GAO-01-432R Incremental Funding of Capital Assets

United States General Accounting Office

Washington, DC 20548

February 26, 2001

The Honorable Pete V. Domenici

Chairman

Committee on the Budget

United States Senate

Subject: Budget Issues: Incremental Funding of Capital Asset Acquisitions

Dear Mr. Chairman:

In your August 23, 2000, letter you asked us to (1) identify the extent to which capital

projects are funded incrementally; (2) illustrate the effects of incremental funding by

assessing the implications for future DOD budgets if the Navyís shipbuilding and

conversion account were to change from full to incremental funding; (3) examine the

consequences of the past use of incremental funding, including lease-purchases, at

civilian agencies and the Department of Defense (DOD); and (4) provide ideas that might

be helpful to the Congress in promoting more-effective budgeting for capital asset

acquisitions.

On December 21, 2000, we briefed the Committee staff on the results of our work. As

agreed with your office, we later briefed the staffs of the Senate Committee on Armed

Services, Senate Committee on Appropriations, and the House Committee on

Appropriations. This letter summarizes our work and transmits briefing slides.

To identify incrementally funded projects, we reviewed fiscal year 2001 Budget

Justifications and agency documentation for 18 agencies involving approximately 700

individual projects. We identified projects that have received funding through fiscal year

2000 and are still in progress. To illustrate the effects of incremental funding on the

Navyís shipbuilding and conversion account, we used the Navyís fiscal year 2002

Program Objective Memorandum to determine the full-funding baseline and developed

four notional incremental funding scenarios. To examine the consequences of past

incremental funding, we researched prior GAO work in this area. We conducted our

review between August and December 2000 in accordance with generally accepted

government auditing standards. We obtained comments from DOD, Army Corps of

Engineers, NASA, Federal Bureau of Prisons, and the U.S. Coast Guard on the slides

relevant to each. The agency officials concurred with the accuracy of the information

contained in the slides. The Office of Management and Budget (OMB) reviewed the

entire briefing and concurred with our position on full funding.
2 GAO-01-432R Incremental Funding of Capital Assets

Background

Capital projects can be grouped into three funding categories: full funding, incremental

funding, and high technology. Fully funded capital projects are those for which budget

authority is or appears to be provided for the full estimated cost of a capital project or a

stand-alone stage if the project is divisible into stages. Fully funded projects also include

the survey and design of a capital project and a major upgrade or renovation that results

in a usable asset. Incrementally funded capital projects are projects for which budget

authority is or appears to be provided for only part of the estimated cost of a capital

acquisition or part of a usable asset. High technology capital projects are incrementally

funded projects for which budget authority is or appears to be provided for only part of

the estimated cost of information technology acquisitions or projects that are highly

dependent on research and development and highly uncertain in outcome. Space

exploration equipment would be an example of such a project. Incremental funding can

be justified for high technology capital projects because such projects are often closer in

nature to research and development and funding provided on an incremental basis can

provide useful knowledge even if no additional funding is provided. GAO has advocated

full funding for capital asset acquisitions as a way to increase recognition of implied

commitments embodied in budgetary decisions as compared to the incremental funding

approach. OMB and others in the budget community have supported and endorsed this

concept. The Navy and DOD also are proponents of the full-funding approach.

Results in Brief

We identified civilian nondefense agency capital projects with total estimated costs of

$175.6 billion, based on agency Budget Justifications and other agency data. Costs for

incrementally funded and high technology civilian projects are estimated to total $154.7

billion. Of this amount, $78.5 billion in budget authority has been provided through

fiscal year 2000, leaving $76.2 billion of budget authority still required after fiscal year

2000 to complete these projects, a requirement that constitutes a claim on discretionary

spending in future years. About half of the $154.7 billion total is for high technology

projects. Because some capital projects have unknown or ìyet to be determinedî funding

requirements beyond the fiscal year 2001 request, the remaining budget authority needed

to complete all projects is actually greater than the $76.2 billion identified and assumes

no further cost growth. This budget authority relates only to civilian projects. DOD

spending for capital acquisitions is generally fully funded; its fiscal year 1999 capital

spending totaled almost $53 billion. (See slides 12 and 13.)

If the Navy shipbuilding and conversion account were to be moved from full to

incremental funding for a given period of time, this would not allow the Navy to procure

more ships for a given amount of funding. Additional ships would require additional

funding. After the initial year, incremental funding reduces the amount of budget

authority available to fund new ships in any given fiscal year because a portion of the

funding must be devoted to completing ships partially funded in prior years. In addition,

there is a risk of cost growth associated with all capital projectsócost growth has

occurred with fully funded projects as well as incrementally funded projects. Any cost

growth on ships partially funded in prior years would further reduce the funding available
3 GAO-01-432R Incremental Funding of Capital Assets

for new ships. In addition, costs and commitments continue beyond the years depicted in

the briefing slides in all scenarios. (See slides 20 to 29.)

There are several other budgetary implications as well as acquisition management issues

related to incremental funding for the Navy and for agencies in general. In general, full

funding ensures that the full estimated costs of decisions are recognized at the time that

the commitment is made. Incremental funding erodes future fiscal flexibility for

programs such as shipbuilding because funding is dedicated to completing procurements

begun in previous years. According to DOD and OMB officials, incremental funding

also limits cost visibility and accountability. These officials believe that acquisition

estimates are likely to increase because there would be an incentive to ìlow ballî the

estimate at the beginning. Additionally, contractors may hedge their bets on pricing

because they may not be able to take advantage of economies of scale that can come with

longer-term and more certain commitments. (See slides 30 and 31.)

The use of incremental funding and lease-purchase arrangements in the past has had

some negative consequences. For example, a 1996 GAO report1

 cited incremental

funding as a key factor underlying Department of Energy project cost overruns and

schedule delays. Another GAO report2 found that the use of long-term leases for

auxiliary ships in the 1970s and 1980s resulted in higher costs per ship. (See slides 33

and 34.)

Promoting effective management of capital asset acquisitions is important. We recognize

that some incremental funding for high technology acquisitions is justified because, while

such projects are intended to result in a usable asset, they are closer in nature to research

and development activities. However, for other capital projects, as we have previously

reported,3 full funding is an important tool for maintaining governmentwide fiscal

control. Failure to recognize the full costs of proposed commitments when budget

decisions are made could lead to distortions in the allocation of resources.

During the course of our review, we also found that the data supporting agency capital

project requests are often incomplete and/or not clear. For example, some project

requests did not include the total estimated project costs. For other requests, the project

descriptions were vague, making it difficult to determine future costs or whether funding

provided would produce a usable asset. Since there is value in providing executive and

legislative decision-makers the best possible information, we plan to discuss with OMB

some options for improved reporting.

We will send copies of this letter to Senator Kent Conrad, Senator Ted Stevens, Senator

Robert C. Byrd, Senator John Warner, Senator Carl Levin, Representative Jim Nussle,

 1

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

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

2

Defense Acquisitions: Historical Analyses of Navy Ship Leases (GAO/NSIAD-99-125, June 25,

1999).

3

Accrual Budgeting: Experiences of Other Nations and Implications for the United States

(GAO/AIMD-00-57, Feb. 18, 2000) and Budget Issues: Budgeting for Federal Capital (GAO/AIMD97-5, Nov. 12, 1996).
4 GAO-01-432R Incremental Funding of Capital Assets

Representative John M. Spratt, Jr., Representative C.W. Bill Young, Representative

David Obey, Representative Bob Stump, and Representative Ike Skelton in their

capacities as Chair or Ranking Member or Ranking Minority Member of Senate or House

Committees. We also will send a copy to the Honorable Mitchell E. Daniels, Jr.,

Director, Office of Management and Budget. Copies will be made available to others on

request.

We appreciate the opportunity to be of assistance. If you or your staff have any questions

regarding the briefing or this letter, please contact me at (202) 512-9573 or Christine

Bonham, Assistant Director, at (202) 512-9576. Key contributors to this review were

Trina Lewis, Jennifer Eichberger, and David Best.

Sincerely yours,

Paul L. Posner

Managing Director, Federal Budget

Strategic Issues

Enclosure
Enclosure

5 GAO-01-432R Incremental Funding of 

Briefing for the Senate Budget Committee on

Incremental Funding of Capital Asset Acquisitio

December 21, 2000
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Agenda

• Background• Objectives, scope, methodology, and data limitations• Civilian capital projects funded through fiscal year 2000 and future re

required

• Department of Defense capital spending• Agency capital project examples• Navy Shipbuilding—incremental funding scenarios• Budgetary and other acquisition management issues related to increm

funding

• Consequences of past incremental funding (including lease-purchase• More effective budgeting for capital asset acquisitions• Related GAO products
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Background

• Full Funding

• GAO has advocated full funding for capital projects as a way to inc

recognition of implied commitments embodied in budgetary decisioOMB’s capital programming guidance has endorsed this concept, asupported by the President’s Commission to Study Capital Budget

• Full funding is defined as the practice of providing budget authority 

full costs of a capital acquisition or project at the time decisions are provide financial resources.

• Full funding need not mean the entire project if the project is divisib

stand-alone stages. For such a project full funding is providing budauthority sufficient to complete a stand-alone stage. A stand-alone a component of a project that either (1) provides information that athe planning, design, and assessment of costs, benefits, and risks potential acquisition or (2) results in a usable asset for which the bexceed the costs even if no further funding is provided.

• OMB considers the use of a combination of regular and advance

appropriations as satisfying the full-funding concept.

• Navy and DOD are proponents of full funding.
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Background

• Incremental Funding

• Incremental funding is the practice of providing budget authority for only 

of a capital acquisition or project—a portion that would not be usable if funding were provided. Incremental funding is usually funding sufficienobligations estimated to be incurred in one fiscal year. Funding to contproject would need to be requested from the Congress each year unlesadvance appropriations were provided.

• Although OMB considers advance appropriations as consistent with ful

the practice could be viewed as a form of incremental funding.

• Capital Investment Defined

• Capital asset spending within the scope of this study is defined as spen

defense weapons systems; other procurement, buildings, natural resouprojects; and a wide variety of other construction and equipment owned federal government and used to deliver federal services. It includes noassets as initially acquired, but also major improvements, renovations, repairs.

• Capital asset spending also includes spending for information technolo

research and development activities directly intended to result in a usabasset.
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Background

• Perspective on Magnitude of Current Capital Investment

• $74.7 billion outlays in fiscal year 1999 on direct major physical ca

represents 4.4 percent of fiscal year 1999 total direct federal outlay

• $53.9 billion outlays on defense-related capital assets.• $20.8 billion outlays on nondefense capital assets.

• President’s fiscal year 2001 budget estimated $75.7 billion outlays 

year 2000 and $78.5 billion outlays in fiscal year 2001 on direct mphysical capital.
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Objectives

• Senate Budget Committee requested that GAO:

• Identify incrementally funded capital projects at major capital-ownin

agencies.

• Assess the implications for the Navy’s shipbuilding and conversion 

if its funding were changed from full to incremental and illustrate thscenarios.

• Examine the consequences of the past use of incremental funding

lease-purchase arrangements, at civilian agencies and DOD.

• Provide ideas that might assist the Congress in promoting more eff

budgeting for capital assets.
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Scope and Methodology

• Using GAO’s Budget Database, identified agencies with capital outlay

fiscal year 2000. This database contains data taken from OMB’s MA

system—the computerized system used to collect and process inform

needed to prepare the President’s Budget.

• Identified 25 entities whose capital spending covers over 80 percent o

year 2000 capital spending (excluding military procurement which waseparately addressed). Reviewed data for approximately 700 individprojects.

• Data sources: fiscal year 2001 Budget Justifications, agency capital p

other agency documents, and OMB, CBO, and GAO staff.

• Identified agency capital projects that have received funding through 

year 2000 and are still in progress (on-going). Did not identify fiscal yappropriated amounts.

• Included data such as estimated total project cost, funding provided t

fiscal year 2000, advance appropriations requested (if any), and comestimated costs to complete project.
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Scope and Methodology

• Grouped capital projects into three categories of funding:

• Full funding: budget authority is or appears to be provided for the f

estimated cost of a capital project or stand-alone stage, including tand design phase of a project and major upgrade or renovation resa usable asset.

• Incremental funding: budget authority is or appears to be provided 

part of a capital project or part of a usable asset; requires additionato complete acquisition.

• High technology: incremental budget authority is or appears to be p

for information technology projects and capital projects that are higdependent on research and development and highly uncertain in osuch as space exploration equipment.
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Scope and Methodology

• For Shipbuilding and Conversion account, used Navy’s fiscal year 20

Program Objective Memorandum to determine baseline. Then develscenarios: (1) baseline funded incrementally over 3 years; (2) additioadded to baseline and funded incrementally over 3 years; (3) additionadded to baseline and funded incrementally over 5 years; and (4) selship classes (Carriers and Amphibious ships) incrementally funded ovyears.

• The DOD, Army Corps of Engineers, NASA, Federal Bureau of Priso

Coast Guard have each reviewed the relevant slides. The Office ofManagement and Budget has reviewed the entire briefing.
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Data Limitations and Required Judgments

• Accuracy of Budget Justification and other agency data not verified.• Level of detail needed to completely judge whether funding was for a 

alone stage was not always provided in the data source we used; claspending required significant use of team judgment based on availaband time constraints. Agencies may be able to provide additional cladata if questioned in detail on each project.

• Most agencies have not reviewed and agreed with judgments made.• No assurance that all of capital projects were identified in all agencies• Data for the Environmental Protection Agency and the Department of 

Affairs were not received in time to review and analyze.

• In seeking to identify consequences of past use of incremental fundin

not have identified all past uses.
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List of Agencies/Bureaus

Army Corps of Engineers General Services AdministratioBureau of Prisons Indian Health ServicesBureau of Reclamation Internal Revenue ServiceCenters for Disease Control & Prevention NASACoast Guard National Institutes of HealthDepartment of Defense National Oceanic & AtmospherDepartment of Energy National Park ServiceDepartment of Housing & UrbanDevelopment National Science FoundationDepartment of Veterans Affairs Smithsonian InstitutionEnvironmental Protection Agency Department of StateFederal Aviation Administration Tennessee Valley AuthorityFood & Drug Administration U.S. Postal ServiceFederal Railroad Administration
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Summary Tables
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Civilian Capital Projects Funded Through Fisca

2000 and Future Resources Required

Type of Funding

(Dollars in Thousands)

Total Budget

Authority to Date

and Identified

Future

Requirements

Total Budget

Authority Provided

Through Fiscal Year

2000

Remaining Budget

Authority Required

After Fiscal Year

2000*

Incrementally FundedCivilian $76,751,876 $31,421,676 $45,330,200 High Technology- Civilian 77,930,848 47,018,861 30,911,987 Fully Funded- Civilian 20,915,871 13,200,243 7,715,628b 

Total- All Projects $175,598,595 $91,640,780 $83,957,815 

*Some projects included have funding requirements beyond the FY 2001 request that are unknown or yet to be detherefore the remaining budget authority that will be required after FY 2000 is certainly greater than the numbers pa Advance appropriations amounts represent amounts agencies requested in the FY 2001 budget request. These adva

appropriations ranged from FY 2002 through 2008. Advance appropriation totals are included in the “Remaining BudRequired After Fiscal Year 2000” totals as well.

b This amount was identified by agencies as their planned future requests related to fully funded projects.c Approximately $4.8 billion in advance appropriations are not included in this total because they were requested for 

starting in FY 2001 or later and therefore are not in the scope of this tabulation.
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Department of Defense Capital Spending

(Fully Funded) a

Capital Outlays

Account

(Dollars in Thousands)

FY 1999 FY 2000 (estimate) FY 2001 (estimate)

Advance

Appropriation

Requestb

Armed Forces RetirementHome (Civilian) $6,000Family Housing $731,000 $898,000 $801,000Military Construction $3,333,000 $3,248,000 $3,640,000 $821,000cOperation and Maintenance $426,000 $480,000 $333,000Procurement $48,288,000 $47,356,000 $50,215,000Total $52,778,000 $51,982,000 $54,989,000 $827,000

Source: GAO Budget Database, Capital Expenditures by Character Class; President’s Budget, Fiscal Year 2001,

Analytical Perspectives.

a Two procurement projects were determined to be exceptions to the full funding concept:

 At a unit cost of $1,922.8 million, the last of eight LHD-1 amphibious assault ships is being incrementally funded

received $44.2 million in budget authority in FY1999, $356.2 million in FY2000, and $460 million in FY2001, leavin$1,062.4 million. The LPD-17 amphibious ships have been fully funded through FY2000, but in FY2001 received $560.7 million to with a unit cost of $744.6 million each.

b Advance appropriations amounts represent amounts DOD plans to request as advance appropriations in FY 2002 c These advance appropriations are to fully fund selected military construction and family housing projects in the DO
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Some Specific Examples
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Army Corps of Engineers

Incrementally Funded Project

Project Name: Atlantic Intracoastal Waterway Bridge at Great Bridge, VABrief Description: Replacement of the existing federal bridge. New bridge provides 5 la

shoulders, and pedestrian walkways.

Funding Stream (Budget Authority in Thousands of Dollars):

Estimated

Federal Cost

Provided

Through

FY 1999

Provided in

FY 2000

Requested

in FY 2001

Required

After FY2001

to Complete

Project

$24,054 5,066 2,573 8,492 7,923

Key Phrases (terms & phrases used to determine funding category):

• Funds to initiate preconstruction engineering and design were appropriated in FY1995. Fun

construction were appropriated in FY1998.

• Status as of Jan 1, 2000- 10% complete• Physical Completion Schedule- September 2002• The requested amount in Fiscal Year 2001 will be applied as follows:

Continue construction $7,592,000Construction management $ 900,000Total $8,492,000
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U.S. Coast Guard

Incrementally Funded Project

Project Name: Alex Haley Conversion Project- Phase IIBrief Description: CGC Alex Haley was recently converted to operate in the harsh AlaskSea. Improvements to crew habitability, operation capability, and machinery and personal srequired. Plans include the installation of a helicopter hangar to allow deployment of HH-65 installation of a machinery space fixed fire suppression system; and installation of an onboaincinerator.Funding Stream (Budget Authority in Thousands of Dollars):

Estimated

Federal Cost

Provided

Through

FY 1999

Provided in

FY 2000

Requested in

FY 2001

Required

After FY2001

to Complete

Project

TBD $20,000 0 3,200 TBD

Funding Descriptions:

FY1998 Project Start-upFY1999 Completion of Phase I Vessel ConversionFY2001 Engineering, Design & Long Lead Time Material procurementFY2002 – Phase II ProductionFY2004FY2005 Project Completion
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National Aeronautics and Space Administra

Incrementally Funded Project—High Techno

Relativity Mission/ Gravity Probe- B

The development of the Relativity mission began in 1993, after many years of studying mission alternatives and developing the advanced technologies required for this mission to verify Einstegeneral relativity. The award of the spacecraft development contract was made in 1994. The sclaunch date is September 2001, using a Delta II launch vehicle.

(Budget Authority in Thousands of Dollars)

Activity

Prior to

FY1999 FY 1999 FY 2000 FY 2001 FY 2002 FY 2003 TOT

Development $388,200 $46,500 $37,700 $13,800 $486,

Mission

Operations* 1,000 1,000 1,000 3,00

Data

Analysis* 8,000 5,200 3,100 16,3

Launch

Support 24,100 14,800 12,200 51,1

Tracking &

Data

Support*

TB

Total

(Excluding

Civil Service

Costs)

$412,300 $61,300 $49,900 $22,800 $6,200 $4,100 $556,

*These line items are not included in the capital spending totals found on page 17 because they fund operation act
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Federal Bureau of Prisons

Use of Advance Appropriations

The prisons listed below are being fully funded in stand-alone stages by the Bureau of Prisons. year appropriations will fund the site planning/preparation phase of the prison. The funds in yeaprovide for a design/build contract.

(Budget Authority in Thousands of Dollars)

Advance Appropriation Reque

Planned Future Prisons:

FY 2001

Request FY 2002 FY 2003

Funding Starting in 2001USP Western $11,930 $147,000USP Southeast 11,931 133,000FCI Southeast 5,430 106,000FCI Mid-Atlantic 1 5,430 121,000FCI Midwestern 5,431 131,000

SubTotals $40,152 $638,000

Funding Starting after 2001FCI Western $6,000 $131,000FCI South Central 5,000 115,000FCI Northeast 5,000 133,000FCI Mid-Atlantic 2 5,000 133,000Mid-Atlantic Secure Female 2,000 23,000

SubTotals $23,000 $535,000

TOTAL $40,152 $661,000 $535,000
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Navy Shipbuilding
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Navy Shipbuilding

Incremental Funding Scenario Observation

• For a given period of time, incremental funding does not procure mor

for a given amount of funding. More ships will require more funding.

• Incremental funding creates funding commitments in later years in ord

complete ships partially funded in prior years that at some point requiincreased total funding or reduced funding for new ships.

• Cost growth on incrementally funded ships would further increase the 

funding requirements in the following years and/or further reduce fundnew ships. Cost growth currently happens under the full-funding appCost growth was not factored into the model that follows.

• Costs and commitments continue beyond the years depicted in all sc

While more ships are initiated in some scenarios, approval of the totaauthority to finish those ships is completed over a longer time frame.
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Navy Shipbuilding

Incremental Funding Scenarios

• First—present a scenario run against the shipbuilding account coveri

2001 to 2006 in which procurements are incrementally funded over royear periods.

• Assumptions Scenario 1 (baseline) is essentially the Navy’s 2002 P

Objective Memorandum; advanced procurements are only considethe aircraft carrier and the DD-21; incremental funding is evenly divquantity procured is unchanged; no cost growth is included (althougrowth regularly occurs for fully funded programs).

• Second—present two scenarios in which funding initially freed up is u

additional ship construction and examine the budgetary effect. Incremfund all previously planned procurements plus additional ships:

1. Scenario 2: Rolling 3-year period and2. Scenario 3: Rolling 5-year period

• Third—present a fourth scenario in which incremental funding is appl

only selected ship classes (Carriers and Amphibious ships) on a rollinperiod, with no additional ship purchases.
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Navy Shipbuilding

Baseline Ship Profile

• Created a baseline from the Navy’s 2002 Program Objective Memora

Baseline

Fiscal Year 2001 2002 2003 2004 2005 2006 

CVN 77 1 CVN (X) AP AP AP AP AP 1 NSSN 1 1 1 1 1 1 DDG-51 3 2 2 2 1 DD-21 AP 1 LHD 1 LPD-17 0 1 2 2 1 TADC(X) 1 2 2 2 1 2 JCC(X) 0 1 

Quantity 6 6 7 7 6 5 

Funding (billions) $9.41 $5.58 $6.64 $7.82 $7.63 7.30 

Notes: (1) AP is advance procurement and only included for the carrier and the DD-21. (2) No Lprocured in fiscal year 2001, based on congressional action. (3) LHD-8 is treated as fully fundeyear 2005. (4) Ship designations: CVNs are aircraft carriers, NSSNs are submarines, DDGs and destroyers, LHD and LPDs are amphibious ships, TADCs are auxiliary vessels, and the JCC is ship.
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Navy Shipbuilding

Incremental Funding Scenario 1

• Scenario 1: The baseline incrementally funded on rolling 3-year pe

broken into prior-year commitments and new procurement. Exprespercentage relative to the baseline for each fiscal year (see p. 27).

0

20406080

100120

'01 '02 '03 '04 '05 '06

Fiscal Years

Percentage

of Baseline

Observations: (1) Commitments of about $7.3 billion made in fiscal years 2005 and 2006 would carry ove2007 and 2008 in order to complete ships funded in 2005 and 2006. (2) While significantly less budget auis needed in year 2001, this benefit declines or disappears in future years. (3) Available discretionary fundreduced by between 50% and 74% in fiscal years 2002 through 2006 in order to fund the completion of shpartially appropriated in prior years. (4) Cost growth could significantly reduce or eliminate any “freed-up” b

authority. For example, in fiscal year 2002 there is about $500 million in freed-up budget authority, howevrecent press accounts indicate that the LPD ship class has had a $200 million cost growth. If that cost growere absorbed in fiscal year 2002, it would reduce the freed-up budget authority by 40%.
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Navy Shipbuilding

Incremental Funding Scenarios 2 and 3

• Incremental funding might initially free up budget authority for other u

as other Navy programs, other military service programs, or civilian pHowever, a more likely use might be to fund additional shipbuilding por to cover the cost growth of existing ship programs. Cost growth is modeled in this briefing.

• Therefore, additional ships are added in the sequence listed below.

Additional Ships

Fiscal Year 2001 2002 2003 2004 2005 2006 

CVN 77CVN (X)NSSNDDG-51 1 2 1 2 DD-21 2 LHDLPD-17 1 1 TADC(X) 1 JCC(X) 1 1 

Quantity 1 2 2 2 4 2 

Notes: (1) One of the two LPD-17s removed in 2001 is added back in 2001 (the other was placeNavy in 2005 in the baseline). (2) Four ships (one LPD-17, one TADC(X) and two JCC(X)) remNavy in the 2002 Program Objective Memorandum are added back in. (3) Six DDG-51s identifiNavy’s November 2000 update to the 1993 Arleigh Burke DDG-51 Class Industrial Base Study (4) Two DD-21s are added in fiscal year 2006 to more closely duplicate earlier plans that projeccontinuous production.
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Navy Shipbuilding

Incremental Funding Scenario 2

• Scenario 2: 3-year rolling funding with additional ship purchases.• Funding as a percentage of each year’s original full funding (see the 

on p. 27).

0

2 04 06 08 0

100120140160

'01 '02 '03 '04 '05 '06

F isca lY e a rs

P ercen tage o f 

B a selin e

Observations: (1) Commitments of about $10.8 billion made in 2005 and 2006 carry over into 2007 and 2008 btotal costs of the 2001 through 2006 profile are complete. (2) More funding will be needed starting in the second than under the baseline case. (3) Available discretionary funding is reduced by between 61% and 87% in fiscayears 2002 through 2006 in order to fund the completion of ships partially appropriated in prior years. (4) Both these last two effects would likely be compounded if cost growth occurs.
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Navy Shipbuilding

Incremental Funding Scenario 2

• Scenario 2: 3-year rolling funding with additional ship purchases.• Total cost (then-year) difference between full funding and 3-year incre

funding with additional ship procurement.

-8-6-4-2

024

$ billions

Difference -5.997 0.39 2.35 1.543 1.324 2.495

'01 '02 '03 '04 '05 '06

Observations: (1) Commitments of about $10.8 billion made in 2005 and 2006 carry over into2007 and 2008 before total costs of the 2001 through 2006 profile are complete. (2) Lower initbudget authority of about $6 billion is more than offset by an additional $8 billion in budgetauthority to complete incrementally funded ships.
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Navy Shipbuilding

Incremental Funding Scenario 3

• Scenario 3: 5-year rolling funding with additional ship purchases.

5-Year funding as a % of original full funding Total cost (then-year) difference betw

5-year incremental funding

-8-7-6-5-4-3-2-1

0123

$ billions

Difference -7.354 -1.951 -1.089 0.474 1

'01 '02 '03 '04 

0

2 04 06 08 0

100120140

'01 '02 '03 '04 '05 '06

F isc a l Y e a rs

P e rc e n ta g e o f 

B a s e lin e

N ewP r io r

Observations: (1) The effects identified for the 3-year incremental funding scenario are delayed. For example, more is needed than originally planned starting in fiscal year 2004 instead of 2002. (2) Commitments of $19.9 billion continthrough fiscal year 2010. Only commitments made in fiscal years 2001 and 2002 are complete by 2006. (3) Availablediscretionary funding is increasingly reduced, with reductions reaching 92% in fiscal year 2006, in order to fund thecompletion of ships partially appropriated in prior years. (4) Any cost growth would reduce or eliminate freed-up budgauthority.
Enclosure

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Navy Shipbuilding

Incremental Funding Scenario 4

• Scenario 4: Baseline is fully funded except for Aircraft Carriers and

Amphibious ships which are incrementally funded over rolling 3-year with no additional ship purchases.

0

20406080

100120140

'01 '02 '03 '04 '05 '06 '07

F iscalY ea rs

P ercen tage o f 

B a selin e

Observations: (1) Commitments of $3.5 billion made in 2006 carry on into 2008 (there is no new incrementalfunding in 2007). (2) Under this approach funding is needed above that planned in the baseline in 2002, 20032007. (3) Cost growth would exacerbate the need for additional funding.
Enclosure

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DOD/OMB: Budgetary Concerns With Increme

Funding for the Navy

• Reduces the ability to make changes in the shipbuilding program because a lar

percentage of funding is dedicated to completing ships begun in previous years

• Creates commitments in following fiscal years and limits flexibility to make ratio

planning decisions. While incremental funding allows more programs to be bougiven year, it is a one-time benefit. From then on, current-year funding will pay year programs. This funding bow wave makes it more difficult to initiate new padjust for unforeseen cost growth.

• Limits cost visibility and accountability. Estimates may be more likely to have c

since the incentive is to “low ball” the estimate at the beginning.

• Execution problems are created. Incrementally funded programs are more ofte

subjected to across-the-board reductions and “get by with less funding this yea

reductions.
Enclosure

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DOD/OMB: Acquisition Management Concerns R

to Incremental Funding

• Increased Cost*

• Inhibits contractor ability to right-size its workforce and use economies of sc

uncertainty in funding. Potential personnel disruption (layoffs and rehiring) chigher acquisition costs or a need for greater amounts of government fundinmaintain critical skills during program stretchouts.

• Reduces cost consciousness because increases in cost can simply be adde

subsequent increments for the same ships, but in future budgets.

• Increases financial risk to the contractors and/or increases cost risk to the go

for cancellation costs.

• Contracting Difficulties*

• More difficult to specify a discreet package of work.

• Hampers the opportunity to use performance-based fixed-price contracts.

• Any disruption/reduction in the planned funding stream would likely result in 

claims and a ripple effect on follow-on options.

* Congress provided authority to enter into a contract for the LHD-8 amphibious shfiscal year 2001 defense authorization act. According to one congressional staff mthe provision of contract authority could have some effect on the concerns expresby indicating a strong congressional commitment to the ship.
Enclosure

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Consequences of Past Incremental Fundin
Enclosure

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Consequences of Past Incremental Fundin

• Cost increases and project schedule delays for Energy projects. A GAO r

incremental funding as one of the key factors underlying DOE project cost overschedule delays. For many projects, particularly in the first years of developmeconstruction, funding received was well below requested amounts. This causeschedules to slip and costs to rise, because certain contractor expenses andadministrative costs continued to accrue each month (e.g., utilities and security regardless of the progress. For example, one project received only about 60% $155 million expected during the first 3 years of a 5-year construction cycle. Agofficials cited the funding delay as the reason the construction schedule was exyears and the total construction costs rose from $236 to $313 million, an increamillion. Similarly, another project received only 40% of its first 3 years planned and another was funded at only 43%. Both of these projects went over originaestimates and were years behind schedule.

• Higher ship costs may have resulted from long-term leases. The use of lo

leases for auxiliary ships in the early 1970s and 1980s resulted in higher costs For these acquisitions, the Navy used long-term leases primarily to avoid a largobligation of procurement funds. By leasing the vessels, the Navy believed it cspread payments over the length of the leases and use its annual Operation anMaintenance appropriations to fund them without incurring an up-front obligatiototal lease amount. While the Navy conducted the required lease versus purchanalyses, guidelines for such analyses at that time were neither detailed nor spAlthough the methodologies and assumptions used by the Navy showed leasincheaper, a GAO review and a Joint Committee on Taxation (JCT) study used dmethodologies and assumptions and found purchasing to be the cheaper alternexample, the Navy’s cost comparison for one type of vessel concluded the govwould save $29.3 million per ship by leasing. However, the JCT study conclud
Enclosure

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38

outright purchase would be cheaper by $20.8 million per ship. The GAO study that it would cost between $11.9 million and $38 million more per ship to lease vessels.

• Lease-purchase arrangement to construct Reagan Building proved more 

than direct financing from the Federal Financing Bank. Congress authorizePennsylvania Avenue Development Corporation to enter into a development agwith a private company to construct the Reagan Building. At the time, it was inthe building would be a public/private partnership and used for both federal offiand commercial activities. It was envisioned that the project would be privately so that construction costs would not be recorded in the budget. GSA was authlease the building from the development company for a period not to exceed 35 rate that would cover the full development cost and, at the end of the lease, the would be government owned. Later, it became clear that the building was, for apurposes, a government project, and most plans for nonfederal uses were scrathat point, it was realized that private borrowing to finance the project would be costly than if the government financed the borrowing itself. Direct borrowing froFederal Financing Bank saved millions in financing costs, including transactionexpenses associated with private financing, such as underwriters’ fees.
Enclosure

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More Effective Budgeting for Capital Acquisiti
Enclosure

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More Effective Budgeting for Capital Acquisiti

• As we have previously reported,1 full funding for stand-alone stages is 

important tool for maintaining governmentwide fiscal control. It helps that Congress considers the full costs of all proposed commitments atrade-offs based on the full costs.

• Failure to recognize full cost when budget decisions are being made 

lead to distortions in the allocation of resources. It can also force futuCongresses and administrations to choose between having an unusaand continuing project funding for years, even after priorities may havchanged.

• Some instances of incremental funding are justified for high technolog

projects. Such projects, while technically capital projects because theintended to result in tangible assets, are often closer in nature to R&Dcosts are highly uncertain, and funds already invested are not necesswasted if no additional funding is provided because knowledge is likebeen gained.

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

• Complete, comprehensive and clear information needs to be provided 

Congress to make informed capital decisions. Budget Justifications dbe improved if for each project they contained: total cost estimates, dall prior spending, and a description of the purpose of spending for eayear. This would assist in determining whether a project is fully funderequires additional funds in the future. Capital asset plans (required bfor major acquisitions) and long-term agency capital plans (encourageOMB) could be useful in reviewing capital requests but are not routineprovided to the Congress.

• Innovative funding mechanisms could be used to ease “spiking” issue

might lead to attempts for incremental funding. For example, one appthat could be considered is a capital acquisition fund (CAF). A deparlevel CAF would borrow from the Treasury, as provided in appropriatito purchase an asset needed by a department subcomponent. Thesubcomponent would “rent” the asset, paying sufficient rent so the CA

repay loan principal and interest to the Treasury. Full funding is pres“spiking” at the sub-component level is eased. Discretionary caps co

adjusted to reflect a concept change for appropriating interest.
Enclosure

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Related GAO Products

Defense Acquisitions: Historical Analyses of Navy Ship Leases (GAO/N125, June 25, 1999).Defense Acquisition: Historical Insights Into Navy Ship Leasing (GAO/T99-141, April 21, 1999).Executive Guide: Leading Practices in Capital Decision-Making (GAO/A32, December 1998).Budget Issues: Budgeting for Capital (GAO/T-AIMD-98-99, March 6, 19Department of Energy: Improving Management of Major System Acquis(GAO/T-RCED-97-92, March 6, 1997).Department of Energy: Opportunity to Improve Management of Major SyAcquisitions (GAO/RCED-97-17, November 26, 1996).Budget Issues: Budgeting for Federal Capital (GAO/AIMD-97-5, Novem1996).