United States General Accounting Office

GAO Testimony

Before the President’s Commission to Study Capital

Budgeting

For Release on Delivery

Expected at

9 a.m.

Friday,

March 6, 1998

BUDGET ISSUES

Budgeting for Capital

Statement of Paul L. Posner

Director, Budget Issues

Accounting and Information Management Division

GAO/T-AIMD-98-99

Members of the Commission:

I appreciate the opportunity to appear before you to discuss our work on

budgeting for capital.

In discussing this issue, it is useful to recognize two different ways to look

at the federal government: it is both an operating entity and, at least

partially, the custodian of the economic health of the nation. As an

operating entity, the government makes expenditures on federal services

to increase internal efficiency and maximize the use of scarce resources.

This includes spending for physical assets that provide long-term benefits

to the government’s own operations, such as federal office buildings and

hospitals, land, major equipment, and information technology. We refer to

these types of physical assets as federal capital.

In its role as partial custodian for the nation’s economy, the government

invests in activities such as education, research and development, and

infrastructure, which are intended to increase the private sector’s

long-term productivity and growth. While providing long-term benefits to

the nation as a whole, much of this spending does not result in assets

owned by the federal government. For the most part, the federal

government provides its support for these activities through federal

subsidies to other levels of government or the private sector. We refer to

this latter type of spending as investment.1

 In considering the way the

federal government should budget for capital, it is important to consider

the underlying purposes of capital spending and these dual roles of the

federal government.

Frequently, the debate on capital budgeting centers around proposals that

do not fully recognize these differences, applying a one-size-fits-all

treatment to spending with vastly different characteristics and federal

roles. As I will discuss, the challenges faced in budgeting for a federally

owned asset are different than for most of our investments where the

federal role is to subsidize spending on assets, human capital, and

research and development undertaken by other sectors of the economy.

The debate on capital budgeting at the federal level often starts with

certain concepts and models extended from state, local, and private

1

Reductions in tax liabilities that result from preferential provisions in the tax code, such as

exemptions and exclusions from taxation, deductions, credits, and deferrals, are intended to

encourage certain behaviors, to adjust for differences in individuals’ ability to pay taxes, or to

compensate for other parts of the tax system. Some may be designed to encourage investment. Such

“tax expenditures” are reflected in the mandatory portion of the budget and are not included in this

testimony, which addresses discretionary spending on capital and investment.

Page 1 GAO/T-AIMD-98-99
budgeting that are not appropriate due to fundamental differences in the

role of the federal government. When state and private entities make

investments, they typically own the resulting assets, while this is

frequently not the case for the federal government. This makes it difficult

to fully apply traditional capital budgeting approaches, such as

depreciation and bond financing.

Moreover, federal fiscal policy, broadly conceived, plays a key role in

managing both the short-term economy as well as promoting the savings

needed for long-term growth. The most direct way for the federal

government to increase national saving is to achieve and sustain a

balanced budget or surplus.2

 Any changes in the budgetary treatment of

investment need to take into consideration the broader federal

responsibility. While well-chosen investments may also contribute to

long-term growth, such programs financed through deficits would

undermine their own goal by reducing savings available to fund private

investment. Reforms in how the federal government budgets for capital

and investment should be considered, but any capital budgeting allocation

process should be studied within the overall constraints of a fiscal policy

based on unified budget principles.

In our work, we have been mindful of the need to focus on investment and

federal capital, but within the overall constraints established in the budget.

We have sought to recognize both within a responsible fiscal framework.

My testimony will address five points:

• problems with the current process,

• traditional capital budgeting proposals,

• an alternative investment framework,

• budgeting for federally owned capital assets, and

• improving the way federal agencies plan for and manage federal capital

acquisitions.

Problems With the

Current Process

As a nation we have made greater strides in articulating a budget control

framework to achieve our overall fiscal policy goals than in designing a

framework for addressing the composition of spending. The unified

budget provides information on the federal government’s overall fiscal

policy—the aggregate size of the government and its borrowing

2

Budget Issues: Long-Term Fiscal Outlook (GAO/T-AIMD/OCE-98-83, February 25, 1998) and Budget

Issues: Analysis of Long-Term Fiscal Outlook (GAO/AIMD/OCE-98-19, October 22, 1997).

Page 2 GAO/T-AIMD-98-99
requirements. However, the current budget does not highlight different

types of spending; budget data are not presented in a way that promotes

decisions to be made between spending intended to have future benefits

versus spending for current consumption and improving the current

quality of life. Since the current budget does not provide this type of focus

on the composition of spending, it is difficult to focus on the impact

various types of spending would have on the long-term potential output of

the economy.

Alternative budget presentations that accompany the President’s budgets

provide some supplemental information to congressional decisionmakers,

but they are assembled after executive budget decisions have been made.

These presentations have had little effect on the level of investment

undertaken by the government. The congressional budget and

appropriations process allocates spending by broad mission area and by

agency. These were not established to distinguish between investment and

consumption spending. In the budget process there is no explicit

consideration of investment versus consumption; a dollar is a dollar is a

dollar.

The share of total federal budget outlays devoted to investment, defined by

GAO as including research and development, human capital, and

infrastructure that has a direct bearing on long-term economic growth,

gradually declined about 2 percentage points from a high of just over

10 percent in 1981. Investment outlays for fiscal years 1997 to 2002 are

projected to continue this downward trend. This is in part a function of the

fact that most investment spending is in the part of the budget considered

“discretionary”—a part that has decreased.

Traditional Capital

Budgeting Proposals

Some have proposed that the challenges agencies face in budgeting for

capital acquisitions can be corrected by adopting a capital budget that

separates revenues and outlays for long-lived physical assets from the rest

of the budget. Many proposals for capital budgeting include an associated

depreciation component for capital assets that is charged to the annual

operating budget. In addition, these proposals commonly envision special

budgetary treatment for capital by requiring balanced operating budgets

while allowing deficit financing of capital.

Capital budgeting of this nature presents several unique problems at the

federal level. First, the federal government does not own many of the

investments it makes that are intended to promote long-term private

Page 3 GAO/T-AIMD-98-99
sector economic growth. Accounting standards developed by the Federal

Accounting Standards Advisory Board3

 are consistent with this

thinking—assets not owned by the government are not reported on the

government’s balance sheet.

Second, appropriating only annual depreciation means the budget in any

given year would reflect only a fraction of the total cost of an investment.

This would undermine budgetary control of expenditures by not

recognizing the full cost of an asset at the time a decision is made to

acquire it. Currently, the law requires agencies to have budget authority

before they can obligate or spend funds on any item. If the full amount of

budget authority need not be available up front, the ability to control

decisions when total resources are committed to a particular use is

reduced. In addition, reporting only depreciation in the budget for an asset

would make it look very inexpensive relative to other spending. It might

also advantage physical capital amenable to depreciation over human

capital and research and development. This would create a tremendous

incentive to classify as many activities as possible as capital.

Even if the fund control issues could be resolved, determining an

appropriate depreciation amount would present problems. Investments in

human capital would be particularly difficult to depreciate because of the

complexities associated with measuring the future value and useful life of

human capital. Thus, including depreciation in the budget could result in

spending decisions being based on data that are not easily explained or

supported.

It is also important to remember that neither states nor private enterprises

budget for depreciation. States do not record annual depreciation in either

their capital or operating budgets because depreciation has no effect on

the flow of current financial resources. Private businesses use

depreciation primarily for two purposes: (1) to match revenues with

expenses in a given period for the purposes of reporting profit or loss in

financial statements and (2) for tax purposes. Neither of these purposes

are applicable to federal budgeting, except for federal business-type

activities that consider revenues and expenses in setting user fees.

Some have proposed to deficit-finance capital and investment on the

ground that such spending creates economic growth. Deficit financing of

capital, however, would also create problems for the integrity of the

3

The Federal Accounting Standards Advisory Board was created by the Office of Management and

Budget, the Department of the Treasury, and GAO to consider and recommend accounting principles

for the federal government.

Page 4 GAO/T-AIMD-98-99
budget process. If capital assets can be deficit-financed while other types

of activities cannot, there would be a significant incentive to categorize as

many activities as possible as capital. In addition, the

productivity-enhancing benefits of investments may be offset if these

investments are financed by deficits that reduce national saving and so

displace private investment for long-term growth. Deficit financing implies

that public investment has a higher rate of return than the private

investment it would displace, which is an arguable presumption.

Implementing an

Investment Focus in

the Budget

The problems discussed with these two approaches do not mean that

reform in budgeting for capital is not feasible. Meaningful budget reforms

can be considered to improve decision-making on investments, but they

need to be tailored to the unique roles and environment of the federal

government. In prior work,4

 we have proposed an alternative approach for

dealing with federal spending intended to promote the private sector’s

long-term economic growth. Establishing an investment component within

the existing budget constraints is one promising way to encourage the

Congress and the executive branch to make explicit decisions about how

much spending overall should be devoted to investment. By recognizing

the different impact of various types of federal spending, an investment

focus within the budget would provide a valuable supplement to the

unified budget’s concentration on macroeconomic issues. It would direct

attention to the consequences of choices within the budget under existing

caps. It would prompt a healthy debate about the overall level of public

investment—a level that is now not determined explicitly by policymakers

but is simply the result of numerous individual decisions. The unique

budgeting problems raised by this approach are how to define investment

and how to incorporate and enforce this framework within the current

budget process.

Turning first to the definitional question, if an investment component

within the budget is to be implemented in a meaningful fashion, it will be

important to decide what activities qualify for inclusion. There are many

possible definitions, but the definition used for budgetary purposes should

depend on the purpose that an investment component is expected to

serve. Many analysts have suggested that investment is that which

increases long-term private sector economic growth. The federal

government promotes long-term economic growth in two ways—through

4

Budget Trends: Federal Investment Outlays, Fiscal Years 1981-2002 (GAO/AIMD-97-88, May 21, 1997),

Budget Structure: Providing an Investment Focus in the Federal Budget (GAO/T-AIMD-95-178, June 29,

1995), and Budget Issues: Incorporating an Investment Component in the Federal Budget

(GAO/AIMD-94-40, November 9, 1993).

Page 5 GAO/T-AIMD-98-99
its broad fiscal policy and through public investment. Accordingly, we

have suggested that investment spending be defined as federal spending,

either direct or through grants, that is specifically intended to enhance the

private sector’s long-term productivity. We recognize, however, that the

Congress may choose to define this category in other ways that may

highlight other spending that has long-term benefits.

Our definition of investment spending includes spending on (1) some

intangible activities, such as research and development, (2) human capital

designed to increase worker productivity, particularly education and

training, and (3) infrastructure—physical capital—that is viewed as having

a direct bearing on long-term economic growth, such as highways, water

projects, and air traffic control systems. As noted above, although much of

this is federally funded, it is not federally owned. Spending for many

federally owned physical assets, such as for federal land, for office

buildings, and for defense weapons systems, would not be included

because such spending does not directly enhance long-term private sector

productivity.

The current budget process embodies a system of controls set up by the

Budget Enforcement Act of 1990 (BEA), which established a set of caps on

discretionary spending as part of the process. Most investment spending is

within this category of spending. If a target for aggregate investment

spending were established within the overall discretionary caps, the

budget structure and process would prompt explicit consideration of the

level of support for investment within overall fiscal constraints. An

investment component would direct attention to the trade-offs between

investment and noninvestment activities without undermining fiscal

policies and established fiscal policy paths.

This approach has the advantage of focusing budget decisionmakers on

the overall level of investment supported in the budget without losing sight

of the unified budget’s impact on the economy. It also has the advantage of

building on the current congressional budget process as the framework for

making decisions. And it does not raise the budget control problems posed

by the more traditional capital budgeting proposals that use depreciation

and deficit financing.

Although the investment component would be subject to budget controls,

the existence of a separate component could create an incentive to

categorize many proposals as investment. Any distinction in a system of

restraint creates such incentives. If, however, the Congress and the

Page 6 GAO/T-AIMD-98-99
President want a separate component to work, difficult definitional issues

can be resolved. Defining mandatory programs for BEA was not easy in

1990, but the Congress and the executive branch did reach agreement.

Also, as part of the 1997 Balanced Budget Act, the President and the

Congress were able to reach agreement on certain categories of spending,

such as education, to receive favorable budget treatment.

Choosing Investments Each type of capital we are discussing raises its own unique

decision-making challenges. For investment, the definitional question

discussed earlier will have to be addressed. Moreover, if the federal

government is to focus on the allocation of spending between

consumption and investment in order to improve long-term economic

growth, then it is important that federal investments be wisely selected.

Programs proposed or defended as investments should be evaluated

against the criterion of improving long-term economic capacity. Such

judgments are difficult, but they are not impossible.

In 1993, we developed a series of questions related to a program’s

economic returns, design, and performance measures that may help

decisionmakers assess the relative worth of competing investments.5

 First,

is the program designed to produce long-term economic growth? Second,

is it worth implementing, including whether there is really a need for

federal government intervention? Third, is it well-designed, including some

assurance that federal funds supplement and do not supplant nonfederal

funds? And fourth, how should the program be evaluated after

implementation?

Ideally, policymakers should have access to measures of relative rates of

return from federal investment programs in allocating resources among

programs. However, such data are scarce and further research is needed

to develop additional and better information on the economic effect of

various types of investment proposals.

Potential economic returns may determine whether to embark on a plan

for increased federal investment. In seeking the “best” federal investment,

however, decisionmakers should consider not only estimated returns, but

also whether the federal government is the right entity to address that

need. Alternative approaches to meeting the perceived public need should

be considered before addressing the problem with federal outlays.

5

Federal Budget: Choosing Public Investment Programs (GAO/AIMD-93-25, July 23, 1993).

Page 7 GAO/T-AIMD-98-99
Program design is important to the ability of a program to contribute to

private sector output and economic growth. Decisionmakers should

consider design issues to promote effective program delivery, including

(1) coordination with other federal programs and those of state and local

governments and (2) targeting of funds to achieve the highest possible

benefit. Coordination with state and local governments is particularly

important when federal investments are implemented through those

governments. Policymakers need to be aware of the possibility that the

states and localities could use federal investment funds to supplant their

own spending. We have reported on this issue6

 and found that studies have

suggested that even the prospect of additional federal grant funds can

prompt states and localities to reduce their planned spending, which could

trigger a decline in total overall public spending for the funded activity.

Thus, even if a program is properly classified as an investment, its

economic impact can be thwarted when federal funds are used to replace

nonfederal funding.

It is important that all public investment programs include, at the time of

their implementation, provisions for evaluating program outcomes.

Policymakers should use outcome data to ensure that ongoing investment

programs continue to be worthwhile and well designed under changing

circumstances. Also, to improve the federal government’s ability to invest

wisely in the future, it is important to learn from public investments that

have already been made.

Budgeting for

Federally Owned

Capital Assets

As federal agencies find themselves under increasing budgetary

constraints and increasing demands to improve service, the importance of

making the most effective capital asset acquisitions grows. Since spending

by the federal government to support its own operations would not qualify

for the investment component, a different approach is required. Here, the

unique capital budgeting problem is the funding of assets that provide

benefits over the long term but that must be paid for in one up-front sum.

Capital assets often require large amounts of resources up-front and some

may generate long-term efficiencies and savings.

Like investment spending, spending for most federal capital assets is

provided in annual appropriations acts and therefore is categorized by BEA

as discretionary spending. The total of all agencies’ discretionary

appropriations must remain within BEA’s discretionary caps, which

generally have been declining since 1991. Thus, federal capital spending,

6

GAO/AIMD-93-25, July 23, 1993.

Page 8 GAO/T-AIMD-98-99
like all discretionary spending, is being squeezed. In fiscal year 1997, the

federal government spent $72.2 billion (4.5 percent of total outlays) on

direct major physical capital investment. Of this, the largest portion,

$52.4 billion, was spent on defense-related capital assets, while

$19.7 billion was spent for nondefense capital. The President’s budget

estimates for spending for direct physical capital investments decrease to

$64.1 billion in fiscal year 1998, and then rebound slightly to $68.8 billion

in fiscal year 1999. Of these amounts, $15.4 billion and $18.5 billion are for

nondefense capital in fiscal years 1998 and 1999, respectively.

For more than 100 years, the Adequacy of Appropriations Act and the

Antideficiency Act have required agencies to have budget authority for any

government obligation, including capital acquisitions. This is referred to as

up-front funding. The requirement of full up-front funding is an essential

tool in helping the Congress make trade-offs among various spending

alternatives. Up-front funding helps ensure that decisionmakers are fully

accountable for the budgetary and programmatic consequences of their

decisions. This also ensures that the full costs of capital projects are

recognized at the time the Congress and the President make the

commitment to undertake them.

Agencies have not always requested or received full up-front funding for

capital acquisitions, however, which has occasionally resulted in higher

acquisition costs, cancellation of major projects, and inadequate funding

to maintain and operate the assets. For example, our work has identified

the lack of full up-front funding as one of the key factors in the high rate of

cost overruns, schedule slippages, and terminations in the Department of

Energy’s (DOE) major acquisitions.7

 The Office of Management and

Budget’s (OMB) long-term goal is to include full funding for all new capital

projects, or at least economically and programmatically viable segments of

new projects.

However, adherence to the up-front funding requirement also extracts a

price, at least from an individual agency’s viewpoint. The requirement that

the full cost of a project must be absorbed in the annual budget of the

agency or program combined with the effect of the tight BEA discretionary

spending caps can make capital acquisitions seem prohibitively expensive.

This has led some to suggest that the result is a bias against capital in

budget deliberations.

7

Department of Energy: Opportunity to Improve Management of Major System Acquisitions

(GAO/RCED-97-17, November 26, 1996).

Page 9 GAO/T-AIMD-98-99
Although up-front funding within the budget caps presents a challenge, a

number of agencies have found ways to meet that challenge. Our work at

selected federal agencies has demonstrated that more modest tools than

adopting a full-scale capital budget can help accommodate up-front

funding without raising the congressional or fiscal control issues of a

separate capital budget. When accompanied by good financial

management and appropriate congressional oversight, these tools can be

useful in facilitating effective capital acquisition within the current unified

budget context.

Strategies Used by Some

Agencies to Reduce the

Impact of the Up-Front

Funding Requirement

In a 1996 report,8 we identified some strategies that have been successfully

used by some agencies to accommodate spending on federal capital while

preserving the fiscal discipline provided by the current budget controls. To

identify these strategies, we examined how selected federal agencies plan

and budget for capital assets. I must emphasize that agencies must obtain

authority from the Congress to undertake some of these strategies and

that some, such as the revolving funds and “savings accounts” discussed as

follows, work best in agencies having proven financial management and

capital planning capabilities.

• Budgeting for stand-alone stages of larger projects - A stand-alone

stage is a unit of a capital project that can be economically or

programmatically useful even if the entire project is not completed. For

example, the Coast Guard may structure its contract for a class of new

ships to acquire a lead ship with options for additional ships. The lead ship

would be useful even if the entire class of ships is not completed as

planned. Budgeting for stand-alone stages means that when a decision has

been made to undertake a specific capital project, funding sufficient to

complete a useful segment of the project is provided in advance. This

helps ensure that a single appropriation will yield a functional asset while

limiting the amount of budget authority needed.

• Using a revolving fund - Agencies use revolving funds to accumulate,

over a period of years, the resources needed for up-front funding. By

charging users for the cost to replace and maintain capital assets,

revolving funds can help ensure that needed funds will be available for

capital acquisitions and that program budgets reflect capital as well as

operating costs. The concept of depreciation is useful for revolving funds

when determining the fees to be charged to users.

• Establishing a “savings account” - A “savings account” achieves many

of the same goals sought by revolving funds; however, users make

8

Budget Issues: Budgeting for Federal Capital (GAO/AIMD-97-5, November 12, 1996).

Page 10 GAO/T-AIMD-98-99
voluntary contributions according to an established schedule for

prospective capital purchases, rather than being charged retrospectively

for capital usage. The “savings account” is designed to encourage

managers to do better long-range planning for capital purchases and to

enable them to accumulate over time the resources needed to fund capital

acquisitions up-front.

• Contracting out and asset sharing - Some agency functions for which

capital assets are acquired can be performed by the commercial market at

less expense, thus reducing the amount of funding that an agency needs to

have up front. Asset sharing involves sharing the purchase and use of

capital assets with external entities. Sharing assets through contracting

out can be especially useful and cost-effective when asset needs are

short-term or episodic and nonrecurring.

Agencies and the Congress must work together to find tools that

encourage prudent capital decisions. Federal agencies should be

encouraged to develop flexible budgetary mechanisms that help them

accommodate the consistent application of up-front funding requirements

while maintaining opportunities for appropriate congressional oversight

and control.

Improving Federal

Agency Capital

Decision-Making

Practices

Regardless of the budget approach ultimately chosen for federal capital, it

is essential that agencies take the time to properly plan for and manage

their capital acquisitions. Prudent capital planning can help agencies to

make the most of limited resources while failure to make timely and

effective capital acquisitions can result in increased long-term costs. GAO,

the Congress, and OMB have identified the need to improve federal

decision-making regarding capital. Our past work has identified a variety

of federal capital projects where acquisitions have yielded poor

results—costing more than anticipated, falling behind schedule, and failing

to meet mission needs and goals.

For example, we have monitored the Federal Aviation Administration’s

(FAA) acquisitions of major systems since FAA began its program to

modernize the nation’s air traffic control system in the early 1980s. This

modernization program has experienced substantial cost overruns, lengthy

schedule delays, and performance shortfalls. Our work pointed to

technical difficulties and weaknesses in FAA’s management of the

acquisition process as primary causes for FAA’s recurring cost, schedule,

and performance problems. Identified weaknesses included a failure to

analyze mission needs, limited analyses of alternative approaches for

Page 11 GAO/T-AIMD-98-99
achieving those needs, and poor cost estimates.9

 As I mentioned earlier,

we have also identified incremental funding as one of the causes of cost

overruns, schedule slippages, and terminations in DOE’s major acquisitions.

A number of laws enacted in this decade are propelling agencies toward

improving their capital decision-making practices, including the Federal

Acquisition Streamlining Act, the Clinger-Cohen Act, and the Government

Performance and Results Act. To help agencies integrate and implement

these various requirements, OMB recently developed a Capital

Programming Guide—a supplement to OMB Circular A-11—which provides

guidance to federal agencies on planning, budgeting, acquisition, and

management of capital assets. We participated in the development of the

guide and conducted extensive research to identify practices in capital

decision-making used by outstanding state and local governments and

private sector organizations. One federal agency, the U.S. Coast Guard,

was also used as a case study.

We will soon be reporting on the results of our research and I would like

to provide you a preview of our results today. We identified five general

principles that are important to the capital decision-making process as a

whole, which I will summarize for you.

1. Integrate Organizational Goals Into the Capital Decision-making

Process

Leading organizations begin their capital decision-making process by

defining their overall mission in comprehensive terms and by articulating

results-oriented goals and objectives. These organizations consider a range

of possible ways to achieve desired goals and objectives—examining both

capital and noncapital alternatives. For example, the U.S. Coast Guard

now begins its process by conducting a comprehensive needs assessment

through what it calls its mission analysis process.

2. Evaluate and Select Capital Assets Using an Investment

Approach

An investment approach builds on an organization’s assessment of where

it should invest its capital for the greatest benefit over the long term.

Leading organizations use various decision-making practices and

techniques to make comparisons and trade-offs between competing

9

Aviation Acquisition: A Comprehensive Strategy Is Needed for Cultural Change at FAA

(GAO/RCED-96-159, August 22, 1996).

Page 12 GAO/T-AIMD-98-99
projects as well as to assess the strategic fit of the investment with the

organization’s overall goals. Leading organizations also develop long-term

capital plans that allow them to establish priorities for project

implementation over the long term and assist with developing current and

future budgets.

3. Balance Budget Control and Managerial Flexibility When

Funding Capital Projects

Officials at leading organizations agree that good budgeting requires that

full costs be considered when making decisions to provide resources. At

the federal level, this calls for a balance between congressional budgetary

control and agency flexibility in financing capital acquisitions. As I

discussed earlier, some strategies currently exist that allow agencies a

certain amount of flexibility in funding capital projects without the loss of

budgetary control on the part of the Congress. At the state level, one state

we studied is funding the construction of a college campus in stand-alone

stages—completing and occupying one building at a time.

4. Use Project Management Techniques to Optimize Project

Success

Leading organizations apply a variety of project management techniques to

optimize project success and enhance the likelihood of meeting

project-specific as well as organizationwide goals. These techniques

include developing a project management team with the right people and

the right skills, monitoring project performance, and establishing

incentives to meet project goals.

5. Evaluate Results and Incorporate Lessons Learned Into the

Decision-making Process

Leading organizations have a common trait—a desire to assess and

improve their performance. Some of the organizations in our study have

implemented systematic procedures for evaluating project results, while

others have taken a broader approach and reevaluated their capital

decision-making processes as a whole.

Conclusion In order to promote an efficient public sector and a healthy and growing

economy, the federal government should make explicit and well

thought-out decisions on national investments that will foster long-term

Page 13 GAO/T-AIMD-98-99
economic growth as well as on spending for federal capital that provides

long-term benefits to the government’s own operations. The creation of an

investment component within the federal budget could help the Congress

and the President make more informed decisions regarding an appropriate

mix of spending while retaining the strengths and discipline fostered by a

unified budget and the current congressional budget process.

While federal capital spending is important to efficient long-term

government operations, a goal of the budget process should be to assist

the Congress in allocating resources efficiently by ensuring that various

spending options can be compared impartially—not necessarily to

increase capital spending. The requirement of full up-front funding is an

essential tool in helping the Congress make trade-offs among various

spending alternatives. In an environment of constrained budgetary

resources, agencies need, and some have developed, strategies and tools

that can help facilitate these trade-offs and that enable them to

accommodate up-front funding. Agencies have demonstrated that more

modest tools than a full-scale capital budget can be developed to

accommodate up-front funding within the current unified budget.

It is essential for federal agencies to improve their capital decision-making

practices to ensure that the purchase of new assets and infrastructure will

have the highest and most efficient returns to the government and that

existing assets will be adequately repaired and maintained. Federal

agencies could draw lessons from the strategies and practices used by

leading federal, state, local, and private sector entities and more widely

apply these practices to the federal decision-making process.

This concludes my prepared statement. I would be happy to answer any

questions that you may have at this time and look forward to working with

you as the Commission completes its work.

(935263) Page 14 GAO/T-AIMD-98-99
Ordering Information

The first copy of each GAO report and testimony is free.

Additional copies are $2 each. Orders should be sent to the

following address, accompanied by a check or money order

made out to the Superintendent of Documents, when

necessary. VISA and MasterCard credit cards are accepted, also.

Orders for 100 or more copies to be mailed to a single address

are discounted 25 percent.

Orders by mail:

U.S. General Accounting Office

P.O. Box 37050

Washington, DC 20013

or visit:

Room 1100

700 4th St. NW (corner of 4th and G Sts. NW)

U.S. General Accounting Office

Washington, DC

Orders may also be placed by calling (202) 512-6000 

or by using fax number (202) 512-6061, or TDD (202) 512-2537.

Each day, GAO issues a list of newly available reports and

testimony. To receive facsimile copies of the daily list or any

list from the past 30 days, please call (202) 512-6000 using a

touchtone phone. A recorded menu will provide information on

how to obtain these lists.

For information on how to access GAO reports on the INTERNET,

send an e-mail message with "info" in the body to:

info@www.gao.gov

or visit GAO’s World Wide Web Home Page at:

http://www.gao.gov

PRINTED ON RECYCLED PAPER
United States

General Accounting Office

Washington, D.C. 20548-0001

Official Business

Penalty for Private Use $300

Address Correction Requested

Bulk Rate

Postage & Fees Paid

GAO

Permit No. G100