Report of the Advisory Panel on Streamlining and Codifying Acquisition Regulations

Volume 3 of 3 | January 2019

Budget Volume 3

Recommendation 56: Use authority in Section 1077 of the FY 2018 NDAA to 

establish a revolving fund for information technology modernization projects 

and explore the feasibility of using revolving funds for other money-saving 

investments.

Problem

The federal government’s apparent inability to internally finance projects that show promise for 

improving agency efficiency and effectiveness—such as recapitalizing facilities, upgrading IT systems, 

and improving the energy efficiency of existing systems—frustrates federal agencies and contractors 

alike. In some cases, private contractors offer to finance such projects on behalf of federal agencies, only 

to be told such action is impossible under the budgetary scoring rules.

Background

The most important factors in determining whether or not a lease, lease–purchase, or other capitalintensive federal facility or equipment recapitalization or upgrade project is funded should be the 

validity of the requirement, whether the project is executed properly and delivers quality goods and/or 

services, and whether the price is fair. Notwithstanding, a project’s budget score also can play a role in 

the government’s decision to move forward with a project. 

The manner in which a project is scored is governed by complex scorekeeping rules (also known as the 

scorekeeping guidelines) promulgated by OMB and Congressional Budget Office (CBO). The budget 

scorekeeping roles of OMB and CBO are an outgrowth of the modern era of concern about federal 

spending and deficits. The scorekeepers play a role analogous to an independent test and evaluation 

entity for weapons performance—enforcing a neutral set of rules to ensure a level playing field on 

which potential investments compete for funding. 

The ability of a government agency to engage in a long-term capital or real property project is 

governed by the OMB A-11 scorekeeping rules (adopted in 1991).1 These rules generally require that 

the entire amount of a long-term obligation be scored upfront in fiscal year 1, instead of spreading the 

obligation over each year of the project.

Perhaps because these rules have at times been perceived as too rigid, exceptions to the rules have 

occasionally been made. In addition, multiple mechanisms have been developed that ensure certain 

types of projects receive favorable scoring treatment or are otherwise exempt from the requirement to 

have full budgetary authority up front. For example, the exception for operating leases provides that 

the lease payments due in each year are scored only in that year, and not upfront. Energy savings 

performance contracts (ESPCs) and enhanced use leases promise increased resources through energy 

savings and other efficiencies that pay for themselves over time. DoD relies on these existing 

authorities for efficient use of its real estate assets, so the first principle in this area should be to do no 

harm to this foundation when seeking even greater flexibility. 

 

1 OMB Circular No. A-11, Appendix B—Budgetary Treatment of Lease-Purchases and Leases of Capital Assets, accessed November 3, 2018,

https://obamawhitehouse.archives.gov/sites/default/files/omb/assets/a11_current_year/app_b.pdf.
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Additional flexibility could assist in ensuring that DoD’s infrastructure needs are met and that 

additional exceptions could or should be drawn. CBO and OMB have historically been opposed to such 

mechanisms, although over time OMB has granted exceptions ad hoc. Some have suggested that CBO 

and OMB opposition has been driven in part by a reaction to the 2001 Air Force tanker lease proposal, 

which appears to have been attractive to the Air Force because the lease costs would not have to be 

paid until after the end of the Future Years Defense Program. 

As such, any proposal to change the current scorekeeping rules should be tailored to meet the 

objectives behind the scorekeeping rules: ensuring that the budget-making process is as fair and 

transparent as possible. 

Discussion

Revolving Funds for Money-Saving Investments

Federal law and regulations permit the use of private-sector capital to augment federal funds under 

certain circumstances. Among these mechanisms are Energy Savings Performance Contracts (ESPCs) 

and Utility Energy Service Contracts (UESCs). These arrangements permit DoD to third-party 

financing as private contractors invest in energy-saving improvements on behalf of the federal 

government and are paid out of the resulting savings. Under OMB memoranda M-98-13 and M-12-21, 

OMB does not treat these facilities investments as capital improvements (which would require scoring 

the net present value of the government’s obligations of the contract up front), but rather, scores 

payments to contractors on an annual basis as they are made. 

In principle, the ESPC/UESC safe harbor approach could be applied to other money-saving investments, 

such as aircraft re-engining programs that promise a similar stream of savings in reduced fuel and 

maintenance costs. By mandating a minimum level of return on investment or payback period, and 

requiring that contractors be paid out of the savings, the government could ensure these programs 

would pay for themselves over time, rather than simply push off investment costs onto future 

taxpayers. 

CBO and OMB have historically been opposed to additional mechanisms that would allow annual 

scoring of private financing mechanisms. The use of public, rather than private-sector, financing could 

be one way of avoiding this political problem. One potentially viable method of alternative public 

financing could be increased use of revolving funds. 

In particular, the federal government could establish revolving funds with the express purpose of 

investing in money-saving improvements. Reimbursement of the revolving funds would be tied to 

money saved as a result of increased efficiencies. After an initial investment, the revolving funds

should, in theory, pay for themselves. Because the financing mechanism would be internal to the 

government, this approach should not be subject to the OMB and CBO scoring problems hindering 

private-sector financing proposals. 

Tying the reimbursement of the funds to any savings achieved would create several complexities. 

Agencies would be required to estimate future savings, which can be difficult and is subject to a 

number of assumptions. Actual savings would be difficult to determine because of external factors, 

such as increased operational tempo and changes in maintenance standards or schedules. Savings 
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Budget Volume 3

would appear in multiple accounts of different DoD organizations, requiring some kind of mechanism 

to ensure that entities realizing the savings would reimburse the entity paying the contractor bills.

The Information Technology Systems Modernization Funds authorized by Section 1077 of the FY 2018 

NDAA is an attempt to address these issues, authorizing federal agencies to establish revolving funds 

for IT modernization projects. DoD elected not to take advantage of Section 1077 authority. In a 

memorandum to Congress, the DoD Chief Information Officer (CIO) stated, “The Department 

appreciates the subcommittee’s advocacy of Defense IT systems, and the authority Modernizing 

Government Technology (MGT) Act provides. However, we believe our existing Working Capital 

Fund (WCF) structure, policies, and processes provide the type of flexibilities and incentives 

envisioned by the MGT Act.”2 DoD should still exercise this opportunity and put in place a pilot 

program for IT investments as authorized in the FY 2018 NDAA. The pilot’s success would help 

determine whether a similar process could be applied toward other investments for which savings 

would be used to reimburse the fund and allow contractors to be paid on an annual basis. Re-engining 

aircraft is one area where such a model might be applied. 

Revolving Funds Not Expressly Tied To Savings

The complexities associated with estimating future savings, and then accounting for those savings 

when they occur, could potentially be avoided by developing a method of public financing whereby 

repayments are tied to annual appropriations. This is the method endorsed by OMB and the current 

administration in the Analytical Perspectives volume of the FY 2019 budget, which proposes a Federal 

Capital Revolving Fund (FCRF) for investments in nondefense capital infrastructure. As OMB 

explained, “balances in the FCRF would be available for transfer to purchasing agencies to fund largedollar capital acquisitions to the extent projects are designated in advance of appropriations Acts and 

the agency receives a discretionary appropriation for the first of a maximum of 15 required annual 

repayments.”3 Agencies would borrow from the FCRF to cover the full cost of acquiring a capital asset 

and then repay the FCRF over time using appropriated funds. Because “future discretionary 

appropriations will have to be used to repay the FCRF” rather than all from the agencies’ discretionary 

budgets in the first year, OMB believes that this structure will “provide an incentive for agencies, OMB, 

and the Congress to select projects with the highest mission criticality and return.”4

If this approach is successfully implemented for federal civilian agencies, it may be useful for DoD as 

well. DoD should explore use of revolving funds for which reimbursement is tied to appropriations 

rather than savings. 

 

2 Chief Information Officer Memorandum to U.S House of Representatives, Committee on Oversight and Government Reform, 

Subcommittee on Information Technology, dated May 21, 2018.

3 OMB, An American Budget: Analytical Perspectives, Fiscal Year 2019, February 2018, 119, accessed November 4, 2018, 

https://www.whitehouse.gov/wp-content/uploads/2018/02/spec-fy2019.pdf. The principle in the fund would be provided by Congress 

through direct spending which would be subject to the PayGo requirements that any increase in direct spending be offset by reductions 

in other direct spending or an increase in revenue. This paper assumes that Congress will find such a fund a high enough priority that it 

will provide the requisite direct spending. The subject of this paper is the scoring by OMB of long-term projects whether reliant upon a 

federal capital revolving fund or otherwise.

4 OMB, An American Budget: Analytical Perspectives, Fiscal Year 2019, February 2018, 120, accessed November 4, 2018, 

https://www.whitehouse.gov/wp-content/uploads/2018/02/spec-fy2019.pdf. 
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Current and Past Program-Specific Interpretations to the Scoring Rules 

DoD currently uses several mechanisms that allow supplementing federal funds with private-sector 

capital under specific circumstances, in addition to ESPCs and UESCs. Among those mechanisms are 

enhanced-use leasing, public–private partnerships (P3s), capital leases, and performance-based service 

contracts (e.g., for aircraft engine maintenance). 

At times, OMB has interpreted the scoring rules as mandating differing treatment for these types of 

public–private endeavors. The deal structure determines whether a project must be scored upfront. For 

example, in 1997, OMB Director Franklin D. Raines issued guidelines (the Raines Memo) that provided 

extensive guidance on how different types of Military Family Housing Privatization Initiative (MHPI) 

transactions would be scored. Among other things, the Raines Memo gave DoD authority to convey 

property in exchange for housing or an equity investment in a limited liability company. Under these 

circumstances, there would be no scoring impact if there was no cash income or expenditure. 

According to an Army history of the MHPI program, it was this clear scoring guidance that enabled the 

privatization program to proceed.5

OMB has at times interpreted its scoring rules to exempt certain types of long-term projects, including 

those involving private capital, from being fully scored upfront. Commissioning a study of these past 

interpretations would allow better insight into why OMB scores certain types of projects differently 

than others. Understanding the factors that led to these scoring outcomes would provide additional 

predictability to both DoD and the private sector when considering pursuing such projects. The lessons 

learned could be used to identify candidates for future projects. 

A Study of Mature Statutory and Regulatory Regimes from Other Jurisdictions 

A form of financing public infrastructure that has gained traction in recent years in state and local 

jurisdictions, as well as internationally, is the P3. Jurisdictions that have recognized the benefits of P3s 

have adopted legislation and regulation to authorize and then guide their P3 programs. The federal 

government is outpaced by states such as Virginia and countries such as Canada when it comes to P3 

program use. Many developing countries are in the process of putting in place such legislation. 

Currently, no comprehensive statutory regime exists that governs circumstances under which DoD 

may make use of a P3. P3s are not appropriate for all situations, but when they are, they could be an 

additional tool to address DoD’s infrastructure requirements. A study of mature P3-authorizing 

statutes and regulations from other jurisdictions could assist in determining whether the P3 model 

could be further implemented at the federal level and include analysis of how P3 projects would be 

scored by OMB. 

Conclusions

DoD is unlikely to obtain approval for private financing of public investment projects under current 

conditions because such financing could be seen as a maneuver to get around the budget rules and 

require future generations to pay for today’s investments. Internal investments in money-saving 

efficiencies (such as upgraded IT systems or more fuel-efficient engines) may pay for themselves out of 

 

5 Matthew C. Godfrey et al., Privatizing Military Family Housing: A History of the U.S. Army’s Residential Communities Initiative, 1995–

2010 (Washington, DC: GPO, 2012), 41, accessed November 4, 2018, http://www.rci.army.mil/programinformation/docs/RCI_history.pdf.
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future operation and maintenance funds savings. In these cases, there is a public financing alternative 

that may be acceptable: the use of a revolving fund that provides financing for an initial set of 

investments. If the savings from the initial investments can be tracked and used to reimburse the 

revolving funds, additional money-saving investments could follow. 

DoD could conduct studies to assess whether other approaches to financing public projects could be 

viable. For example, the recently proposed FCRF is intended to be a revolving fund that is reimbursed 

out of annual appropriations, instead of from savings. Although the FCRF is intended to fund 

investments in civilian infrastructure, DoD could study whether such a model would work for defense 

infrastructure and could explore the characteristics that led OMB to interpret its budget scoring rules in 

favorable ways (i.e., from lower upfront scores to the continuation of individual projects or programs, 

including projects and programs that employ private sector financing). Better predictability of how 

projects and programs will be scored will encourage initiation of such projects or programs, or a 

decision not to begin at all. Models of mixed public–private financing, such as the P3s, could be studied 

to determine whether such a model would be as feasible at the federal level as they are at state and 

local levels as well as internationally. 

The Secretary of Defense should issue a memorandum requiring DoD to use the authority in 

Section 1077 of the FY 2018 NDAA to establish a revolving fund for IT modernization projects. This 

revolving fund should serve as a pilot program to prove the feasibility of using the revolving fund 

mechanism to finance continuous, money-saving upgrades to DoD systems and facilities. To ensure the 

success of the pilot program, DoD should establish specific guidance for estimating future savings from 

IT investments financed through the revolving fund, tracking actual savings and identifying the 

accounts in which they accrue, and ensuring the transfer of savings to the extent needed to reimburse 

the revolving fund for initial investments. 

If DoD is able to navigate these hurdles and successfully implement the IT revolving fund on an 

ongoing basis, it should seek additional authority to use revolving funds for other money-saving 

investments, such as aircraft re-engining programs. 

§ DoD should commission a feasibility study for using the revolving fund for capital projects, to 

be reimbursed annually out of appropriations, similar to the FCRF. 

§ DoD should analyze the characteristics of projects and programs that OMB has employed when 

accepting that such projects and programs do not require full, upfront scoring, whether the 

projects are privately or publicly financed. The goal of the study would be to make transparent 

the additional, and currently unstated, factors that OMB will consider. 

§ DoD should commission a study of mature P3 authorizing statutes and regulations from which 

to develop and adopt federal level P3 statutes and regulations for DoD to promote 

infrastructure projects in partnership with the private sector. 
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Budget Volume 3

Implementation

Legislative Branch

§ Authorize $100 million to be appropriated to the Secretary of Defense for a revolving fund 

established under Section 1077 of the FY 2018 NDAA (Pub. L. No. 115–91; 40 U.S.C. § 1130 note) 

to fund an IT systems modernization pilot.

§ Appropriate $100 million for a revolving fund established under Section 1077 of the FY 2018 

NDAA (Pub. L. No. 115–91; 40 U.S.C. § 1130 note) to fund an IT systems modernization pilot.

§ Authorize the transfer of savings back to the revolving fund, to the extent needed to reimburse 

the revolving fund for initial investments in money-saving IT projects. These transfers would be 

subject to the appropriations process under the same terms and conditions laid out in 

section 1077.

Executive Branch

§ Issue a decision memorandum directing establishment of a pilot Information Technology 

Systems Modernization Fund pursuant to section 1077 of the FY 2018 NDAA.

§ Direct the Under Secretary of Defense(Comptroller) (USD(C)), in consultation with the CIO, to 

provide guidance for estimating future savings from IT investments financed through the 

revolving fund; tracking actual savings and identifying the accounts in which they accrue; and 

ensure the transfer of savings to the extent needed to reimburse the revolving fund for initial 

investments.

§ Request legislative authority—on completion of one successful round of investments, up to and 

including reimbursement of the revolving fund for initial investments—to establish additional 

revolving funds for other money-saving investments, such as aircraft re-engining programs. 

§ Commission studies of the following: 

- The advantages and disadvantages of a revolving fund for capital projects, to be reimbursed 

annually out of appropriations, similar to the FCRF.

- The factors OMB uses when agreeing to exceptions to the current budget scoring rules, 

including for specific projects and programs.

- Mature P3 authorizing statutes and regulations from which to develop and adopt federal P3 

statutes and regulations for DoD to promote infrastructure projects in partnership with the 

private sector and to study the scoring of such projects by OMB.

- Other executive branch changes to analyze mechanisms to improve industrial capitalization. 

Recommended studies are included in the Section 809 Panel’s Volume 3, Section 2.

Implications for Other Agencies

§ There are no cross-agency implications for this recommendation.