Capital Financing: Potential Benefits of Capital Acquisition Funds Can Be Achieved through Simpler Means
Published: 2005-04-08T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: CAFs have been discussed as a new mechanism for financing federal capital assets. As envisioned, CAFs would have two goals. First, CAFs would potentially improve decision making by reflecting the annual cost for the use of capital in program budgets. Second, they would help ameliorate at the subunit level the effect of large increases in budget authority for capital projects (i.e., spikes), without forfeiting congressional controls requiring the full cost of capital assets to be provided up-front. Through discussions with budget experts and by working with two case studies, the Departments of Agriculture and of the Interior, we are able to describe in this report (1) how CAFs would likely operate, (2) the potential benefits and difficulties of CAFs, including alternative mechanisms for obtaining the benefits, and (3) several issues to weigh when considering implementation of CAFs.
section_title: What GAO Found
paragraphs: Capital acquisition funds (CAF) have been suggested as department-level funds that would use appropriated up-front borrowing authority to buy new departmental subunit assets. These subunits would then pay the CAF a mortgage payment sufficient to cover the principal and interest payment on the Treasury loan. The CAF would use those receipts only to repay Treasury and not to finance new assets. If existing capital assets were transferred to the CAF, subunits would pay an annual capital usage charge to the CAF. CAFs might achieve the goals intended, but these goals can be achieved through simpler means. Alternative mechanisms, such as asset management systems, cost accounting systems, and working capital funds may achieve the goal of allocating annual capital costs and improving decision making for capital assets. Our case study agencies generally did not indicate problems with budget authority spikes. They budget in useful segments, use accumulated no-year authority, or finance capital assets using working capital funds. Many concerns about CAFs were raised, including the long-term feasibility of making fixed annual mortgage payments and the added complexity CAFs would create. Implementation would raise a number of issues. If CAFs were applied only to new assets going forward, all programs would not reflect the full annual cost of capital for decades. Yet the difficulties of including existing capital are numerous. Even if these issues were tackled, there is little assurance that CAFs alone would create new incentives for programs to reassess their use of capital since CAF payments would not affect the deficit. Implementation issues could overwhelm the potential benefits of a CAF. More importantly, current efforts under way in agencies would reflect asset costs as part of program costs without introducing the difficulties of a CAF. As long as alternative efforts uphold the principle of up-front funding, CAFs do not seem to be worth the implementation challenges they would create. Except for OMB, agencies generally agreed with our conclusions.

section_title: Letter
paragraphs: This report responds to your request that we explore the concept of capital  acquisition funds (CAF) as a possible way to reflect the annual cost for the  use of capital in program budgets while still maintaining up-front  congressional control over budgetary resources. To fully understand how  these funds would work in the federal government, we agreed to  (1) describe how CAFs might work as a financing approach for federal  agencies’ capital investment, (2) examine the potential benefits and  difficulties of instituting and using CAFs, and (3) identify any issues that  Congress might consider before instituting CAFs.
Since CAFs do not currently exist, we developed an in-depth understanding  of the CAF mechanism through a review of written CAF proposals and  interviews with budget experts at the Office of Management and Budget  (OMB) and the Congressional Budget Office (CBO). We then presented a  detailed description of CAFs to officials at the Departments of Agriculture  (USDA) and of the Interior (DOI) and some of their agencies. We obtained  their insights and opinions on the applicability of the mechanism at their  agencies and on how CAFs might compare to their current practices for  financing capital assets. We also spoke with Department of the Treasury  (Treasury) and General Services Administration (GSA) officials and  congressional staff to gain their perspective on CAFs. Our work was  conducted in Washington, D.C., from May 2004 through January 2005 in  accordance with generally accepted government auditing standards. We  obtained comments on a draft of this report from OMB, Treasury, GSA,  DOI, and USDA. Written comments from Treasury and DOI are reproduced  in appendix I and II. We have incorporated technical comments as  appropriate throughout the report.
subsections: section_title: Background
paragraphs: The federal government acquires a wide variety of capital assets for its own  use including land, structures, equipment, vehicles, and information  technology. Large sums of taxpayer funds are spent on these assets, and  their performance affects how well agencies achieve their missions. To  directly acquire an asset, agencies generally are required to have full up- front BA for the total asset cost—usually a sizable amount. This  requirement allows Congress to recognize the full budgetary impact of  capital spending at the time a commitment is made; however, it also means  that the full cost of an asset must be absorbed in the annual budget of an agency or program, despite the fact that benefits may accrue over many  years. This up-front funding requirement has presented two challenges for  capital planning and budgeting at the federal level.
One challenge is how to permit “full cost” analysis and to promote more  effective capital planning and budgeting by allocating capital costs on an  annual basis to programs that use capital. Allocating capital costs over the  assets’ useful lives ensures that the full annual cost of resources a program  uses is considered when evaluating the program’s effectiveness. It can  make program managers more aware of on-going capital costs, thus  promoting more effective decision making for capital. It may also  contribute to equalizing comparisons across different programs or different  approaches to achieving similar goals.
A second challenge is how to address the possible bias against the  acquisition of necessary capital assets that may be created by spikes (large,  temporary, year-to-year increases in BA), which can make capital assets  seem prohibitively expensive in an era of resource constraints. GAO has  reported in the past that agencies view up-front funding as an impediment  to capital acquisition because of the resulting spike in BA. CAFs have  been suggested as a capital asset financing approach that would benefit  federal departments and their subunits by addressing both of these  challenges. CAFs would be department-level funds that use annually  appropriated authority to borrow from the Treasury to purchase federally- owned assets needed by subunits of the department. These subunits  would then pay the CAF a mortgage payment sufficient to cover the  principal and interest payment on the Treasury loan. The CAF would use  those receipts only to repay Treasury and not to finance new assets.
The CAF concept was formally proposed in the February 1999 Report of the  President’s Commission to Study Capital Budgeting as a mechanism  that would help improve the process by which annual budget decisions are  made by promoting better planning and budgeting of capital expenditures  for federally owned facilities. The report states that by ensuring that  individual programs are charged the true cost of using capital assets, the  CAF encourages managers to make more efficient use of those assets. The  Commission report also argues that CAFs could help smooth out the spikes  in BA experienced by subunits with capital project requests. By aggregating  all up-front BA for capital requests at the department level, subunit budgets  would reflect only an annual payment for capital. Since the Commission  report, CBO, GAO, and the National Research Council (NRC) have all  agreed that CAFs should be explored as a capital financing mechanism.
CAFs were also discussed in the President’s Fiscal Year 2004 Budget  issued in February 2003. The section on “Budget and Performance  Integration” briefly described the concept and reports that draft legislation  creating CAFs has been developed, discussed with agencies, and improved.  It said that CAFs would be one way to show the uniform annual cost for the  use of capital without changing the requirement for up-front  appropriations. At this time, OMB’s interest in CAFs appears to have  waned. CAFs were not mentioned in the President’s Budget in either  fiscal year 2005 or 2006 and the CAF legislation described has not been  introduced.
section_title: Scope and Methodology
paragraphs: To address our objectives, we reviewed the available literature describing  the CAF concept. We also interviewed budget experts at OMB and CBO to  gain a more thorough understanding of how CAFs would operate and  discuss issues involved with their implementation. This permitted us to  describe a theoretical CAF with some operational detail. Additionally, we  sought the views of the many parties that would be affected if CAFs were  established. Since agency and congressional officials were generally  unaware of the CAF concept, we developed a brief summary describing the  general mechanics of a CAF and shared that summary prior to interviews in  order to generate discussion.
To get the department perspective, we chose USDA and DOI as case  studies. Both of these departments have substantial and varied capital  needs. Capital assets acquired by USDA and DOI include land, buildings,  research equipment, laboratories, quarantine facilities, dams, bridges,  parklands, roads, trails, vehicles, aircraft, and information technology  (hardware and software). In addition, each department has multiple  subunits that use capital assets to achieve their missions—important for  examining the question of subunit spikes. We interviewed officials at the  department and subunit levels to gather their opinions and insights on the  operation, benefits, and difficulties of CAFs. Specifically within USDA we  spoke with officials in the Animal and Plant Health Inspection Service  (APHIS), the Agricultural Research Service (ARS), and the Forest Service  (FS). Within DOI, we spoke with officials in the National Park Service  (NPS) and the Bureau of Land Management (BLM). During these  discussions, agency officials also compared CAFs (as described in our  summary) with current practices used for planning, budgeting, and  acquisition of capital assets.
Since congressional approval would be necessary for the creation and  operation of CAFs, we spoke with staff on the House and Senate Budget  Committees, the House and Senate Appropriations Subcommittees on the  Interior, and the House Appropriations Subcommittee on Agriculture to  get their opinions on the proposed CAF mechanism. We also interviewed  officials at Treasury, which would be responsible for managing the  borrowing authority. In addition, we spoke with officials at GSA to discuss  how a CAF might affect the FBF, used by some federal agencies to acquire  federal office space and the FTS, used by some federal agencies to  acquire IT.
Finally, we reviewed agency documents including asset management plans,  accounting system descriptions, capitalization policies, and working  capital fund information. We also examined our prior work, financial  accounting standards, and various legal and budgetary sources specifically  related to federal property management.
We recognize that our findings on agency perspective, which are based on  interviews with five subunits within two departments, may not be  applicable to all agencies within the federal government. However, we were  struck by the consistency in department and subunit reaction to the  concept, especially when followed by comparable reactions from  congressional officials. Our work was conducted in Washington, D.C., from  May 2004 through January 2005 in accordance with generally accepted  government auditing standards.
section_title: CAF Operations Would Create a New Financing System and New Oversight Responsibilities
paragraphs: Implementing CAFs would change the current process for financing new  federal capital projects. In addition, if all existing capital assets of a  department and its subunits were transferred to the CAF, the CAF would  impute an annual capital usage charge on those assets to using agencies.  This additional complication could be avoided if CAFs were limited to new  assets. However, this would mean it would be decades before all programs  showed the full annual cost of capital in their budgets.
Although in many respects CAFs are accounting devices to record financial  transactions, their creation would create new management and oversight  responsibilities for many federal entities. Treasury would have primary  responsibility for administering the borrowing authority. Both Treasury and  those departments with CAFs would be required to keep track of the many  CAF transactions. The management and oversight responsibilities of the  departments would need to be clearly spelled out in order for CAFs to  operate effectively. OMB would likely have to issue guidelines on operation  specifics and OMB and the congressional appropriations committee staff  would have to review the CAFs to ensure they were operating properly.  OMB and CBO would score (estimate) the CAFs’ and subunits’ BA—both  the initial authority to borrow and the subsequent appropriations used for  repayment. The scoring of the annual capital usage charges, if CAFs were  applied to existing capital, has not yet been developed.
subsections: section_title: CAFs Would Be Positioned at the Department Level and Create a More Complex Process for Financing Capital
paragraphs: Although CAFs do not currently exist, we can describe how they would  likely operate based on written proposals and our discussions with budget  experts. CAFs would be established at the department level as separate  accounts that would receive up-front authority to borrow (provided in  appropriation acts) on a project-by-project basis, for the construction and  acquisition of large capital projects for all of the subunits within a  department. For those departments with subunits split between two  appropriation subcommittees, it is likely that two CAFs would be  necessary. For example, DOI receives appropriations through two  subcommittees:  the Energy and Water Development Subcommittee, which  is responsible for Bureau of Reclamation (Reclamation) programs; and the  Interior and Related Agencies Subcommittee, which is responsible for all  other Interior programs. CBO, OMB, and agency officials we spoke with  generally believed that having a CAF that crossed subcommittee  jurisdictions would create many problems, thus it would likely be  necessary for departments to have a separate CAF for each subcommittee  with which they work. Using the example above, DOI would have one CAF  for Reclamation and a second for the remaining subunits within DOI.  Alternatively, CAFs could be situated at the appropriation subcommittee  level rather than the department level, with each of the 13 subcommittees  appropriating to their respective CAF for the agencies under their  jurisdiction. Some congressional officials did not seem to think that this  would be the most effective arrangement and raised the point that  increased resources might be needed at the subcommittee level to manage  CAF transactions. In addition, OMB argued that CAFs should be located at  the department level because the department is the focus of accountability  for planning and managing programs and capital assets, as well as for  budget execution and financial reporting.
The CAF would receive appropriations for the full cost of an asset (or  useful segment of an asset) in the form of borrowing authority. Like all BA,  the borrowing authority for each CAF-financed project would specify the  purpose, amount, and duration of the authority. Unless the asset is to be  available for use in the same fiscal year, the subunit itself would receive no  appropriations. The CAF would use its authority to borrow from the  Treasury’s general fund to acquire the asset for the subunit. When the asset  became usable, the subunit would begin to pay the CAF an amount equal to  a mortgage payment consisting of interest and principle. These equal  annual payments would consist of the principal amortized over the useful  life of the asset and include interest charges at a rate determined by  Treasury (based on the average interest rate on marketable Treasury  securities of comparable maturity). The CAF would use these mortgage  payments to repay Treasury for the funds borrowed plus interest. Unlike a  revolving fund, the mortgage payments collected by the CAF would be used  only to repay Treasury and could not be used to finance new assets.
For each project funded through the CAF, the subunit’s annual budget  request would need to include the annual mortgage payment in each year,  for the useful life of the asset (or until the asset was sold or transferred).  The subunit would need annual appropriations for these payments, along  with its other operating expenses. On the basis of our discussions, we  conclude that the appropriations from which the payments are made would  be discretionary as opposed to mandatory. They would not be provided as a  line item for mortgage payments to the CAF, but would be part of the  subunit’s total appropriation. While the subunit would be required to make  the annual payment, there would be no guarantee that Congress would  include the additional amounts to cover the payment in the subunit’s  appropriation.
At some point, the mortgage on an asset would be “paid off.” However, if  annual capital usage charges on existing capital were established,  payments would continue, although the amount of the payments would  depend on the method used to calculate the charges for existing capital.  Any imputed charges collected by the CAF would be transferred to the  general fund of Treasury and not be available to finance new assets. Later  in this report we discuss in more detail the idea of imputing a capital usage  charge on existing capital.
section_title: Treasury Would Oversee Borrowing Authority Used to Acquire Capital Assets
paragraphs: Treasury is responsible for administering and managing borrowing  authority. Treasury officials explained that within the department, the  Financial Management Service (FMS) would have responsibility for setting  up the accounts to correspond with each CAF created. Before a CAF could  actually borrow from Treasury, an agreement would have to be signed  establishing the interest rate and repayment schedule. Treasury officials  recommended that OMB establish guidelines to specify the useful life of  capital assets so departments would abide by an appropriate amortization  schedule and not attempt to lower payments by lengthening the asset’s useful life. The standards issued by the Federal Accounting Standards  Advisory Board (FASAB) on how to account for property, equipment, and  internal-use software could be useful in developing these guidelines.  According to Treasury officials, FMS would also be responsible for  preparing the warrants, an official document that establishes the amount of  monies authorized to be withdrawn from the central accounts maintained  by Treasury, and would report annually on account activity. The Bureau of  Public Debt would have the most day-to-day interaction with the CAF. It  would be responsible for transferring the borrowed funds to the  department and for receiving payments. Although Treasury officials did not  think it would be an unmanageable task, they said that tracking individual  transactions could become complicated, depending on the level of detailed  reporting required, and would certainly require additional staff time. To  cover these costs, they would want to charge an administrative fee, as they  do for trust funds.
section_title: CAFs Would Add Complications to Oversight and Scoring
paragraphs: A CAF is an additional layer of administration that could complicate  program management rather than streamline it. At the department level,  the chief financial officer would likely be responsible for the financial  operation of the CAF. Department heads would need to specify duties for  those with capital asset management and oversight responsibilities  according to the unique needs of the department. Oversight functions  would include accounting for all the transactions between the CAF and  Treasury as well as between the CAF and the subunits. In addition, the  managerial relationship between the CAF and individual subunits would  have to be worked out. OMB would also likely have new responsibilities.  For example, OMB would probably have to develop guidelines on issues  such as (1) the types of assets to include in the CAF, (2) the amortization  schedule for various types of assets, (3) the method for calculating a capital  usage charge on existing capital (along with CBO and Congress), and  (4) the relationship between a CAF and FBF. Indeed, the NRC report  argued that oversight and management of CAFs should actually reside at  OMB. Although OMB officials provided no details, they agreed that they  would have some responsibility for reviewing CAFs, as would  congressional committees.
As they do for all appropriation actions, CBO and OMB would score the  CAF and subunit BA—both the initial authority to borrow and the  subsequent appropriations used for repayment. Although the net amounts  of BA and outlays for capital acquisitions would not change, the type of BA  would. Currently, annual appropriations, which allow program managers to  incur obligations and make outlays with no additional steps, are provided  for most capital acquisitions. A CAF, however, would be appropriated  up-front borrowing authority. On a gross basis, the BA would have to be  appropriated twice, once as up-front borrowing authority and  incrementally over time through appropriations for the annual mortgage  payment. Since the annual mortgage payment is purely intragovernmental,  the subunit’s BA and outlays are offset by receipts in the CAF, so the total  BA and outlays are not double-counted. Therefore, appropriation  subcommittee allocations would not need to be adjusted if a CAF were  used for new assets.
The initial borrowing authority would be equal to the asset cost and would  be scored up front in the CAF budget. When the annual mortgage payments  begin, the amount provided in the subunit’s budget would equal the  mortgage payment and would be scored as discretionary BA. The mortgage  payment would then be transferred to the CAF and, as a receipt, be  considered mandatory BA. However, according to OMB, it would be treated  as a discretionary offset for scoring purposes. The payment and receipt  would completely offset each other within the appropriation  subcommittees’ totals and in the BA and outlay totals for the federal budget  as a whole.
When the CAF repays Treasury using the mortgage receipts, scoring would  follow the current guidelines for debt repayment transactions. The  mortgage receipt would be considered mandatory BA and be used to repay  Treasury; however, the portion of the mortgage payment that corresponds  to the amortization of the asset cost would be deducted from the BA (and  outlay) totals. When collections are used for debt repayment, they are  unavailable for new obligations, and therefore are not BA. If they were  counted, the BA and outlay totals would be overstated over the life of the  loan. According to OMB, the remaining mandatory BA would be obligated  and outlayed for interest payments to an intragovernmental receipt  account in Treasury, but would not be scored. At this time, the scoring of  annual capital usage charges on existing capital assets has not been  determined.
section_title: CAF Benefits Can Be Achieved through Alternative Means Without the Added Budget Complexity
paragraphs: CAFs have been proposed as a way to address two challenges that arise  from the full up-front funding requirement for capital projects. The first  challenge is to facilitate program performance evaluation and promote  more effective capital planning and budgeting by allocating capital costs on  an annual basis to those programs using the capital. By having annual cost  information, managers can better plan and budget for future asset  maintenance and replacement. During our interviews, we learned that asset  management and cost accounting systems are currently being implemented  that could be used to address this problem. These systems are designed to  provide the information necessary for improved priority setting and better  decision making, although we found that many agencies are still working to  fully implement and use these systems. The second challenge—managing  periodic spikes in BA caused by capital asset needs—if considered a  problem at all, is managed by our case study agencies through existing  entities and practices, such as the use of WCFs. Consequently, CAFs appear  to offer few benefits over and above those provided by other mechanisms  being put into place or in use. In addition, officials at the department and  subunit level and key congressional staff we spoke with have a number of  concerns about adopting CAFs as an alternative financing method. Most of  those we spoke with said CAFs sounded like a complicated mechanism to  achieve benefits that can be achieved in simpler ways and some worried  that implementation of CAFs could distract from current efforts to improve  capital decision making.
subsections: section_title: Allocating Annual Capital Costs and Improving Decision Making for Capital Assets May Be Achieved through Existing Initiatives
paragraphs: Officials we interviewed reacted to our presentation of the CAF mechanism  by describing current agency initiatives and existing mechanisms that they  believe can better achieve the ultimate goal of improving budgeting and  decision making for capital. We found that some agencies currently make  use of asset management plans to collect, track, and analyze cost  information and to assist management in budget decisions and priority  setting. Accounting systems that report full costs are also being developed  that will include the cost of capital assets in total program costs and will  provide a tool for agency managers to make better decisions and use  capital more efficiently. Once fully implemented, these methods will  provide agencies with the ability to assign costs at the program level and  link those costs to a desired result. The information provided should lead  agencies to consider whether they will continue to need the current  quantities and types of fixed assets they own to meet future program needs.
subsections: section_title: The Departments of the Interior and Agriculture Are Implementing Asset Management Systems to Make Informed Decisions on Capital Investment
paragraphs: As we have reported in previous work, leading organizations gather and  track information that helps them identify the gap between what they have  and what they need to fulfill their goals and objectives. Routinely  assessing the condition of assets and facilities allows managers and their  decision makers to evaluate the capabilities of current assets, plan for  future asset replacements, and calculate the cost of deferred maintenance.  We found that asset management systems are being developed and  implemented at some agencies as a mechanism to aid in the identification  of asset holdings and prioritization of maintenance and improvements.
For example, we reported in 2004 that NPS, within DOI, is currently  implementing an asset management process. If it operates as planned, the  agency will, for the first time, have a reliable inventory of its assets, a  process for reporting on the condition of those assets, and a systemwide  methodology for estimating deferred maintenance costs. The system  requires each park to enter all of its assets and information on its condition  into a centralized database for the entire park system and to conduct  annual condition assessments and regular comprehensive assessments.  This new process will not be fully implemented until fiscal year 2006 or  2007, and will require years of sustained commitment by NPS and  other stakeholders.
According to NPS documents, this approach and the information captured  in the asset management plan provides Grand Canyon National Park  managers with the knowledge and specifics to make informed capital  investment decisions and to develop sound business cases for funding  requests. The appropriators for NPS that we spoke with agreed that the  additional funding they have provided for condition assessments and asset  management has improved planning and decision making at NPS.  Department officials told us that these types of asset management plans  would eventually be completed for all capital-holding subunits within DOI.  The completion of this management system is especially important for DOI  because much of its mission is the upkeep and improvement of its capital  for use by the public.
FS, whose capital includes numerous trails, roads, and recreation facilities,  has implemented and is continuing to enhance its asset management  system referred to as Infrastructure (INFRA). INFRA has been in  production since 1998 and served as the agency’s primary inventory  reporting and portfolio management tool for all owned real property until  May 2004. FS officials said that they have used INFRA to assist  management in prioritizing backlogs of maintenance and renovations.  According to these officials, INFRA allows for the transfer of FS asset  inventory data directly into USDA’s asset inventory system known as the  Corporate Property Automated Information System (CPAIS). CPAIS, which  agency officials said was modeled after INFRA and further enhanced to  include leased property and GSA assignments, was implemented in May  2004 and maintains data elements necessary to track and manage owned  property, leased property, GSA assignments, and interagency agreements.  The system will provide the department and its subunits with the capability  to increase asset utilization and cost management and to analyze and  reduce maintenance expenses. The primary users of the system are those  subunits with considerable capital needs, according to agency officials.  ARS’s capital is mostly high-priced laboratories, specific scientific  equipment, and research facilities, and officials are confident that CPAIS  will provide the information needed to ensure accountability over its real  property. ARS also has its own facilities division made up of contractors  and engineers that are equipped with the experience and expertise to  manage and oversee their specialized capital projects. APHIS officials said  they are in the process of doing facility condition assessments and hope to  use the information in order to better align its mission with its strategic  plan.
The need for asset management systems to aid agency officials in making  informed decisions was underscored in our report designating federal real  property as a new high-risk area in 2003. The report highlighted the fact  that in general, key decision makers lack reliable and useful data on real  property assets. In February 2004, the President issued an Executive  Order for Federal Real Property Asset Management. The order requires  designated agencies to have a real property officer and to implement an  asset management planning process. Its purpose is to promote the efficient  and economical use of America’s real property assets and to assure  management accountability for implementing federal real property  management reforms.
section_title: Some Agencies Are Beginning to Use Full Cost Information to Make Budget Decisions, Although Much Work Needs to Be Done
paragraphs: We found that some agencies are currently implementing cost accounting  methods, such as activity-based costing (ABC), to help determine the full  cost of a product or service, including the annual cost of capital, and using  that information to make budgeting decisions. For example, BLM has  implemented a management framework that integrates ABC and  performance information. We have previously reported that BLM’s model  fully distributes costs and can readily identify, among other things, (1) the  full costs of each of its activities and (2) what it costs to pursue each of its  strategic goals. The system provides detailed information that facilitates  external reporting and can be used for internal purposes, such as  developing budgets and analyzing the unit costs of activities and outputs.  Integrating cost and performance information into one system helped BLM  become a finalist for the President’s Quality Award in 2002 in the  “performance and budget integration” category. The bureau was recognized  for implementing a disciplined approach that allows it to align resources,  outputs, and organizational goals, and can lead to insights to reengineer  work processes as necessary. Among the results of its ABC efforts, BLM  has reported increased efficiency and success in completing deferred  maintenance and infrastructure improvement projects. BLM was at the  forefront of this cost management effort, which began in 1997 and has now  been adopted departmentwide as part of DOI’s vision of effective program  management.
In another report, we described how the National Aeronautics and Space  Administration (NASA) is beginning to use accounting information to help  make decisions about capital assets. NASA’s “Full Cost” Initiative  involves changes to accounting, budgeting, and management to enhance  cost-effective mission performance by providing complete cost information  for more fully informed decision making and management. The accounting  changes allow NASA to show the full cost of related projects and  supporting activities while the “full cost” budgeting uses budget  restructuring to better align resources with its strategic plan. The  accounting and budgeting portions of the initiative support the  management decision-making process by providing not only better  information, but also incentives to make decisions on the most efficient use  of resources. For example, NASA officials credited “full cost” budgeting  with helping to identify underutilized facilities, such as service pools—the  infrastructure capabilities that support multiple programs and projects.  NASA’s service pools include wind tunnels, information technology, and  fabrication services. If programs do not cover a service pool’s costs, NASA  officials said that it raises questions about whether that capability is  needed. NASA officials also explained that when program managers are  responsible for paying service pool costs associated with their program,  program managers have an incentive to consider their use and whether  lower cost alternatives exist. As a result, NASA officials said “full cost”  budgeting provides officials and program managers a greater incentive to  improve the management of these institutional assets. Although accounting  changes alone are not sufficient to improve decision making and  management, it is clear from discussions with NASA officials and agency  documentation that the move to full costing is a critical piece of the  initiative.
Some agencies still need to make more progress before their cost  accounting can more fully inform their decision making, including  decisions on capital planning and budgeting. In a 2003 report looking at the  financial management systems of 19 federal departments, we found that  although departments are required to produce information on the full cost  of programs and projects, some of the information is not detailed enough to  allow them to evaluate programs and activities on their full costs and  merits. For example, the Department of Defense (DOD) does not have the  systems and processes in place to capture the required cost information  from the hundreds of millions of transactions it processes each year.  Lacking complete and accurate overall life-cycle cost information for  weapons systems impairs DOD’s and congressional decision makers’ ability  to make fully informed decisions about which weapons, or how many, to  buy. DOD has acknowledged that the lack of a cost accounting system is its  largest impediment to controlling and managing weapon systems costs.  Our report states that departments are experimenting with methods of  accumulating and assigning costs to obtain the managerial cost information  needed to enhance programs, improve processes, establish fees, develop  budgets, prepare financial reports, make competitive sourcing decisions,  and report on performance. As departments implement and upgrade their  financial management systems, opportunities exist for developing cost  management information as an integral part of the systems to provide  important information that is timely, reliable, and useful.
section_title: CAFs Might Smooth Budget Spikes, but Benefit May Be Minor
paragraphs: The President’s Commission to Study Capital Budgeting and NRC have  suggested that a CAF might help ameliorate the spikes in agency budgets  that often result from large periodic capital requests by smoothing capital  costs over time and across subunits. Our analysis of recent trends in BA for  capital acquisitions clearly shows the presence of spikes at the subunit  level. See figure 3 for an illustration of budget spikes and potential  smoothing effects of a CAF at ARS.
However, these spikes did not appear to be a major concern to the case  study subunits we spoke with nor did they consider them a barrier in  meeting capital needs. Given current practices for financing capital assets,  it seems that some program managers and Congress have found ways to  cope with spikes in the absence of CAFs. As a result, the benefit of  smoothing costs with a CAF would be minimal.
subsections: section_title: Some Spikes May Be Created by Congressional Funding Decisions
paragraphs: Our prior work indicates that some agencies have complained that large  spikes in their budget hinder their ability to acquire the needed funding to  complete capital projects and reveals that some agencies have turned to  alternative financing mechanisms, such as incremental funding, operating  leases, and public-private partnerships, that allow them to obtain assets  without full, up-front BA. A few agency officials we spoke with said that  because of the up-front funding requirement, they have sometimes opted  for operating leases instead of capital leases or constructing buildings.  Operating leases are generally more expensive than construction,  purchase, or capital leases for long-term needs but do not have to be  funded up front. Nevertheless, the agencies we spoke with reported that  spikes are often created by the changing priorities of Congress and its  willingness to provide up-front funding for favored capital projects. For  example, ARS officials reported that appropriators have increased the  agency’s budget in a given year to fund a new or expanded facility that the  subcommittee considered a priority. Historically, the appropriations  subcommittee for ARS (and all USDA agencies except FS) has been active  in initiating capital projects and following through with the up-front  funding necessary to build or acquire assets. From ARS’s perspective,  budget spikes are not problematic because of the perceived ease in  obtaining needed funds. DOI also reported that some of its subunits have  received “waves” of funding for capital projects largely dependent upon the  priorities of Congress and the President. Within DOI, BLM officials agreed  that budget spikes were mostly a result of congressional add-ons. On the  other hand, NPS reported that most of its capital projects are just not large  enough to cause a noticeable budget spike.
Staff from the congressional budget committee suggested that  deliberations during the appropriations process result in some smoothing  at the subcommittee level. The smoothing effects may not be apparent to  agencies when they review their individual budgets, but they are evident  from a governmentwide perspective. Historical analysis shows that federal  nondefense capital spending has remained relatively constant over the past  30 years.
section_title: Spikes Are Being Managed by Funding Useful Segments or Using No-Year Authority
paragraphs: When spikes might be a problem, the departments and subunits we spoke  with have been able to manage them by dividing projects into useful  segments and accumulating funds with no-year authority. USDA and FS  reported that they have broken capital projects into useful segments and  requested the funding accordingly to minimize dramatic fluctuations in  capital costs. For example, USDA is currently renovating its headquarters  in Washington, D.C., and is using funds the department receives every other  year to finance the overhaul of one discrete section of the building at a  time. APHIS and BLM have also broken up large projects by funding the  survey and design phases in the first year and requesting funds for  construction in subsequent years. In addition, ARS and APHIS have  authorities that allow them to accumulate a specified amount or  percentage of unobligated funds until the amount is sufficient to cover the  full up-front costs of the desired asset. For example, ARS is building an  animal health center in Iowa, which costs an estimated $460 million. ARS  received $124 million in fiscal year 2004 towards the project and can  accumulate that money in its no-year account until the total amount to  cover the costs is collected. In its efforts to consolidate field offices, APHIS  officials told us they were granted authority to convert $2 million in  unobligated balances into no-year money each year for 3 years. The  $6 million it was able to accumulate allowed it to fund the consolidation  with up-front funding. The bureau hopes to expand this authority to apply  to other capital, including helicopters and airplanes.
section_title: WCFs and FBF Can Be Used Both to Finance Capital Assets Without Spikes and to Allocate Capital Costs
paragraphs: WCFs, a type of revolving fund, are a mechanism that can be used both to  spread the cost of capital acquisition over time and to incorporate capital  costs into operating budgets. As reported previously, we found that WCFs  can be effective for agencies with relatively small, ongoing capital needs  because the WCFs, through user charges, spread the cost of capital over  time in order to build reserves for acquiring new or replacement assets.  Also, WCFs help to ensure that capital costs are allocated to programs that  use capital by promoting full cost accounting. Since WCFs are designed to  be self-financing, the user charges must be sufficient to recoup the full cost  of operations and include charges, such as depreciation, to help fund  capital replacement.
Some we spoke with use WCFs to finance capital assets such as  IT initiatives and equipment. For example, USDA’s WCF provided funds to  the National Finance Center, one of its activity centers, to purchase and  implement a financial system. Department officials explained that after the  system became operational, the Finance Center charged the 28 user  entities a depreciation expense to recoup the costs of purchasing the  system so it could repay the WCF. In another example, the FS’s WCF  purchases radio equipment, aircraft, IT, and other motor-driven equipment.  The equipment is rented out to administrative entities within the agency,  such as the National Forests and Research Experiment Stations, and to  outside agencies for a charge that recoups the costs of operation,  maintenance, and depreciation. The user charge is adjusted to include  sufficient funds to replace the equipment. Agency officials would like to  expand the WCF beyond just equipment and establish a facilities  maintenance fund. Through this fund, they would apply a standard charge  per square foot plus a replacement cost component. The charges would be  used for ongoing maintenance and replacement and they believe would  help influence line officers to reexamine capital needs. BLM’s WCF  functions similar to that of the FS’s WCF. BLM’s WCF purchases vehicles,  then charges fees to users of the vehicles and uses the revenue to buy  replacement vehicles. In both of these examples, the WCF is designed to  accumulate the funds to absorb the up-front costs of the capital while the  user entities incur the annual costs of using the capital.
This mechanism operates similarly to a CAF, but with more flexibility in  the funding requirements. First, since WCFs are revolving funds, they  allow agencies to purchase new capital without a specific congressional  appropriation whereas a CAF would require a new appropriation to  purchase new capital. Second, WCFs are not subject to fiscal year  limitations (they have no-year authority) while CAFs would have  project-by-project borrowing authority specified in appropriation acts.  Third, WCFs reflect annual capital costs through a depreciation charge  whereas CAFs would reflect this cost through an annual mortgage payment  of principal and interest. Hence, both would reflect the annual cost of  capital in the subunits’ budgets.
To obtain federal office space, many agencies lease from and make rental  payments to GSA, which deposits those funds into the FBF. Although  leasing is recognized as being more expensive in the long run than  ownership, some agencies lease because it does not require as much  up-front funding as ownership (i.e., to avoid spikes). Although a CAF is  conceptualized to reduce the amount of up-front funding needed by  subunits when acquiring capital assets (while still requiring up-front  funding at the department level), it is not clear that having a CAF would  encourage subunits to build rather than lease office space. Two agency  officials we spoke with said that they would likely continue leasing and one  commented that if planning outright ownership, it would be easier to deal  with obtaining the traditional up-front funding than worry about the annual  mortgage payments required by a CAF. Through their charges, both WCFs  and FBF spread the cost of capital over time and ensure that capital costs  are properly allocated to the user programs.
section_title: Agency Officials, Congressional Staff and Other Key Players Have Numerous Concerns About CAFs
paragraphs: Agency officials, congressional staff, and other key players raised  numerous concerns about CAFs. For example, department and subunit  officials are concerned that there is no guarantee or assurance that the  annual mortgage payments to be collected by the CAF will be adequately  funded in annual subunit appropriations. In addition, some subunits and  appropriators are reluctant to shift more control for capital planning and  budgeting to the department level. Congressional staff also raised concerns  about the feasibility of the congressional mind shift that would be required  to fund capital through a mechanism such as a CAF, especially if a charge  on existing capital is included, and questioned the value that a CAF would  really add to agency planning and budget decision making that could not be  obtained through other means. CBO and GSA were also apprehensive and  cautious about the usefulness of the CAF concept when operating details  were described in full. Most budget experts and agency officials we spoke  with agreed that the complexities involved in operating a CAF would likely  outweigh the possible benefits. A few worried that CAFs might even divert  attention from the current initiatives under way to improve asset  management and full costing.
subsections: section_title: Concerns over Receipt of Annual Mortgage Payment
paragraphs: Treasury, which would assume responsibility for collecting debt  repayments, was concerned that there would be no guarantee that future  appropriations would finance the mortgage payments, nor would there be  any enforcement mechanism by which Treasury could enforce repayment.  Treasury officials feared that over time other types of spending would take priority over debt repayment. They based their concerns on the record of  some other programs that have struggled to repay debt or for which debt  has been “forgiven” or otherwise excused. For example, the Black Lung  Disability Trust Fund, which provides disability benefits and medical  services to eligible workers in the coal mining industry, has growing debt  and will never become solvent under current conditions. Although Black  Lung Disability Fund revenues are now sufficient to cover current benefits,  they do not cover either repayment of the over $8 billion owed the Treasury  or interest on that debt. Another example is the Bonneville Power  Administration (BPA), which is a federal electric power marketing agency  in the Pacific Northwest with authority to borrow from Treasury on a  permanent, indefinite basis in amounts not exceeding $4.45 billion at any  time. BPA finances its operations with power revenues and the loans from  Treasury, and has authority to reduce its debt using “fish credits.” This  crediting mechanism, authorized by Congress in 1980, allows BPA to  reduce its payments to Treasury by an amount equal to mitigation  measures funded on behalf of nonpower purposes, such as fish mitigation  efforts in the Columbia and Snake River systems. BPA took this credit for  the first time in 1995 and has taken it every year since that time. The annual  credit allowed varies, but has ranged between about $25 million and  $583 million, including the use in 2001 and 2003 of about $325 million total  unused “fish credits” that had accumulated since 1980.
Some officials at the department and subunit level also raised concerns  about the long-run feasibility of fulfilling their mortgage payments over the  entire repayment period given that the payments are made from their  annual appropriations, which they expect to become increasingly  constrained. The mortgage payments would be relatively uncontrollable  items within an agency’s budget, to the detriment of other, more  controllable items, such as personnel costs. Because the mortgage costs  would not change unless the asset is sold, managers would have less  flexibility in making budgeting decisions within stagnant or possibly  declining annual budgets that occur in times of fiscal restraint. BLM  officials said this type of fixed obligation, which could consume an  increasing share of its budget, could hinder its ability to address emergency  needs that arise during the year. For example, they cited a case in which the  agency reprogrammed resources to deal with a landslide that occurred on  the Oregon coast in late 2003. BLM delayed other projects in order to  redirect funds for the removal and stabilization of the landslide and to  reopen Galice Creek Road, which is a major artery for public access,  recreation, and commercial activity such as timbering, as well as BLM and  FS administration. BLM officials questioned whether the fixed payment to  the CAF would constrain their ability to make adjustments such as this.  Many agency officials were skeptical of the idea that they could fulfill  annual mortgage payments to a CAF without squeezing program operations  and some said they would rather deal with the up-front funding  requirement than have to worry about annual mortgage payments.
The alternative to force-fitting a mortgage payment within agencies’ annual  appropriations is to adjust agency budgets with an automatic add-on equal  to agencies’ mortgage payments. While this would relieve budget pressures  at the agency level, it would probably not provide incentives or influence  managers to improve capital asset management and decision making.
section_title: Concerns About Shifting More Control over Capital Assets to the Department Level
paragraphs: Under the CAF concept, requests for capital projects would come from the  department level and the CAF would own all capital assets. This would  shift more control of capital planning and decision making from the subunit  to the department level. Some agencies and one appropriation  subcommittee staffer said they would not favor this shift. Several agencies  feel that they have the expertise and experience to better assess their own  capital needs, which are often mission specific. For example, ARS’s capital  consists of mostly scientific equipment, laboratories, and research facilities  designed for conducting agricultural research in various climates. In fact,  the agency has its own facilities division consisting of contractors and  engineers who are involved in the management and oversight of capital  projects. Similarly, APHIS’s facilities are mission specific. BLM’s use of  activity-based costing allows it to assign capital costs to the program level  and track those costs to desired outputs. Consequently, the bureau has a  more intimate understanding of its capital needs and how capital  contributes to carrying out its mission. One agency raised the point that  departmental management might force bureaus to share facilities or later  decide to use an asset for purposes other than those originally intended.  While some of these departmental decisions might be beneficial, some  agencies were skeptical of departmental decision making.
section_title: Concerns over Problems Not Addressed, Additional Complexity, and Limited Benefits
paragraphs: The officials we interviewed stated that there are important problems in  capital budgeting that CAFs do not address. Before the smoothing effects  of a CAF can be realized in the out years, the department must still receive  full up-front funding to begin new capital projects or acquire new assets.  And as noted above, some agency officials stated that the annual mortgage  payments may be even more of a dilemma than the up-front funding  requirement. Since a CAF assumes up-front funding, some agencies may  still seek to use some of the alternative financing mechanisms that they  already use, such as operating leases or enhanced-use leases, to meet  capital needs without first having to secure sufficient appropriations to  cover the full cost of the asset. As currently envisioned, CAFs would  probably not help improve capital planning concerns, such as the need for  improved budgeting and management of asset life-cycle costs. According to  the NRC report, operation and maintenance costs are typically 60 to 85  percent of the total life-cycle costs of a facility while design and  construction typically account for only 5 to 10 percent of those costs.  For example, agencies must properly determine the funds needed for  increasing staff in new and expanded facilities in order to avoid staffing  shortages.
Almost everyone we spoke with agreed that CAFs sounded complicated  and many questioned whether the challenges in budgeting for capital that  CAFs were designed to address were great enough to warrant CAFs as a  solution. Congressional budget committee and appropriations  subcommittee staff agreed that CAFs might be beneficial in theory but  were probably not worth the additional budget complexity they would  create. Budget committee staff considered the proposed benefits of a CAF  to be abstract and uncertain coupled with a sizeable likelihood for  repayment problems in the out years. In addition, they saw no obvious  dilemma prompting the need for CAFs. While this capital financing  approach may be appealing in theory since it promotes strategic planning  and broadened, forward-looking perspectives, budget practitioners  cautioned the adoption of an approach involving such layers of complexity  in the absence of a clearly stated, agreed-upon problem that the new  approach is expected to address. Further, they saw a need for agencies to  complete their implementation of capital asset management and cost  accounting systems, which can help achieve some of the same benefits that  CAFs were meant to achieve. A good asset management system including  inventories and asset condition would likely be a necessary precursor to  successfully implementing CAFs. All of these factors weaken the case for  CAFs as an improved approach to current capital financing practices.
section_title: Several Issues to Weigh When Considering Implementation of CAFs
paragraphs: While in theory CAFs could be implemented at most agencies, there are  several complex issues that Congress would need to consider before  adopting such a mechanism. For example, proposals to apply CAFs to  existing capital would require the development of a formula to calculate an  annual capital usage charge, which is likely to be a difficult and contentious  undertaking. Key players including OMB, CBO, and Congress would need  to work together to develop an agreed-upon method to estimate an  appropriate capital usage charge for various types of assets. And even if the  full cost of programs, including the cost of existing capital, was more  accurately reflected in the budget through the use of CAFs, incentives to  cut capital costs may not materialize except in times of severe budget cuts.  Even then, managers’ abilities to eliminate unneeded capital assets would  probably be limited given mission responsibilities and legal requirements  that dictate the disposal of surplus federal property. To remedy this,  additional funding or agency flexibilities would be needed, as would  provisions to ensure debt repayment if CAF-financed assets were  transferred or sold. Additionally, it is likely that some capital projects for  federal office space, IT, and land would continue to be financed outside of  the CAF through mechanisms such as the FBF, WCFs, or the GSA IT Fund.
subsections: section_title: Imputing an Annual Capital Charge on Existing Capital May Offer Benefits but Would Be Difficult and Contentious
paragraphs: There are arguments that the CAF concept be applied to existing capital  assets as well as new capital assets to ensure that the full costs of all  programs are reflected in the budget. OMB points out that if CAFs were not  applied to all capital, it would be many decades before programs reflected  full annual costs and before the cost of alternative inputs could be  compared. Developing an annual capital usage charge for existing assets  would establish a level playing field for federal capital investment and  allow for comparisons across programs. In addition, this new charge could  influence agency managers to get rid of excess capital assets.
Accomplishing these goals would require developing a standard method of  computing an appropriate annual capital usage charge. Subunits would pay  these charges to the department’s CAF using appropriated funds, which  would then be transferred to Treasury’s general fund. In other words,  agencies would receive appropriations to pay for the use of capital assets  they already own and would not retain any of the funds to maintain or  replace assets. Imputing such a charge on existing capital is likely to be  difficult and very contentious given questions about how to estimate the  charge and the fact that the assets were already funded.
Before imputing an annual capital usage charge, key players, including  OMB and Congress, would need to agree on some type of standard formula  to estimate the charge. Three possible approaches to compute annual  capital usage charges would be to (1) use historical cost for the asset by  applying a charge as though the original cost had been financed by  borrowing from Treasury, (2) use market rental rates, or (3) devise a  calculation incorporating asset replacement cost, depreciation rates, and  interest rates. There are arguments for and against each of these options.  For example, while using historical cost would make the charge congruent  with accounting data; the charge would not reflect the current cost of using  capital and so might be less meaningful for evaluating costs. Although  using market rates would theoretically be the right measure for comparing  the cost of using resources for federal versus private purposes, the fact that  many government assets fill unique purposes means there is not a measure  of market value for them. For example, some agencies occupy historic  buildings, such as the Old Executive Office Building, for which a  comparable market-based value would be difficult to determine. The third  approach might be considered an agreeable middle ground, but applying  depreciation rates poses problems since they are largely arbitrary.  Agreement on whether to apply Treasury or market interest rates would be  necessary.
Some agency officials and congressional staff suggested that any charges  on existing capital should reflect the life-cycle costs of maintaining assets  and, similar to a WCF, receipts collected should be made available for  future maintenance and renovation costs. We have reported that repair and  maintenance backlogs in federal facilities are significant and that the  challenges of addressing facility deterioration are prevalent at major real  property-holding agencies. However, research and discussions on CAF design indicate that CAF receipts could only go to Treasury and not for  future projects. Officials were also skeptical about how to accurately  charge for highly specialized capital. For example, ARS has more than  100 laboratories located in various regions of the country, as well as  abroad, which are designed to carry out mission responsibilities ranging  from the study of crop production to human nutrition to animal disease  control. The highly technical and diverse nature of its objectives requires  capital assets that are suitable for varied climates, soils, and other  agricultural factors, which pose unique and difficult challenges in  establishing capital usage charges that would be viewed as acceptable by  agency officials.
If key players were able to agree on the method for calculating usage  charges on existing capital assets, they would also have to examine the  budgetary effects of such charges. Budget scorekeepers—OMB, CBO, and  the budget committees—would need to develop additional scoring rules to  clarify how the usage charges would be treated in the budget. Unlike  charges on new capital, there is no corresponding debt to repay. As a result  scorekeepers would have to specify how to score the usage charges as they  are transferred from the CAF to Treasury. Although these charges would  not change agency or government outlays or the deficit, they could require  a permanent increase in agencies’ total BA, which would require Congress  to consider adjustments of appropriations subcommittee allocations.  Oversight would be especially important for these transactions since CAF  collections would be greater than needed to repay Treasury loans, creating  a temptation to use accruing balances for other purposes.
Similar questions about how to charge for and how to score capital usage  charges for existing assets would eventually pertain to new capital funded  through the CAF. Once an asset is fully “paid off” through the CAF, it is  comparable to existing capital and would similarly incur an annual capital  usage charge. Some might argue that payments should continue in the  same amounts as before, while others may call for the calculation of a new  capital usage charge for “paid off” assets based upon the formula used for  capital that existed before the creation of CAFs. In any case, numerous  decisions on capital usage charges for existing capital would need to be  made prior to implementing CAFs.
Aside from the specifics of how to develop appropriate capital usage  charges, most agency officials and congressional staff with whom we  spoke were skeptical of the need for such a charge. Many said that the cost  of maintaining capital assets—which is reflected in agency budgets—and  depreciation expenses—which are reflected in agency accounting systems  along with asset maintenance costs—sufficiently represent the cost of  existing capital assets and help inform managers. As discussed earlier,  asset management systems and full cost accounting approaches are also  beginning to provide the information managers need to make better  decisions about the maintenance or disposal of existing assets and the need  for new capital. Some congressional staff thought the mind shift required  for Congress to agree to impute this new charge on existing capital assets  would be even more difficult than that required for purchasing new capital  using borrowing authority.
In the countries of New Zealand, Australia, and the United Kingdom,  charges on existing capital are being used to encourage the efficient use of  assets. These charges, similar to interest charges, are generally used to  reflect the opportunity cost of capital invested. In New Zealand,  departments are appropriated a capital charge based on their asset base at  the beginning of the year; at the end of the year they must pay the  government a capital charge based on their year-end asset base. If a  department has a smaller asset base at the end of the year than the asset  base for which the appropriation was made, the department is permitted to  keep part of the appropriation made for the capital charge. This spurred the  New Zealand Department of Education to sell a number of vacant sites that  it had acquired in the 1960s but that were no longer needed. However,  officials in New Zealand’s Office of Controller and Auditor General were  uncertain about the effectiveness of having a charge for capital in changing  behavior significantly. In addition, some analysts in New Zealand expressed  concern that capital charging could drive department executives to  decisions that are rational in the short term but damaging in the long term.  For example, an audit official suggested that a department might have an  incentive to try to operate with obsolete and fully depreciated assets in  order to avoid a higher capital charge.
section_title: Cost Allocation Efforts May Have Limited Effect on Agency Decision Making
paragraphs: Although one goal of CAFs is to ensure the allocation of full costs to  programs in the budget and thereby encourage managers to make more  informed decisions about capital assets, additional incentives to evaluate  new or existing asset needs are unlikely to be created except during times  of severe budget cuts or downsizing. For new assets funded through the  CAF, the mortgage payments made out of the subunits appropriations  would be equal to those received by the CAF and thus the payments would  offset each other within the department budget and at the appropriations  subcommittee level and would not affect the deficit. Although the  information on total program costs might be made more transparent, it is  not clear that this would create stronger incentives for more careful  deliberation on future asset needs than having these costs shown through  available methods such as cost accounting systems or the use of working  capital funds.
A charge on existing assets might also have limited impact. If appropriation  subcommittee allocations were simply raised to accommodate new capital  usage charges, programs would appear more expensive but perhaps not  differentially so. As with new assets, the capital charge on existing assets  would not affect the deficit. As a result, incentives for rationalizing existing  capital would not necessarily be created. Even during tight budget years,  when mandatory CAF payments would squeeze operating budgets and be  most likely to force trade-offs among capital assets, managers may be  constrained by mission responsibilities, legal requirements, or the cost of  disposing of assets. Consequently, agencies might have to argue for  increased funding or case-by-case exemptions, which Congress has granted  in the past.
Some agencies questioned the effectiveness of applying a charge to  influence managers’ decision making given the unique locations or types of  assets required to accomplish mission goals. BLM officials said an annual  capital usage charge would have a limited impact on their ability to dispose  of capital assets because of its stewardship role over the nation’s public  lands. Similarly, ARS officials justified having locations dispersed all over  the country because its research activities are diverse and require facilities  in various climates and environments. As discussed, Congress also plays a  role in determining where ARS will conduct its research. Likewise, many of  APHIS’s capital assets are mission specific, including animal quarantine  stations, sterile insect-rearing facilities, and laboratories, and typically do  not have a comparable counterpart in the commercial sector. APHIS  officials said this limits managers’ abilities to sell or transfer assets because  the land often must be converted to original condition, a costly  undertaking. For some subunits we spoke with, destruction of certain  assets, which also has an up-front cost, is the only viable option for  eliminating unneeded assets. For example, NPS and FS have many facilities  located on public land. If no longer needed, some of these facilities cannot  be sold or transferred and would have to be demolished. According to FS  officials, when they determine that an asset has exhausted its useful life  and needs to be disposed of, the agency will incur the cost for removal and  recover the salvage value.
Many agencies are subject to certain legal requirements that create  disincentives for disposing of surplus property. In these cases, agencies  would need additional funding or more flexibility to modify asset holdings  if improved decision making were to be realized. For example, under the  National Environmental Policy Act, agencies may need to assess the  environmental impact of their decisions to dispose of property. In general,  agencies are responsible for environmental cleanup of properties  contaminated with hazardous substances prior to disposal, which can  involve years of study and amount to considerable costs. Agencies that  own properties with historic designations—which is common in the federal  portfolio and certainly within the inventories of USDA and DOI—are  required under the National Historic Preservation Act to ensure that  historic preservation is factored into how the property is eventually used.  The Stewart B. McKinney Homeless Assistance Act, as amended, sets forth  a requirement that consideration be given to making surplus federal  property, including buildings and land, available for use by states, local  governments, and nonprofit agencies to assist homeless people.
If none of these restrictions apply and an agency is able to sell an asset,  most cannot retain the proceeds from the sale of unneeded property even  up to the cost of disposal. However, Congress has granted special  authorities in some cases. For example, FS officials told us it owned a  number of trails and roads on public lands that ran through the city of Los  Angeles, California. When the city expanded, it was no longer feasible to  maintain the roads and trails. As a result, the agency was granted authority to sell the land and use the proceeds to build a new ranger station. We  have said that agencies be allowed to retain enough of the proceeds from  an asset sale to recoup the cost of disposal, and that in some cases it may  make sense to permit agencies to retain additional proceeds for  reinvestment in real property where a need exists.
section_title: Issues Regarding Property Sales Would Further Complicate CAF Implementation
paragraphs: Provisions would also need to be established to ensure the full repayment  of CAF debts in the event that an agency sells or transfers a capital asset  before it reaches the end of its useful life (the repayment period). Two  possible options would be to (1) transfer the outstanding debt to a new  “owner” agency of the asset or (2) allow the “seller” agency to sell the asset  and use the proceeds from the sale to repay the outstanding CAF debt.  Both of these options would produce complications and issues to resolve.  For example, transferring the asset would require all parties involved,  including Treasury, to record adjustments to their CAF accounting systems  and oblige subunits to adjust their budget requests accordingly. After the  transfer, it is not clear whether the “seller” agency’s budget would be  reduced by an amount equal to the asset’s mortgage payment. However, if  that was done, it would lessen or eliminate the incentive for the “seller”  agency to sell or transfer the asset. If the asset was sold instead of  transferred, an appropriate “sale price” would need to be determined as  well as the appropriate disposition of the sale proceeds. For example, if the  asset was sold for an amount that is greater than the outstanding CAF debt,  the Treasury general fund would receive full repayment on the asset plus  excess revenue. On the other hand, if an asset was sold for an amount less  than the outstanding debt, the CAF would default on the loan unless  additional receipts for debt repayment were appropriated. Finally, some  subunits may argue to refinance their mortgage if a lower Treasury interest  rate became available and lower payments would result. Again, before  CAFs are implemented, proposals on how to handle such circumstances  would need to be addressed.
section_title: Some Capital Would Likely Continue to Be Obtained through Existing Means
paragraphs: The CAF’s scope of coverage would need to be addressed by any CAF  proposal. Capital assets are generally defined as land, structures,  equipment and intellectual property (such as software) that are used by the  federal government and have estimated useful lives of 2 years or more.  However, departments have some discretion in defining capital. The  Commission report suggested that OMB issue guidance on which capital  items belong in the CAF to ensure uniform implementation of the CAF  proposal. Alternatively, each department could use its current department  guidelines and definitions to determine which capital to fund through the  CAF. Whatever parameters are put in place, some capital assets would  likely continue to be funded outside the CAF through existing mechanisms.
For example, for federal office space, the Commission and NRC reports  state that agencies would generally continue to lease space from GSA and  pay rent to FBF. FBF, a governmentwide revolving fund, is used to acquire  office buildings and the space is then rented out to federal agencies. Most  agencies are not allowed to lease their own office space unless GSA  delegates its authority to do so to that agency, which GSA has done in the  past. Under the CAF mechanism, if GSA were to delegate this authority, the  CAF would lease the office space. The NRC report recommends that  agencies should use their CAF for office space acquisition only if it could  be done more effectively and efficiently than through GSA. GSA would  negotiate the acquisition of space for multiple agencies that seek to  collocate in a single facility.
Agencies also have the option to purchase IT through FTS and its IT Fund.  For a fee, FTS provides expertise and assistance in acquiring and managing  IT products. Those agencies that chose to use this service may argue for  continuing to finance these projects outside of the CAF so that they are not  paying a fee to FTS as well as interest on the borrowed funds. Some  officials also questioned the effectiveness of using borrowing authority to  finance IT purchases when their useful life is typically no more than  10 years and is often 5 years or less, thus indicating that officials may argue  to fund some IT projects outside the CAF. Departments and subunits would  also likely continue to rent certain capital assets from WCFs or to use their  WCFs to purchase some capital. As discussed, WCFs rely on user charges  to fund ongoing maintenance and replacement of capital assets and the  collections are used by some departments and subunits to finance capital  assets, such as vehicles and IT.
Land, such as wilderness areas, is also likely to remain outside the CAF.  Land retains its value so concepts such as depreciation and amortization do  not apply to it. However, one subunit official stated that using borrowing  authority to buy land might be beneficial if it meant that land could be  purchased at a faster rate to obtain environmentally sensitive land before it  is damaged.
section_title: Conclusion
paragraphs: There is little doubt that in the mechanical sense CAFs could work as a new  system for financing capital assets. However, the implementation and  operation of the CAF concept would be complicated. Managing the extra  layer of responsibilities for CAF administration and oversight would  require the devotion of resources within departments, subunits, and  Treasury and to a lesser extent, OMB, CBO, and Congress. Accounting for  CAF transactions would be complex and burdensome. The annual debt  repayment would be a source of concern for Treasury and agency officials,  especially as more assets were financed through the CAF and mortgage  payments became a larger percentage of agency appropriations.
Beyond the complexities inherent in financing capital assets using  borrowing authority is a list of difficult issues that would have to be  resolved before benefits could be realized. The most difficult of these  issues, applying a capital usage charge to existing capital, would also be the  most important to address if annual capital costs were to be allocated to  program budgets. If CAFs were applied only to new assets going forward,  programs would not reflect the full annual cost of capital for decades and  programs purchasing new capital would appear more expensive than those  using existing capital. Even if this and other issues were tackled and  improved information about capital costs was provided to managers, there  is little assurance that CAFs alone would create incentives for programs to  reassess their use of capital. Even in times of severe budget constraints, it  is probable that managerial flexibility to adjust the amount of assets used  by a program would continue to be limited by agency missions, legal  restrictions, and limited funds for asset disposal. Given the execution  complexities and implementation concerns, the ensuing question seems to  be whether there are simpler methods that can be used to achieve the same  benefits as CAFs.
We believe there is strong evidence that both benefits attributed to CAFs  could be more easily obtained through existing mechanisms. Asset  management and cost accounting systems, when fully implemented, will be  important tools for promoting more effective planning and budgeting for  capital. Cost accounting systems can provide the same information on  capital costs as CAFs are intended to provide, while the information  provided by asset management systems could be even more crucial for  helping managers with limited budgets prioritize capital asset maintenance  and replacement. For existing capital, incentives to rationalize assets might  be created if agencies were allowed to retain proceeds to recoup the cost of  disposal, or in some cases, for reinvestment in real property. While some of  our case study agencies did not view spikes as a problem, those that did felt  they were managing them well through the use of WCFs, no-year authority,  and acquiring assets through useful segments. In any case, spikes in  spending for capital assets are likely to continue as congressional and  presidential priorities change over time.
When described in detail to executive branch and congressional officials,  we learned that the CAF proposal would likely have few proponents.  Almost everyone we consulted concluded that implementation issues  would overwhelm the potential benefits of a CAF. More importantly,  current efforts under way in agencies would achieve the same goals as a  CAF without introducing the difficulties. Given this, as long as alternative  efforts uphold the principle of up-front funding, then a CAF mechanism  does not seem to be worth the complexity and implementation challenges  that it would create.
section_title: Agency Comments and Our Response
paragraphs: We obtained comments on a draft of this report from OMB, Treasury, GSA  and our case study agencies—USDA and DOI. Treasury, GSA, USDA and  DOI generally agreed with the report. Treasury, USDA, DOI and OMB  provided technical comments, which have been incorporated as  appropriate. OMB agreed with our description of the mechanics of CAFs  and concurred that spikes in BA for capital assets could be alleviated  through other means. OMB also acknowledged the problems with CAFs  that are highlighted in this report, including those related to existing  capital, and agreed that the complications of designing and operating CAFs  might outweigh the benefits. However, they disagreed with our description  of the primary goal of CAFs and therefore do not believe alternative  mechanisms achieve the same goal.
OMB supports having program budgets reflect full annual budgetary costs  in order to change incentives for decision makers. In addition to proposing  to budget for accruing retirement benefit costs, OMB has suggested  budgeting for accruing hazardous waste clean-up costs and budgeting for  capital through CAFs. Budgeting for full annual budgetary costs should  facilitate decision makers’ ability to compare total resources used with  results achieved across government programs. For capital, OMB has  suggested CAFs as a possible method to allocate and embed the cost of  capital assets at the program budget level. OMB recognizes the usefulness  of asset management and cost accounting systems regardless of whether  CAFs are adopted. It is OMB’s opinion that these tools do not ensure that  the costs of capital are captured in individual program budgets and  therefore do not affect incentives for decision makers in allocating  resources among and within programs. We disagree on several points.
We recognize that if the sole or primary purpose of a CAF is to embed costs  in the program budgets, then the alternatives discussed in this report do  not achieve that purpose. However we believe, as highlighted in the Report  of the President’s Commission to Study Capital Budgeting, that the  primary goal of CAFs is to improve decision making for capital. We are not  convinced that CAFs and the annual mortgage payments they would  require would achieve this more effectively than other mechanisms. We  argue instead that the information provided by asset management and cost  accounting systems, when fully implemented, could assist decision makers  in efficiently allocating budgetary resources. While this information may  not necessarily be reflected in program budgets, it is available to aid in  budget and program decision making. The fact that many of these systems  are in relatively early stages of development also increases our concern  about CAFs. In a recent report, we noted the belief among some agency  officials, congressional appropriations committee staff, and budget experts  that improving underlying financial and performance information should  be a prerequisite to efforts to restructure program budgets. We argue this  would also be true for CAFs, since without adequate measures of program  costs and an ability to identify capital priorities, a new financing  mechanism would do nothing to address the basic challenges of  determining how much and what types of capital are needed.
It is also unclear that CAFs would create new incentives as OMB argues. As  we describe in the section titled “Cost Allocation Efforts May Have Limited  Effect on Agency Decision Making,” if the annual mortgage payments offset  each other within the department budget and at the appropriations  subcommittee level, the deficit would not be affected, and it is unlikely  incentives would be changed. Even during tight budget years, when CAF  payments would squeeze operating budgets, managers may be unable to  change the amount of capital assets they use because of mission  responsibilities, legal requirements, or the cost of disposing of assets.
We also recognize the value of linking resources to results in comparing  programs; however, it is unclear that CAFs are necessary or would even  work to accomplish this. Institutionalizing CAFs could permit program  comparison, but fair evaluations would only be possible if existing capital  were included. Therefore, the difficult issue of including existing capital  would have to be addressed. Alternatively, we believe that cost accounting  systems, when well developed within and across agencies, provide a  similar opportunity for comparing programs. In conclusion, we remain of  the view that the operational challenges of CAFs outweigh the benefits and  that alternative mechanisms described in this report can more simply  accomplish the goals of CAFs.
As we agreed with your office, unless you publicly announce the contents  of this report earlier, we plan no further distribution of it until 30 days from  its issuance date. At that time we will send copies of this report to the  Director of the Office of Management and Budget, the Administrator of the  General Services Administration, the Secretary of the Department of the  Interior, the Secretary of the Department of Agriculture, and the Secretary  of the Department of the Treasury. We will also make copies available to  others upon request. This report will also be available at no charge on the  GAO Web site at http://www.gao.gov. If you or your staff have any  questions regarding the information in this report, please contact me at  (202) 512-9142 or Christine Bonham at (202) 512-9576. Key contributors to  this report were Jennifer A. Ashford, Leah Q. Nash, and Seema V. Dargar.
section_title: Comments from the Department of the Treasury
subsections: section_title: GAO’s Comments
paragraphs: We believe that the discussion of BPA’s use of “fish credits” is an  appropriate example for the section on agencies’ repayment of their  borrowing from Treasury. Although these credits were provided by  Congress, their use for offsetting payments on Treasury debt has been  controversial and opposed by some members of Congress and other  interested parties. However, we have made technical changes to the section  based on Treasury’s comments.
section_title: Comments from the Department of the Interior
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