impact of these decisions on future years’ budgets are made consid-
ering increased operating requirements. An analysis of the operat-
ing costs associated with all capital improvements to be included
in the capital program is reviewed and considered in the
prioritization process. No county facility, newly constructed or ren-
ovated, is to be built to be held empty. Our policy of forecasting
these operating budget impacts prevents surprise budget adjust-
ments as facilities are completed.

In closing, I believe that our capital budgeting process effectively
balances the need for public facilities and improvements against
the realities of the county’s financial position at any given point in
time. The continually evolving process of identifying pe lic im-
provement needs and prioritizing these against other budget re-

uirements ensures its financing is in place or planned to minimize
the impact of construction and facility operating costs on county
residents. Our process provides for buy in from both the political
leadership and the community for the need for the project and the
costs of these improvements.

We are very proud of our approach to capital budgeting. We are
very proud of the overall financial management program. And we
are very pleased that what we do and the way we do it has been
widely recognized by financial leaders and financial institutions.
We believe that there may be aspects of our capital budget program
and process that may be transferable to the Federal budget proc-

ess.
I will be pleased to answer any questions you have.
{The prepared statement of Mr. Leidinger follows:]

PREPARED STATEMENT OF WILLIAM J. LEIDINGER, COUNTY EXECUTIVE, FAIRFAX
County, VA

Let me begin by putting the County’s budget in perspective, particularly the part
of the budget targeted for capital projects. In FY Pood, the County's budget totale
$3.0 billion. Of this amount, approximately $572 million or about 19% is associated
with capital projects. In Fairfax County, financing for capital projects comes from
a variety of sources, including transfers from the General Fund (paydown), general
obligation bond proceeds, Federal grant funds for transportation/iransit related
projects, and other sources such as sewer and solid waste fee revenues and devel-
oper contributions.

The County's total paydown or “pay as you go” financing program in FY 1995 is
approximately $30 million. In addition, General Obligation Bond proceeds are used
to finance $348.0 million in capital costs in FY 1995. The County currently has
$624.1 million in general obligation bonding authorization and the County sells ap-
proximately $160 million in bonds annually, We also have done a great deal of bond
refunding in recent years as a result of favorable interest rates. rough the end
of FY 1995, the County will have completed $782 million in general obligation and
sewer bond refunding, resulting in a total of $31 million in net present value sav-
ings in debt service, The County total bonded indebtedness at the end of FY 1995
will be approximately $1.0 billion.


20

this, how would it affect our current—would this mean that you
couldn’t borrow on human or day-to-day operations, but you would
be able to borrow on day-to-day——

Mr. CLINGER. It wouldn’t limit you. I think what has been said
here is that right now we have no idea how much we are borrowing
for day-to-day operations and how much we are borrowing for in-
frastructure because it is all mixed into one bag. What this would
do at least, would differentiate between the two so you have more
control.

Mrs. MALONEY. More control for planning.

Mr. CLINGER. Because it is a unified budget, there would not be
the limitations such as you had in the city of New York.

Mrs. MALONEY. Thank you.

Mr. Horn. Chairman Clinger, do you have any further questions.

Mr. Cuincer. I do not. I would like to thank the panel.

Mr, Horn. Are there any questions from any Members who re-
main?

If not, we thank you both. You both have given excellent testi-
mony and we appreciate your enthusiasm for this device that has
been. hidden for 16 years and hidden since 1949, so thank you for

elping us.

Mr. MINETA. We thank you for your leadership.

Mr. THORNTON. Thank you for your leadership.

Mr. Horn. The next panel would please come in order. Panel
two: Katherine Hanley, William Leidinger, and Thomas McMahon.
We will introduce you more appropriately as I get to each one of

you.

If you would remain standing, we have a habit here and practice
that all witnesses but Members of Congress take the oath as to
their testimony. If you would raise your right hand.

[Witnesses sworn.]

Mr. Horn, The clerk will note that all the witnesses did affirm
it. You may be seated and we will now start.

Mr. Davis. Mr. Chairman, if I could introduce the first couple of
panelists. I am just very, very pleased to have two people I think
really are worthy of national recognition. They happen to be from
Fairfax County.

First of all, the new chairman of our board of supervisors, who
we can congratulate on winning the election to that position, that
is Fairfax County, a county of 900,000 people, the largest in Vir-
ginia, Katherine Hanley. Mrs. Hanley was a member of the county
school board prior and for 8 years was a member of the county
board before her election to chairman in a special election and I
consider her to be one of the experts on budgeting and capital
budgeting in particular. And William Leidinger, our county execu-
tive, our chief administrative officer, who has guided this county,
Fairfax County, over the last 2¥2 years, was prior to that a city
manager in Richmond, VA, and a member of the city council in
Richmond before coming to Fairfax.

And I think between all of them, Fairfax was voted the best fi-
nancially managed county in the United States by City and State
Magazine last year. It has a triple A bond rating and I just am
very proud to welcome you before this committee and hear your
testimony today.


103

Part Two
‘Case Studies in Selected Seaton

Finally, the states most satisfied with their capital budgenng process
‘have some method of keeping legislanures informed on the capital
budget needs of the state. Some states have a formal comminee made
up of individuals who are in charge of financing project, supervising
construction of projects, or budgeting for the state. Commitees include
‘both the executive branch and legislative branch. States that have a
‘commit in place report that it leads credibility tothe capital budget
[process it tends to take politics out of the decision making process, and
that itis perceived as a fair and equitable approach for seting capital
riorities for the state. In states that did not have a formal committee or
commission to evaluate the capital budget, the budget office or the
person in charge of the capital budget always kept key legislators
informed.

© Question: How does your state generate a list of capital
improvements and capital construction needs?

Kansas ‘Statute requires agencies to submit five-year facilities plans each year,
encompassing the forthcoming budget year and four succeeding budget
years.

Maryland Agencies submit requests for consideration. The capital budgeting

process runs parallel to the budget process but is separate from it.
Forms are provided to the agencies to make their requests.

Minnesota ‘State agencies submit their requests on capital needs. The capital
budget guidelines, forms, and procedures are sent to the state agencies
by the budget office. The capital budget is a separate document from
the operating budget and itis presented to the legislaure at a separate
time. In fact, the budget office 1s artempting to change the timing of the
‘operations and capital budgets so that one year of the biennium, (the
first year) operating budgets would be passed by the legislarure and the
second year of the biennium (when only minor changes need to be made
ty the operating budgets), che capital budget would be passed. The state
‘of Minnesota is on a biennial budget system but its legislanare does meet
every year. When both budgets are considered during the same
legislative session, the caprtal budget does not receive a thorough
bearing. Doing the capital budget on the off year of the operating
‘budget would allow legislators the opportunity wo do site visits. 10
research conducted, about half the states did capital budgets and
‘operating budgets at the same time and the other half did them at
different times.

Page @ Capital Budgeting in the States: Paths to Succem


32

Mr. MCMauown. No.

Mr. CLINGER. OK.

Ms. HANLEY. It has traditionally been that it has turned out to
last the life of the bond. In other words, we shouldn’t still be pay-
ing on the bond when whatever it is is no longer around. And tradi-
tionally we have had 30-year bonds. Equipment then is not consid-
ered capital.

Mr. CLINGER. You are talking about tangible things?

Ms. HANLEY. Tangible things, yes.

Mr. LEDINGER. We finance the acquisition of our equipment, ei-
ther motorized or technological equipment, either with direct pur-
chase or through the use of establishing revolving funds to fund an-
nually an amount estimated to have a sum sufficient to replace it
at the end of its useful life.

There are some places in Virginia that allow the issuance of
short-term notes, short-term bonds, 5 to 7 years, to provide highly
specialized equipment that lasts longer than a police vehicle, but
not as long as a jail if you would. For example, a fire truck or a
new computer. That might go 5 to 7 years.

So there is some capital debt financing done with using short-
term bonds for highly specialized equipment. But as Ms. Hanley
said, it is bricks and mortars, it lasts the life of the debt, then it
is capital. If it doesn’t, it is capital equipment; it is either paid for
one way or another out of current cash.

Mr. CLINGER. Right. Thank you all.

Mr. Horn. Representative Maloney.

Mrs. MALONEY. I would like a comment from all of you on how—

the structure by which you balance your budget. I know we are
hearing a lot about all the cities are balancing their budgets and
the States are balancing their budgets, and on long-term invest-
ment.
Is that off budget in the balancing or is it just the cost of the
interest rates to carry the long-term investment? How do you—I
know that on the expense side, you balance it. But how is the cap-
ital part part of balancing the budget?

Mr. McManon. In New York City, as you know quite well, we
carry the interest and the principal of our debt from the capital
budget in the expense budget. The expense budget is required to
be balanced under generally accepted accounting principles, which
on an annual basis, your revenues have to match your expenses.
And it is essentially so the capital budget is a separate—is a sepa-
rate document with the expense budget, including the principal
and debt service payments on that capital program.

Mrs. MALONEY. The same?

Ms. HANLEY. Our capital budget is limited by the amount of debt
service that will support it. In other words, our debt service is—
our policy is that our debt service should not exceed 10 percent of
our general fund budget, not including—I guess not including what
the capital costs are, but that our debt service is figured in into the
general fund and we must have a balanced budget in Virginia. We
are required to.

Mrs. MALONEY. The ability of local governments, I would like to
ask Ms. Hanley, to fund capital projects is often dependent upon
the opinions of those wonderful credit rating services.


113

Part Two
(Case Studies in Selected Seates

Preplanning Studies

For major projects determined to have merit as a result of the
preliminary review. preplanning studies must be prepared. In these
cases, the information contained in the capital project request justified
the need for the project and provided an initial estimate of the projex’s
cost. The preplanning study presents more detailed architectural,
engineering and technical information associated with the project,
confirms the technical feasibility of the project and refines the project's
cost. Agencies may use up to $50,000 from operating expense
appropriations to fund a preplanning study.

‘Agencies prepare preplanning studies berween April and September of
‘odd-numbered years and submit them to the Department of General
Services. By November. the Department of General Services reviews
the preplanning studies and provides recommendations tothe
Department of Planning and Budget on the technical aspects of the
project (including a revised cost estimate).

Once the major projects have been reviewed for programmatic and
technical merit, the Governor's Secretaries and the Department of
Planning and Budget conduct a similar preliminary review on the
projects of lesser magnmde between April and September. The same
criteria for determining merit is applied to these projects.

Final Decisions
‘The next part of the review process is to combine the two categories of
projects into a single priority listing: within each Secretarial area and
statewide. From this comprehensive listing, projects with top priority
will be selected for funding in the 1992-94 biennium. Less urgent
projects will become the foundation for the development of the six-year
capita outlay plan for 1994-2000. The priority categories used to make
the preliminary decisions are also used for this determination. In
addition, the urgency of the project (from the statewide policy
perspective) is considered

Once the programmatic and technical review is complete, the next stage
in the development of a capital budget is to establish criteria for how the
various types of projects will be financed. Virginia traditionally has
financed capital projects on a pay-as-you-go basis. This funding method
has created competition for resources between the operating and capital
budgets. Asa result. limited funding has been available for capital
projects and has restricted funding to only the most urgently needed
Projects.

Paae sz Capital Budgeting in the States: Paths to Success


56

bing the Federal Government of the base of Federal revenue or
services that undergirds its commitment.

In my own judgment, that sort of situation speaks to the inad-
equacies of the program—limitation—and not necessarily to any
flaw in the notion of a capital budget by itself. If systematically one
finds that the agency involved is overestimating the life of the as-
sets, then that is something that the agency should be asked to cor-
rect. And if it won’t, obviously the last—the last opportunity is the
Congress imposing a correction on the agency’s deliberations.

Mr. Horn. Yes. Mr. Sheridan.

Mr. SHERIDAN. One might also include in the capital budget at
the outset the notion of replacement and refurbishment require-
ments in the future. It was clear that in that project and many
that we see not too far from here that that was not allocated at
the time and I think that was a shortcoming of the process.

Mr. Horn. I think you are absolutely correct. California does ex-
actly that with major capital outlays separated from minor capital
outlay where you could go in, completely redo the building to adapt
to modern computer systems, so forth, and take care of equipment
replacement.

Governor Reagan personally ordered that change made because
until he became Governor, the rule in California was you got your
scientific equipment with the initial building but there was no
funding formula to ever replace that equipment. So I remember my
planning dean came in to me the first few months when I was
president. He said, “I have a great idea.” He said, “Let’s split this
campus in two. It would only mean we would need another presi-
dent, and we could double our formulas and go back and get all the
new equipment and everything else that we need that didn’t come
with the buildings.”

And it was just crazy, that type of bureaucratic system. That was
pointed out to the Governor. He laughed and said, “This is the
stupidest thing I ever heard of,” and the Department of Finance fi-
nally changed it, but we still have some crazy anomalies.

Let me yield to the gentleman from Illinois, Mr. Flanagan.

Mr. FLANAGAN. Thank you, Mr. Chairman. Thank you, gentle-
men, for coming.

Mr. Sheridan, I was very interested as you were talking about
capital budgeting in the private sector. And it all seems to be objec-
tive oriented. We have a direction that we are going. We know
where we want to be in a certain amount of time. We will budget
accordingly and we will get there by allocating resources to make
that happen and making sure that we have operating expenses to
cover as we go along.

Would the government could work that way. There is an enor-
mous fluidity with change of administration, with change of parties
as the payers of bills come in and the payers of bills go and the
level of priorities, the level of objectives changes enormously
through that time.

How does in a business context, for instance, a part of the apoca-
lyptic problem of stock crashing, divisions being sold off and other
really horrible things happening in business when you have such
a change whether externally or internally imposed, in the context


110

Part Two
Case Studies in Selected States

‘The oversight committee can be useful in helping to iron out questions
‘of equity. When the budget office makes its recommendations, it
generally looks at sesting priorities based on absolute program needs,
‘while the legislanure tends to focus more on specific districts, When the
‘oversight committee was optional, it helped to structure the Governor's
recommendations so that it did meet program needs, but also equitably
dispersed funds to localities. An oversight comminee may allow the
state to benefit from a mote diversified view, rather than the straight
‘budget analyst view of program needs.

Section 3

Capital Project
Selection

Question: How do you establish priorities for selecting capital
projects?

Kansas

‘Agencies are required, as part of the submission of their five-year
facilities plans, to indicate the priority of projects based on safety
considerations, adherence to program requirements, conformance with
codes, and so forth. There are few formal guidelines or definitions that
agencies are directed to follow. On the negative side, the depth of
analysis is not as great as it should be because of time considerations
and the complexity of cost estimates and benefit/cost evaluations. On
the positive side, the process generally produces rational results, and
with a few exceptions, has not been a source of discord among projet
selectors. The experience of the agency representatives who develop
requests helps to make the process work.

Virginia

Overview
‘The process for selecting capital outlay projects for funding takes about
twenty months. In December of even-numbered years, the Deparment
of Planning and Budget provides agencies with instructions for
developing their capital budget proposals. It is not until Suly of the
following even-numbered year that projects receive funding.

‘Agencies submit their capital budget proposals to the Department of
Planning and Budget in February of odd-number years. The capital
bbudget proposal sets forth the agency's capital project needs in priority
‘order and relates these needs to the agency's programs and services.
‘The proposal consists of three parts — a six year plan, a maintenance
reserve plan and individual capital project requests.

Pane 10


14

Table 3
Treatment of Maintenance
Sune Is Maintenance Treated In The Capita
‘Ausbara ‘Renovation and repair are capital ems, maintenance u operiung,
‘Alaska on. repair, deferred fre capital items: general 1s operating,
‘Anaona Routine maintenance excluded Buildang renewal funds approprated by formula in stalute
Arcanaas ‘Treated like any other request
Cabfomia 1n operating budget
Colorado (Deferred maintenance in capital, ovine maLnlenance in OpeTanng
Connecucut Jn opermting budget.
Delaware Deferred building mainienance aderessed
Florida ‘An annual uwentory of state-owned buildings conducted to determine maintenance need
Georg Included sf relatively substantial cost_not recurnng, and increases useful bfe
Havas In operaing budge
aah Cenc maintenance budgeted at 1% of budding valuation
Runow In operating budget
Induana In operaung budget
lows Deferred maintenance i capital
Kansas Largely financed (rom dedicated funds
Kentucky Mir maintenance below $200,000 funded from poo! of state funds
Lowisians In operaung budget
Mane Included in operating budget
Maryland Included if over $100.000_15 vear life
Mastachuseus No response.
Michigan Lump sum maintenance appropnation
Munnesoua ‘Major maintenance in capital budget. recurring mainienance in operating budget
Misssippi Maintenance project generally not recommended
Mistoun Ongoing maintenance to preserve a facility sn operaing, other mainienance & repair ove minimum 19 cap
Montana Major maintenance wcluded
Nebraska Renovation and repair are capital tems, masntenance  operaing,
Nevada No response
New Hampshire Deferred maintenance in capital, usual mauntenance sn operaung budget
New lersey Maintenance above $50,000 i capital
New Meuco Th operating budget. In faire. may plan io fund prevenive mainienance in capial
New York In operating budge
Nomh Carolina In operaung budget
Nonh Dakow In operaung budget
One Deferred maintenance in capital: routine mavtensnce wt operating
‘Oulahoma In opernung budget
Oregon Routine mauntenance excluded
Pennsylvania {In operning budget.
Rhcde Island In operating budget,
South Carolina According o need
South Dakouw In operaung budget
Tennessee “Major maintenance above $50,000 included
Teme Tn operating budget
vah In operaung budget
Vermont Mayor maintenance and repair in capil general maunenance 19 operating budget
Vagina “Maintenance reserve appropnation provided
Washington Renovation and major repairs are capil wems, masnienance operating
West Virgous 1m operting budget
Waconnia Funding provided
Wroming In operaung budget
pc NA

Page 2 Capital Budgeting in the States:

2 Pathe to Success


26

only the most critical emergency repair and maintenance projects from the paydown
capital program.

the County’s revenue base recovers in reaction to the current economy, addi-
tional resources are becoming available for the restoration of selected capital
projects. These restorations will be programmed based on continued reprioritization
of community goals and facility needs.

3. The Fairfax County Capital Budgeting Process encourages more ef-
ficient government administration.

The County’s Capital Improvement Program promotes coordination among
mental agencies and provides a check on Potential overlapping or co:
projects. Decisions related to site selection and the timing of construction activity
can be made in relation to improvements planned by various agencies, For example,
our planned roadway construction projects are closely cuordinated with State road
construction to minimize community cheruption, to reduce County costs where pos-
sible, and to maximize the impact of improvements in the area by providing a more
efficient roadway network.

4. The Fairfax County Capital Budgeting Process fosters a sound and
stable financial program.

Through the five year capital planning process, the need for bonds or other financ-
ing mechanisms can be projected and programmed so that emergency financin,
measures. not required. In addition, the operating costs of new and expande
public facilities can be included in forecasts of County disbursement requirements,
and appropriate actions can be planned to provide resources to staff the facility
when complete. For example, Fairfax County will be constructing a 750-bed expan-
sion to our Adult Detention Center, the additional annual operating costs of which
will be more than $14 million. Budget decisions of the Board for the current budget

ear and the impact of these decisions on foture years budgets are made considerin;
increased operating requirements. An analysis of the operating costs associated wit!
all capital improvements to be included in the capital program is reviewed and con-
sidered in the prioritization process. No County facility, newly constructed or ren-
ovated, is to be built to be held empty; our policy of Torecasting these operating
budget impacts prevents surprise budget adjustments as facilities are completed.

In closing, I believe that the County’s capital budgeting process effectively bal-
ances the need for public facilities and improvements against the realities of the
County’s financial position. The continually evolving process of identifying public
improvement needs and prioritizing these against other budget requirements in-
sures that financing is in place or planned to minimize the impact of construction
and facility operating costs on County residents. Our process provides for “buy in”
from both the political leaders and the community of the need for and the cost of
these improvements.

Tam proud of the County’s approach to capital budgeting and its overall financial
management program and am pleased that these practices have been recognized by
financial leaders. I believe that there are many aspects of the our capital budget
Program which may be transferable to Federal Budget process.

1ank you for the opportunity to speak to you today.

ern-

FalRFAx CounTy’s TEN PRINCIPLES OF SOUND FINANCIAL MANAGEMENT

1, The planning system in the County will continue as a dynamic process which
is synchronized with the capital improvement program, capital budget and operat-
ing budget. The County’s land use plans shall not be allowed to become static. Frere
will continue to be periodic reviews of the plans at least every five years. Small area
plans shall not be modified in isolation from and in contradistinction to contiguous
plans.

2. Annual budgets shall continue to show fiscal restraint. Further, it is imperative
that a positive cash balance (surplus) be shown in the General Fund at the end of
each fiscal year. If necessary, spending during the fiscal year will be reduced suffi-
ciently to create such a cash surplus.

a, A managed reserve shall be maintained in the Combined General Fund at
a level sufficient to provide for temporary financing of unforeseen needs of an
emergency nature, and to permit orderly adjustment to changes resultin,
termination of revenue sources through actions of other governmental bodies.
The reserve will be maintained at a level not less than 2 percent of total Com-
bined General Fund disbursements in any given year.

b. As part of the Board's policy on appropriation during quarterly budget re-
views, nonrecurring revenues should be used for either capital expenditures or


Table 15
Project Financing: Part 2
Use OF Include Reveave Bonds Interim
Treasury Losas pital Process Financing Methods
Aapane N ¥ N
Alaska Y y General fund
Anton N N N
Arkansas N Y N
Cabforna y ¥ Planning funds pooled inves
t Y ¥
y y
No response N
N Y General fund. special ures. E20"
N y ‘
¥ Y Treasury loats BANS
Y Y Permanent Buiging Furs GA
N N N
N N ‘
N y Anuemal funds
Y Y By
¥ y Masier note financing ads e063
Y y Loans
Y Y Bond Anucipation Notes
Marviand y y ‘Ady funds consol_bond procees
Mussachuseas To response ‘No response ‘No response
Michiger Y Y General fund
Minnesow y N N
Mussasipp: N N N
Mistoun N ¥ N
Moniaa nN ¥ Cash
Neorasia N y N
evade No response No response No response
New Hampshire N Y General fund
Sew Jeney y N N
Sew Mexico w Y N
New York Y y Tax rte loan, commerca!
Nom Carolina N Y N
Nonh Dako N N N
Ow N y N
Cnahome N Y n
Oregon N Y Iniemal loans
Pennsylvania N N Bond Anticipation Notes
Rhode island Y " ‘Bond Antieipation Notes gene”
Sout Carolina y ¥ Bond Anticipation Ses
Sun Dako Wx ix NA
Tennessee Y Y N
Tous N Y x
van Y y Cash flow Treasure?
Vermont y¥ N Bond Anticipation Notes gerers “35
Virgina Y Y Being developed
Washington N Y N
West Virgin Y Y Treasury loans, aotes
Wisconsin y Y N
Wromag x y N
pe y s General fund pooied sash
you ¥=36

Page 30 5 Capital Budgeting in the States: Paths to Success


7

dollars allocated to infrastructure. Incorporating this planning in-
formation in the annual budgeting process is essential.

The President’s budget documents show capital investments as
an afterthought for informational purposes in the appendix. We
need to move the capital decision process into the beginning of the
process, into the planning stage. That is what every good effective
local government, university, and private firm does to benefit its
citizens and shareholders. So should the Federal Government.

Capital budgets can have their pitfalls. Some have attempted to
widen the definition of capital to include a large number of social
programs that are not always associated with a particular asset.
Although it is worthy of consideration, this gimmickry sometimes
has damaged the bond ratings of several large municipalities and
discredited the notion of capital budgeting. However, incorporating
capital budgeting into the planning process is crucial and we
should avoid this type of abuse in doing so.

I look forward to hearing the testimony of our witnesses. We are
delighted to have two distinguished Members of Congress open this
hearing this afternoon. First, I would like to ask Mr. Norman Mi-
neta, the distinguished ranking member and former chairman of
the Committee on Transportation and Infrastructure, former mayor
of San Jose, CA, and a very distinguished public servant to begin
the testimony.

STATEMENT OF THE HON. NORMAN Y. MINETA, A REPRESENT-
ATIVE IN CONGRESS FROM THE STATE OF CALIFORNIA

Mr. Mineta. Thank you very much, Mr. Chairman. I really ap-
preciate this opportunity to appear before you and the members of
the subcommittee.

At the outset, let me commend you, Mr. Chairman, for calling
this hearing. Let me also commend you for your continued support
as a fellow colleague on the Committee on Transportation and In-
frastructure regarding the importance of physical investments to
our Nation’s long-term economic vitality.

I would also like to pay special recognition to the very distin-
guished ranking Democratic member of the subcommittee, Mrs.

laloney of New York, who as a member of the New York City
Council for 10 years has had good firsthand experience with capital
budgeting at the local level.

Last, I am pleased that we are joined by the two real leaders in
the House on the issue of capital budgeting. First, Chairman
Clinger and our colleague Congressman Wise who presently is not
here, but in any event, both of these Members have championed
the cause of capital budgeting over a long period of time. They have
introduced bills, they Fave held hearings, they have sponsored
symposiums. They have lobbied the White House and done just

out, every! thing you can think of in promoting this issue. And so
in my book, Mr. Chairman, they are to be commended for their
leadership.

Mr. Chairman, Federal programs come in many shapes and
sizes. Dollars are spent for highways, Federal salaries, health bene-
fits and foreign aid, just to name a few. These are different pro-

‘ams, with different purposes, with different needs, and with dif-

ferent impacts on the economy.


15

Part Oue
Capital Budgeting in the States

Section 2

Organization of ‘The capital budgeting process usually starts with budget instructions

the Capital issued to agencies. The time-line from the initial instructions until the
. varies from six months wo two years, with an average

Planning Process: time-line of about one year. As Table ¢ shows, in addition to state

Tables 4-6 agencies, some states also allow non-profit agencies, boards and

commissions, and elected officials to make requests for capital projects.
States are about evealy divided between having a separate capital

descriptions, multi-year planning documents, and portions of the
‘operating budget seeving as capital documents.

‘With the many actors involved in the capital process, some states - more
than one-third - have established joint legislative boards or commissions
tw oversee the process as shown in Table 5. Some boards are
established with specific missions, such as developing and implementing
«a long-range planning process as in Kenmucky.

Capital planning in most states is a autti-year process. Table 5 shows
that in about two-thirds of the states, the capital budget extends from
three to tea years, with five years the most frequent timespan for
Capital plans. In about half the states with long range capital budgets,
the budgets are passed into law. In most cases, the long-range budget is
amended through anaual appropriations. Often the budget office
provides an overall coordinating role for the long-range plan. Although
‘many states have long-range plans, estimates for the out-year costs
provide a general trend for the project and are not as detailed as the
current year estimate.

‘The coordination of the capital and operating budget is a significant
feature of the capital budgeting process. Table 6 demonstrates that
‘coordination occurs in many states by including the impact on the
operating budget as part of every capital request. Budget analysts
provide a key role in coordinating operating and capital budgets. Other
approaches to coordinating operating and capital budges include a
program planning process in higher education used in Colorado and a
strategic planning process that fosters communication berween those
involved in the operating and capital budgeting decisions in Delaware.

Page B Capital Budgeting in the States; Paths to Sucre


81

Part One
Capital Budgetiog in the States

‘Table 12 shows that in most states future operating costs are projected
and often compared to current operating expenses. Projected future
‘costs, however, do not necessarily have any claim on funure

‘Table 13 presents the variety of methods states use to track projects
‘once they are underway. Monitoring during the process occurs in the
budget office as well as in agencies. Some states, such as Kentucky and
Virginia, require an anmual or semi-annual progress report for
legislative review. A formal tracking system as part of the accounting
‘system is being developed in New Jersey. Other states have a
decentralized tracking system within the specific agency overseeing the
project.

Good Practices ‘* Identify the criteria used im selecting capital projects.

States often determine their needs on a functional basis such as higher
‘education and aid to localities. While the functional approach is used
for needs assessment over time, emergency of health and safery criteria
often determine immediate project selection. States should have some
method to integrate needs assessment with project selection. What
‘constitutes an emergency or health reason should be clearly defined. In
‘reviewing the process for project selection, states should assess how
actual project selection compares to the priority list,

Define all program outcomes for capital investments.
Reviews of project requests often do not explicitly link the program
objective to the project in question. Projects may be approved that meet
financial criteria, but do not meet the objectives of the program.

‘+ Evaluate cost estimating methods to measure their validity.
Even though the experuse for estimating methods is often with the
architects and engineers outside of the budget deparunent, budget
‘analysts should be able to understand the undectying assumptions and
‘methods used in the cost estimates in order to thoroughly review project
requests.

‘+ Establish » tracking system to keep projects on schedule and within
budget.
‘The tracking system should be ongoing and should serve as an early

warning device for projects that are exceeding projections for both cost
and time.

Page 19 Capital Budgeting in the States: Paths wo Succes


3

[The prepared statements of Hon. Carolyn B. Maloney, Hon. Mi-
chael P. Flanagan, Hon. Cardiss Collins, and Hon. Bud Shuster fol-
low:

PREPARED STATEMENT OF Hon. CAROLYN B. MALONEY, A REPRESENTATIVE IN
Conaress FRoM THE STaTE OF New YorK

Mr. Chairman, thank you for holding this hearing on capital budgeting. It is al-
ways useful to examine the operation of the budget process and to look for construc-
tive improvements. I am especially pleased that we have several witnesses present
from local government, including New York City, which have employed capital budg-
eting.

Local governments cannot print money and incur debt the same way the Federal
government can and therefore operate under serious fiscal constraints. They have
to rely increasingly on their own resources and less on help from the Federal gov-
ernment. We can all learn from the tough choices that they have to make.

Iam open to the idea of establishing a more explicit capital budget at, the Federal
level, assuming we can properly define what constitutes capital expenditures. Cap-
ital budgeting can work if it is structured to help congress and the President make
choices which increase long-term national productivity and our stock of capital as-
sets. It can help us set priorities and choose between competing capital assets chas-
ing scarce funds. But it won't work if it is treated as a gimmick used to shelter too
much of the budget from the hard fiscal choices we have to make.

A capital budget can work as a long-range planning tool, and as a means to make
difficult choices within the national budget. We have allowed our national infra-
structure to decay, and we have not planned for future needs to the degree nec-
essary. We have too often chosen the quick fix, in preference to some of the major
decisions we should make about our highways, rail systems, bridges and aviation
system.

I want to commend Chairman Clinger, Congressman Wise and others for intro-
ducing legislation which attempts to apply capital budgeting at. the Federal level.

stand that we may deal with that legislation more specifically at a future
hearing, once members gain a better understanding of the concepts and the con-
troversies involved,

Based on what I'have seen, I am not sure that I agree with all of the suggestions
that have been made as to what might constitute capital expenditures. We can prob-
ably agree that they include things like roads, bridges and mass transport. How-
ever, T would be very skeptical about including items euch as defense and weapons
systems. A useful capital budget would enhance our ability to understand the budg-
et and make hard choices. It is not one which includes most of the old budget under
anew name.

Thank you again Mr. Chairman.

PREPARED STATEMENT OF HON. MICHAEL P. FLANAGAN, A REPRESENTATIVE IN
CONGRESS FROM THE STATE OF ILLINOIS

Thank you Chairman Horn. I am looking forward to working toward a better un-
derstanding of how the capital budgeting process works in Fairfax County as well
as New York City and how the federal government might benefit from a similar
process. We all have a stake in public facili that operate well and at the same
time are cost effective to deliver. I understand the difficulty in combining these two
qualities and congratulate Fairfax County and New York City on their success.

I am particularly interested in how adopting a capital budgeting process helps
balance a budget, be it a city budget, county budget or a federal budget and how
effectively capital budgeting can be defined when applied to the federal government.
‘My concerns regarding capital budgeting include placing constraints on debt levels
of the federal government before we implement capital budgeting and what is the
appropriate entity to decide on these constraints. I am also conscious of capital
budgeting being used as a tool to mask deficit numbers for political purposes.

at said, I certainly agree with the notion of projecting cost in anticipation of
budgeting concerns and strongly believe in a balanced federal budget. Therefore, I
am looking forward to learning more about the capital budgeting process and how
it will work to make the federal government run more efficiently.

I thank Chairman Horn for holding this hearing as well as the witnesses for tak-
ing the time to better inform us on this complex issue.



‘The guidelines may in fact restrain bonding; for example, the guideline
in Minnesota is that no more than 3 percent of the general fund can be
used for debt service. However, guidelines make one stop and think
about prioritizing projects and getting the most for the money. Another
suggestion is to gain an understanding of how the legislature is going to
process the capital budget. Kaowing how the legistanure will deal with
a capital budget means one can plan to meet the information needs of
the legislature.

(One suggestion is to separate the financing phase and the construction
phase because they are not similar; totally different expertise is needed
in both areas.

© Question: Do you have an oversight committee?

Maryland ‘The state of Maryland does not have a review board. It has budget
hearings where an agency has an opportunity to explain its capital
budget request, and generally the legislative staf is there. On occasion.
there is a legislator present, but that is fairly rare. The Deputy Budget
Secretary for Capital Programs puts a lot of effort into informally
Keeping key legislators abreast of capital budgeting needs. During the
legislative session when projects and budgets are making their way
‘durough the budget process, there is daily contact with the legislators.
‘The legislature tends to focus mainly on the budget year requests rather
than the years beyond the budget when making its decisions.

Minnesota ‘The state of Minnesota does not have an oversight commitee, but the
legislature is considering establishing a joint comminse where both
political parties and the legislative and executive branches would be
epresented. This committee could set out the basic parameters to
follow in the capital budget and provide oversight to the capital budger
process.

Virginia ‘Virginia does not have an oversight committee. The previous Governor
hhad a cabinet level commitee to review various capital ouday requess.
‘but that no longer exists. That comminee was made up of the Secretary
of Finance, Secretary of Education, Secretary of Health and Human
‘Services, and three others appointed by the Governor. There were no
legislators on this particular oversight committee. The committee was
‘haired by the Governor's Chief of Staff.

Page 8 Capital Budgeting in the States: Petts to Succes


19

Table 6
Capital Budgeting Coordinated with Operating

Sate How 11 Capical Budgetiag Coordinated With The Operatiog Budget?
‘Alabama “Combined in one appropriation bul
Alissa Combined in one appropriation bill
Araona CCapizal project requests must include impact on operating budget
Arkansas Agency anticipates impact on opermting budget (rom capial requests,
Cabfornia “Through verbal communication, sharing of plans. and system data reports
Colorado Higher education hes program planning process that links operating budget © capsal
Connecticut ‘Through analysis by budget and capaal analsas
Delaware Strategic planning process serves in promoting communication
Flonds Plant inchide impact of capital project on operating budget
Georgia Developed rimukancously; included in one appropration bill
Hawai ‘Capua project include impact on operating costs
Idaho By governor's budget anal.
poe ‘Through budget office instructions and cooperation of budget analysis,
Indiana Combined in one appropriation bill
lows Both operating and capital developed simukancousiy, umptct af operations taken nto account
Kansas ‘Budget analyst review of capital request uncludes umpact on operaing budge.
Kentucky Prepared simuhancously with operating budget
Louisiana Budget analyst review capaal budget requests
Mave Same process as operating budget except for General Fund and Highway Bond Projects
Maryland Through capiaVopersting coordinator Impact on operating budget par of capéal buduet presentati'?
Massachuseas No response.
Michigan ‘Component of tua! budget process
Capital requests must include impact on operating budget
Match capaal recommendations to agency 4 operating mussion: project change in operaiing cows
8 Capial budget analyst coordinates analvaw wah operating budget enalvst
Montana Budget office reviews capaal projects and soardvtcs wath operating

Nebraska ‘Capit project inchide impact on operating cous
Nevade No response

New Hampshire Budget Office reviews capital projets and coordinates wh operating

Now leney “Through slT interaction and by manssement review

New Mexico Capital budget inclades operaing badges umpaca and aperaung budge reicrencescapial projet
New York Capital budget requests ut inclode umpact on operating cote

Nonh Caroling Through capital and operating budget anaiyas

Noh Dakou In the same budget, diferent ine tems,

Oho Capi bil is one vear ater the budget bil_Anavss review capa request or pact on operating “isc
‘Oklahoma Esumated operating coats caleuiated

Oregon, Capital ia monly, and after the, budget

Penntyivania Capa and operating budgas are both developed by the Orfce ofthe Budget

Rhode sand Agencien mus include impact on operaung

Sout Carolina Capea plana include § year expendeures

Sout Dakou Bond payments nclodd in operuung budget

Teonessee Architectural aff mens wih budget analvaa 4nd Separmenis to review capil and operating
Tess Pan ofthe operating budget.

van ‘Through Office of Panning and Bodget

Vermont Developed atthe same tune; impact (rom <aptal provers must be welded in vpernting Dadeet
Vagina Developed at same ume, Cepéal requests must aclode unpact on operating budget

Washington ‘Debt sevice part of operating budget. oherwnse septate

West Virginia No reaponse

Wisconsin Periodic review wih budget office and fclaes management

Wyoming (Operaung and/or maumenanee expenica referenced i capaal request

oc Agency directors request projec in pie f ong term operating plant

Page 7 Capital Budgeting i the States: Paths ts Saco


105

Part Two
Case Studies in Selected States

Question: How much do your long-range plans guide future years?

Kansas

‘The plans submitted are generally a guide to the future: however, the
scope and cost of projects will change significantly from the time they
first appear in the plan to the time a decision is made to fund them.

Maryland

‘About 70 percent of the requests anticipated for the second year of the
five-year plan will actually be part of the budget process the following
year. The other 30 percent could change for reasons such as delays in
‘design or other types of delays for scheduled building or renovations;
discovery of new needs; requests for projects that had been tured down
by the legislarure and are requested again; or perhaps the legislature had
appropriated planning funds for a project that was not inthe five-year
plan for the budget year. If the legislamre appropriated planning funds,
then the capital project would be scheduled sooner

Minnesota

‘Those years that are not actually in the budget itself do not have the
same level of documentation and needs analysis as occurs in the budget
year.

Virginia

Plans are constantly being updated because of changing needs. In fact.
the program is in a state of flux right now, because Virginia has always
‘operated its capital construction budget on a pay-as-you-go basis. The
state has done no borrowing for buildings since 1978, with the
exception of revenue producing types of projects in higher education
and a few prison sites through the Public Building Authority. Asa
‘Beneral rule, renovations and new construction have been done
‘completely on a cash basis. Because there was no need for debt
financing, there was not a great deal of emphasis on the six-year plan.
However, beginning with its next biennium, the state is looking at a
six-year debt financing instrument in order to manage capital
renovations and new construction. There is not much detail beyond the
‘current two years. Beyond two years, agencies aggregate the number of
square footage and apply a general cost per square foot.

Virginia requires by statute that a preplanning study precede any
construction. Generally, the preplanning study is funded in the
biennium prior to construction. If the legislature did not fund the
replanning study, the department that wants to build during the next
biennium needs to find he money on its own to do the study. The
preplanning study actually means that about 20 percent of the planning
is done, and the agency 1s ready to move into the design phase. The
Preplanning study results in a much more accurate estimate.

Page ‘Capital Budgeting in the States: Paths to Success


90

Part One
Capital Budgeting in the States

Table 16. About half the states have the users of approved facilities
anticipate in paying for debt service. Some states require private sector
participation in certain capital projects. The types of projects most
likely to have private sector participation include economic development
projects and build-to-sunt projects with an option to buy. About half
the states compare debt service expense with the net operating impact
and changes in revenues and expenditures of the projects funded.

States make decisions on the amount of general funds to allocate for
debt service based on available revenues as well as
stamutory/constitutional debt limits, As Table 17 shows, about
two-thirds of the states have limits on the amount of debt service or
authorized debt. The limits vary across states, with a range from no
general obligation debt to fifteen percent of available revenues for debt
service. Limits on authonzed debt also range from no allowable debt to
a dollar amount such as $500,000 or percentage of income or revenues
Other limits are waived with the requisite voter approval. Limits on
revenue bonds are less frequent and when they exist, the limits tend to
be dependent on various issuing authorities. As an approach to setting
targets for debt, about half of the states start the capital budget process
with amounts based on funding sources such as total general obligation
bonds, total debt service appropriation, and total cash appropriation for
capital projects.

Good Practices

Define the factors to consider in decisions of whether to own or
Tease.

Factors to consider include life-cycle costs and the impact on local
Property taxes.

© Develop a clear debt policy.
With the trend towards more of state expenditures in the entiuement or
category, states limit theit flexibility when debt service
exceeds a comfortable portion of theis operating budget. The debt
service limits states set for themselves should be viewed in light of
anticipated overall growth in the states" revenues.

Review cost-benefit comparisons for private sector participation in
capital projects.

Opportunities to involve the private sector would help target the specific
benefits and costs of a proyect.

Page 28 (Capital Budgeting in the States: Paths to Succes


58

Mr. Cuu. I think, as people here are well aware, the executive
branch, particularly the Office of Management and Budget, has not
been enthused about this concept. It has come up repeatedly over
the last several decades. And notwithstanding its widespread use
at the State and local level, it’s been something that the Federal
Government, at least on the executive branch side, has consistently
rejected.

In my own judgment, a principal element in the opposition to the
idea is the fear that the chairman mentioned: that people would
improperly hide, or attempt to solicit support, for operating costs
as a capital item. And that, I think, is one of the reasons that the
nonphysical investments are so controversial, even if they clearly
are Tonglived and have an enduring contribution to the productive
enterprise of the Nation.

Mr. Bass. Who does the Federal Government borrow from and
what is the difference between borrowing for a capital budget and
borrowing to balance the operating budget?

Mr. Cuu. Well, the Federal Government, of course, as you know,
sir, ultimately borrows from two sources: either from our own citi-
zens or from citizens or organizations abroad, setting aside the out-
right printing of money by the Federal Reserve as a solution to fi-
nancing the Federal deficit.

Those two sources have different implications for the future eco-
nomic life of the country. Ultimately, as an economic matter, what.
counts is the level of Federal borrowing and the implications of the
Federal Government consistently running excess of expenditures
over revenues.

Mr. Bass. This is my last question. Has anybody ever considered
the establishment within a capital budget network of an authority
or this committee in oversight capacity or whatever for leasing ver-
sus purchasing and setting limits on leasing, so that when we con-
tract to build buildings that don’t work or to purchase aircraft that
are obsolete before they even get finished or never tested and so
forth, have either of you two gentlemen given any thought to this
as a mechanism whereby we could provide more flexibility, less
risk, and so forth and so on?

Mr. SHERIDAN. Well, in most cases, a lease versus buy for a high-
ly creditworthy entity, the lease will not win simply because you
have to pay somebody else to rent their money. There may be some
cases where operating leases would have some merit for particular
reasons given the obsolescence, such as computer within a certain
period of time, but if it is purely a cost-of-money question, it is

ard to get a better credit rating than the United States and hence
you would be paying more to have the same asset utilized.

Mr. Cuu. As I observe this, there have been two principal issues
in the use of leases by the Federal Government. One is the one
that Mr. Sheridan mentions; can you do better in some financial
sense by leasing versus buying? At one point, when agencies didn’t
have to discount the leases completely up front with the Federal
Financing Bank, it was an end run around Federal budgetary limi-
tations. That loophole has been largely closed.

The other issue is a little different, and it revolves around the
question of using the lease as a way of involving the private sector


54

And they recognize that the impact on their own businesses and
their own lives and their own adjustable rate mortgages are at
stake. We find that they have more difficulty turning down ballots
and they fire only every 2 years, but I think that they will speak
and have.

Mr. Cuu. The observation I would offer on this whole controversy
is that, as is obvious to everybody, we are making these decisions
now. We are making capital investment decisions now. But we
aren’t making them—and I think this is the point really in Mr.
Clinger’s bill—we aren’t making them in an organized way, think-
ing about our choices in some strategic sense. We are also making
borrowing decisions now. In essence, all the capital budget notion
does—for all the economics that get attached to it—is insist that
we try a more organized, more strategic approach to capital invest-
ments decisions. It doesn’t change the fact that we are already
making them.

Mr. Horn. Do you agree with Mr. Sheridan’s suggestion that
some of the long-term weapons systems would qualify for a capital

budget?
ir. CHU. Yes, sir.

Mr. Horn. You served in the Pentagon?

Mr. CHu. Yes, sir.

Mr. Horn. What did you think objectively —

Mr. Cuu. Yes, sir.

Mr. Horn [continuing]. As to the criteria by which the Depart-
ment of Defense picked and chose between competing projects of a
5, 10, 15-year nature? I am familiar with the C-17. I think that
has been in initiation stage, production stage, for 17 or 18 years
at this point from the original design.

How did you see that process working? Were there things that
you as an expert in this area thought, foo heavens, why don’t
they apply some common sense and use this as a criteria?” Or are
there criterion to separate between these items?

Mr. Cuu. I think that the imposition of, or the requirement to
submit a capital budget, would do the Department of Defense a
great deal of good, because its present budgetary horizon is for-
mally only 6 years into the future. There is a tendency not to look
beyond that, and a tendency, in fact, to try to push bills out to the
end of that period—if you're really clever, to the 7th year.

And of course as you appreciate, typically it takes at least a year
to build an airplane. It takes several years typically to build a large
naval war ship. It takes more than 6 years to conceive, design, and
develop a major weapons system, C-17 being an excellent case in
point.

One of the advantages, it seems to me, of a capital budget, is
that it would compel the Department to deal with these issues on
a long-term basis, including, ironically, having to think about the
operating costs commitments it is making in the future by the cap-
ital decisions that it is initiatin, lay.

In my judgment, it would be healthy for the Department. I don’t
wish to pretend that it would necessarily be enthusiastically re-
ceived as a notion within that Department, but I think it would
bring a very useful, proper long-term perspective to the choices
that it must always make.


16

operations in human investments were separated completely and
totally from the capital long range investment in the infrastructure
of the city. I would. like to ask, in Chairman Clinger’s bill, whether
you agree with some of the areas that he mentions for capital. He

as many things that are the same as New York City, roads,
bridges, et cetera. But he also has space and communications facili-
ties. Would you agree that that is capital, Chairman Mineta?

Mr. MINETA. Well, again, I think there are productivity gains
that you—that are measurable from those kinds of investments.

Mrs. MALONEY. Would you say yes to that?

Mr. Mineta. Yes, I would.

Mrs. MALONEY. Mr. Thornton says yes. Defense facilities and
Major weapons?

Mr. MINETA. Well, again—I don’t know about weapons. I am not
sure that I would have, let’s say, an M-1 tank or a Bradley fighting
vehicle in that sense.

Mrs. MALONEY. What about petroleum reserves and mineral
stockpiles? Would that be an infrastructure capital budget item in
your opinion?

Mr. MINETA. I would think of that more as an asset rather
than—I am not sure in what sense in terms of—in order to build
a petroleum reserve and the money that goes into building that pe-
troleum, should that be considered—I guess yes. I guess in that in-
stance, I would say yes.

Mr. THORNTON. Ves.

Mrs. MALONEY. I think the biggest difficulty really is how you de-
fine the capital budget and what is a fixed asset and both of you
are such distinguished leaders in this body and have so much expe-
rience, I would just like to ask if you would try to define it in writ-
ing for us later for the record of what should be the capital budget.
I am working off the chairman’s bill, if you agree with it or not,
in the definitions of a condition budget and I yield back the balance
of my time.

Mr. CLINGER. Would the gentlelady yield for one question, if I
might?

Mr. Horn. Certainly.

Mr. CLINGER. In the bill, we define capital assets meaning phys-
ical assets and financial assets, but would not include consumable
inventories. In other words, that’s why we put in the strategic oil
reserves, because that is a financial asset and within our definition
of capital assets.

I thank the gentlelady.

Mr. Horn. Thank you very much, Mr. Chairman. Those were ex-
cellent questions from Mrs. Maloney.

Let me ask if Mr. Mascara has any questions?

Mr. Mascara. More of a statement, Mr. Chairman.

Iam surprised as we are ready to enter the next century that
the Federal Government does not use basic and fundamental ac-
counting principles as it relates to this government. In fact, as a
former county commissioner, I was one of the individuals who
worked with the National Association of Counties in forming
GASB. As an accountant, I worked with FASB, which is the Finan-
cial Accounting Standards Board, and now we do have a Govern-
ment Accounting Standards Board. I say they could give us direc-


45

here, I testified before then-former Chairman Conyers on the CFO
Act. I have been involved with various things with GAO, OMB, and
Treasury, and worked for the late Malcolm Baldrige in some proc-
esses here and others.

In addition to being CEFO of Fairchild Industries, I also held a
similar position with AMF for 12 years and I have been involved
with this matter in a variety of other contexts, including part of the
faculty at Columbia University, where I held a seminar on this
matter.

The issue is why capital budgeting and why the private sector
over the last 15 years has gone through a wrenching process of
reengineering and downsizing and virtually every business has had
to reassess its mission, its priorities, and the ability to deliver a re-
quired level of goods and services at lower cost and with greater
efficiency.

Those of us in the corporate financial community know how criti-
cal and painful this process can be. We had to do it because of the
official laws of survival in the global marketplace. In this current
environment of multibillion dollars deficits, we strongly recommend
that the Federal Government emulate wherever possible the pri-
vate sector experience.

Central to private sector reengineering has been employment of
a highly disciplined mission definition and capital allocation proc-
ess conducted on prescribed cycle schedules. Pivotal to this is the
commitment to long-term fixed assets which will drive much of the
operating budgets of future years.

The importance of capital budgeting in the private sector cannot
be overemphasized. Capital budgets force companies to develop
long-term strategies on how to most efficiently accomplish the busi-
ness objectives and link costs to the fulfillment of that mission. By
doing so, it subjects the process to serious analysis for setting pri-
orities and allocating scarce resources.

Given the impact on long-term mission accomplishment and the
financial commitments embodied in the capital budget, it’s impera-
tive that it be analyzed, approved, and accounted for in a process
totally separate from that for current operations. To lump them to-
gether as is currently done in the Federal unified budget is to ob-
scure and to frustrate the role it should play.

It must be understood that the presentations accompanying the
Federal budgets that break out capital appropriations for fixed as-
sets and other investments are done after the fact and are not sep-
arately considered in the decisionmaking process. Doing so makes
it virtually impossible to adopt the disciplined approach of the pri-
vate sector to mission definition and capital allocation.

Capital budgeting forces companies to develop a long-term strate-
gic plan, usually 5 years, to fulfill stated goals and objectives. In

eveloping the strategic plan, companies first determine what their
capital asset requirement needs will be to accomplish the mission.
Once completed, the costs to fund the capital assets will be cal-
culated.

Determining the ability to fund capital projects requires compa-
nies to prioritize projects in order to accomplish the stated objec-
tives and best fulfill the overall mission within funding constraints.
In the private sector, analysis using investment criteria such as


49

Mr. SHERIDAN. Well, Mr. Chairman, I only suggested the FA-18
because the empennage is built in southern California but that was
just a——

Mr. Horn. I don’t have any parochial interest so don’t worry
about that. I just think the general principle of including weapons
systems would bother me, frankly. Maybe I could be convinced dif-
ferently, but I just think it is so liable to mischief by the executive
branch that pretty soon we would have the capital budget equal to
the operating budget. There is a constitutional provision on weap-
ons anyhow that they need reappropriation every few years, which
no other budget has.

So this is immensely helpful.

Let us ask Dr. Chu, now, a fellow of the National Academy of
Public Administration and, I guess, still a fellow, at Rand?

Mr. Cuu. Yes, sir.

Mr. Horn. We are most grateful for you coming. Again, your
statement will go in the record. Please feel free to summarize it
and then we will get to the questions the Members have. -

Mr. CuHu. Thank you. I will summarize it briefly. Let me say it
is a great pleasure to be here and to have a chance to offer testi-
mony. I should stress that this is testimony based upon my service
on a NAPA panel, although NAPA itself has not taken a position
on these matters. My remarks should not be viewed as represent-
ing NAPA’s institution, nor as representing the organization on
whose staff I serve, Rand.

Capital budgeting is obviously a critical issue, one that has long
been with us, but one which you know has met considerable resist-
ance over the years at the Federal level. A core conclusion of the
panel on which I served was it was important to understand wh’
this idea has not been adopted at the Federal level. In that regard,
I believe that our deliberations identified five issues that are useful
to consider.

First of all, a question which has already been touched upon re-
peatedly this afternoon, is the proposed scope of a Federal capital
budget. Does it go so far at one extreme to embrace such invest-
ments as ideas, which includes the product of research and devel-
opment software data bases, et cetera, on which the Federal Gov-
ernment expends considerable resources?

Does it include human capital or is it limited to items of physical
capital?

And within the physical regime, are we talking principally about
items that support private sector activities—roads, bridges, et
cetera—or are we also encompassing items that support the gov-
ernment production of services, whether those are health services,
veteran’s services, postal services through the postal system, de-
fense—the FA-18 example in Mr. Sheridan’s pilot list? Are we talk-
ing simply about plant here, meaning buildings and their improve-
ment, or are we embracing equipment, as well?

The second major issue, in my judgment, is whether the method
of financing the capital investment is important in deciding what
we are talking about. Are we restricting the capital account to di-
rectly financed items, through appropriations or orrowing?

Do we include items that are financed through tax subsidies?


Suate

Joint
ie

18

Table §

Organization of Capital Budget: Part 2

Boards (or
ital Review

TimeLine for Span of Long-Range

‘Alabama
‘Auth
‘Anaons
Arenas
Calforna

Capital Process Capital Budget
‘No response N
10 months 6 years
113 years S years
6 months N
S years

‘Colorado
Connecucut

dyer
s
3 years

iexz<-<jz<z<zlzzz<<\<zz22|

Svea

Wo responre

No response

S years
S years
a

yen

No response
yan
Teint

S years
S years

years

3 yeart
U1 years N

10 months S yen
No response yearns

Dasermined by Legusiature oi

S years

S yearns
£10 vers

Washington
West Virgina
Wisconnin
Wyoming

pce

z cxtadecnceezzaniencede<§ azlenn<

i
8

Page 16

6 yean

Capital Budgeting in the States: Paths to Suxccem


11

the human capital of a well-educated citizenry. And that is the se-
cret to our competitiveness.

The only additional thing that my bill H.R. 1109 brings to the
table is the recognition that an investment in infrastructure should
include an investment in human infrastructure as well. That
makes some difficult allocations, but it is possible to measure what
kind of return you get from an investment.

And my addition to this discussion is that we should consider
human capital as well as physical capital as we go into this. It ma
be that we need to have a commission outline the exact, precise dif-
ferences because some people are very concerned about the dif-
ficulty of measuring an investment in the human mind, but no
matter how difficult it is, Mr. Chairman, I think it is an essential
part of this debate.

[The prepared statement of Mr. Thornton follows:]

PREPARED STATEMENT OF HON. RAY THORNTON, A REPRESENTATIVE IN CONGRESS:
FROM THE STATE OF ARKANSAS.

‘As Congress begins to set budget priorities for the coming year and consider a
variety of deficit reduction measures, we are faced with an increasingly urgent need
for fiscal esponsibility and restraint. Congress has taken steps toward dealing with
spiraling deficits through spending caps, discretionary cuts, and tax increases, but
cutting and taxing are not going to be enough.

My grandfather used to say that if a family gets deeply into debt, they cannot
borrow their way out of debt, nor can they starve their way out of debt; they must
work their way out of debt—increase their productivity. On the national level, when
unemployment is down and investment is up, the deficit situation improves. For too
long, we have ignored investment in growth and productivity as a key component
of deficit reduction.

My home state of Arkansas has, for most of this century, managed on a balanced
budget. Its Arkansas Revenue Stabilization Act, by statute, requires that operating
expenses be reduced to equal the actual revenues available during any given year.
For many years, I have urged that the federal government adopt our approach.

Of course, Arkansas has recognized that investments in the future should not be
confused with spending for current operations, Providing gasoline for a police cruis-
er is a current operational expense, but building a jail to restrain hardened crimi-
nals is an investment that provides value for many years. My state does not prohibit
borrowing money for construction of prisons or highways or for building hospitals
or public schools. Arkansas was one of the first states to invest in economic develop-
ment and jobs by issuing bonds to build industrial facilities and provide equipment.

It is time that we learn from the American people. They know the difference be-
tween current expenditures and an investment in the future. Most families who pru-
dently balance their budgets would not borrow money for ries, telephone bills,
entertainment, or other on-going, consumptive expenses, but they would certainly
consider assuming a mortgage to buy a home or borrowing to buy a truck or to edu-
cate their children. That reasonable standard is appropriate for our nation. Wh:
should we run the country differently than we run our households and businesses?

In my state, as in much of our region, surviving economically has meant having
to work harder with fewer resources—a situation not unlike the fiscal climate Con-
gress is facing today. In Arkansas, while balancing our operating budget each year,
we do not hesitate to make investments in the factors that contribute to long-term
economic growth—education and worker training, a sound infrastructure, and re-
search and development capabilities that spawn commercial activity.

The objective o: enhancing long-term economic growth for our nation is not well-
served by a budget process focused on short-term results. The existing presentation
of the federal budget obscures the distinctions between current consumptive spend-
ing and long-term capital investments or expenditures of a developmental character.

‘at is why T have introduced H.R, 1109, the Capital Budgeting Act, which ad-
dresses the need for improved budgetary information to clarify our choices of ex-
penditure. My colleague, Bob Wise from West Virginia has proposed a similar meas-

ure.
The Capital Budgeting Act would require that the budget submitted to Congress
by the President be a unified budget comprising an operating budget and an invest-


53

agency will be the depreciation or the asset consumption charge
every year, the drawdown, in some sense, of the life of the equip-
ment. And that is another element, another balance that in my
judgment would warrant your attention.

If you are drawing—if you are consuming faster than you are in-
vesting, that is a signal that over time—eventually—there will be
nothing left in that particular capital stock.

Mrs. MALONEY. Do you care to comment?

Mr. SHERIDAN. There is the notion that because the Federal Gov-
ernment is a Sovereign entity that it doesn’t have to go before the
rating agencies and therefore some of the process of allocating the
liabilities to the asset side is not relevant. That is far from truth.

The world capital markets are looking at us just as they use the
benchmarks beneath the deutschemark and the yen and when we
exceed, whether it is a percentage of benchmark of GDP or con-
sumption or whatever, we are at peril that we are going to put our-
selves in a position where our interest costs on this lebt will ex-
ceed that which it should be. And even though the rating agencies
do not necessary give us a double B or a triple A, we should look
at this in the same manner and take it with the same degree of
seriousness as it if were a firm mandate.

Mrs. MALoNneyY. Thank you very much. I have no further ques-
tions.

Mr. Horn. You raised an interesting point. The State of Virginia,
as I recall, prided itself in the twenties and the thirties as the debt-
free State. Everything was pay as you go out of the taxes raised
that year. Bonds were not floated.

In the State of California, until this last election, the voters
would almost always approve a bond authorization for higher edu-
cation. They approved one for the University of California about 10
years ago. This time the voters went right down the ballot and said
no to practically every Statewide bond measure regardless of its bi-
partisan or nonpartisan basis. Some had absolutely no opposition
statement on the ballot, but it didn’t matter. The voters said
enough is enough. We have a deficit, folks. We are not going to
pass the bonds.

Of course, the Federal Government doesn’t go to anybody in
terms of an actual electorate for their bond authority. They would
come to Congress. We finance it in a wide variety of ways com-
pared to the States. I believe that in the States, usually the capital
budget is primarily financed by bonds voted by the voters. Obvi-
ously part of it can be paid out of the operations budget if the legis-
lature so votes.

But does that in your judgment pose any problems for how the
Federal Government approaches this? It is strictly a congressional
decision at this point. We don’t ask the voters of America to au-
thorize a capital project and retire it by bond.

Mr. SHERIDAN. Well, the process is clearly more cumbersome, but
the private sector knows when it is being crowded out of the finan-
cial marketplace. It also knows that the benchmark that it pays for
its money is predicated on that which the Treasury pays. And if
the Treasury pays more, they pay more, whether it is 100 or 150
basis points.




10

Summary

Good Practices In
Capital Budgeting

Establish a clear definition of expenditures within the capital budget

© Define maintenance expenditures and provide for adequate funding
‘of maintenance in statute.

Include specific operating casts for each capital project.

Ensure that effective legislative involvement occurs throughout the
capital budgeting process,

Strengthen the review of the years beyond the budget year in
long-range capital plans.

Identify the criteria used in selecting capital projects.

Define all program outcomes for capital investments.

Evaluate cost estimating methods to measure their validity.

‘* Establish a tracking system to keep projects on schedule and within
budget.

Define the factors to consider in decisions to own or lease.

* Develop a clear debt policy.

Review cost-benefit comparisons for private sector participation in
capital projects.

Maintain an updated inventory system of capital asses.

Page? Capital Budgeting in the States: Paths to Surcew


25

Since 1976, Fairfax County has had the distinction of having a “Triple A” rating
from both Standard and Poor's Corporation and Moody’s Investment Service, the na-
sions leading rating agencies Fairfax County is one of only 33 of approximately
30,000 jurisdictions including states, counties and cities that have received this rat-
ing. The Triple A rating gives Fairfax County bonds the highest rating attainable
which allows the County to sell bonds at the most favorable price. It is estimated
that since 1978, the Triple AAA bond. rating alone has saved County $110 mil-
lion in debt service costs on general obligat(on bonds. In addition, the Triple A rat-
ing opens up other avenues of eapital project financing that otherwise would not be
available.

Tconaider the County’s capital budgeting process a dynamic one, a process which
ia interactive with our overall budget and Recal goals, Our process evelves around
# long term capital improvement program whith tdntiies public improvement
projects over a five year period. The process of prioritizing projects for inclusion in
Our capital budget program results in political support and community consensus for
the project and the appropriate financing mechanism. Projects such as new and ex-
panded facilities, facility repair and renovation, roads and some transit require
nents, and public improvements such aa sidewalks, trails and storm drainage im.
provements are programmed within the five year plan. The first year of the five
Year program is the foundation for the next years capital budget with the four re-
maining years serving as a guide on the financial and programmatic impact of un-
dertaking the construction program.

Development of the annual capital budget process begins in the Fall of each year
when County agencies submit project proposals, justifications, project costs and re-
lated operating expenses, pad project construction schedules. These submissions are
reviewed by County stall and evaluated for need, consistency with the County's
Comprehensive Plan, and funding requirements. Recommendations for appropriate
fonding and the phasing of projecta are reviewed and consolidated into an adver.
tised program which becemes the subject of Board of Supervisors work sessions and
public hearings before the Board aad the Planning Commission. The County Board
Of Supervisors adopts the CIP in conjunction with the budget for the next fiscal
year.

There are several benefits of the Fairfax County capital budgeting process, all of
which ingure that decisions related tothe financing of public improvements are bal
anced against the current and projected resources of our overall budget.

1. The Fairfax County Capital Budgeting Process is essential in fulfill-
ing the Board adopted “Ten Principles of Sound Financial Man-
agement.”

In the mid 1970s, the Fairfax County Board of Supervisors wisely endorsed a set
of policies designed to maintain the “Triple AAA” bond rating awarded to the Coun-
ty. These 10 principles, reaffirmed in 1985 and again in 1988, stress the close asso-
ciation between the planning and budgeting processes and provide guidance in the
planning and financing of public expenditures. The principles relate to the integra-
tion of capital planning, debt planning, cash management, and productivity ag a
means of ensuring prudent and responsible allocation of the County's resources. Key
to the principles is the guideline that debt service on County bonds will not exceed
ten ad percent of total General Fund Disbursements. I have attached a copy of
these “10 Principles” to my-testimony for your information. Firm adherence to these
principles in financial decision-making has allowed the County to maintain its Tri-
Pie A rating, through two recessions aad hes established Fairfax County as a model
of sound financial management. In fact, Fairfax County was recently named the
best fiscally managed county in the nation by City & State magazine.

2. The Fairfax County Capital Budgeting Process focuses attention
and promotes consensus on Co-unity and Needs.

The very process of annually identifying, evaluating, prioritizing, and program-
ming publ facility needs over a five year period helps match the expectations of
the community with the realities of the economic situation. Case in point: The reces-
sion of the early 1990’s had a significant im on Fairfax County and its ability
to fund capital project construction. Faced with a declining revenue base and associ-
ated expenditure reductions, the capital budget also was downsized. Because of
Board established limits on debt service as a peroentage of the total budget, a total
of $220 million in bond funded capital projects was deferred. Board and community

riorities of education facilities, the Adult Detention Center and the Fairfax County
arkway remained in the capital program while other projects such as storm drain-
age facilities, neighborhood improvements, libraries and human service facilities
were deferred. In addition, the reduction in County resources required eliminating



68

STATE ADMINISTRATIVE MANUAL
(CAPSTAL OUTLAY

slectrtcal rewiring; repairs; dredging of river or tran: beds (lo restore original Sow capacity);
Neplacing old oquipracct itcms (xis conditioners, carpeting, otc); and road repelre.

BUDGET PREPARATION AND ENACTMENT TIMETABLE (New 9/91) om
1a grit © ast degartncs paling tls copied ontay bodgt work, he fllowing hdl provid


61

I would like both of you to comment on your views on deprecia-
tion. Also, with the demise of the Soviet Union would that reduce
the defense assets in value if we are to use depreciation?

Mr. SHERIDAN. Depreciation is really an accounting term and it
is basically an effort in the private sector to link the profit motives
to allocate cost to the same time you are receiving revenue. And,
therefore, it is important when you are trying to do, as the FASAB
is doing, which is to create commonality with the private sector to
accounting measures that are at least comparable. And to that end,
they should be applauded.

That should be differentiated from the investment process which
is purely cash on cash, at least it is in—so that in the private sec-
tor you take account of depreciation, but then you add it back to
the process. Depreciation is a meaningful proxy for a diminished
life because the other attribute in the accounting sense is that you
don’t want to carry an asset on your books and then 1 day junk
it and have an abrupt kind of spike.

So it has—it has a purpose, but to use depreciation within an op-
erating budget absent real world cash constraints, which would be
to look at perhaps pairing it with a liability I think is fraught with
some dangers, but it conceptually is not an inappropriate thing.

Mrs. MALONEY. Mr. Chu.

Mr. Cuu. I would argue it is a particularly important concept if
you are going to apply capital budgets to any agency like Defense,
which has an operating focus, because without it there will be a
tendency to ignore the rate at which you are actually drawing
down your assets.

Now, I grant that physically the asset doesn’t disappear 10 per-
cent every year, but it signals to you the fact that now there are
9 years left until it dies or 8 years left, et cetera. And it gives you
some sense of the renewal level that you have to maintain in order
to Provide for the future. It is a signaling device. There has to be
a thoughtful accounting way of lining it up with actual cash ex-
penditures, which are a different matter. But its signaling value as
a planning tool I think is very significant for a number of Federal
agencies.

Mr. SHERIDAN. You raised a second issue and that is the valu-
ation of certain assets, whether they be intangibles of human re-
sources or the value of a weapon system. I think if one examines
the mission of the weapons system and it no longer has value, it
should go off whatever balance sheet, whether it be one that it kept
within a service to say do we have mission support, it should be
taken off because it no longer has value. But attributing that value
and putting it on a balance sheet for purposes of financial state-
ments, that is a very, very difficult area and one that is sort of a
trap for anybody that is an adherent of it.

Mrs. MALONEY. Thank you.

Mr. Horn. Thank you, Mrs. Maloney.

Any further questions?

Tf not, let me thank Mrs. Maloney for arranging the witness from
New York City; Mr. Davis for arranging the witnesses from Fairfax
County. Mr. Brasher and Ms. Young of the majority staff for their
fine work in nrenaration for the hearing.


18

the nation’s wealth and capacity for future economic expansion. Borrowing to meet
the day-to-day expenses of government cannot.

Both Chairman Clinger and I have introduced legislation that would divide the
federal unified budget into an operating budget and a capital budget. Under our
bills the operating budget would include all programs that meet the immediate obli-
gations of ronning the government. The capital budget would include long-term,
tangible investments in infrastructure. This legislation would direct the operating
budget to be balanced but would allow the federal government to borrow money for
certain investments in infrastructure that increase the national wealth and contrib-
ute to economic growth. Money borrowed for those infrastructure investments would
be paid back over the life of the road, bridge, sewer system or other infrastructure
investment.

The concept of a federal capital budget is not new. The budget was expanded in
the 1950s to include information on investment spending. Reform in the 1980s re-
quired even more investment information in the unified budget. Many other indus-
trialized countries employ a capital budget, and businesses and most state and local

vernments have investment budgets that separate long-term capital investments

from year-to-year operating costs, lodividuals and groups-as diverse as former O)
Director Richard Darman, the General Accounting Office and the Progressive Polics
Institute have endorsed distinguishing between investment and consumption spend-
ing in the budget. As a recent GAO report on the harmful effects of the deficit points
out, “a new (budget) decision-making framework is needed, one in which the choice
between consumption and investment spending is highlighted throughout the deci-
sion process, rather than being displayed for information purposes after the fact.”

Businesses know the difference between borrowing to consume and borrowing to
invest. Borrowing is a smart move when the money is used to finance productive
investments that help a business modernize its equipment, expand and become
more profitable. But borrowing money to pay salaries or executive bonuses or to
send employees to expensive conferences rather than to modernize would be foolish.

I believe the federal government should make this same distinction in its budget.
By borrowing for current expenses the government is asking future generations of
taxpayers to pay for the cost of running the government today. But borrowing to
invest ia different. If the government passes part of the cost of building a road to
future taxpayers, it also gives them something in return—a new highway that will
encourage economic development, facilitate commerce and increase economic growth
for years to come.

Tnstituting a capital budget would force policy makers to decide whether or not
each investment is worth borrowing money to finance. In addition, the public would
benefit from knowing that the government's current costs are being paid for and
that any borrowing is for investments in the future rather than paying for the
present and saddling future operations with bad debt.

All of us agree that the U.S, must make investments that are critical to future
economic growth but that the budget deficit must also be reduced. Rather than
going from crisis to crisis, the federal government should have an institutionalized
system of long-term investment planning. Adopting a federal capital budget would
provide such a mechanism.

Mr. Chairman, Members of the Committee, this is a time of fundamental change
in the way government serves the people. In order to be more responsive to tax-
payers’ needs and more responsible with taxpayers’ money, I believe the federal gov-
ernment should reform its budgeting to distinguish between consumption and in-
yestment. Adopting a capital budget would begin to effect this critical change and
I hope you will seriously examine and ultimate

form.

ly endorse this important budget re-

Mr. Wise. To say to you and to Chairman Clinger who has heard
me say many times before what my real dream was that 1 da
there will be a march on the Capitol by people waving placards
saying “Cap Budgeting Now.” We are almost there, Mr. Chairman,
because Mr. Mineta can testify today as he did today in another
committee there is another hearing on in which four private sector
witnesses testified about the need for capital budgeting for the
General Services Administration. So that movement is building and
in fact I jokingly suggested, but maybe not so, that we ought to in-
corporate their remarks into this hearing, as well.

I do think we have a serious chance this time to move capital
budgeting and I just want to thank you and the gentlewoman from


35

Mr. LEIDINGER. Trust funds like enterprise funds for water and
sewer?

Mr. Davis. Right. Like we are supposed to have at the Federal
level for Social Security and the highway trust funds that get into
the integrated budget, for planning purposes, get thrown in. Do ei-
ther one of you want to talk about how you——

Ms. HANLEY. The enterprise funds are separate from our general
fund budget. They are self-generating. They pay for themselves, if
you will, by either fees or some kind of revenue in terms of sewer
is the one that particularly comes to mind. The water authority,
there is another one. They are not—those funds are not usable in
the general fund. They don’t transfer and they are internally—I
hate to say internally generated, but they are self-contained and
not part of the general fund budget.

Mr. Davis. So there is no mixing and matching on that. They
just stand there——

Ms. HANLEY, You can’t take money out of the—from sewer reve-
nues and pay for human services out of that.

Mr. Davis. OK, thank you.

Ms. Hanley, let me ask you if you have any thoughts in terms
of the—you have heard the discussion of how you define capital
and whether it should be human factors, personal property, real es-
tate. Do you have any thoughts on that? You have worked—you
have been on the Metro board here, worked with transportation.
You have been on the school board. You have very broad experi-
ence,

Ms. HANLEY. I think the 20th century view of capital has been
bridges and roads and rails and bricks and mortar, but as we look
to the 2ist century, the highways are different. They may be infor-
mation highways and we may have to think about the technology
infrastructure in order to be competitive worldwide, particularly in
a locality, if the locality is going to be competitive.

And so what we have maybe called equipment under the head-
line of computer equipment may be broader in the 21st century
technology infrastructure, and I think that would appropriately be
a capital improvement.

I don’t think that we know yet what all that means. I wouldn’t
propose to know what that will mean in the next 20 or 30 years,

ut when you are talking about long-term life, those things may
have long-term life.

Mr. Davis. Objection, thank you.

Ms. HANLEY. Certainly as I mentioned, in transit, that is back
the other way, that would—some kind of stability in terms of reve-
nue for that kind of capital would relieve localities of having to
make up the difference, particularly in subsidies, if you have some
kind of regional arrangement where the localities are on the hook
for the capital, and in that case, that comes out of our general—
either that is our capital—either we have to plan for it under our
capital consideration or we have to make it up out of our general
fund.

Mr. Davis. OK, thank you.

Mr. McMahon, let me ask you a question. You still have the con-
trol board in New York functioning as an oversight now as opposed


55

Mr. Horn. Well, that is an excellent point that you have made,
in my humble opinion, because, as you suggest, they put it right
outside of where that line was and then they dump the cost on us
later and say, “oh, well, you should have known what you were
doing when you approved it.”

Well, did we not have all of the information at the time and
there is no question that we are misled by the Pentagon regardless
of administrations, as far as I am concerned. That was just con-
firmed on my recent walk to the Capitol with a person that is an
expert in this area.

t me give you an example, the V-22, Osprey. It has been in
development, production, experiment. One Secretary of Defense is
for it. One cancels it. A few years later, another Secretary of De-
fense wants to restore it.

What do you do in a capital budget situation with that particular
project?

Mr. Cuu. The first thing you do—and I think that the debate on
this would have been substantially helped by a capital budget—is
you pay attention to the extant stock of equipment that supports
the mission, in this case principally the movement of marine forces
from ship to shore. What I think that would have underscored for
everyone, and thereby assisted the debate on this issue, is that the
present stock is being drawn down very rapidly, much more rapidly
than any replacement like the V-22 can possibly sustain. Had a
capital account approach been taken, I think that would have given
greater support to those in the Department who were worried
about the immediate drawdown that was occurring.

Now, I should acknowledge, Mr. Chairman, that I am highly bi-
ased commenting on that specific issue, because I was one of those
who advised the Secretary to cancel the program.

Mr. Horn. Let me move to a domestic example, HUD, Housing
and Urban Development. Its predecessor agency, I think, built Pru-
itt Igo, a major public housing project in St. Louis.

I don’t know if you remember, but a few years ago the evenin,
news showed that whole project, I don’t know, 8, 10, 12 stories tall,
being blown up by dynamite. It was so bad that nobody knew what
to do with it. | remember that project because I was the vice chair-
man of the U.S. Commission on Civil Rights. I held a hearing in
St. Louis in 1970 and we saw that project. It was a disaster then.
A decade or more went by before they blew it up.

But I cite that because generally in capital projects there is some
estimate of the useful life, as the point was made by you and ear-
lier panels, in order to retire the bonds. You don’t issue bonds for
a 20-year project that comes apart in 10 years. But if things be-
come so bad that they do not last for the expected duration of the
project?

Now, how do we accommodate that in the capital budget idea if
the bond authority is the basic way those are being funded? Does
that become sort of a whimsical government to the bond holders or
what?

Mr. Cuu. Of course, as you appreciate, Mr. Chairman, ultimately
it is the full faith and credit of the United States that stands be-
hind the bonds. I think this is an example of an unfortunate situa-
tion where the capital asset vanishes prematurely, effectively rob-


21

Thank you.
Mrs. MALONEY. I am honored to be able to introduce someone
from the great city of New York, Tom McMahon, who is director
of city council finance. He has had a long, distinguished career and
held many titles. I don’t know all those titles, but believe me, he
is important. And has brought a heavy, stern hand to the financial
runnings of the city of New York and has helped it become a more
effective body serving the people.

Thank you for coming, Tom. It is good to see you again.

Mr. Horn. Thank you very much. We will begin with Ms. Han-
ley, the chairwoman of the Fairfax County Board of Supervisors.

s. Hanley.

STATEMENTS OF KATHERINE K. HANLEY, CHAIRWOMAN, FAIR-
FAX COUNTY, VA, BOARD OF SUPERVISORS; WILLIAM J.
LEIDINGER, COUNTY EXECUTIVE, FAIRFAX COUNTY; AND
THOMAS L. McMAHON, DIRECTOR, FINANCE DIVISION, NEW
YORK CITY COUNCIL

Ms. HANLEY. Mr. Horn, Mrs. Maloney. Thank you, Mr. Chairman
and members of the subcommittee. As Representative Davis has
said, I am Kate Hanley, chairman of the Fairfax County Board of
Supervisors. And I am pleased to be here today representing my
fellow board members and the residents of Fairfax County. I very
much appreciate the opportunity to share with you our capital
budgeting program and its relationship to Fairfax County’s fiscal
planning process.

I believe our capital budgeting process works well and provides
an effective approach to planning for and financing public facilities
and improvements. As you have heard Representative Davis say,
with me today is William J. Leidinger, county executive, and also
our assistant director of the Office of Management and Budget,
Susan Data, and Mr. Leidinger will present the county’s details.

Mr. LEIDINGER. Thank you, Mr. Chairman.

Mrs. Maloney and Mr. Davis, other members of the subcommit-
tee, let me begin by putting the county’s budget in perspective, par-
ticularly the part of the budget targeted for capital projects. In the
current fiscal year, our budget totals $3 billion. Of this amount, ap-
proximately $572 million or about 19 percent is associated with
capital projects.

n Fairfax County, financing for capital projects comes from a va-
riety of sources, including transfers from the general fund, cash
pay down if you would, general obligation bond proceeds from debt
we incur, Federal grant funds, State grant funds, and other sources
such as sewer and solid waste fees and developer contributions.

The county's total paydown or pay-as-you-go financing program
in the current year is about $30 million. In addition, general obli-
gation bond proceeds are used to finance $348 million in capital
costs in the current year. We currently have $624 million in gen-
eral obligation bond authorization and the county sells approxi-
mately $150 million in bonds annually. We also have done a great
deal of bond refunding in recent years as a result of favorable in-
terest rates. Through the end of this current fiscal year, we will
have completed almost $800 million in general obligation and
sewer bond refunding resulting in a $31 million net present value


88 .

Table 13
Forma! Reporting System To Track Capital Projects

Do ¥e A To Track

‘No formal system,

‘Agencies and the budget office comple a capaal suthorzation sus report.
Projece reviewed by legislature

[No formal system,

Saae Public Works Board ud lows Lepulauve Budget Commie

Dept of A reviews some. ‘and ventes fund ry
[No formal system,

Development Offie/Dept of Adm Services approves expenditures, construction, and mondars progress
‘Governor's Budget Office and agency provide an annual analy on progreas of royect sl vanou phases

George. Each ageney has tracking process
Hawa Planning, design. and project coordinalor branches of agency
labo Division of Public Works tracks projects
Nanos ‘No formal system,
Indra Entity receiving appropriations has major tracking responubiliry. Pubbe Works Division also trucks projects
lows Agencies gather information and Legulanve Capial Projects Commitee reviews &.
Kansas ‘Governor's budget report. ‘descrapuons ofall projects Architectural wack all projects
Kentucky Governor's Office for Policy and Management prepares annual report for leglature
Lowwiana Office of Facilty Planning and Control oversees project
Maine ‘Agencies and Department of Administration tick projects
Maryland Genera| services und budget office update daubene
Mastachuseas ‘No respons.
Michigan Deparment of Managemen tnd dest rien wean lw, manor APropnons
Mi ana Ci prepares quanerly satus report
Mususipp uildings tracks projects
Masiour flormauon system provides informanon on each provect
Monuaas. ‘Architecture and Engineering adminusier all projects, budget office racks epproprations
Nebraska ‘Quanerty satus repor are prepared
Nevada No responte
New Hampthice Agencies prepare status report
New Jenee A formal project irackang svitem iy being deve
Rew Meno ‘Capial project monuioring aynem tracks funds expended and progress @ dale on a somianaual basse
New York ‘The dexipr-construcion agencies moniior design and construction, the chent agency reviews,
Nonh Caroline Office of State Budget and Management and Sute Construcuon oversee fiscal and quality assurance
Nonh Dakow ‘No formal system,
Office of Budget and Management with State Convroling Board approve all releases of capwal funds

Office of Pubbe Affairs and Office of Sute Finance admuawict funds and reper
Management by agency design review by Captol Panning Commuion.

Otis of the Budget masiana « satus report.

Building Code Commision and depaniments nck progress

Seme. Office amsst w biddin 124 spproval
‘Sute Engneers Office and Commisnoner of Admunutration monsor projec.
Project and bby Capaal Projo and Finance and

Roquesung agency oversees the project
Div. of Facilines Construction and Mngt, Drv of Water Resources, and Dept. of Transportation tc projects

Vermont Department of Suue Buildings tracks coms
Verne ‘Agency and Dept. of General Prepare = Tepon on ‘base fr
Washington [Executive and legulature review, reporung symem in development

West Virgie No formal system

Wisconnn Division of Suse Fecilises Management

Wyoming No forma system

be Implementer tracks suru, user does te vuas, Rnancul officer execuies budget action and financing

Page 26 Capital Budgeting inthe States: Paths to Succes


42

The Government Center, of which I spoke, was not a general ob-
ligation bond and so that did raise that confusion because the vot-
ers hadn't voted on it.

Mr. Horn. Let me ask you on that debt capacity: is that an act
of the board or do you have a county charter and that is written
into the charter?

Ms. HANLEY. We don’t have a county charter. It is the act of the
board and we believe that our rating agencies think it is very im-
portant that we do that.

Mr. Horn. So if the board changed it, obviously that might well
affect your rating?

Ms. HANLEY. Certainly, as well as the rating agencies look for us
having some kind of annual capital expenditure within our annual
budget.

Mr. LEIDINGER. If I may, while the 10 percent limit on debt serv-
ice, 10 percent of general disbursements is self-imposed, I don’t
think the rating agencies would really care if it was 8 percent or
9 or 11 or 12 or 10 so long as it was agreed upon locally and you
were consistent with what you did over time.

Mr. Horn. I just ask Mr. McMahon, is the city university of New
York budget in your budget, or is that a separate budget?

Mr. McMauon. No. The city university budget shows up as part
of our budget.

Mr. Horn. They would have that kind of problem I described. If
you had cutbacks, shiny buildings are going up, while the faculty
is being laid off, how much of a problem is that?

Mr. McMauow, It is a significant problem because New York is
now facing the same situation that you pointed to in California
where, because of tremendous pressures on its budget, it has to cut
back on a whole host of areas, including employees in the city uni-
versity and there are facilities that exist that will have to be
closed.

The same situation exists in the Health and Hospitals Corp. in
the city of New York where we have created a massive structure
now with cutbacks and entitlements in a whole host of areas, that
significant downsizing will be needed.

tis a significant problem. I don’t know what the answer is. It
is probably something that requires—you know, that is—reflects a
certain Jack of planning or a lack of thought, but going back years
ago, there were assumptions that people relied on, erroneously
now, but I don’t know what the easy answer is.

Mr. HorN. Well, the answer is obviously one thing: That you
have to educate your constituency, both your employees and the
taxpayers that provide the funds that we are talking about, that
two different methods of funding that just happened to come along
at different times,

Representative Maloney, do you have some more questions? Any-
body on this side have questions?

Mr. Davis. If I could just ask one other question?

Mr. Horn. The gentleman from Virginia.

Mr. Davis. Basically, as I understand it, to follow up on two
questions that the chairman had raised——

Mr. Horn. Please.


83

Table 8
Project Characteristics
‘Approve Projects with 2 Separate Planning Include Emergency Requests
State Cost Savings Component ___& Construction in Capieal
abana w w ©
‘Alaska Y Vanes Y
‘Arzons Y Y Y
Arkansas N Y N
Caufornia Y y N
aTendo Y ames Y
Connecticut Y Y Y
aware Y Y Yilite sfery
Flonda N Sometimes N
Georgia ¥ Usatly y
Hawai Y Y
Idaho N Y
inom Y Seldom
Indians Y Y
lows N N
Kane Y Y
Kemucky Y y
Lousiana y Y
Maine Y Y
Maryland y y
Wiasrachareir No respaane “Ws reapanie
Michigan N ¥
Y Y
Musnasisspi Usually Ma
isourh ¥ Y
onan Y Y
Nebraska N N
Nevada No response No response
New Hampshire No response response No response
New Jersey Y y Y
New Meuco v Y v
New York Y Y y
Nomh Caroling Y y Y
Nomh Dakow N “ N
Ohio 7 Somenmes Y
lahore Y Y Y
Oregon N Y N
Pennsylvania, Y N N
Rhode Island Y Y N
South Carolina v y v
ca Dako NIK Okan WK
Tennessee Y Y Y
Texas Y s N
un N y YiConaukants
Vermont Y y ¥
regina +" v v
Washington N Y Mayor project Y
West Virginia N oy N
Wisconsin ¥ Y Y
Wyoming Y Y Y
pe Y Y Y
Yeo ven Yau
Page 21 Capital Budgeting in the States: Pathe to Succes


60

tion to implementation and operation, I often wonder and say how
does this ever work? Because when you think where we started the
second world war, and granted that we had designs that were com-
ing up in the late 30’s, but how did anything ever get built? When
you think about what we did in production, it is simply amazing.
The productive capacity of this Nation was completely focused on
war production and winning the war.

Do you have any wisdom on that? Are we now taking too long
on some of these long-term efforts?

Mr. CHU. Maybe we're taking too long, although I am not per-
suaded that we are actually taking much longer than we ever did.
One interesting datum: Of ship designs preferred by the U.S. Navy
in World War II, of those ships of such designs whose keels were
laid down after Pearl Harbor, not a single one was delivered before
VJ Day. So we basically fought the war either with ships that we
started producing before the war or with emergency designs—jeep
carriers, destroyer escorts, et cetera—the industrial aircraft, I
would acknowledge—that we conceived during the course of con-

ict.

Mr. Horn. Yet merchant ships were built one per day at one
point.

Mr. Cuu. Right, but of a standardized design, not to, “normal
military specifications.”

Mr. Horn. Does that have anything to do with the differences be-
tween the private sector deciding on a design and the public sector
deciding on a design?

Mr. Cuu. Some of it does. But some of it also reflects the fact
that the military sector, particularly in the cold war period, was
constantly trying to push the edges of technology to gain an advan-
tage over its opponent. Whether it is an airplane or it is the Taurus
sedan, the history of technologically ambitious projects is they take
a long time.

Mr. SHERIDAN. It is worthy of note, however, that even though
we have the C-17 and some other issues, the C-5 in a prior era,
there have been—there has been the ability to prolong the life of
certain fixed assets. Air frames that are aerodynamically exactl
the same as they were in the 50’s are still flying today. By upgrad.
ing the mission requirements based on technology, the changes in
F-11 from an earlier era to something that has a totally different
mission. So it is possible with careful work to take a long-lived
asset and give it as a cap many more lives.

Mr. Horn. There is no question that is true. C-17 is expected to
go into 2020, maybe even for my 100th birthday in 2031. I am hop-
ing the C-17 will last that long and we will have 240 or so by that
time.

But are there any other questions?

Mrs. MALONEY. If I could, Mr. Chairman, ask one question on de-
preciation. The Clinger bill has a depreciation in it and he refers
to it as the asset consumption charge which is to be financed by
the appropriations in the operating budget, allows for depreciation
to be based on either historical cost or replacement cost or current
value.


84

Table 9
Program Objectives Met Through Project Requests

State How Do You Ensure That Program Objectives Are Met Through Project Requests?

‘Aibama There is no formal process in place

Asska No proceas currently exist for measurement

Anson ‘Adminitration Department analyzes project requests in terms of program objestives end fcal impact

rtanses Monitoring by Ofice of the Budget.

Cabfornia “Through management coordination and communication

Colornco “There is no formal process in place

Connectiot ‘Through agency reports afer constriction

Delaware No response.

Florida “Through «review of release request

Georg, Budget analysis sreen requests

Haas Budget and Fiance analyzes request and evaluates projet

tho Frnt plang phase determines program needs

Wino Bureau of Budget review

Induna ‘Vanes with projet

fowa Monitored by departments

Kansas ‘Budget analysts make sure Gal program objectives are meh

Kentucky Require writen jstifiation

Louisiana Budget antiya review requests

Maine Department of Administration and Control Prec

Maryland Review and analvsis by the Deparment of Budget and Fuca! Planning

Mastachusezs No response

Mictogan ‘A project program satementu reviewed before architecture plant are iiisted

Minnesots No formal process exists

Miasissipps By pesforming two separae review per account

Missoun Requests must explain how program objectives are met Reguets and objectives are thoroughly reviewed

Moniane ‘Arch. de Eng. reviews and pnoruizes requests, budget office eviews; and Gov. recommends acuon io Leg

Nebraska No formal process, but Budget Office conducts analysis as needed.

Nevada No response

New Hampshire Budget Office review

New Jersey Budget office conducts analysis, audits. studies

New Mexico ‘Analyst reviews requests Agencies starting lo wnplement management sytem through goals and objectves
New Yor ‘Through annual budget request-budget recommendation process by budget stall

Nonh Carolina Office of State Budget and Management reviews and analyzes requests

Nom Dakous No response.

Ohio Office of Budget and Management and lepsiauve reviews

Oklahoma ‘No response.

‘Oregon No response.

Pennsylvania No response,

Rhode Island Budget anaivats and policy staff review

South Carolina __Review by engineers, Legislative Coupes, State Reorg Commission, and agency's intemal auditors
South Dakous ‘No reaponse.

Tennessee ‘Trrough team and comminee work

Tes Lepislauive Budget Office reviews anaiyies

uh Through analyas

Vermont No formal process

Verpiia 'No formal process exis

Washington Review by program analyst and technical budget aft

West Virginia No response

Waconin Review by program analysts

Wyoming ‘Through informal assessment

bc Project . wath longterm pian dong evaluauon

Page 2 Capital Budgeting in the States: Pathe te Suocass


119

Part Two
Case Studies in Selected States

‘The state makes extensive use of capital leases and certificates of
Participation as alternative financing mechanisms. The state organizes
and manages the financing of equipment and real property through a
master lease purchase acquisition program. Lease development for
privately owned buildings with leases exceeding five years or have a
purchase option are evaluated in the capital budget request. Lease
development projects are funded from operating funds only.

Question: Often states have to make decisions on whether to
finance a project from operating funds or bond proceeds. What
uidelines or practices do you use to make these decisions. Do you
have specific bondability guidelines that you use in your state?

California

Cash is frequently used for project if there is a dedicated fund source,
and for deferred maintenance and small projects. California uses bonds
for costs associated with projects with a twenty-year useful life or
longer. Associated costs may include planning, administrative
expenses, equipment and start-up costs. (Note: legislation is pending to
limit administrative costs financed by bonds to 2 percent of the project.
‘The Administration opposes this legislation due to the cost that would be
shifted to the operating budge).

Financing by the Lease Revenue Bond Progam is generally limited to
construction cost.

Kansas

‘There are no specific bondability guidelines in the state. The authority
to finance projects through bonds issued by the Kansas Development
Finance Authority is an integral part of the budget process, from the
Governor's recommendation through legislative approval, followed by a
‘specific request from the Secretary of Administration. For all practical
purposes, Kansas is not a state that issues general obligation bonds,
although local units of government can issue them.

Kentucky

In Kentucky, cash is generally used for small projects (under $200,000)
and maintenance and renovation projects. Debt is used to finance large
projects (including major renovations), and projects that produce a
revenue stream. In the case of particular projects and particular years,
the decision to finance with cash or bonds will depend in part on the
availability of funds.

Puee 5 Capital Budgeting in the States: Pathe to Succes


122

Part Two
Case Studies in Selected Senses

Question: How do you keep up to date on your state’s capital
‘assets? How does the information help you to maintain your state's
capital stock?

Arizona

‘Arizona has a maintenance program that uses 2 formula to provide the
‘amount needed on maincenance each year. The Facilities and
Management Division uses the Sherman-Durgess Program designed by
‘two professors in Michigan.

Input for the computer program is the age, size, and replacement value
of the facility. This information is cun through a formula. The ourput
is the amount that should be spent on maintenance each year,
approximately 1 percent of the replacement value.

‘This program was installed in 1985. In 1991, the formula showed a
‘eed to appropriate $6.8 million, though $807,000 was appropriated.

California

California uses a basic preventive maintenance computer program. The
program has been in use for two years in Sacramento and for one year
in both Los Angeles and San Diego. Additional capital asset inventory
information was added in order to maintain a centralized capital asset

inventory. It took three years 10 develop and to input the information

for this centralized system. Though some information on the system is
‘bot currently needed, the information could be used for maintenance in
the furure.

Once data was centralized, the program became insufficient and is now
being modified to meet the state's needs

Idaho

abo has a centralized maintenance system. Officials in the Public
‘Works Division do not recommend designing your own system since
there are many available vendors.

‘The capital asset inventory coasists of The Bureau of Risk
computerized list of replacement values of all the state facilities and is
‘ot used for budgeting of capil management.

Illinois

inois implements a two-stage program to provide funding for
‘maintenance and renovation work Essentially, projects less than
$25,000 are funded by agencies in separate appropriations in the
‘operating budget and larger projects are funded by the capital budget.

Page 61


29

equipment, technology and capital stock? needed to promote economic growth. Yet
the reduced spending for infrastructure in the last decade has limited the growth
potential of the U.S. as a whole and has had an even more devastating impact on
local economies.

In New York City the deterioration of the infrastructure, and the economic con-
sequences of this deterioration, are visible to residents and businesses within the
City. We provide a graphic example of the way in which economic growth is slowed
due to the poor condition of our infrastructure. According to a 1992 Department of
Transportation study, road congestion and poor pavement can increase the cost of
operating a truck by between 24 to 42 percent. This upward pressure on costs has
contributed to the decline of the City’s wholesale industry and limited job opportuni-
ties for our less skilled residents. It has also contributed to a generally high cost
of doing business in New York City which has slowed growth across a variety of
local industries. In 1988 the Congressional Budget Office estimated that selective
expansion of the highway system in congested, urban areas would have yielded re-
turns of 10 to 20 percent.

-al governments often need help in financing capital improvements (and some-
times need help in financing infrastructure maintenance) so declines in federal
spending on infrastructure are of great concern to localities. We believe that the cre-
ation of a federal capital budget would aid in developing a long term infrastructure
strategy which could integrate the needs of localities within regional and national
goals. We also believe that the absence of a federal capital budget has contributed
to the nation’s and the localities infrastructure deficit.

In New York City we separate the capital budget from the rest of the expense
budget and while the City has not had sufficient funds for ali the infrastructure im-
provements needed, we feel that the existence of a capital budget has improved the

udget process and helped the City focus on a capital strategy. Our capital budget
provides funds for the purchase of property, the construction of facilities, improve-
ments of existing facilities and the purchase and installation of major equipment.
The capita) budget therefore, functions as an investment plan for the City’s infra-
structure.

The capital budget is presented by the Mayor to the Council for adoption each
year® and forms part of a four year capital programs. The first year of the program
represents spending planned for the upcoming fiscal year, while the remaining three
years of the capital program is a projection of the spending necessary to complete
each project in the capital budget and to fund new projects anticipated in the follow-
ing three years. The Charter also requires the preparation of a ten-year capital
strategy that is used to describe all facets of the development of the
facilities for the next decade,

However, including an item in the capital budget does not guarantee an actual
expenditure. The City’s capital commitment plan is a measure of what is actually
to be spent on capital projects during the course of the fiscal year. Agency targets
in the commitment plan represent the actual dollar amounts that are to be spent
in the current fiscal year based on a projection of the dollar value of contracts into
which the City will enter.

‘The capital ‘budget process insures that capital projects adopted each year are the
final product of a longer capital planning process that begins with a ten-year capital
strategy, takes firmer shape when it reaches the four year capital program and crys-
tallizes in the current year capital budget. We believe that the short-term time hori-
zon associated with the annual operating budget is not appropriate for capita) plan-
ning.
ithout a capital budget, spending for current. goods and services is mixed-in with
spending for long term investments. This creates a timing mismatch between out-
lays and benefits. Further, the unified budget makes it difficult to evaluate the fi-
nancial solvency of the federal government because you can not incorporate the val-
ues of assets acquired into your understanding of the budget. A capital budget also
creates an improved understanding of the budget process among the public that can
contribute both to balancing the budget and providing more funds for investment
and infrastructure.

ity’s capital

Sharon Erenburg in “The Relationship Between Public and Private Investment” Working
Paper No. 85, The Jerome Levy institute, 1993 estimated that each one percentage point in-
crease in public infrastructure expenditure would yield a 0.6 percent increase jin private sector
equipment investment. The work of David Aschauér and M.1. Nadirie and T.P. Mamuneas have
tended to confirm Erenburg’s finding.

Charter Section 225(a).

4Charter Section 212.

®Charter Section 215.



5

ess makes no distinction between cuts in wasteful programs and investments in our
economic future.

Over the long run, a focus on reallocating spending toward infrastructure invest.
ments will help lower the budget deficit. In terms of Federal spending programs,
the government ean best promote economic growth by making investmente that im-
prove the productivity of the private sector and create jobs.

Numerous economic studies have documented the link between carefully targe
increases in infrastructure spending and increases in private sector productivity.
For example, testimony before. the ‘Transportation and Infrastructure Committee
found that: if, since 1970, the US. had maintained the 1950s and 1960s share of
GNP for core infrastructure (roads, bridges, airports, water and sewer systems, ete.)
productivity growth would have been 50 percent higher.

Transportation and other infrastructure investments add value. Reduced travel
time and improved safety benefit the entire economy since it allows every business
and individual to operate more efficiently. This is the proper role of goverament—
making infrastructure improvements that would not otherwise be by the pri
vate sector but are critical to our economy. These investments that add long-term
value should not be treated the same for budget purposes as operating expenditures,

ngestion takes a terrible toll on the nation’s economy. In major urban areas it
is estimated to cost $40 billion yearly. An efficient transportation system is central
to lean production and just-in-time manufacturing. By 1995, more than half of the
nation’s manufacturers will use just-in-time delivery. In a similar vein, businesses
cannot grow and create jobs if there is an inadequate water and sewer infrastruc-
ture to support expansion.

With the globalization of the world’s economy, our economic prosperity will de-
pend on our ability to export goods and services on a competitive basis. ‘To achieve
export-based growth, adequate infrastructure must be in place.

ir economic competitors recognize this fact, and are increasing their infrastruc-
ture investments. In 1992, Japan's investment in infrastructure as a percent of its
GDP was roughly three times that of the United States. Of all the G-7 countries,
the United States was last both in public infrastructure investment and productivity
growth from 1978 to 1990.

A review of actual Federal spending trends for infrastructure demonstrates the
failure of the current process, Public investment in infrastructure fell from nearly
2.0 Percent of the GDP in 1959 to a little over one percent today. As a share of the
be federal budget, infrastructure investment dropped from 4.0 percent in 1959 to

1.1 percent lay.

While America sponds nearly $1 trillion dollars annually on transportation and
transportation services, representing 17 percent of the gross domestic product, there
are billions of dollars of unmet infrastructure needs.

Nearly one-fourth of our highways are in poor or mediocre condition, with another
36 percent rated only fair. More than 70 percent of peak-hour travel on urban inter-
states occurs under congested or severely congested conditions, compared to 55 per-
cent in 1983. The cost to eliminate the existing backlog of highway deficiencies is
approximately $212 billion.

ne out of three bridges is rated structurally deficient or functionally obsolete and

needs major improvements ranging from deck replacements to complete reconstruc,

tion, The cost to eliminate all backlogged bridge deficiencies iv approximately $78
illion.

For public transit, almost one-fourth of the Nation’s rail transit facilities are in

r condition, and one-fifth of transit buses must be replaced as soon as possible.

dditional investment of as much as $11 billion every year is needed to improve

the Nation’s transportation systems so they can provide adequate service through-
out urban, suburban, and rural areas.

By the year 2003, at least 32 lange US. airports will suffer delays of more than
20,000 hours a year, up from 23 currently delay-plagued airports. The delays that
exist today throughout our aviation system cost our economy as much as $6 billion
every year. It will cost $30 billion in capacity improvements to meet the projected

jeman

‘The Nation’s inland waterways contain a series of outdated and antiquated locks
and dams that hinder the movement of coal, grain, and other bulk products. In
1990, 10 locks on the inland waterway system averaged more than three hours of
delays per barge tow, while many other locks had lesser delays, With the use of the
inland waterway system expected to increase each year, delays are likely to con-
tinue to rise.

ediate construction needs for the inland waterway system could reach as
much as $4.3 billion, but we are currently investing at a pace that will see us falling
further behind these needs. Additional investment of hundreds of millions of dollars



44

Mr. Davis. You have the revenue stream. Thank you.

Mr. McMauon. And IJ should point out, the State of New York
is different in this case because there, in order to issue debt, you
need the authorization of the voters. And what Governor Rocke-
feller did was, he also found creative ways to create authorities
that were off budget that got around that mechanism and utilized
it to create a number of things that are very attractive in New
York but also very expensive.

Mr. Davis. Thank you.

Mr. Horn. I thank each of you very much. We have delayed the
Virginia contingent long enough to get caught in the rush hour
traffic and feel the problems of modern urban capital projects.

Mr. Davis. HOV-2 now, though. They are OK.

Mr. Horn. We do thank you for coming. And Mr. McMahon, we
deeply appreciate you coming down from New York and sharing
your experience with us. It is very important. So thank you all.

And if the last panel will come forward, I would appreciate it. In
the meantime, I ask consent that the working papers provided b:
Mr. Brasher and Ms. Young of the majority staff having to do wit!
the California legislative analysts’ definitions of the terms we are
discussing, and the excerpts from the California State Administra-
tive Manual and the work of the National Association of State
Budget Officers entitled, “Capital Budgeting in the States, Path to
Success,” as well as an article in Government Finance Review, “Op-
erating Capital Budget Reform in Minnesota, Managing Public Fi-
nances Like for Future Matters,” be included at the conclusion of
today’s hearings as part of the hearing record.

Hearing no objection, that is so ordered.

Please Fe seated. Our first speaker will be Mr. Ted Sheridan, the
former Chief Financial Officer of Fairchild. Thank you very much
for coming.

STATEMENTS OF TED SHERIDAN, PRESIDENT, SHERIDAN
MANAGEMENT CORP., ON BEHALF OF FINANCIAL EXECU-
TIVES INSTITUTE; AND DAVID CHU, FELLOW, NATIONAL
ACADEMY OF PUBLIC ADMINISTRATION, SENIOR FELLOW,
RAND CORP.

Mr. SHERIDAN. Good afternoon, I am Ted Sheridan, president,
Sheridan Management Corp. and I am a member of the Financial
Executives Institute, Committee on Government Liaison. FEI is a
professional association of 14,000 chief financial officers, treasur-
ers, and controllers from some 8,000 major corporations throughout
the United States and Canada. The committee on government liai-
son formulates positions on economic and regulatory issues of con-
cern to American business.

Mr. Chairman, we appreciate the opportunity to present the
views of FEI before the subcommittee and are always willing to
provide our technical assistance to you, the ranking member, and
your representative staffs. And I was very pleased to see that
Chairman Clinger was here and I have a copy of H.R. 767, which
Thad not seen before and it appears that is quite germane to these
processes. I have read his prior submissions in earlier Congresses.

As to why I am here, I have been a member of this committee
of FEI for virtually its entire existence, and the last time I was


4

STATEMENT OF Hon. CarDISs COLLINS, A REPRESENTATIVE IN CONGRESS FROM THE
STATE OF ILLINOIS

Mr. Chairman, I welcome this opportunity to discuss once again the issue of eap-
ital budgeting. Over the past decade, we have tried many approaches to our meth-
ods of budgeting, but we have had limited success.

For example, ve have had Gramm-Rudman, We have had “pay as you go". Just
recently, the House passed a version of a line-item veto, which I believe raises seri-
ous Constitutional problems.

Most importantly, a few weeks ago, the House passed the most extreme proposal,
the balanced budget amendment. 1, therefore, must wonder whether the issue of
capital budgeting may be coming oo late.

ring the consideration of that amendment, Congressman Wise offered a pro-

gal to woe capital budgeting as the basis for a balanced budget. The proposal

fate, ‘and we may soon be locked into a constitutionally mandated balanced budget

that fails to distinguish between investments in our future and payments for cur-
rent operating costs.

T cannot help but ask what the ultimate point of the subcommittee’s work here
today is expected to be. Unfortunetely, decisions have already been made concerning
the budget. We appear to be closing the barn door after the horses have left.

Hearings on capital budgeting are exactly the sort of hearings that should have
been held prior to the rushed consideration of the balanced budget amendment. Yet
Iam sure that the Judiciary Committee gave it little thought before it brought the
balanced budget amendment to the Floor.

Recently, the Human Resources and Intergovernmental Relations Subcommittee
has been conducting hearings on restructuring HUD and HHS. However, before
they could draw any conclusions, the Appropriations Committee made massive cuts
at these two agencies, foreclosing any thoughtful approach to downsizing activities,

Similarly, it seems a bit unreal to be discussing capital budgeting, and its primary
purpose of encouraging long term investment rather than operating costs, at the
same time the Appropriations Committee is doing just the opposite.

Let us think for a moment about some of these cuts: the Summer Youth Employ-
ment and Training program, assistance to, educationally disadvantaged children,
and the Safe and Drug Free Schools Act. These are all important investment. pro-
grams, They are investments in our children, the human capital of this country.

Similarly, there have been enormous cuts in our infrastructure, particularly at
HUD, where its budget has been brutally slashed, and its ability to provide the min-
imum necessities of housing for those in need has been made impossible.

Teommend Chairman Clinger in particular for his interest in the use of capital
budgeting to direct our spending toward investment, I note that he was the only
Republican to support the Wise substitute to the balanced budget amendment, to
establish a separate capital budget.

However, I cannot help but believe that these thoughtful approaches to budgeting
are being rendered irrelevant by the mad 100 day dash to pass a balanced budget,
amendment, a line-item veto, and draconian appropriation rescissions to finance a
capital gains tax cut.

new Republican agenda seems to based on a novel approach to legislation:
Act first. Think later.

STATEMENT OF Hon. BupD SHUSTER, A REPRESENTATIVE IN CONGRESS FROM THE
STATE OF PENNSYLVANIA

The current Federal budget process has failed this nation in its treatment of in-
vestments. Specifically, the process does not recognize both the economic value of
infrastructure investments and their unique funding mechanisms.

Tn its failure to achieve a balanced budget, the Federal Government is often com-
pared to a household, business, or state government, each of whom must balance
a budget. A closer look at how households, businesses, or states balance their budg-
ets, however, proves the absurdity of the current budget process.

louseholds commonly take out large loans for a home mortgage or education
loan—in other words, capital expenditures. A business must balance its books, but
it also has the option of borrowing for assets that will provide a positive economic
return over time. Similarly, while states must balance their budgets, some 37 states
utilize a capital budget.

I am not suggesting that a capital budget, be used to justify deficit spending, but
I do believe it is obvious that capital budgeting would be a highly useful tool to im-
prove budgeting decisions. While I support efforts to cut spending, the current proc-


38

The other thing that I would say is that, for example, a locality
like Fairfax doesn’t access income, and because we have no income
tax, and so our infrastructure is—you know, our revenue authori-
ties are fairly limited, and if we had to take over the part of the
Beltway, for example, that was in Virginia—

Mr. FLANAGAN. No one would suggest that you would take over
the Beltway or part of the Interstate hi way system. That is clear-
ly the Federal Government’s responsibility for interstate commerce
because the touching is so close, but a footbridge across the north
branch of the Chicago River, you have really got to go a long way
to convince me that that is something that needs to be done.

However, that is the sort of capital expenditure we are talkin;
about for local transit or necessary regional transit matters an
capital infrastructure generally. I am trying to draw a line here
and I am more inclined to draw it away from the Federal Govern-
ment than toward it, and this is where we remain, I think, perhaps
philosophically opposed.

Ms. HANLEY. Well, I guess the other question is in transit, you
have to balance some other Federal goals, which include clean air.

Mr. FLANAGAN. OK. I yield back.

Thank you, Chair.

Mr. Horn. The gentleman from New Hampshire, Mr. Bass.

Mr. Bass. Thank you very much, Mr. Chairman.

Appreciate your appearance here today and I, like my colleague
from Illinois, Vve et having not been here for your oral testimony.
We had another Government Reform and Oversight Subcommittee

earing.

I come from a State that has a capital budget, the State of New
Hampshire, and we also don’t have a sales or income tax, and as
a former member of the legislature and the New Hampshire State
Senate during tough economic times, there has been some tempta-
tion to use the capital budget as a mechanism whereby it becomes
somewhat easier to balance the budget in a given year.

To what extent do you all feel pressure to utilize the capital
budget as a mechanism to make your operation expenditures a lit-
tle easier to deal with?

Ms. HANLEY. Well, we don’t. In other words, what happens is
that we don’t do those capital expenditures. If the general fund
shrinks to the point that the 10 percent debt service exceeds the
10 percent, we put off the sale of bonds, I suppose you could say
that there are some human investments that we use the bond
funds for if it concerns the design and the construction of a project,
but the operation, we do not use capital and bond funds for.

Mr. LEIDINGER. In Fairfax County, approximately 72 percent of
our general fund revenues come from property-based taxes, real es-
tate and personal property taxes. So we are fairly sensitive to what
ha ppens in the real estate market and the general economy as
well.

During the decade of the 1980’s, our general fund revenues were
growing at an average annual rate of about 12.2 percent. When the
recession hit us in 1991, not only did that growth stop, but we lost
revenue for the first time in the history of the county, and the
board of supervisors took a number of tough actions, as I men-
tioned this morning, but included among that—those actions were


118

Part Two
(Case Studies in Selected States

‘There is a central reporting process for the Treasurer and the budget
department to keep track of agency revenue debt

Virginia

Historically, Virginia has financed capital spending on a pay-as-you-go
basis. Biennial budgets through 1989 have generally included $125
million to $200 million in capical spending, with the specific amount
depending on the availability of funds and the competition with other
initiatives as par of the regular budget process.

Since 1989, lotery revenues have been earmarked for capital projects
State law required these lottery receipts to be allocated as they were
received: the budget could not anticipate lonery revenues. AS a result,
budgets have included some general funds for maintenance reserve and
critical infrastructure projects. Other projects were placed on a
prioritized list, and were funded in priority order as lonery revenues
materialized.

In the recent downturn, lottery funds were diverted to support the
commonwealth’s operating budget, resulting in the cancellation of
capital projects. This experience has led the Department of Planning
and Budget to study the commonwealth’s capital needs and resources.

‘The study calculated debt capacity for Virginia by looking at debt
service per capita and as a percentage of personal income. These ratios
were compared with the same measures for other AAA rated states.
Based on the results of this study, the Governor has oow commined to a
six-year capital plan.

‘The Commonwealth also has a Virginia Public Building Authority
‘which finances state office buildings and new prison construction. The
‘Authority's revenue bonds are backed up by the lease payments of the
‘using agencies. Projects financed through the authority are budgeted on
a project-by-project basis. The Authority's debt ceiling is increased by
the legislanure for each new project.

Washington

‘Washington limits G.O debt to the level where debt service (excluding
debs service supported by project revenues) equals 7 percent of general
funds. The Office of Financial Management conducts a study of
projected debt service over the life of state bonds, to calculate the
amount of bonds that may be authorized each year. In addition to the
debt-financed program, some capital spending is financed from
dedicated revenues. For example, K-12 school construction is financed
from timber receipes.


17

tion if we want to get into the nitty-gritty of what is an asset, long-
term fixed asset, and what you can convert in the accounting busi-
ness, what you can convert an asset to cash within 90 days is con-
sidered a short term asset. But I agree with both the gentlemen.
We need to get. on with the business of accounting for assets in this
government, because I think if you were able to sit down—and I
lon’t know whether we can or not sit down and list every asset.
I would say that a Navy vessel that cost $140 million is an asset.
It has a life, a distinguishable life and we could amortize that and
charge that off, depreciate it just as we do in the private sector and
I want to commend the chairman and all of you. And Mr. Wise, be-
cause we talked to Mr. Wise about the balanced budget amendment.
that I was supportive of and I think—you correct me if I am wrong,
Mr. Wise—we talked about it, including capital assets as a part of
what this government is worth. I think if you look at what we are
worth, we are worth a lot more than we owe. If you are borrowing
money in the private sector, they look at what you have and what
your value is and what your net worth is; and this government is
worth a lot of money that we don’t have that information on.
Thank you, Mr. Chairman.
Mr. MINETA. Mr. Mascara, I think you will find this Wise bill is
a real Clinger.
Mr. WISE. Mr. Chairman, it is also something you can toot your
horn about.
Mr. Horn. And there are no Thorntons in it either, I suppose.
I now yield to the gentleman from West Virginia. Mr. Wise, a
long time expert on capital budgets.
ir, WISE. Actually, I tell you when I realized I wasn’t as much
as an expert as I thought was when I started to explain it to the
new Member, Mr. Mascara, who immediately started asking me
some probing questions and I realized I was dealing with a real ac-
countant.
Mr. Chairman, I would just ask unanimous consent to insert my
statement into the record.
Mr. Horn. Without objection. _
(The prepared statement of Hon. Robert E. Wise, Jr., follows:]

STATEMENT OF Hon. Ropert E. WIsE, JR., A REPRESENTATIVE IN CONGRESS FROM
THE STATE OF WEST VIRGINIA

Mr. Chairman, Members of the Committee, I would like to thank you for holding
this hearing today. As you know, I have long been a supporter of capital budgeting.
Earlier this Congress I sponsored an amendment to balance the federal budget
using a capital budget and for several years Chairman Clinger and I have worked
on legislation to establish a capital budget which highlights investment over con-
sumption spending.

As a veteran of six years of service on the House Budget Committee, I have come
to believe that many of the budget problems facing this Congress, particularly the
shift. in recent years from public investment toward consumption spending, have as
much to do with the budget process as with decisions made—or not made—by the

‘ongress.

Pethaps the greatest, and to me the most mystifying, problem with the current
system is the fact that the federal government's unified budget makes no distinction
between money spent on investments and money spent for consumption. Highways;
federal salaries, health benefits and foreign eid, which are all examples of federal

rograms that are paid for through taxes and borrowing, are all accounted for in
Postcally the same way. But all borrowing is not created equal. Borrowing for phys-
ical infrastructure can be justified if it pays for itself in the long-run by increasing


12

ment budget for each of the three major components of the budget—general funds,
trust funds, and enterprise funds.

investment budget set forth in, my proposal would represent only the major
‘ies and programs which support the acquisition, construction, and rehabilita-
tion of investment assets and which support education and job training and invest-
ments in research and development. All other activities, project, and programs
would be presented in the operating budget,

‘As Congress looks for ways to allocate federal funds more responsibly, a capital
budget would ensure a continued focus on the government’s total financial oper-
ations, while providing better and more relevant information upon which to base
both overall fiscal policy as well as program priorities within the federal budget.

H.R. 1109

A BILL

To improve budgetary information by requiring that the unified budget presented
by the President contain information which facilitates consideration of choices be-
tween spending which is consumption oriented, spending which is of a develop-
ment character, and spending which is in the nature of a capital investment, and
for other purposes.

Be it enacted by the Senate and House of Representatives of the United States
of America in Congress assembled,

SECTION 1. SHORT TITLE.

This Act may be cited as the “Capital Budgeting Act of 1995”.

SEC. 2. STATEMENT OF FINDINGS AND PURPOSE.

(a) STATEMENT OF FINDING.—The Congress finds that—

(1) the objective of enhancing long-term economic growth is not well served
by a budget process focused on short-term results,

(2) long-term economic growth depends not only upon a stable social, political,
and economic environment and a higher level of national savings, but also upon
a sound public infrastructure, an educated citizenry and workforce, an invest-
ment in research and the discovery of knowledge, and the harnessing of inven-
tive genius into the workplace and market place,

(3) the existing presentation of the Federal Budget obscures the distinctions
between long-term capital investments, expenditures of a developmental char-
acter, and current operational spending’ and

(4)'the public interest will be served by a Federal Budget presentation which
presents information showing long-term effects of expenditures.

(b) Purpose.—It is the purpose of this Act to require that the unified budget
present—

(1) an operating budget, and

(2) an investment budget divided into—

(A) federally-owned capital, and

(B) developmental investments,
for each of the major components of the budget (general, trust, and enterprise
funds) in order to ensure a continued focus on the Government's total financial oper-
ations, while providing better and more relevant information upon which to base
both overall fiscal policy as well as program priorities within the Federal Budget.

SEC. 3. CAPITAL AND OPERATING BUDGETS.

(a) IN GENERAL.—Title 31, United States Code, is amended by inserting after sec-
tion 1105 the following new section:

“SEC. 1105A. CAPITAL AND OPERATING BUDGETS.

“(aX1) The budget of the United States submitted by the President under section

1105 of this title shall be a unified budget composed of—

“(A) an operating budget, and

“(B) an investment budget divided into federally-owned capital and devel-
opmental investments.

“(2) Operating and investment budgets shall be presented separately for unified
funds, general funds, trust funds, and enterprise funds.

“(bX1) Actual, estimated, and’ proposed amounts shall be presented for unified
funds, general funds, trust’ funds, and enterprise funds, and, at a minimum, shall

contai:
“(A) For the operating budget:
“G0 Operating revenues.
“(i) Operating expenses.



CAPITAL BUDGETING

THURSDAY, MARCH 2, 1995

House OF REPRESENTATIVES,
SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
INFORMATION, AND TECHNOLOGY,
COMMITTEE ON GOVERNMENT REFORM AND OVERSIGHT,
Washington, DC.

The subcommittee met, pursuant to notice, at 2 p.m., in room
2154, Rayburn House Office Building, Hon. Stephen Horn (chair-
man of the subcommittee) presiding.

Present: Representatives Horn, Flanagan, Davis, Bass, Clinger,
Maloney, Mascara, and Wise.

Staff present: J. Russell George, staff director; Mark Brasher and
Anna D. Gowans Young, professional staff members; and Andrew
G. Richardson, clerk.

Mr. Horn. The Subcommittee on Government Management, In-
formation, and Technology will convene.

We have with us today the chairman of the full committee, Mr.
Clinger of Pennsylvania, and I would like him to make the first
opening statement.

Mr. CLINGER. Thank you very much, Mr. Chairman, and I very
much appreciate you holding today’s hearing. I look forward to this
hearing as a first in a series of discussions on an issue which I
have long championed: the creation of a unified Federal capital op-
erating budget.

The concept of capital budgeting is very simple. It is nothin,
more than a planning device, Telied upon by business leaders an
many State and local officials, to help prioritize spending for the
future. A properly implemented capital budget would enhance the
usefulness of the budget as an overall reporting, control, account-
ing, priority setting, and fiscal policy tool. It affirms what we all
know, that capital is a vital but limited resource, and that capital
budgeting promotes the development of long-term strategies to en-
sure that future infrastructure needs will be met.

In my view, the benefits of a capital budget include; first, its as-
sistance in encouraging greater focus on our Nation’s deteriorating
physical assets to permit more rational investment decisionmaking;
second, the promotion of intergenerational equity by burdening fu-
ture generations with debt solely for assets that provide future tan-
gible benefits; and third, encourage the unbiased treatment of cap-
ital activities by revising budget inequities which currently require
front-end loading of capital costs.

In addition, a unified capital budget can help us to better assess
what we mean by a balanced budget and to determine whether cur-

q@


Minnesota

The state of Minnesota is looking at a major revamping of its capital
budgeting to include several things:

1) better information in all six years of the plan, and

2) de-politicizing the capital budget process, or at least forcing a more
thorough review.

Virginia

‘The budget office is very involved in the execution, the actual
construction, and monitoring construction and should perhaps try to play
a less prominent role. In higher education, certified engineers and
architects on the teaching staff now have oversight of managing project
construction. Most state agencies and institutions however, do not
hhave that expertise, soit falls to the budget office to be involved in the
‘execution of projects. The budget office is attempting, however, to
designate and disperse that type of responsibitity to the state agencies
whenever possible

‘Question: What advice would you give to a state that has never
done a capital budget? How would you recommend they proceed to
organize a capital budget, and what steps do you recommend a state
take (o do its first capital budget?

Maryland

‘One suggestion is the need to educate agencies into the capital budgeting
culture. Agencies tend to be more absorbed in their immediate budget
needs rather than taking ume to plan five years out. Agencies really
need to plan; they must think about the missions of the agency. the
‘overall view of the agency. and their needs. Agencies must explain in
‘great detail, in nontechnical language. why a request is needed, who
will benefit from it, and how it will be utilized

Staffing is very important. ws difficult for the budget staff, who are
concemed with operating budgets in the short-term, to be concerned
also with capital budgeting wn the long-term. A state needs an adequate
Staff dedicated to reviewing capital projects, who have the best interests
of the state as a whole in mind

Minnesota

One recommendation is to have a clear philosophy, a very clear
definition and understanding of the principles on which a state's capmtal
budger is based. Without gusdelines or general principles, making
decisions can be quite difficult, Another suggestion is clearly defining
what is a capital improvement versus what is a maintenance type
expendinure which should appear in the operating line item. Without a
clear definition of what should be bonded. it may be easy to build up
debt for ongoing operating expenses

Pare a7


67

STATB ADMINISTRATIVE MANUAL
CAPITAL OUTLAY

DISTINCTION BETWEEN STATE OPERATIONS AND CAPITAL OUTLAY

orate
uw CAPITAL OUTLAY.
OPERATING EXPENSES | PROJECT LEVEL PROJECT LEVEL
‘AND.ROUPMENT ‘MINOR FROIRCTS ‘MAJOR PROJECTS
#230000 Ta exsew of
ny $250,000
Tompasive of nonat
Treepectve of umexct
‘orva though Go vow eedpenees ist be .
ENON BW REY emenrninne | ewpeetve of emotes
‘Pesos of Lands
‘astadlag teleted eons mh ss sondemonton |
(tad comt souls, legal thes, und te neports
Be emntenmtivtnnentmesennste Irmapootve of acu,
Dental oe Lease Frajecta Tas Dieceion
Parciase Optea of Formerly Rested
Taaoed Space “ Abwapective of smoot
‘TL 341 (6520 ILLUSTRATION 1 DECEMBER 1991


22

savings in debt service for Fairfax County. Our current bonded in-
debtedness at the end of the current fiscal year will be approxi-
mately $1 billion.

Mr. Davis has already mentioned that Fairfax County has a
credit rating of triple A from both Moody’s and Standard and
Poor’s. We are only 1 of 33 States and local governments in the
United States that total 30,000-and-some that have a triple A cred-
it rating and we are justifiably proud.

We in Fairfax County consider the capital budgeting process to
be a dynamic one, a process which is interactive with our overall
budget fiscal goals and financial planning. Our process evolves
around a long-term capital improvement program which identifies
public improvement Projects over a 5-year period. The process of
prioritizing the projects for inclusion in our capital budget program
results in political support and community consensus for the
project and the appropriate financing mechanism. Projects such as
new and expanded facilities, schools, facility repair and renovation,
roads, transit improvement, public improvements including side-
walks, trails, storm drainage projects are all programmed within
the 5-year plan.

The first year, the capital program is the foundation for next
year’s capital budget with the 4 remaining years serving as a guide
in the financing and programmatic impact of undertaking the cap-
ital program.

Development of the annual capital budget process begins in the
fall of each year when our county agencies submit budget propos-
als, their justifications, their costs, and related operating expenses
and schedules. These submissions are reviewed by county staff and
evaluated for need, consistency with the county’s comprehensive
plan, and funding requirements. Recommendations for appropriate
funding and phasing of projects are reviewed and consolidated into
the advertised program which becomes a subject of the board of su-
pervisors’ work sessions and public hearings before both the board
of supervisors and the Planning Commission and ultimately the
board of supervisors adopts the capital program.

The county board of supervisors adopts that capital program in
full conjunction with the budget—the operating budget for the next
fiscal year.

We see several benefits from our capital budgeting process, all of
which ensure that decisions related to the financing of public im-
provements are balanced against current projected resources of our
overall operating budget.

First, the Fairfax County capital budgeting process is essential
in fulfilling the board-adopted 10 principles of sound financial man-
agement. In the mid-70’s, the board of supervisors wisely endorsed
a set of policies designed to maintain the triple A bond rating that
was then awarded to the county. These 10 principles, reaffirmed in
1985 and again in 1988, stress the close association between the
planning and budgeting processes and provide guidance in the
planning and financing of public expenditures.

The principles relate to the integration of capital planning, debt
planning, cash management and productivity as a means of ensur-
ing prudent, responsible allocation of the county’s resources. The
key to the principles is the guideline that debt service on county


8

Yet under the Federal Government’s unified budget, there is no
distinction that is made between $1 spent for investing in our Na-
tion’s physical infrastructure and $1 spent to cover day-to-day oper-
ating expenses. That is, money spent for salaries, foreign aid,
transfer payments. These are all accounted for in the same way as
money spent on highways, transit, water treatment facilities, and
other physical infrastructure.

But indeed, they are not the same. As I said, they have very dif-
ferent impacts on our economy. Capital investments enhance our
productivity, efficiency, and standard of living. Consumption and
operations meet day-to-day needs but leave no discernible long-
term legacy.

Many argue that our current method of accounting biases pend-
ing decisions against physical infrastructure by requiring infra-
structure to be paid for all at once rather than during its useful
life. Thus, infrastructure investments are not judged on their long-
term economic return but rather on a distorted view of their up
front impact.

Now, the concept of a Federal capital budget is not new. The
Federal budget itself was expanded in the 1950’s to include infor-
mation on investment spending. Reform in the 1980’s required
even more investment information in the unified budget, as evi-
denced by inclusion of special analysis D, at Chairman Clinger’s
urging, as part of the Federal budget. And the most recent strong
endorsement of capital budgeting came from Vice President Gore's
National Performance Review. Earlier, the National Council on
Public Works Improvement also recommended capital budgeting, as
did the Competitiveness Policy Council.

Now, many other industrialized countries have gone further than
we have in employing a capital budgeting system. Most of our mu-
nicipalities and States, in fact, 49 according to the National Con-
ference of State Legislatures, distinguish in some way between
spending for capital investments and spending for operating ex-
penses, either through a capital budget or investment account that
charges depreciation to the operating budget or by issuing bonds
and making payments on an annual basis. Such a system reflects
the fact that while undifferentiated borrowing is harmful, borrow-
ing for selected investments such as infrastructure that contribute
to long-term economic growth can have economic justification.

Businesses also know the difference between borrowing to
consume and borrowing to invest. Borrowing is a smart move when
the money is used to finance productive investments that help a
business modernize its equipment, expand, or become more profit-
able. But borrowing money to pay salaries or executive bonuses or
to send employees to expensive conferences rather than to modern-
ize would be foolish.

And I believe it is time the Federal Government organize its
budgetary affairs on the same sensible basis as State governments
and private businesses.

By borrowing for current expenses, the government is asking fu-
ture generations of taxpayers to pay for the cost of running the
government today. But Borrowing to invest is different. If the gov-
ernment passes part of the cost of building a road to future tax-
payers, it also gives them something in return: a new highway that


27

other nonrecurring expenditures, Quarterly review adjustments are not to ex.
ceed 2 percent of the Combined General Fund disbursements. The intent is to
apply this restriction on an annual basis.
3, If'a deficit appears to be forthcoming, the Board will reduce appropriations or
increase revenues.
4. The County's debt ratios shall be maintained at the following levels:

Net debt as a percentage of estimated market value, which is now at 1.66 per-
cent; should always remain less than 3 percent.

The ratio of debi service expenditures as a percentage of Combined General
Fund disbursements which is now at 9.2 percent! should remain under the 10
percent ceiling. The County will continue to emphasize pay-as-you-go capital fi
nancing. Financing capital projects from current revenues is indicative of the
County's intent to show purposeful restraint in incurring long-term debt, To
this end, for planning purposes, the target oa annual bond sales will be $150
million, or $750 million over a five year period, with a technical limit of $175

million in any given year, This planning limit shall exist even though the ratio
of debt to taxable propert: value remains less than 3 percent and the ratio of
debt service to Combined General Fund disbursements remains less than 10

rent.
5. Fairfax County's cash management system is one of the beatin the enuntry and
must continue to receive full support and cooperation from all County agencies, in-
cluding the Public Schools. Such a system is an indication of the soundness and pro-
fessionalism of the County’s financial management.

6. The budgetary process will continue to be oriented toward management by ob-
jectives (MBO) and must continue deliberately toward full utilization of the system.

7. All efforts must be made to improve the productivity of the County’s programs
and its employees. The County’s productivity analysis process is a dynamic part of
the administration. Its presence, together with MBO, are indications of the strength
of the County's commitment to continual improvement of its fiscal management.

8. A continuing effort to reduce duplicative functions within the County govern-
ment and the autonomous and semi-autonomous agencies, particularly those which
receive appropriations from the General Fund, must be made.

9. Underlying debt must not expand beyond that level already contemplated. The
creation af additional sanitary districts for the purpose of incurring bonded inde
edness will be discouraged. Revenue bonds of agencies supported by the Combined
General Fund will be analyzed carefully for fiscal soundness. The issuance of Coun-
ty revenue bonds will be subject to the most careful review. These revenue bonds
must be secured by extremely tight covenants to protect the name of the County
in ita other borrowings.

10. Fairfax County must continue to diversify its economic base by encouraging
commercial and, in particular, industrial employment and associated revenues. Suc!
expansion of business and industry must be in accord with the plans and ordinances
of the County.

Mr. Horn. Thank you very much. We will get to that shortly.

Mr. McMahon, please proceed.

Mr. McMauow. Yes, thank you, Mr. Chairman, Congresswoman
Maloney. Thank you for the opportunity to come down and testify
I have prepared remarks which I will, with your permission, sub-
mit and just summarize. .

As a staff Rergon to the city council, as the director of the finance
division, we look at the capital budget from a legislative perspec-
tive, which I think is an important one because it is the one that
you share here and it is very much a tool that we believe is essen-
tial so that you can develop a strategic plan in addressing the
needs of local governments. As a representative of local govern-
ment, I think I would be remiss if I didn’t say that we often need
help in financing capital improvements and cuts to capital improve-
ments will have a dramatic impact on the ability of local govern-
ments to meet those needs.

But that being said, I think it is important that, when you look
at the need for a capital budget, it is for the strategic purpose that

1As of June 30, 1994.


96

Table 18
‘Asset Management

Dats Base How Often Priority Berween Charge Reat
Suate javentory Duta Updated __Maint & New Fuciities To Deparunents
‘Auber Ny Na Based on need Y
‘Asta Y Now curren Maintenance N
‘Anzona y Yeary Manenance Y
‘areanaat y Kept by Blog Servicee Based on need y
Cablorna y ‘Ongoug Munenance x
Coloma x NA Projet by project N
Connecticut y Yeuty Maintenance N
Deuware ¥ Yeaty Mainuenance N
Flonca y Yearly Marenance Y
George x Na. Now buidings ¥
Hawa Y Tons Wain avai fonds N
Ieane y¥ Yearly Maintenance y
uno y Half appropration "
Indra Y Ongoing Depends N
lows N Na New buildings N
Kari Y Year Mamiznance Y
Kenuchy Y Conunvous Mamenance y
Lowinana Y No response Maintenance Y
Maine Y Yeatly Maintenance Other than general fund
Maryland N Every }vt Depends y
Marsachuacir No response To response No response Ro response
Michigan Y Depends on wa
Minnesous N NIA New consiuction N
Masiassp Y Every 2 yt Depends on future impact ¥
Mansour y ‘Yeariv M ¥
Montana ¥ No response Maintenance ¥
Nebraska N Nia Based on need Y
Nevada No response No response No response No reaponse
New Hampshire N NA Maunerance Y
New Jerse y Penodicaly Meerance N
New Menco Y ‘No response Based on need nN
New York y Mawerance y
Noh Carolina ¥ Depends N
North Dakout Y Mairierance Y
One y Maintenance rer than gener fund
Shahome Y ‘No response Y
Oregon Y Manuenance Y
Pennsyivana Y Not exuded 8
Rhode Island Y Based on need Y
Souh Carvine ¥ Depends ¥
South Dako ¥ Mnenance ¥
Tennessee Y No response Y
Tear Y Masmtenunee N
un y Mantenance Y
Vermont N Need based Otner than gener fund
Verne Y Maenance ¥
Warhingon N New constucion Depends
West Virgina N Equal Y
Wisconsin Y Maintenance y
Wyoming Y Mamenance N
oc Y NIA Maintenance N

yest y

Page Capital Budgeting in the Seates: Paths to Success


‘Part One
Capital Budgeting in the States

Section 4

Capital
Financing
Tables 14-17

‘After priorities are established, states look at how to finance a project.
States’ financing options are often dependent upon legal limits on debt
levels or the ability wo incur debt. Other restrictions include scarcity of
{general revenues as well as policy decisions to maintain certain debt
levels in light of bond ratings.

‘As Table 14 shows, states often look at the amount of general fund
‘resources available for projects through an analysis of funding
availability. In some cases capital allocation is derived from the total
revenues available less operating requirements. Due to severe fiscal
constraints, some states have virtually eliminated the use of general
funds for capital projects in recent years.

For states that have an option to debt finance, the issue of whether to
fund a project through cash or bonds arises. Table 14 dlustrates how
decisions on project financing depend on such factors as funding
availability, the size of the project, the type and life of the project, tax
laws, and the likelihood of voter approval for the projec.

‘Another financing decision states face is whether to own or lease a
facility. Most of the states that have a policy regarding this decision
‘compare the life-cycle costs of the two options in deciding whether to
‘own of to lease. Most states do not explicitly consider the impact on
the local property tax base inthe decision.

In addition to general obligation bonds, states also include revenue
bonds in the regular capital budget process. From a debt perspective,
coordinating various debt issues would provide a state with a bener
picture of total debt. For states that debt finance, there is often the need
to finance a project on an interim basis until the bonds can be issued.
Table 15 shows that about half the states use treasury loans as an
interim form of financing. Other interim financing options used by the
‘states include special funds. pooled investments in California, bond
anticipation notes, and master note financing in Kentucky.

In funding capital projects through debt financing, debt service expense
becomes a fixed cost in the operating budget and, if excessive, can tims
future options. States build discipline into their debt financing decisions
through such means as user fee financing whenever possible as shown in

Page 27 Capital Budgeting inthe States: Paths to Succes


9

will encourage economic development, facilitate commerce, and in-
crease economic growth for years to come.

Remember, infrastructure is not just potholes; it is productivity.
It is not just concrete; it is competitiveness.

Instituting a capital budget would force policymakers to decide
whether or not each investment is worth borrowing money to fi-
nance. In addition, the public would benefit from knowing that the
government’s current costs are being paid for and that any borrow-
ing is for investments in the future rather than for paying for the
present and saddling future generations with the bad debt.

Everyone agrees that the United States must make investments
that are critical to future economic growth. Rather than going from
crisis to crisis, the Federal Government should have an institu-
tionalized system of long-term investment planning. Adopting a
Federal capital budget, Mr. Chairman, would provide such a mech-
anism and this subcommittee indeed could help make it happen.

Thank you very much.

Mr. Horn. Thank you very much, Representative Mineta. Let me
ask you, are you able to stay with us so we can have Mr. Thornton
speak and then question both of you? Five minutes is essentially
what it is going to be.

I am delighted to introduce now Representative Ray Thornton of
Arkansas, the only gentleman that has been president of both the
University of Arkansas and Arkansas State University. That’s a
distinction. It is difficult enough to head one institution but not two
and we are delighted to welcome this very constructive Member

ere.

STATEMENT OF THE HON. RAY THORNTON, A REPRESENTA-
TIVE IN CONGRESS FROM THE STATE OF ARKANSAS

Mr. THORNTON. Thank you very much, Mr. Chairman.

I have shared with you that the reason I left the presidency of
the university to return to Congress was because I got tired of all
the politics. And I am sure that as President of Cal State, you
know that there is a great deal of politics involved in academia.

Mr. Horn. I have told that story about 100 times since Ray told
me and I refuse to pay him royalties on it. It is the best line I

now.

Mr. THORNTON. But we do have something in common at our uni-
versities that needs to be reflected in this very important discus-
sion and I want to commend you, Mr. Chairman, Mrs. Maloney, for
your leadership in bringing this matter forward to hearing but es-
pecially Chairman Clinger and Bob Wise for their leadership in the
effort toward capital budgeting.

The United States of America is possibly the only institution in
the world that does not recognize the difference between an invest-
ment for the future and current operating expenses. And this leads
to a distortion and inability to make wise choices, because when
you are weighing against each other a current operating expense
against a huge expenditure for an interstate highway system or for
an airport or for the education of a contingent of people like the
GI bill, anything that a family would borrow money for, a family
understands this.


95

Part One
Capital Budgeting in the States

Section 5

Asset States often use inventory systems to track the status of existing capital
4 assets, AS Table 18 shows, almost all states maintain a data base
M ere inventory for capital assets. In about one-third of the states, the
ables inventory systems assess the condition of facilities, while about
two-thirds of the states use building maintenance standards. The
frequency of updating data bases ranges from continuously to every
three years.

Some states charge rent to departments in order to finance maintenance
and improvements to facilities. In about two-thirds of the states,
departments are charged tent and the rent is used for building
maintenance. Other funding mechanisms available for maintenance
include building renewal funds, dedicated building funds, maintenance
reserves, and revolving funds in addition to general funds as shown in
Table 19. In about two-thirds of the states the current priority in
appropriations is for maintenance rather than new construction.

Good Practices * Maintain an updated inventory system of capital assets.
‘States should review the adequacy of the information and include the
condition of the facilities.

Pee 33 Capital Budgeting in the States: Paths to Suxcew


Indiana

‘The necessity to improve the method for determining funding levels for
repair and rehabilitation led the Higher Education Commission, the
State Budget Agency, and public institutions, with the support of the
General Assembly, to study the condition of facilities and alternative
public policies towards improving the conditions. A number of funding
formulas used in other states were evaluated and changes were made in
the way in which Indiana's public institutions report facilities inventory
data to the Commission. The formula recommended for use in Indiana
public higher education derives from Michigan's formula. The basic
premises are as follows:

‘The formula should be based on constructioa coss;
‘The formula should reflect current year building valuation;

‘The formula should recognize that as a general policy fewer resources
should be directed to building renewal than the cost of building
replacement;

‘The formula should recognize that older buildings require
proportionately more renewal funds than younger buildings and;

‘The formula should reflect the effects of building renewal projects
already accomplished.

Kansas

‘The definition for rehabilitation stilt has some “gray” areas as to
whether this type of work should be included in capital improvements or
the operating budget. For example, maintenance undertaken by the
Deparment of Transportation, whether done with in-house staff or by
‘contract, is reported in the operating budget, whereas maintenance for
other agencies is reported as a capital improvement. There does not
appear to be any overriding concerns about the definition of
maintenance.

Maintenance funds are protected for certain facitities through the use of
dedicated sources of revenve derived from a property tax levy.
Universities, state hospitals, state mental retardation institutions, youth
eaters, the School for the Visually Handicapped, and the School for the
Deaf are included. In some years. correctional facilities have shared in
the levy for state hospitals and related facilities, but now they have a
dedicated portion of lonery and racing receipts. The Governor
proposed to the 1991 legislature to dedicate another portion of loaery
and racing receipts to a new fund, named the General Facilites Building
Fund, to provide a stable source of financing for facilities belonging to
‘other agencies such as the Department of Administration, Department of
‘Agriculture, Adjutant General. Department of Wildlife and Parks, State
Fair, Kansas Bureau of Investiganon, and Insurance Department.

Page 9 Capital Budgeting in the States: Paths wo Succes,



‘The overall amount of revenue debt to be authorized is based on a
“semi-formal” process. The State Economist (who heads the Office of
Financial Management and Economic Analysis), estimates the state's
capacity for new debe. The estimate is based on projected reverues
‘over the repayment period. The same office approves and manages the
debt issuances of the various authorities, and therefore acts as the
central control agency.

‘Agencies request projects for the biennium which are analyzed and the
most worthy are included in the recommended budget and assigned a
fund source. Kentucky law requires line-item budgeting of projects
‘over $200,000. There are no lump-sum appropriations and funds may
‘ot be transferred from one project to another once funds are
appropriated.

Some of the authorities have caps.on the overall amount of debt they
may authorize, but these caps generally are not the operative
constraints. In the event they become problematic, legislation to raise
the cap is generally successful

‘The operative limit on the suze of the capital budget is the estimate of
‘overall capacity for new debt and the availability of other revenues.

Ilinois

Dinois’ capital budget is funded primarily from two sources: G.O.
bonds and “Build Ilinois” sales tax revenue bonds.

‘The Governor annually recommends a level of new G.O. debt. ta
‘making this recommendation, the Governor considers measures of debt
burden (debe outstanding per capita, debt service as a share of general
fund appropriations, and G O. debt outstanding as a share of state
personal income), rating agency perspectives, and the state's overall
fiscal position. Ultimately, the recommended level is a judgement
involving subjective, political. and fiscal considerations.

‘The “Build Ilinois” program was enacted in 1985, Bonds are issued
‘each year based on cash flow projections. Illinois also authorizes about
‘$70 million annually in a revenue bond program for local civic centers.
‘The bonds are backed by sue general funds and are subject to

Kansas

Financing is decided by project on the basis of cash available, the
urgency of completion, the reliability of the revenue source for debt
service, the estimated useful Ife of the facility, the extent to which it
‘adds to the financial liability of the state, and the long-term effect it has
on the budget.

Page S$


63
EXCERPTS FROM THE CALIFORNIA STATE ADMINISTRATIVE MANUAL
2 Capital Outlay

In addition to state facilities, the state has provided substantia!
funding assistance to local governments for schools, jalls. parks,
‘and other facilities. Most of this assistance has come from general
obligation boods and for the most part is not included in the budget
act.

Below are key terms often used in the context of state capital
outlay budgetiog.

Terns Detinitions

- — _

‘Capital Outay: [nckudes purchases of lend and projects involving construction of
now lecliles or renicvalion of exising facies (ypicaly 10

- ‘accommodate program changes),
at Copia having @ total cost greater than $250,000, All major
Covitel Outey ay pre ay ise budedtehay nee

Minor tote) cost lees than $260,000, Minor projects are
Coty Raped uty am nour Saba

‘Maintenance Inchudes normal repair and the replacement of components and
‘equipment 20 that a leciity can continue to luncion as designed.
cere Com ae eed a eprmee creraeg

‘Spectal Repairs —_Nintenance projects that are required periodically and are above
be bese il of expenre nnd I ovine naasence.

machanicaelectical aquipreat,
‘deo inchided In opanning budgets.
Deferred ‘Maintenonce backiog that ocours when ruling maintenance ls n0t

‘Maintenance ‘uustained bf an appropriele level and special repair projecta are not
accomplished when needed.

hoses of Projects capital outlay projects re budgeted in the folowing phases:
{ifwerteay pare trtdy cond dason Coates

ton—includes construction

‘quailty control teeing and inspection, and adminiatretive oversight,
(4) equpmant—movable equipment that  Grecty related to the
‘capkal outlay project.

‘The cost, complexity, and schedule of a project usualy determines

‘whether the project phases are budgeted in one year of over 2-3.
year,

Legislative Analyst—Cal Guide


69
NATIONAL ASSOCIATION OF STATE BUDGET OFFICERS
CaPITAL BUDGETING IN THE STATES: PATHS TO SUCCESS, FEBRUARY 1992

Introduction

Background Research efforts of the National Association of State Budget Officers
have focused primanly on operatng budgets. Paul Timmyeck, wale
serving as President during 1990-91, initiated this project to provide
budget offices with useful information on capital budgeung. This repon
represents an intial effort to provide comparative analysis on capital
budgeting practices by the states. Although this report does not result in
‘one “model capital process.” its objective is to highlight desirable
practices that can be used by all states.

Part One Part One summarizes the results from the survey sent to all states in 1991
‘The survey covers an array of topics including definung capital
expenditures, the capital budgeting process, estimating costs, setting
priorities, managing assets, financing projects, and managing debt. Good
practices are highlighted at the end of each section.

Part Two Part Two reviews vanous issues common to all states and illustrates thew
impact chrough the use of specific state examples. The topics covered in.
thus part include protecung maintenance funds in a world of compeung
demands and the strengths and weaknesses in states’ capital budgeung
processes. States included in the case studies represent a diversity of
‘approaches in capital budgetung and financing.

Pace S


14

say, trust funds that will be doing physical investment as compared
to utilizing those trust funds as part of that capital budget? And
I don’t see the distinction. If they are willing to say, yes, there are
user fees that go into a trust fund for the construction of these
kinds of physical assets, then it seems to me they ought to be able
to recognize that that is in effect a form of capital budgeting, And
it doesn’t take much more then to expend that in terms of what
we ought to be including across the budget throughout the func-
tions of the budget. We should be able to determine those things
that ought to go into the capital budget.

I think what happens is that people are afraid that there is some
form of ownership there, but again these are funds that are distinc-
tive because you try to make the distinction being the difference
between operating money and something that gives you a long-
term return.

Mr. CLINGER. I think any Director of the Office of Management
and Budget is reluctant to see any ability to move money around.
They don’t like to have any limitation on their ability to do that
and I think that is why they view the capital budget as a threat
to their flexibility.

Mr. THORNTON. Mr. Chairman, I think you also hit upon an im-
portant point in this discussion when you pointed out that this is
not an amendment to moving some funds out of the unified budget
but rather obtaining additional information to make choices and
calling for a presentation of what kind of income production, what
kind of return you have upon investments, that it seems to me is

et the kind of information that decisionmakers then will use to
make the decision; and I just don’t see any real good argument
against gaining the additional information as to the return on cap-
ital investments.

Mr. CLINGER. Ray, you obviously raised the critical issue in a de-
bate about capital budgeting. How do you define what is capital?
And obviously that is going to be a part of our discussion.

Mr. THORNTON. It will be very difficult.

Mr. CLINGER. I think the bill that I have introduced with Mr.
Wise is at the moment very limited in that regard. I think we have
felt that the opponents of the capital budget can come at you if
they see you are going to try to expand the definition of capital and
that has always been an argument against the capital budget in
that everybody then will try and get in under the tent to be consid-
ered part of capital.

Mr. THORNTON. Certainly, Mr. Clinger, I would support the ap-
proach you outlined. I think that is far better than what we now

ave, but I think it is a mistake not to consider the importance of
a new engineering laboratory funded by the National Science Foun-
dation as an investment in the future which has a proven return.
It is difficult to draw the line and that may be a political liability
of the position that I have.

Mr. CLINGER. That has been the one concern I think that we felt
we really had to be very precise in the definition because it made
it too big a target for people if we didn’t have that. I want to thank
both of you for your very helpful testimony and that will clearly be
part of the debate how G0 we define it.

Thank you.


91

Table 19
‘Asset Management: Part 2

Other Mechanimns
Sue For Maistenance
‘Awana Badge revolving funds through ee
‘Alka N
‘Aron Building renewal funds
‘Arcana Y
California a
Colorado w
Connecticut x
Delaware N
Flonda Gener fund
Georg Continuation and vnprovement funds
Hawa Hospi. aupor
Idaho. ‘Operating budget
Winoie N
{ndana y
tows N
Kanan Deseaes Buliing Funds
Kentuery ‘General und
Cousana Operating budget
Maine Operating busfet, Dedieted Bud Funds
Maryland x
Mastachusers To magome
Michigan N
Minnesota Pooled account for arset preservation
Mississippi ¥
Misioun x
Montana Gpsraing badge
Nebraska N
Nevada No response
New Hampshire Operating budget
New leney ii
New Manco ‘Speratng badge
New York "
Noh Carolina ”
Nonh Dakout x
Ohio Operaung
Okahoma 7
Oregon N
Penauylvania N
Rhode ald N
South Carolina x
Souk Dazoa. “Gene GA Va ae APPROPRI
Tennessee Revoting fund though rent
Tema N
Uuh x
Vermont x
Vargas ranerance reserves
Washington Genera fund
Wea Virgin TM
y
Wyoming N
pe x

Page 35 Capital Budgeting in the States:

Paths ws Saves


19

New York, Mrs. Maloney, for making this hearing possible and cer-
tainly Chairman Clinger and Mr. Mineta who has »een a tireless
advocate of it and Mr. Thornton.

Let me just say Ray that my hope would be in discussion—as you
know, we have discussed whether it is limited to physical capital.
I tend to agree with Mr. Mineta we want to get it instituted, but
that we ought to at the same time be able to set up a commission
or something that is evaluating what other types of capital which
you can legitimately show have a long-term life.

Mr. THORNTON. Could I respond by saying that would be a splen-
did approach? I think people are concerned about human capital.
And I think that some objective study needs to be made in order
to lend credibility to the fact that certain investments are to be
treated as capital investments. A commission would be a splendid
idea.

Mr. Wise. Thank you. Thank you, Mr. Chairman.

Mr. Horn. Good suggestion. I now yield 5 minutes to the gen-
tleman from Virginia, Mr. Davis.

Mr. Davis. Thank you. I won’t take it all. I want to thank you
both for testifying, and I think I agree with just about everything
everybody said up here.

I would like to go back to the human capital issue, make a com-
ment, and then get a reaction because you know as you read the
futurists, if you read people like that, they are talking about we
really are going to a technology, knowledge-oriented society where
machinery and equipment probably mean less right now than
human capital, but where you can take a bridge and you can sell
that bridge, the government could as an asset, you can’t really do
the same with humans. That is hard to get your arms around it
at this point.

Mr. THORNTON. That is certainly a very correct, indeed a wise ob-
servation. And no reference to my —

Mr. Wise. Actually, if I might say, Mr. Chairman, please feel
free, refer to the Wise bill all you want.

Mr. THORNTON. But the effort to quantify is critical to an accu-
rate categorization of human capital and there are some measures
that can made and you are absolutely right that as we move
into future years, the investments that we make in human capital
may be more determinative of our economic competitiveness than
what we do in roads and bridges.

Mr. Davis. Right. I thank you for your contribution.

1 yield back.

ir. Horn. Thank you. Representative Maloney, do you have
more questions you would like to ask?

Mrs. MALONEY. We are grappling with this terrible deficit right
now, all of us. The way New York ‘ity worked is we could borrow
on our capital budget only for roads and bridges and investment in
infrastructure. We couldn’t borrow on human investment or day-to-
day operations.

How would this affect the Federal Government, this particular
bill, where we are borrowing in all types of directions? The purpose
of the capital budget was the flexibiity to borrow on our invest-
ment in the future, but apparently in the Federal Government, you
can borrow all you want. I guess I am asking Chairman Clinger


48

* Government-owned infrastructure projects
We would not include such items as:

Intangible assets

« Grants to state and local governments

© Revolving funds

° R& D, education and training

» Human Resources

© Social Investment

FEI Recommendations for a Pilot Program

Because of the long term commitments created by the capital budgeting process
for fixed assets, it is essential that it be analyzed and justified in a process separate
from that used for other forms of federal investment, current operating expenses
and discretionary spending.

However, moving to capital budgeting does raise some additional issues. These in-
clude violating existing policy and law concerning the appropriation process, the i
clusion of depreciation in operating budgets, employment of deficit financing of in-
vestments and possible abuses such as deflecting costs between operating and cap-
ital accounts!

While recognizing these concerns, FEI believes that it is possible to create a sys-
tem that would deal effectively with each of these issues. To that end, FEI proposes
a pilot program to test the applicability of these systems to discrete federal pro-
grams that are representative of three classes of fixed asset investment:

~ A weapons system procurement such as the FA 18 E/F
— An information system acquisition such as FTS 2000, and
— A government owned infrastructure project such as power generation

Each project would create and implement a Mission Definition and Capital Alloca-
tion program. It would then establish a proposed fixed asset Capital Budget distinct
from other investment and spending for the associated department or agency. Fol-
lowing that it would integrate the fixed asset expenditures budget with other appro-
priate investment and spending relevant to the program. A financial management
and control system would be devised with an accompanying reporting and auditing
program to be Presented to this Subcommittee for oversight approval.

Systems and procedures would be devised and tested to prove their efficacy and
their ability to satisfy the concerns expressed by observers. Each of the three pro-
grams would then be evaluated for possible broader application and, hopefully, even-
tual adoption as modified and improved for general use in the Federal budget proc-
ess.

Conclusion

Mr. Chairman, budget decisions made today have long-term ramifications for the
health of the nation’s economy. In this environment of sustained budget deficits,
making informed budget decisions are more important than ever. That is where cap-
ital budgeting can play a vital role. Capital budgets would be an important tool for
Congress and the President to have at their disposal as they work toward a more
efficiently run government.

To that end, FEI has worked for over 15 years promoting the need for improved
financial management practices in the Federal government. Four years have passed
since the passage of the Chief Financial Officers Act of 1990. Much has been accom-
plished, but much remains to be done. We believe the 104th Congress provides some
unique opportunities to significantly strengthen the CFO Act. The time is right to
get the Federal government's fiscal house in order, and we stand ready to assist you
and this Subcommittee to accomplish these long overdue objectives.

Mr Chairman, thank you for this opportunity to appear before the Subcommittee
this afternoon. I would be pleased to answer any questions.

Mr. Horn. That is very interesting. You note a weapon system
procurement such as FA-18E/F could be included. I suspect that
would get shot down as people say, “my heavens, they will hide the
whole defense budget in here.” An information system acquisition
such as FTS 2000, which we will be holding a hearing on, would
be very appropriate to include as would a government-owned infra-
structure project such as power generation.

So what you are saying is take some gigantic project that has
long-term viability similar to the private sector and try to apply
these basic principles.


Table 16
Debt Service
Users Pay Compare Debt Service User Fee vate Se
Sate Deb Service to Revenues & Expen Financing, Participation
‘Somenmes YN ‘Sometimes
Y N Y
Y Y Y
Y N Y
y v ¥
Y co Feapome Y
N No response M4 ys
Y Y Y S
Y N Y .
N N N
v 7 Y yo
Sometimes Y Sometimes s
N YN Y s
N Y N s
¥ v ¥ x
Y Y T
Y N Y y
Sometimet x Y SN
Sometumes y Someumes S
N N ¥ Some.mey
Ro respome 0 Feapome No respome No response
Y ‘ Y N
Sometumes y Someumes Sometames
Misnssippt Y Y Y ”
Mistoun x y N Sy
Montana rete — ame
Nebraska Y s Y NS
Nevada [No responte No response No reapanse No respirye
New Hampshire Y Y Y Y
New Jersey N x N S
Few Wenee © w
New York N x N s
North Carolina N s Y xs
Nonh Dakous Y x Y Y
‘Ohio x N N Sometimes
Dearne v Y ¥
Oregon Y Y Y s
Pennaylvania N s N s
Rhode (sland N Y Y N
South Caroling ¥ v y x
uh Dako Drayeat by prope Praja By BRT PSpER by projet Projen be st
Tennenee Y Y Y Y
Teas N Y Y TM
Uk N y Y Sy
Vermont Y y N Soreures
regina Y vr v
Washington Y oy Y TM
Wen Virginia Y Y Y s
Wisconsin Y x Y .
Wyoming Y ¥ Y .
oc N y N Y
Yeu Yeo

Page 31 = Capital Budgeting im the States: Paths u: Succes


31

How would it help you if we had a Federal capital budget that
you could then use in your own capital budgeting? Isn’t your own
capital budgeting somewhat inadequate because you can’t really
take into account or really plan on whatever assistance you are
maybe going to receive from the Federal level? Do you want to re-
spond to that?

Mr. McManow. I believe that is correct. What we do in the State
of New York is make assumptions based upon historical trend and
actual annual appropriation. But it is more guesswork, and clearly
we recognize that any 10-year plan has to be adjusted over time
and we believe that the Federal Government would make those
same adjustments that we have made in the city of New York.

Mr. CLINGER. Yes. Ms. Hanley?

Ms. HANLEY. I think it would also be useful for those govern-
ments that are part of regional bodies, particularly transit, if we
had a plan so that we knew what the transit—the capital transit
budget would be so that we know what our local obligation, par-
ticularly here in this area in connection with WMATA, what our
local obligation would be, and then it would be—it wouldn’t be
peaks and valleys. It would be more level.

Mr. CLINGER. That is what I mean. It is almost sort of a chaotic
situation because the Federal Government changes its mind, re-
verses policies, does all kinds of things which I think have to be
very disruptive in terms of infrastructure development, certainly it
seems to me. Ms. Hanley, how did the school board and its bonds
interact with the capital program with the board of supervisors?

Ms. HANLEY. Very carefully. I am sorry. In Virginia, school
boards are still—are just now being elected but they are still de-
pendent school boards so they are dependent for their funding, both
capital and operating, on the governing bodies. So the school
boards had the authority to establish a capital program to reach
consensus on it and then it became—it is incorporated into the gov-
erning body’s capital program.

We do have little spurts of disagreement on the size of the
school’s capital program because of course for a county like Fairfax,
that is a majority—that is probably over 50 percent of it, but it is
an interaction that takes a lot of public involvement, but in Vir-
ginia, school boards are dependent, and so it is part of the—the
governing body sells the bonds for the school board as well. The

ebt service is counted.

Mr. CLINGER. One final question. You have heard a discussion
about the definitional problem that you have to deal with, what is
the definition, for example, of the city of New York or in the Fair-
fax County? How do you define capital?

Ms. HANLEY. I want to hear yours first.

Mr. McMauon. It is the standard that I mentioned, the period
of probable usefulness. It has to be more than 5 years and it is——

Mr. CLINGER. Is it pretty much bricks and mortar?

Mr. MCMAHON. Yes. Yes

Mr. CLINGER. You don’t get into—

Mr. McMauow. It is focused on bricks and mortar. Occasionally
vehicles slip in, but that is a close call, a vehicle.

Mr. CLINGER. But you don’t get into so-called human infrastruc-
ture?


15

Mr. Horn. Thank you, Mr. Chairman.

Representative Maloney.

Mrs. MALONEY. Well, I would like to thank both of the distin-
guished panelists for their testimony.

In New York City, we had a very strong capital budget that was
planning strategically for the future, what we were going to invest
in, where we were going to grow as a city, but it was distinctly dif-
ferent from human investment. That was our operating pro-
grammatic budget and I wanted to ask you, Mr. Thornton, you
would include investing in people as part of the capital budget, is
that what you said?

Mr. THORNTON. No. My proposal is to address only two elements
of human capital. And that is basically the information that allows
a human being to be programmed into a higher level of perform-
ance and competition and education in being able to do better than
the uneducated people in other countries. I do not include expendi-
tures for general support of human beings, of improvements in cul-
ture or other activities. It strictly develops the idea that we ought
to, as a Nation, consider as capital the same thing that a famil:
does. A family will borrow money to send kids to college or to medi-
cal school because they believe with some merit that a doctor upon
graduation from medical school will have a very productive life and
will contribute a great deal to society.

Mrs. MALONEY. I would like to ask Mr. Mineta if he agrees?

Mr. Minera. Mrs. Maloney, I take a more restricted view on this.
And I think in terms of to try to get some kind of a start on this
thing, I think we ought to try to keep this as restrictive as possible
in terms of what is meant by capital investment. What Congress-
man Thornton is talking about are really good issues. It may be
that we ought to be doing that in the future in terms of that longer
term investment, again, in education. But I think in terms of
where we want to start in order to make our case, I think we
should try to keep it relatively strict in interpretation.

Now, your experience in New York City and the people who will
testify after me are much more expert in this. But I can recall
when I was mayor of San Jose, we heard about something called
the Beam shuffle. And what happened was that Mayor Beam was
using capital—in fact, it was bond money to not only build a struc-
ture, but he was also paying the workmen, I mean, the engineers
and everybody else.

Well, you can’t do that in a capital budgeting situation because
at the end of your 30-year bonds, you are still paying for the labor
that you used to design the building 30 years ago. To me, that
would be stretching it and I think that is the kind of thing that
got New York City into a problem at that time. So I don’t want to—

want to see this thin, get off the ground. I want to see some suc-
cessful efforts at it and I think at the beginning we ought to just
be very strict as to what we mean by capital investment and I
think that that is fixed assets and also one that has rather, you
might say, tangible returns that you can measure in the lifetime
let’s say of that investment.

Mrs. MALONEY. Well, you raised a very good point. That type of
budgeting did lead to the fiscal crisis in the seventies and after-
wards we created a very strict budgeting system that day-to-day


59

in the provision of a service that the Federal Government would
otherwise have to provide itself.

Examples include the provision of family housing at Fort Drum,
New York, in the Department of Defense, which the Army did wish
to undertake on a leasing basis for exactly that reason. The belief
was if a lease arrangement—a very long-term lease: 20, 30 years—
could be negotiated, then you could have a private sector provider
of the housing services, yet with a substantial amount of govern-
ment control, providing a more efficient and less expensive alter-
native.

As you know, there have been statutory prohibitions, originating
in predecessor versions of this committee, that have precluded the
Federal Government from leasing certain items. One of the benefits
of leasing is avoiding technological lock-in when you acquire some-
thing—computers specifically—whose technological life is much
shorter than you would prefer.

Mr. Bass. Thank you very much, Mr. Chairman.

Mr. Horn. Thank you, Mr. Bass.

Let me ask one last question and then we will adjourn. On this
leasing and owning situation, it seems to me one of the basic deci-
sions you face relates to the pace of modern technology.

You have a certain expected life on the bricks and mortar, but
in terms of those essential basic communication materials that
come within—the computer system, the telecommunications switch,
whatever—their life is increasingly shorter in terms of 5 years ver-
sus 20 or 30 or 40 where you might amortize the bricks and mor-
tar.

Should those items be simply separated out and not put in the
capital budget and put more in the operational budget so you
would have maybe 95 percent of the project in the capital budget
but, 5 percent of that Basic building would be in the operational

udget?

Mr. SHERIDAN. Well, in the private sector, you try to have your
short-lived assets expensed if you possibly can, but, of course, there
is an income tax motive for that. I think what you can do is take
the present value of that asset on a lease basis and put that in
your capital budget, but reflect it is going to be a very fast take-
down asset and reflect that fact in your operating budget in some-
thing akin to a depreciation account, without raising that particu-
lar issue which can keep us here for a longer time.

Mr. Horn. Any comment on that?

Mr. Cuu. I would agree with the point Mr. Sheridan makes
which is I would not exclude short-lived assets from the capital
budget. But I think you have to be realistic about what the life
really is going to be. I think you have to be willing, for a capital
budget to be useful for planning purposes, to revise estimated lives.

Let’s go back to your housing project example. If it turns out the
life is only 10 years, not 30, you need to be honest in that capital
budget and suddenly show large current consumption charges that
reflect the fact its life is coming to an end. And for computers, the
life might be only 2 years.

Mr. Horn. Right. They are often obsolete the day you buy them
after the long purchasing process. I was thinking when we talked
about the 15 to 20 year weapons systems, from design to produc-


128

PREPARED STATEMENT OF THE NATIONAL SOCIETY OF PROFESSIONAL ENGINEERS.

The National Society of Professional Engineers (NSPE) wishes to express serious
concern regarding the United States’ current process used for financing and plan-
ning for its growing infrastructure needs. Funds available for expansion and for con-
tinued maintenance of infrastructure are very limited. The present method of fi-
nancing these projects is complex and fragmented. The traditional “pork barrel” ap-
proach to infrastructure funding contributes to an already disorganized government
decision-making process, resulting in a loss of public confidence.

PE urges Congress to enact legislation that would require the Executive

branch to create an annual Capital Budget as part of its annual budget submission

to the Congress. This Capital Budget would provide the basic information on which

infrastructure needs should be addressed by both the Executive and Legislative
ranches.

The Capital Budget should include:

I. an estimate of gate capital investments (construction and rehabili
tion) required to provide specific levels of service over specific periods of ti

II. an estimate of aggregate operation and maintenance investment require-
ments (for purposes of preparing an operation and maintenance budget);

I. the identification of sources of financing and investment priorities:

IV. a presentation of how proposed annual capital expenditures would relate
to the nation’s long-term needs; and

V. a five-year investment plan.

NSPE believes that the establishment of a Capital Budget must be a high priority
for the federal government. Use of a Capital Budget will ensure appropriate use of
trust fund accounts, aid Congress and the Executive Branch in establishing infra-
structure investment priorities, and improve public confidence in the budget process.

Many state and local governments already utilize capital budgeting procedures to
finance public works construction, Physical plant development, and land acquisition.
Capital budgets permit state and local governments to demonstrate that the borrow-
ing of funds for infrastructure investment will accrue benefits for the public over

Jong. t periods of time.

E urges the Federal government to look to those jurisdictions for guidance in
setting up a Federal capital budget. Furthermore, because the states and localities
play major roles in infrastructure financing, the Society urges those jurisdictions
which do not utilize formal capital budgeting procedures to adopt such practices.

In an era of scarce public resources and a compelling need for renewal of our dete-
riorating infrastructure, capital budgeting must become a high priority item on the
national agenda. Establishing a Capital Budget will enable ‘ederal government
to more accurately plan and account for costs associated with investing in our na-
tion’s physical infrastructure. In addition, the use of a Capital Budget will aid in
selting government priorities and improving public confidence in the process.

NSPE was founded in 1934 and represents 70,000 engineers in the United States
and abroad in 535 local chapters and 54 state and territorial societies. NSPE is a
broad-based interdisciplinary society representing all technical disciplines and all
areas of engineering practice, including government, industry, education, private
practice, and construction.

NSPE appreciates the opportunity to express its’ views on establishing a Federal
capital budget and looks forward to working with Congress and the Administration
on this important issue.

1?)

ISBN 0-16-047295-4

AH


112

Part Two
Case Studies im Selected States

Capital Project Request

‘A capital project request must be prepared for each project listed in the
first biennium of the six year plan, except the maintenance reserve plan
‘The primary purpose of this request it to provide a carefully reasoned
‘explanation of activities. It must also provide a description of the
project. Finally, the request must contain an estimated cost and the
anticipated impact the completed project will have on the agency's
‘Operating budget.

Between February and April of each odd-numbered year, the
Governor's Secretaries and the Department of Planning and Budget
conduct a preliminary review of the major capital project requests. A
‘major capital project s:

» New construction or acquisition of a facility larger than 20,000
square feet or costing greater than $1 milion or:

> Improvements to existing facilities costing more than $500,000

‘The preliminary ceview identifies those major projects that are
considered to have merit without consideration of a source of funding.
For a project to be considered as having merit it must meet one of the
following criteria

» First Priority: Requests for major repairs to existing structures
that are necessary for the continued use of the facility and that
are not normally considered in Maintenance Reserve.

> Second Priority: Requests associated with legal or judicial
mandates requiring new construction of requests to supplement
projects under construcnon.

‘Third Priority, Requests associated with standards and
certification cequirements of existing facilities (e.g, life safery
code requirements, space guidelines deficiencies).

Fourth Priorty Requests associated with improvements to
existing facilites (renovations, restorations, relocations)

Fifth Priority Request associated with new construction that are
in accordance with the mission and service delivery functions of
the requesting agency

Page St Capital Budeetine in the States: Poth 1S


Section 4

Capital Financing + summary

“There is a diverse range in how states financ: capital projects. This
section focuses on two questions. How does a state determine the
overall size of its capital budget (particularly the bond-funded capital
program)? How does a state decide which fund source to use for a
particular project (particularly bond proceeds versus current revenues!”

‘Some states have very formal and sophisticated processes for deciding
(00 a total level of debt. In others, debt authorization is less formal.
‘Two or three states are looking at ways to implement debt managememt
systems. Some states. like Virginia, are contemplating an expanded
‘Beoeral obligation (G.0.) bond program and states like Dlinois are
reigning in debt authorizations. In general, states that actively manage
their debt seem to look to debt service as a proportion of revenues. debt
outstanding per capita, and debt outstanding as a proportion of personal
income as measures of debt capacity

In some states, dedicated revenues provide an important source of
capital funds. ‘This has an important effect on the capital budget
process. Projects eligible for dedicated funds are then considered
separately from (and often preferemtally to) projects that have to
compete for non-dedicated funds. States are more nearly uniform in
bow they allocate cash for capital spending. When cash is available, it
tends to be used for smaller and shorter-lived projects, and for
‘maintenance and renovation projec.

‘There is much variation in the sorts of costs that states allow for bond
funds. Many states have strict bondability requirements, with criteria
relating to the nature of the expense. the life of the project, and the
amount. In other states. guidelines are less formal, or virtally
non-existent.

‘Question: How is the overall size of the capital budget determined?
Is there any process for determining the amount of G.O. debt,
revenue debt, and operating funds to be authorized?

California

Historically, capital funding 19 California has proceeded on an ad-hoc
basis. Bond authorizations must be approved by the voters; they may
{et on the ballot through whe legislauve process or by initiative.
Typically, bond issues are proposed for a variety of projects such as
higher education, health care. bousing, child care, and prisons.

Page 53


2

rent Federal bookkeeping practices accurately reflect both short
and long-term budget goals.

I am always frustrated by the lack of information inherent in our
current budget process. Cuts are displayed agency by agency, pro-

‘am by program, or function by function. Yet there is generally no

ifferentiation in the substance of the cuts. We fail to show wheth-
er cuts are one-time reductions in an agency’s operating expenses
or whether they reflect significant reductions in investment spend-
ing which must be recouped later to prevent unsustainable infra-
structure loss. Similar information is lacking about our spending
priorities. We fail to assess to what extent we are investing in as-
sets, consumables, operating expenses, and human development
programs. The current budget process makes no distinction and lit-
tle sense.

A unified capital budget would simply help us to better plan for
the future. It is not a gimmick, and contrary to some assertions,
it would not permit excess spending to be hidden from public view.
It would simply identify and promote well-reasoned planning for
two very fundamental and distinct economic activities: spending on
assets and spending on operations.

So asa strong advocate of responsible capital budgeting, I en-
courage all our Members to listen carefully to today’s testimony
and join me together with our colleague, Bob Wise, in supporting
H.R. 767 to provide for a unified capital budget.

I want to welcome our colleague, Mr. Mineta, who has long been
interested in this and Mr. Thornton, who has also been a champion
for this concept. It is one we all worked on both in this committee
and the former Public Works Committee, now the Infrastructure
and Transportation Committee. I think we all recognize it could
feally make a tremendous contribution to our ability to control our

udget.

I know that we have trouble convincing Directors of the awesome
Office of Management and Budget to see the wisdom of this course,
but I am hopeful that this time we will have better luck.

Mr. Chairman, again, I thank you for holding these hearings. I
think it is a start of what I hope will be a successful journey that
has been underway now, at least in my regard, for 16 years.

Mr. Horn. Thank you very much, Mr. airman.

Now I would like to ask the ranking minority member, Rep-
resentative Maloney, for an opening statement.

Mrs. MALONEY. Thank you, Chairman Horn.

I want to thank Chairman Clinger for his leadership and hard
work on this. Capital budgeting is an area that has a great deal
of bipartisan support. In fact, my opening statement is very similar
to his. So I am going to ask permission to have it submitted for the
record, along with other Members, Chairwoman Collins and others
that are members of this committee, part of the permanent record.

And we have a distinguished set of witnesses. I am looking for-
ward to hearing what they have to say. I know what I am going
to say, so I want to hear what they have to say. I might mention
we have a witness from the city of New York which has used cap-
ital budgeting very successfully in the strategic planning and in-
vestment and infrastructure of the city.

Thank you, Mr. Chairman.


91

Table 14

‘Amoust of General Use of Boads Policy Own
State Fund Dollars Used Vs. Cash Vs. Lease
"Albema Economic and political consideranons Project ae Y
‘Aska Available revenue minus operating. [Nature of project, availability of funding. Y
‘Arizona. ee and political c limit y
‘Arkansas Financing structure, mechanism in law Legal provisions, availabilty of bood Gnance y
California ___Statute/constitutional Limits Povential (or voter approval, aret life, cash y
Colorado ‘Transfers from general fund un atute Lepalsion FS
Connecticut No response Size of request y
Delware Economic conditions, funds available Federal tax lnwa, project scope, prwvate uvolvement y
Florida Atleast % of general fund growth ‘Type of project y
Georgia Projected revenue minus operating [No set poie x
Hawa ‘Availabilty of funds ‘Nature of project, avaiable fonds, debt limita TM
ldaho ‘Surplus funds when availble ‘Need. political appeal, available cash N
[inois ror years condition revenues Bondabilty guidelines Y
Indiana “Type of project and availability of funds Availability of funds, sautory authorey .
tows Governor's recommendation Govemors recommendation y
Kansas Debt service comm, sat transfer highways ‘Aviabilty of funds, benefit spread ¥
Kemueky Relative need versus dollars avaiable ‘Avulable cash. debt ceiling, life-cycle of project x
Louisiana Lite general fund used Expected lle of project .
Maine Debs service commitment Size of project s
Maryland __ Availabilty of funds, type of project Avulabiity of funds, project wpe Ss
Massachusems No response No response No reapome
Michigan Project sizesnder $5 milion Project nize .
Minnesota Iudgement call Bondabulty constraints ”
Missisnpp: No general fund ‘Al projects use bonda Y
Misroun, ___Financual health of sate/other priorities Avulable funda/amount of sate debt S
‘Montana No general fund/Leg. may add general fund Sue of proyect TM
[Nebraska Availabilty of funds, project type Avauabilty of funds, projec type .
Nevada No response No response No response
New Hampshire Debt service only Econom situation, ile of project y
New Jeney Consider mandated cost and revenue pro Com, sze, purpose of project
New Mexico Availability of funds as process of review
New York General fund “lust in" source Type of project
North Carolina Projected general fund balance Revenues produced and leg. approved GO. bonds
Nomh Dakota Needs vs. funds Avaabilty of funds

bio

Project type and size

Oregon
Pennsylvania Projects urvally Gnanced with banda
Rhode Iland Funds available

South Caroling Allowable debt service

“Amount of proyct, project ype

Cash avuuabiley

‘Special fund agenciea with dedicated revenues
‘Mom project bond financed

Aveuabulay of fund

“Souh Dako N/A Cash evulbuty
Tennessee Cash available afer operating Cash erably

Teus Lepuauve proiies Legalanve prone

uh Executive decision Easrvave decison

Vermont Rarely use general funda Bonding gurelines und tax law

Virgin hudgement call Fisancual feabulry, avulabilty of rvenuca
Washington Funda avaiable Fanding source

West Virginia Estimated cont
Wisconsin Prionties of Governor, Legulature, & Comm
Wyoming Gubematonal/egitlative prontics

pe Repairs not qualifying for bonds

Page 29

Lepalats“e authorization

Aveasbuty of fund

Tape of project

eecealecccalecccalecencle

Y
ves

Capital Budgeting in the States: Paths wo Succes


36

toThow has that traditionally interacted with your capital budg-
ets?

Mr. MCMaHoNn. The control board, as you know, was established
as—during the fiscal crisis as the emergency financial control
board in order to monitor city finances, and they didn’t approve—
they ultimately, during that time Period, had approval over the ex-
pense and capital budgets adopted by the city, but since it was the
expense budget that had the greatest focus, that was where they
focused the majority of their energies.

Since the mid 1980's, they have been serving in an advisory ca-
pacity monitoring both the expense and capital budgets and com-
menting on them on a periodic basis.

I think many of their recommendations have been helpful,
thoughtful. On the capital budget, they have advocated the need for
a written debt policy. They have advocated the need for something
that the city has not done in the past, but which is currently being
explored, which is pay-as-you-go capital. I know you mentioned in
Fairfax they use it and I think it is an important element of any
capital program.

In the city, we haven’t used it as much as we should. I think it
is—the control board has served as an oversight agency and I think
generally a thoughtful one.

Mr. Davis. OK, thank you. I yield back.

Mr. Horn. Thank you very much.

The gentleman from Illinois, Mr. Flanagan, the vice chairman of
the subcommittee.

Mr. FLANAGAN. Good afternoon. I have one jarge question with
a lot of smaller parts attached to it and, Mr. McMahon, in reading
through your testimony, I would first like to apologize for not hav-
ing been here for your oral testimony, but I have read through it
and looked through it all.

I would like to ask the question, should the Federal Government.
finance projects that you discuss, the MTA and the other things in-
volved there, what—I guess for lack of a better term—guarantee is
there that the ongoing funding to maintain and operate them
would be there? And if not, would such a capital expenditure in-
clude operating expenses as well?

Mr. McMauon. Not necessarily. It depends on what the ultimate
goal that you are looking to realize is, articulated by the spending
choice that is made. And I think that it is clear that both nation-
ally, regionally, and locally that investments have to be made in in-
frastructure if this country and our regions and our cities will be
able to compete in the economics of the 21st century. So I think the
idea—I mean, the investment is necessary to make us competitive.

Mr. FLANAGAN. I understand that. My question continues
though. Maybe you can guess where I am going. Why a Federal ex-
penditure? I wrestle with this—I am from Chicago and I wrestle
with these problems constantly there where a local authority will
come to me and say, I need a handful of millions for this, for that,
for the other thing, all of them local need, local necessity, local re-
quirement and sometimes a local good idea. Why out of the Federal
pot?

Mr. McManon. The Federal Government is responsible for na-
tional commerce. Why is there an interstate highway system?


123

Part Two
‘Case Studies in Selected States

Although there are safeguards within a budget to protect maintenance
funds (a restriction to move no more than 2 percent of any line item to
another appropriation) maintenance funds continue to be a target during
budget cutting exercises. Priorities are set by agencies and the actual
list of projects is determined by the capital budget office with help from
public works professionals.

‘The Illinois inventory data is not being used to manage maintenance or
to assist in the development of the capital budget, as was the original

intention.

Kansas ‘Capital asset management varies in this state. Some agencies, such as
the Board of Regents for the Universities and the Department of
Transportation, have well-developed inventory systems. Others are not
well developed.

‘The type of information maintained by the Regents institutions allows
them, by means of a formula adopted from the State of Indiana, to
determine an appropriate amount of funds for maintenance that would
reserve the useful life of a facility to a predetermined age. The
system, after several years of development, never has been completely
implemented.

Wisconsin ‘Wisconsin has a computerized maintenance program and several other
programs for maintenance. Agencies evaluation of their facilities
showed that preventive maintenance was needed. Funds were

appropriated for agencies/insttutions to help them train in preventive

maintenance.
Wisconsin has three other programs. First, there are two engineers in
the division who work strictly with roof maintenance in the spring and

the fall. The engineers use a checkbook to pay for minor projects.
‘Second, there is one person who only does masonry inspections.

‘The third program is a road program that costs $1 million a year. This
program is for preventive road maintenance and includes patching
‘sidewalks and roads. ‘The state bought the patching equipment and uses
inmate labor.

Page Capital Budgeting is the States: Paths to Success


Part Two

Case Studies in Selected States

Section |

Defining Capital — + Question: How do you define or breakout your categories of capital
itures an expenditures (e.g., renovation, maintenance, construction,

Expendits and planning)? What do you include as “capital” expenditures? Are

1B you satisfied with your definition? Why or why not?

Maintenance

Funds

Arizona ‘There are two types of capital appropriations. The first is a statutorily

prescribed “building renewal” formula and the other type overs ail
‘ther appropriations in our Capital Outlay Act. “Building renewal” is
defined in A.R.S. 41-790 to mean

Major activities that involve the repair o reworking of a building,
including the upgrading of systems which cesult in maintaining a
building's expected useful life. Building renewal does not include new
‘construction, landscaping and area beautification, infrastructure
ceplacement or repairs. routine maintenance, new paving resurfacing of
an area that was not capitalized as part of the original vost of the
building, or demolition and removal of a building,

The other type of capital appropriation includes renovation projects,
major systems replacement, design and/ or engineering fees, land
acquisition, and new construction.

Operating budget agencies may expend resources for items related to
capital facilities. Minor renovations, relocations. remodeling, paving.
‘general maintenance, statewide capital planning and inspections. and
‘emergency infrastructure repairs are usually expended against the
operating bud,
Since legislative enactment of the building renewal formula in 1986, the
formula has never been fully funded. For example, while the total state
‘general fund appropriation in the Capital Outlay Act for FY 1992 is $4.0
million, the general funds “building renewal” formula allocation alone
is targeted to be $22.9 mulion Accordingly, there are doth insufficient
‘general fund appropriations to finance capital projects and no clear
definition of capital projects (other than building renewal),

Page 37 Capital Budgeting in the States: Paths tu uins


39

deferring $220 million worth of capital projects that were scheduled
to be completed. They simply cut back and cut the suit to fit the
cloth, both in the operating budget and the capital budget. There
was not an effort to conduct operating activities in the capital pro-
gram at all, as Ms. Hanley has said.

Mr. Bass. So in effect, you have very strict limits on what you
can capitalize and how much capitalization you can undertake in

‘iven period?
ir, LEIDINGER. That is correct.

Mr. Bass. Thank you very much, Mr. Chairman.

Mr. Horn. Thank you. Let me ask a few questions and then we
will have another round. I am curious about how much your status
as a member of a governmental entity determines your support for
a capital budget? How does that process differ from the process
which determines your support for an operational budget?

Are there different standards, different criteria, or is there an
overlap in some areas? How do you prioritize those things so you
are satisfied that you will get a majority of the board’s support?

Ms. HANLEY. I get to go first.

Mr. Horn. Besides putting one project in each Member’s district.

Ms. HANLEY. Oh, well you gave my answer. There may not be
anything left to say. I guess in Fairfax County, we have a com-
prehensive plan that is the basis of what—the long-range plan of
what kinds of infrastructure we need in terms of fire stations and
police stations and that kind of thing, as well as the Judicial Cen-
ter and all that.

And so that all goes into a—on a list with costs. And the real
question becomes, what do you do first? How do you establish
which things to do first if there are bonds approved for it? We do
most of our—obviously, as we said earlier, most of our capital con-
struction through the sale of general obligation bonds, and so they
have to be approved by the electorate in order to do that. So the
real discussion is: What do you do first and, yes, there are some
standards, and yes, there is a lot of give and take in order to get
things on the list first and how you squeeze it all in each year.

It is a different kind of give and take, however, from an annual
budget because that is more immediate. We take a little longer
range view on the capital budget.

Mr. Horn. How about New York?

Mr. McMauon. In the city of New York, it is a process that pro-
ceeds on two separate tracks, the expense budget with all the pres-
sures that go there for the next year’s expenditures, and the capital
budget with more of a long range view, and the linkage is the debt
service that is necessary to support the capital budget.

Four years ago, the city of New York went through a charter re-
vision, which is still evolving in many ways, and one of the require-
ments of that charter was that the—with each capital budget, there
be an itemization of the expense pressure that would be needed to
maintain that capital asset or to operate that capital asset.

It is something that is required by the charter but hasn’t been
fully implemented yet and we are still trying—going through the
process of developing the mechanism to measure the pressure that
would be placed on the expense budget because of the existence of
an asset.