Budget Issues: Budgeting for Federal Capital
Published: 1996-11-12T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Pursuant to a congressional request, GAO reviewed how the Army Corps of Engineers, the Coast Guard, the General Services Administration's Interagency Fleet Management System and Public Building Service, and the U.S. Geological Survey plan and budget for fixed assets, focusing on: (1) these agencies' perception of how the budget process affects their capital acquisitions; (2) whether there are funding mechanisms that might be helpful in planning and budgeting for fixed assets; and (3) the responses to the Office of Management and Budget's (OMB) Bulletin 94-08 on planning and budgeting for the acquisition of fixed assets.
section_title: What GAO Found
paragraphs: GAO found that: (1) the up-front funding requirement for the full cost of acquisitions allows Congress to control capital spending at the time a commitment is made and to better understand the future economic impact of its decisions; (2) officials at most of the agencies reviewed see up-front funding as problematic, since it requires the full cost of an asset to be absorbed in an agency's or program's annual budget, despite the fact that benefits may accrue over many years; (3) when combined with discretionary spending caps on agency and program budgets, the up-front funding requirement can make capital acquisitions seem prohibitively expensive; (4) a full-scale capital budget would raise major budget control issues and may not be necessary to address agency-identified impediments to capital spending; (5) several strategies can reduce the impact of the full funding requirement on agency budgets and help agencies accommodate the consistent application of up-front funding within the existing budget structure; (6) these strategies include budgeting for stand-alone stages of capital acquisitions, and using a revolving fund or an investment component in a working capital fund; (7) Congress has authorized agencies to accumulate budget authority for capital purchases over time; (8) some agencies have sought accounts dedicated to capital acquisitions, while others have sought additional authority to retain proceeds from capital asset sales; (9) some of these same problems and strategies surfaced as a result of an OMB effort to improve agencies' planning and budgeting for fixed assets; (10) the OMB review identified the full extent to which capital projects were not fully funded up front and led to OMB requesting $1.4 billion in fiscal year (FY) 1997 to fully fund some of these capital projects; and (11) new budget preparation instructions for FY 1998 require agencies to request full up-front funding for stand-alone stages of all ongoing and new fixed-asset acquisitions.

section_title: Letter
paragraphs: This report responds to your request that we review how five federal organizations—the Army Corps of Engineers, the Coast Guard, the Interagency Fleet Management System and Public Buildings Service of the General Services Administration, and the U.S. Geological Survey—plan and budget for fixed assets. Specifically, we examined (1) how these organizations perceive the current budget process affects their capital acquisitions and (2) whether there are funding mechanisms, used or proposed by these organizations, that might be helpful in planning and budgeting for fixed assets. In addition, we agreed to examine the responses to the Office of Management and Budget’s Bulletin 94-08, “Planning and Budgeting for the Acquisition of Fixed Assets.” We have included a matter for congressional consideration and are making recommendations to the Director of the Office of Management and Budget to continue to improve fixed-asset planning and budgeting.
We are sending copies of this report to the Ranking Minority Member of your Committee, the Director of the Office of Management and Budget, and to interested congressional committees. We will also make copies available to others upon request. The major contributors to this report are listed in appendix VII. If you have any questions concerning this report, please call me on (202) 512-9573.
subsections: section_title: Introduction
paragraphs: Budgetary constraints and increasing demands to improve service have increased focus on the importance of federal agencies making wise and efficient use of resources to accomplish their missions. Some of these decisions require balancing short-term demands to fund day-to-day operations with needs to acquire assets that yield benefits over the long term. Spending for some assets may be necessary to produce program efficiencies and cost savings over the long-term. Some budget observers believe, however, that a bias is created against spending for long-term capital assets because of the requirement that the entire cost of these relatively expensive assets be budgeted for in an agency’s or program’s annual budget or “up-front” rather than spread over the life of the assets.These concerns have led some to suggest that the federal government adopt a capital budget to spread the cost of long-lived assets across their useful lives. However, capital budgeting proposals have raised concerns among budget experts about fiscal control and accountability.
This report responds to a request by Representative William F. Clinger Jr., Chairman of the Committee on Government Reform and Oversight, to examine issues federal agencies face in planning and budgeting for the acquisition of capital assets. It also assesses ways that some federal organizations have developed to address those concerns and that could be used by other agencies within the existing budget structure. For the purposes of this study, the terms “capital assets” and “fixed assets” are used interchangeably and are defined as tangible assets that are owned by the federal government and that are primarily used in the delivery of federal services. These types of assets are normally available in the commercial market and include buildings, equipment, and information technology. Capital asset acquisition may take the form of rehabilitation of existing assets or development and construction of new ones. The primary focus of this report is on the capital planning and budgeting experiences of five case study organizations represented by four agencies: the Army Corps of Engineers, the Coast Guard, the General Services Administration’s (GSA) Interagency Fleet Management System (IFMS) and the Public Buildings Service (PBS), and the U.S. Geological Survey (USGS).
subsections: section_title: Capital Decisions Are Made in an Environment of Resource Constraints
paragraphs: Budgetary constraints have long had an influence on federal decision-making. Since 1970, the federal government’s spending has consistently exceeded its income, resulting in pressure to restrain spending. Discretionary spending or the portion of the budget that lawmakers annually control through appropriations—which is the primary source for capital spending—has dropped from 12.2 percent of gross domestic product (GDP) in 1970 to 7.8 percent in 1995. In dealing with a shrinking resource base, it is inevitable that some agency missions may be curtailed, and some assets may not be, nor need to be, replaced. Thus, a decision not to fund a particular capital asset may reflect the outcome of competition with other capital projects and other types of expenditures as much as it does any characteristics of the budget process. Distinguishing between obstacles which are rooted in overall resource constraints and those which are an outflow of budget practices and rules is a difficult but critical task.
Agencies have often pointed to the poor condition of their existing capital assets as evidence of the need for increased capital spending. Articles in the popular press and past GAO reports have discussed the poor condition of various federal fixed assets, including the Pentagon, National Park Service facilities, Forest Service facilities, and many financial and information systems throughout government. Moreover, spending on capital is often necessary to generate operational savings in the future. Some observers have been concerned that even as overall resources are limited, resources for capital assets are constrained even more because of the high initial cost of capital assets and what these observers believe to be the short-term focus of the budget process.
It is inevitable that resource constraints will prevent some worthwhile capital projects from being undertaken. However, decisions about whether any particular resource need—capital or operating—is funded reflect the priorities that are determined by the administration and the Congress. Ideally, those capital projects that are funded will be ones with the highest returns or that meet the highest priority mission needs. Therefore, the goal of the budget process should be to ensure neutrality vis-a-vis various types of spending so that decisions are guided by what is economically and programmatically justified rather than by what is recorded or “scored” most favorably in the budget.
section_title: Capital Spending Has Been Relatively Constant Over Time
paragraphs: It is reasonable to expect that historical budget data would give some indication as to how spending on capital has changed over time. However, the federal government does not aggregate data on capital asset spending in the same way that we have defined it in this report—spending on assets used in agency operations. One reason for this is that federal budget data is intended to serve multiple purposes. For capital spending, the data collected are used to highlight the level of investment activity (character class data) and to record the nature of the assets procured (object class data). Nevertheless, OMB’s character class data, object class data, and program and financing data each provide some rough approximation for capital asset spending, and therefore, an approximate gauge of how such spending has fared over time.
OMB asks agencies to code their net outlays each year according to various investment categories or character classes. Investment outlays are defined by OMB as spending that is intended primarily to yield benefits in the future—whether to the nation as a whole or to the government. Investments may be in the form of direct federal spending or grants to state and local governments, and may be for tangible or intangible assets. The OMB categories that we have used to most closely match our definition are those for direct spending on physical assets. However, the character class data will include some types of spending, such as for flood prevention and the acquisition of park land, which are excluded from our definition but cannot be easily segmented from the character class codes.
OMB also requires that agencies classify their obligations by object of expenditure or object class. Object class schedules appear for each account in the President’s budget. The classifications for “Equipment” and “Land and Structures” are the closest approximation to our definition of capital assets, although they include some obligations which we exclude and omit others we would include. For example, some salaries and contractor costs that are devoted to capital projects are not included in these object class categories.
Finally, agencies may also identify their obligations as “capital investments” in the program and financing schedules that appear for each account in the President’s budget. In these schedules, capital investments are acquisitions of physical or financial assets that yield benefits over several years. The program and financing classification capital investments is only shown when such investments are material for a program and represent nonreimbursable obligations. Agencies have discretion in defining programs, and consequently capital investments for this schedule. Therefore, some capital investments in the program and financing data may include items we would not consider capital and exclude others.
Despite the limitations of the available data, a review of historical trends can provide some perspective on the magnitude and overall pattern of spending for capital assets. (See figures 1.1 through 1.3.) OMB character class data show that direct federal spending for “nondefense physical assets” in 1995 measured $19.5 billion and was about the same proportion of GDP and of total budgetary outlays as it was in 1970. Direct outlays for nondefense physical assets measured 0.26 percent of GDP in 1970, and in spite of ups and downs over the period, it represented about the same proportion in 1995. Likewise, as a percent of total budgetary outlays, direct spending for nondefense physical assets is basically unchanged from the 1970 level of 1.3 percent (although it did fluctuate over the period between 1.0 and 1.5 percent). Since these assets are primarily funded from the domestic discretionary category of spending, it may be insightful to compare trends against this portion of the budget. Here, too, we found that direct spending on nondefense physical assets is about identical to the proportion it was 25 years earlier (7.7 percent in fiscal year 1995 and 7.4 percent in fiscal year 1970).
Historical budget data for our four case studies also show that spending on capital assets has not necessarily fared poorly relative to operations and programs. (Appendixes II through VI provide graphical analysis of agency trends.) Each case study experienced at least a modest increase in its overall budget in real terms between 1982 and 1995. For both GSA entities, capital obligations as a percent of total obligations have generally increased since 1982. For two other agencies, USGS and the Corps of Engineers, the proportion of obligations and outlays, respectively, made for capital assets over time has fluctuated up and down. In contrast, the Coast Guard has seen a steadily decreasing proportion of its outlays go toward capital assets.
Caution is required in interpreting the significance of these trends. This is not solely due to the limitations noted above. Neither the overall federal data nor the case study trend data provide any indication as to whether the past levels of capital obligations or outlays were deficient, adequate, or excessive. Nor can the data indicate whether there is a bias in one direction or another. Trends could reflect changes in priorities between capital and other spending or changes in underlying needs for capital. Economies of scale in operations may suggest that in some cases operating expenses should decline relative to capital. In contrast, advances in technology may enable agencies to maintain consistent levels of operations while reducing their spending on capital assets.
section_title: Private Sector and Federal Practices for Budgeting for Capital Differ
paragraphs: As agencies try to adopt more business-like practices, it is inevitable that comparisons are made with private-sector practices in budgeting for capital. Some observers have noted that when it comes to acquiring capital assets, businesses—unlike government agencies—are able to spread the expense of capital assets by depreciating their value in income statements over the estimated useful life. Budget practitioners rightly observe that because of the cash basis of the federal budget, there is a difference between the timing of the costs and benefits of capital assets. While the benefits of capital assets flow over time, federal budget rules require that their full cost be recognized in the budget when acquired. This has been equated to a business charging the full cost of capital assets to a single year’s income statement. Doing so would distort the true profitability of the firm in that year and make the cost of capital asset acquisitions appear artificially high. However, although the budget is occasionally called upon to serve the purpose of an income statement as well, it is not designed to measure profitability and is poorly suited for this role. In both the public and private sectors, budgets generally are a means through which organizations allocate resources.
For many years there has been discussion of the federal government adopting separate capital and operating budgets. Under many such proposals, capital assets would be financed over time by borrowing—with depreciation charged each period to the operating budget (which under most proposals would be required to be balanced). Such proposals, however, fail to recognize key differences between budgeting and accounting. While depreciation is appropriate for helping companies measure profit or loss in financial statements, it is generally not used by companies in budgeting. They base capital spending decisions on present value comparisons of total cash inflows and outflows that are expected to result from alternative capital projects. Depreciation is not a cash flow and therefore affects a company’s capital spending decisions only to the extent that, as a tax deduction, it affects the amount of cash outflow for income tax. A company’s capital budget reflects the results of its spending decisions and records the cash requirements for its selected capital projects that are expected during each period. In this manner, a business’ capital budget has some similarity to the federal unified budget, which also records the cash requirements for capital projects during each year. If depreciation were recorded in the federal budget in place of cash requirements for capital spending, this would undermine Congress’ ability to control expenditures because only a small fraction of an asset’s cost would be included in the year when the decision was made to acquire it.
section_title: Federal Spending Is Guided by Budgetary Controls
paragraphs: The Antideficiency Act, as amended, implements Congress’ constitutional oversight of the executive branch’s expenditure of funds. The act reflects laws enacted by the Congress since 1870 to respond to abuses of budget authority and to gain more effective control over appropriations. The central provision of the act (31 U.S.C. 1341(a)(1)) prevents agencies from entering into obligations prior to an appropriation or from incurring obligations that exceed an appropriation, absent specific statutory authority. Thus, agencies may not enter into contracts that obligate the government to pay for goods or services unless there are sufficient funds available to cover their cost in full. Instead, agencies must budget for the full cost of contracts up-front. Also, the Adequacy of Appropriations Act (40 U.S.C.11), established in 1861, prohibits agencies from entering into a contract unless the contract is authorized by law or there is an appropriation to cover the cost of the contract.
While these acts require that agencies have sufficient appropriated funds to cover their obligations, the Budget Enforcement Act of 1990 (BEA) created new mechanisms by which to limit federal spending overall. BEA formalized the distinction between direct and discretionary spending and provided separate controls for each. Discretionary spending is defined as budget authority provided in annual appropriations acts, while direct or mandatory spending is that which is provided by law other than annual appropriations acts. To control discretionary spending—including spending for fixed assets—BEA established strict dollar limits or “caps” on budget authority and outlays for each fiscal year through 1998. These caps are implemented through allocations to House and Senate appropriations committees, who subsequently allocate these totals among their subcommittees. The Congressional Budget Office (CBO) and OMB “score” or track budget authority, receipts, and outlays estimated to result from enacted legislation. Should a breach of the caps occur, BEA established a process called sequestration in which spending for most discretionary programs is reduced by a uniform percentage.
As a result of BEA, scorekeeping guidelines, called scoring rules, were developed that significantly changed how certain types of contracts were scored in the budget. Previously, when an agency entered into a lease-purchase contract, budget authority and outlays were scored over the period of the lease in an amount equal to the annual payments. The new guidelines changed this by requiring that budget authority for lease-purchases be scored up-front and outlays be scored over the period during which the contractor constructs or purchases the asset. After BEA, a lease-purchase, which is tantamount to borrowing from the private sector, was no longer treated in the budget preferentially to borrowing by the Treasury to finance direct ownership. This effectively eliminated lease-purchases from consideration as a capital acquisition method that could be used to spread the cost of purchases over a period of years.
The benefits to the government as a whole and the disadvantages to individual agencies resulting from the change in lease-purchase scoring are illustrative of the dichotomy that can exist between agencies’ and Congress’s perspective on the budget process. Changes in the scoring of lease-purchases, while problematic from the perspective of an individual agency because of up-front funding requirements and budget caps, are critical to enabling the Congress to control the total commitments made by agencies. Likewise, some ideas agencies propose to alleviate their perceived obstacles to capital spending may in turn create obstacles to maintaining fiscal control if implemented on a governmentwide basis. In this regard, there is a constant tension between agency and congressional perspectives on the nature of capital acquisition problems and their solutions.
section_title: The Nature of This Report
paragraphs: This report illustrates how a select group of federal organizations plan and budget for capital assets and the experiences they have had with the budget process. Five case studies were selected to include a broad range of characteristics—large and small organizations, operations-intensive and capital-intensive organizations, and organizations having a range of asset needs and account structures. While it is inappropriate to generalize about governmentwide practices in budgeting for capital from these case studies, it is possible to gain insight into some issues and discover potential strategies for addressing these issues. The information obtained from the case studies, supplemented by a limited number of interviews at other agencies that purchase capital assets, provides some indication of the range of issues that may be encountered governmentwide.
Because agencies can differ substantially in their asset requirements, account structure, financial management history, and other characteristics, care must be taken in applying lessons from one agency to another. The chapters that follow include issues that generally affect all federal organizations, such as the requirement to fully fund capital acquisitions up-front, as well as issues that may be limited to selected organizations as a result of their particular characteristics. Likewise, any strategy that an agency has adopted to deal with its perceived obstacles to capital spending has been tailored for its specific circumstances. Some may be adaptable to other agencies; others may not be. The report is also not exhaustive with respect to the problems and strategies of case studies. Some financing strategies, such as budgeting for stand-alone stages of a larger capital project, may be used by case studies other than those explicitly mentioned in this report. Similarly, case studies may be using other financing approaches in addition to those cited.
This report is not intended to represent a final or universal solution to the problems in budgeting for capital assets. Indeed, other issues would also need to be addressed if the capital acquisition process is to be improved. For example, the selection and evaluation of capital projects must be improved. GAO’s past work has identified a variety of federal capital projects including information technology as well as large-scale construction projects where acquisitions have yielded poor results—costing more than anticipated, falling behind schedule, and failing to meet mission needs. In addition, to effectively evaluate program performance as called for in the Government Performance and Results Act of 1993 (GPRA), agencies will need data on the full annual cost of programs including the cost of capital usage.
section_title: Objectives, Scope, and Methodology
paragraphs: The objectives of this study were to examine (1) how case study organizations perceive the budget process and structure affects their ability to acquire capital assets, (2) whether there are financing mechanisms currently used or proposed by our case studies that could be helpful in improving budgeting for capital assets within the current unified budget structure, and (3) the results of OMB’s Bulletin 94-08 on “Planning and Budgeting for the Acquisition of Fixed Assets.”
To identify aspects of the budget process that affected case studies’ capital spending decisions and the financing mechanisms they used and proposed, we interviewed officials from our case studies as well as OMB and congressional staff responsible for reviewing the budgets of these organizations. To select our case studies, we used data from OMB’s MAXsystem to identify federal organizations making capital expenditures between fiscal years 1982 and 1994 and the general type of assets they acquired. We developed an initial short list of organizations that provided coverage across various departmental levels of government and asset types. The short list consisted of the Army Corps of Engineers, the Coast Guard, the Forest Service, the Food and Drug Administration (FDA), the General Services Administration (GSA), the National Oceanic and Atmospheric Administration (NOAA), and the U.S. Geological Survey (USGS).
We reviewed our past work and other literature to identify organizations among the short list that had expressed difficulty in acquiring capital assets and/or were using a financing mechanism that helped alleviate this difficulty. After conducting initial interviews with officials at each of the short list organizations to confirm the issues they face and the assets acquired, we agreed with the requestor to select five case studies representing four agencies: the Army Corps of Engineers, Coast Guard, GSA (the Public Building Service (PBS) and the Interagency Fleet Management System (IFMS)), and USGS. Our selection of case studies was based on a goal of choosing organizations that reflected diversity in the types of assets acquired, the volume of capital spending, the type of account used, and the appropriations subcommittees. Table 1.1 (see p. 33) shows the types of assets case studies acquire and the account(s) used to finance capital. After conducting more extensive interviews with officials of our case studies, we discussed the organizations’ problems and financing mechanisms with staff of the case studies’ House and/or Senate appropriations subcommittees, as well as OMB program examiners and policy specialists.
GAO requested comments on a draft of this report from the Secretary of Defense, the Secretary of the Army, the Secretary of Transportation, the Secretary of the Interior, the Acting Administrator of GSA, and the Director of OMB. At meetings conducted in August and September of 1996, these officials’ designees provided their comments. Their comments are discussed and evaluated in chapter 6 and certain other sections of the report as appropriate.
To examine the responses to OMB Bulletin 94-08 on “Planning and Budgeting for the Acquisition of Fixed Assets,” we reviewed submissions OMB received from agencies. We discussed the bulletin with officials of each of our case studies and with OMB officials responsible for the bulletin’s development and implementation. We also had discussions with OMB to determine differences in the responses to and results of OMB’s second bulletin on fixed assets (Bulletin 95-03). To improve the currency of our discussion of OMB’s fixed asset efforts, we also reviewed OMB’s A-11 guidance to agencies on submitting their fiscal year 1998 budget requests.
Capital spending data in appendixes I through VI and chapter 1 were derived from OMB’s MAX system. Although we did not verify this data at the individual budget account or organizational level, total obligations in the object class and program and financing schedules and total outlays in the character class schedules were reconciled by fiscal year to published sources.
We performed our work from June 1995 through February 1996 in accordance with generally accepted government auditing standards.
section_title: Agency and Governmentwide Perspectives on Up-Front Funding Differ
paragraphs: The Adequacy of Appropriations Act and the Antideficiency Act require that resources be available to fulfill government commitments to pay for goods and services when the commitments are made, or up-front. However, officials at the organizations we contacted typically viewed the requirement as an impediment to their meeting capital asset needs. Managers expressed concern that their agency or program budgets are not able to accommodate the large, single-year increases in budget authority needed to fully fund capital projects up front. As a result, managers believe that capital needs are either not met or met through methods that are more costly in the long term.
Despite the potential problems for individual agencies, up-front funding is critical to safeguarding Congress’ ability to control overall federal expenditures and to assess the impact of the federal budget on the economy. Without up-front funding, projects may be undertaken without adequate attention being given to their overall costs and benefits. Moreover, failure to fully fund projects before they are undertaken can distort the allocation of budget resources and obscure the impact of federal budgetary action on the private sector. Only a few agencies, including the Army Corps of Engineers (one of our case studies), have been exempted from the up-front funding requirement. Despite these agencies’ use of incremental funding, OMB has taken steps to encourage consistent application of up-front funding across government in the future.
subsections: section_title: Agencies View Up-Front Funding as an Impediment to Capital Acquisition
paragraphs: Managers in most of the organizations we contacted cited requirements for full up-front funding as an obstacle to acquiring capital assets. These officials felt that when it is necessary to purchase expensive capital assets, up-front funding requirements result in a spike in their agency’s or program’s budget authority that often would not be provided in the current budget environment. Although an asset may be an important component to carrying out the mission of the organization and may bring benefits over many years, managers believed that having to budget for the full cost in 1 year is often a significant impediment to its acquisition. Although general resource constraints are not new, full up-front funding has become more difficult because most capital spending is discretionary and, thus, annually capped by BEA. OMB has responded to BEA by frequently imposing limits on agency spending and by prohibiting agency borrowing. Consequently, managers may find themselves faced with a situation in which funding an expensive capital project may require deep cuts in operations or in all other capital projects during that year. Faced with these trade-offs, agency managers may either delay capital projects until an additional appropriation can be obtained or, when possible, look for other ways of meeting their capital needs though the long-run cost may be higher.
Officials from virtually every organization that we contacted could cite examples of how the up-front funding requirement affected their ability to acquire capital. Up-front funding appeared to be a particularly significant issue at organizations we contacted that acquire buildings because these assets often have a high initial cost, provide benefits over many years, and could be financed over an extended period of time. Up-front funding was also a concern for USGS in acquiring equipment because the cost of the equipment sometimes represented a significant portion of the organization’s resources.
PBS has often cited the up-front funding requirement as an impediment to meeting federal agency space needs in the most cost-effective manner. PBS is responsible for acquiring general and special purpose work space for federal agencies and has multiple methods available for meeting these space needs, including operating leases, capital leases, lease-purchases,and direct purchases. Each of these methods for obtaining space presents a combination of advantages and disadvantages in terms of flexibility and short- and long-term cost to PBS. Budget scoring rules are intended to facilitate comparisons of the long-term cost of each method and to ensure compliance with the full funding concept. For each space acquisition method except for operating leases, PBS (like other federal organizations) is required to have budget authority for the total cost up front even though the outlays may occur over several years. PBS has generally found that ownership is the least costly manner with which to meet long-term federal space needs. However, PBS officials indicated that the up-front funding requirement coupled with caps on total discretionary budget authority and outlays has resulted in PBS not receiving sufficient budget authority to allow it to own the amount of office space that its studies indicate to be optimal. PBS has maintained that by relying on operating leases instead, the government incurs a higher long-term cost and consumes resources that could be used for repairs and alterations of the existing inventory.
Other organizations felt similar constraints on their ability to obtain or replace facilities. Coast Guard officials, for example, cited a need for new employee housing. The Coast Guard prefers to satisfy housing needs by providing allowances to employees to rent from the private sector. However, in remote or resort areas of the country where affordable rental housing is not available, the Coast Guard constructs housing. Coast Guard officials stated that even though the housing fulfills a long-term need, they must budget for the full cost in a single year, which generally limits the number of capital projects that can be undertaken. Officials at the Forest Service also felt that up-front funding requirements in conjunction with resource constraints prevented them from making investments in buildings and facilities. Many of the agency’s facilities are in very poor condition and in need of repair or replacement. However, Forest Service managers say they are not able to obtain the large increases in appropriations needed to meet these one-time costs.
FDA officials also felt that up-front funding was an obstacle to acquiring needed facilities. They felt that some of their facilities were in need of repair or replacement, but that many of these cannot be undertaken because their cost must be budgeted for up-front. In addition, FDA has been waiting for a number of years to obtain funding to consolidate headquarters staff that are currently spread out across many different locations in the Washington, DC metropolitan area into fewer sites. FDA officials believe that the segmentation of their facilities increases their operating cost and makes it harder to fully use some pieces of equipment that could be shared if staff were consolidated into fewer facilities.
section_title: Up-Front Funding Is Paramount to Governmentwide Fiscal Control
paragraphs: Although possibly problematic for individual agencies, up-front funding has long been recognized as an important tool for maintaining governmentwide fiscal control. The requirement that budget authority be provided up-front, before the government enters into any commitment, was established over 100 years ago in the Adequacy of Appropriations Act and the Antideficiency Act. These acts responded to past problems in which agencies committed the government to payments that exceeded the resources made available to them by Congress.
The importance of the principle was reinforced by the 1967 Report of the President’s Commission on Budget Concepts, which emphasized the primary purposes of the budget as being the efficient allocation of resources and the formulation of fiscal policy to benefit the national economy. The up-front funding requirement advances both. It is essential for efficient resource allocation decisions because it helps ensure that the Congress considers the full cost of all proposed commitments and makes trade-offs based on full costs. To be useful in the formulation of fiscal policy, the budget must be able to highlight the impact of the federal budget on the economy. For this purpose, the requirement for up-front funding also serves the Congress well. The point at which capital spending has the largest and most direct economic impact on the private sector occurs at the point the commitment is made—that is, up-front—not over the expected lifetime of a long-lived asset.
Failure to recognize the full cost of a particular type of expenditure when budget decisions are being made could lead to distortions in the allocation of resources. In other words, if particular types of spending, such as for physical assets, were given preferential treatment in the budget by virtue of recognizing only a fraction of their total cost, then it is likely that relatively more spending for those types of assets would occur. While advocates for purchasing some federal assets may see this as a desirable end, such an outcome may not accurately reflect the nation’s needs. In particular, other types of federal spending that also provide long-term benefits but that are not physical assets (including research and development and spending for human capital) would be arbitrarily disadvantaged in the budget process, even if national priorities remain unchanged.
Furthermore, failure to fully fund capital projects at the time the commitment is entered into can force future Congresses and administrations to choose between having an unusable asset and continuing projects’ funding for years even after priorities may have changed. For example, if the Congress provides funding for only part of a project and that part is not usable absent completion of the entire project, then the Congress and the administration may feel compelled to continue funding in the future to avoid wasting the initial, partial funding that was already spent. Thus, if capital projects are begun without full funding, future Congresses and administrations may, in effect, be forced to commit a greater share of their annual resources to fulfilling past commitments and thus have less flexibility to respond to new or changing needs as they arise.
Although the organizations we contacted may perceive it to be difficult to obtain full funding in a single year for capital assets, OMB and the Congress have at various times accommodated agencies’ needs for large increases in budget authority to fully fund their capital projects. However, given overall resource constraints, all of the capital needs (and operating needs) that agencies may have or perceive cannot be met. Thus, an agency’s failure to receive funding for its capital request may reflect the fact that, on a governmentwide basis, other agencies’ capital projects are of higher priority to OMB or the Congress. It also reflects governmentwide trade-offs that are made to continue funding operations of one agency over increases in capital spending at other agencies.
section_title: A Few Agencies Have Been Exempt From Up-Front Funding
paragraphs: Although up-front funding is generally required across government, it is not applied to all agencies. Water resource projects were explicitly exempted from up-front funding by the Rivers and Harbors Appropriation Act of 1922. As a result, the Corps of Engineers implements many of its construction projects through the use of continuing contracts. These contracts cover the entire project but indicate the amount of work that is expected to be completed during each year and the cost of that increment. Although the Congress is aware of the total expected cost of the project, the Corps annually requests funding for the projects in increments—only the amount of money necessary to complete the next year’s portion of work.
The Corps’ contracts are structured so that it is not committed to paying for any additional work on a project beyond that specified for the budget year. If the Congress were to discontinue funding for the project at some point during the overall contract, the Corps would be responsible for paying the contractor various cancellation or decommissioning costs. However, while the Corps is not legally obligated to complete an incrementally funded project, terminating it before completion can leave the Corps without anything of economic value. Corps officials suggest however, that because of the costs that have already been incurred and the economic justification that is done before beginning any project, it is unlikely that the Congress would choose to cancel a project for fiscal reasons once it is begun. In fact, the officials indicated they are not aware of any Corps projects that have been cancelled by Congress.
The Energy and Water Development appropriations subcommittees have been comfortable with incrementally funding the Corps and other agencies within their jurisdiction (such as the Bureau of Reclamation and DOE) and have not changed the practice. Officials from OMB and the Corps indicated that the Carter administration had proposed to the Congress fully funding Corps construction projects, but full funding was rejected because it would have required either a large increase in appropriations or a significant drop in the number of projects that could be undertaken in a given year.
One of the traditional concerns with incremental funding is that it risks allowing projects to be started before adequate scrutiny is given to their total cost and benefit. Some within OMB have suggested that this may not be as much of a concern with the Corps, in part because both OMB and the Congress have had confidence in the Corps’ total cost estimates because of the historical reliability of its cost-benefit justifications. Thus, the Congress is aware of the costs and the benefits of a project before it is authorized. OMB officials also indicated that other factors contribute to ensuring that projects are managed cost effectively. For example, state or local authorities that act as financial partners in Corps projects have a strong incentive to ensure that projects are well-managed. In addition, project authorization levels limit the amount of additional appropriations the Corps can obtain for cost overruns.
OMB has acknowledged that agencies have not always requested or received full up-front funding for capital acquisitions. Besides the Corps of Engineers, some capital projects at the Bureau of Reclamation, DOE, and NASA have also been funded incrementally. One of the objectives of OMB’s bulletins on fixed assets (Bulletins 94-08 and 95-03) was to identify the extent to which incremental funding was being used and to encourage agencies to request full funding for their capital projects.
Estimates are still being refined by OMB as to what the total cost would be to fully fund all projects currently funded incrementally. In the fiscal year 1997 President’s budget, OMB requested $1.4 billion in budget authority to fully fund selected ongoing projects in DOE and NASA that otherwise would have been incrementally funded. Although full funding was not requested for capital projects at the Corps of Engineers and the Bureau of Reclamation, the President’s budget indicated that the cost of fully funding ongoing and new projects for these two agencies would be about $23 billion in fiscal year 1997 (which represents 11 percent of total domestic discretionary budget authority in fiscal year 1995). The implications of fully funding capital projects—including those that have been incrementally funded—will be clarified for the government as a whole when agencies submit their fiscal year 1998 budget requests to OMB. The principal effect will be to increase budget authority in the initial year for projects that would otherwise be incrementally funded over a period of years. Because projects’ cash flows would be unaffected by the application of up-front funding, the government’s total annual outlays would also not change for a given level of capital projects. For the longer term, the impact of such a shift on future years’ budget authority will be a function of whether policymakers change the number or types of capital acquisitions in response to the up-front funding requirement.
section_title: Up-Front Funding Can Be Accommodated by Balancing Managerial Flexibility and Congressional Control
paragraphs: Case studies use a variety of methods for adapting to the requirement to fully fund capital acquisitions up-front. Some of these methods demonstrate a balance between managerial flexibility and congressional control. They include: budgeting for stand-alone stages of an acquisition, revolving funds, an investment component within a working capital fund, reducing capital needs, and operating leases.
Several of these approaches to financing capital may be worthwhile for other agencies to consider to help accommodate the up-front funding requirement. For example, one case study uses contracting strategies that are designed to limit the government’s commitment and spread the amount of budget authority needed over a period of years. Under certain conditions and for certain types of capital acquisitions, revolving funds and investment-type accounts can serve to manage the spikes in resource needs that are created for an agency by up-front funding. Case studies have also pursued strategies intended to reduce their need to own capital assets and to lower their overall cost of operations so that capital spending may be more easily accommodated. Yet some case studies, unable to meet long-term capital needs with current resources, use financing methods, such as operating leases, that are better suited for meeting short-term needs and that can lead to higher long-term cost. Finally, officials of some case studies believe that additional tools would be useful, such as borrowing authority and partnerships with the private sector. While these proposed tools would enhance managerial flexibility, they must be considered in light of their impact on congressional control.
subsections: section_title: Budgeting for Stand-Alone Stages of an Acquisition Limits the Budget Authority Needed
paragraphs: The Coast Guard requests funding for separate stand-alone stages of large capital projects. In contrast to incremental funding, budgeting for stand-alone stages helps ensure that a single appropriation will yield a functional asset while limiting the amount of budget authority needed. For example, the Coast Guard may structure its vessel and other equipment contracts to acquire portions of such projects that are economically or programmatically useful even if the entire project is not completed as planned. In acquiring a class of ships, the Coast Guard may write a contract for a lead ship and spare parts with options to buy additional ships in future years. By structuring its acquisitions in this way, the Coast Guard can request full funding for each useful piece of the project as the project progresses, rather than requesting funds for the entire project up-front. This strategy reduces the budget authority needed by the Coast Guard to initiate the project and is consistent with full funding because the Coast Guard receives a useful asset from each funded option, though the full value of the asset may not be realized until the entire project is completed.
The Coast Guard’s experience indicates that structuring a capital acquisition into fully-funded, stand-alone stages has several advantages to agencies and the Congress. First, it allows agencies to spread the amount of budget authority needed to complete a large capital acquisition over multiple years. For the agency and for the Congress, this can enable more projects to be underway concurrently. A second advantage is that the Congress can exercise more frequent oversight over the progress of the total capital project. As each usable portion of the total project is completed, the Congress has an opportunity to review progress, re-evaluate needs, and decide whether to provide funding for the next segment. Third, budgeting for stand-alone stages of a project gives the Congress greater funding flexibility to respond to changing needs or national priorities. If changing circumstances dictate that other needs are of a higher priority, the Congress can discontinue the project at an appropriate juncture, shift funds to the new need, and still benefit from the funds already spent on the stand-alone stages.
Agency managers, of course, would prefer to receive funding for the entire project at the outset since that would reduce uncertainty, make project management easier, and possibly lower the cost contractors charge. However, it is appropriate from an overall federal budgeting perspective for projects spanning multiple years and requiring significant resources to be re-evaluated as they progress, with the Congress maintaining the option to end the project. Decisions to terminate or slow down projects reflect current budget priorities given available resources. If projects have been funded in stand-alone stages, such decisions can be made without the concern that past spending has been wasted. On the other hand, even though the assets are usable, their net effectiveness may be compromised if the succeeding parts of the project are not completed as well.
section_title: Revolving Funds Can Be Effective in Spreading the Cost of Capital Acquisition Over Time and Incorporating Capital Costs Into Operating Budgets
paragraphs: Four case studies used revolving funds to finance capital assets and manage the spikes in resource needs that can occur with up-front funding. Their experiences indicate that revolving funds can be effective for agencies with relatively small, ongoing capital needs because the funds, through user charges, spread the cost of capital over time in order to build reserves for acquiring new or replacement assets. In addition, revolving funds help to ensure that capital costs are allocated to programs that use capital. However, revolving funds do not always work as intended. For example, while revolving funds are intended to be self-financing, PBS’ revolving fund has faced several structural constraints that have limited its ability to satisfy customer needs with the fund’s rental income. Case studies’ experiences led us to conclude that revolving funds will be most effective when they possess certain characteristics—sound financial management, identifiable customers to charge, the ability to recoup replacement cost, appropriations to fund major expansions to the asset base, and the ability to retain proceeds from the sale of assets when expected to maintain the same size asset base. In addition, to ensure opportunities for oversight and control, revolving funds also need to have capital plans, including expected benefits from the acquisition against which actual benefits may be judged. Equally important, for revolving funds that acquire large-scale and heterogeneous assets, the Congress and OMB must be able to annually review whether proposed acquisitions are those most needed and whether the overall level of capital spending by the agency is appropriate given other competing capital and operating needs across the government.
subsections: section_title: Revolving Funds Were Widely Used by Case Studies
paragraphs: Case study organizations showed that revolving funds are neither a new nor rare tool in budgeting for capital assets. Case studies also demonstrated that revolving funds can be used in a variety of circumstances. At some case studies, the revolving funds primarily provide assets to external customers, while at others, the assets are used primarily to support internal operations. However, regardless of the particular types of assets or the customers to whom the services are provided, revolving funds relied on charges to users to fund ongoing maintenance and replacement of capital assets.
The Corps of Engineers has used a revolving fund since fiscal year 1954 to finance equipment and facilities shared by multiple Corps civil works projects and programs. The original cost of the equipment is charged as a depreciation cost to the projects or programs that use it. In addition, user charges are set to recover expected increases in the asset’s price. By including depreciation and inflation in its charges to users, the revolving fund ensures that resources are available to buy new equipment when necessary.
The Congress established USGS’ working capital fund (WCF) in fiscal year 1991 to finance replacement of the agency’s mainframe computer, telecommunications equipment, and related automated data processing (ADP) equipment. The WCF grew out of USGS’ experience in having to finance a telecommunications upgrade and mainframe computer from annual appropriations. USGS recognized that it needed a way to plan for the augmentation or replacement of these acquisitions in the future if it was to reduce the one-time impact on operating units. Through the WCF, charges to users will help fund the replacement of these assets.
The IFMS uses a revolving fund to finance operations of its fleet of vehicles. Since 1982, IFMS charges to client agencies have enabled it to recover depreciation, operational costs, and an inflation increment. The revolving fund accumulates reserves during the year so that portions of the fleet can be replaced as needed; proceeds from the sale of old vehicles are also applied toward new purchases. The revolving fund is intended to be self-sustaining and IFMS tries to ensure that its user charges are competitive with those of private-sector car rental providers.
GSA’s Information Technology Fund (ITF) was initially established in 1987 and currently funds, on a reimbursable basis, federal local and long-distance telecommunications services and ADP technical services. Fees charged to client agencies recover the full cost of services plus contributions to a capital reserve fund. The capital reserve fund finances replacement of ITF fixed assets—primarily PBX and telephone switches used for local phone service. The ITF also uses its capital reserve fund to finance extraordinary operating expenses related to long-distance service and to finance pilot projects.
The Federal Buildings Fund (FBF) began operations in 1975 and is the largest of the revolving funds at GSA. PBS, which manages the FBF, charges client agencies rent for buildings it provides for their use. Like other revolving funds, the FBF is intended to be self-financing. The charges to users are intended to cover all costs of operations and replacement and a limited amount of new construction. In practice, the FBF has been faced with customer demands for new space that exceed collections. As a result, PBS has sought appropriations to supplement the Fund’s income. PBS officials cited a number of structural constraints placed on the FBF, such as congressional restraints on the generation and use of FBF income that have prevented it from operating like a true revolving fund. Nevertheless, they believe that the FBF has been a more effective method of financing the maintenance and replacement of assets than was the former process of funding through appropriations alone.
section_title: Revolving Funds Can Promote More Cost-Effective Capital Decisions
paragraphs: In addition to the benefits they provide in smoothing spikes that can result from up-front funding, revolving funds can also help agencies and the Congress better monitor program costs by promoting full cost accounting. Although full funding up-front leads to recognition of the full cost of commitments in the year made, when agencies finance capital through appropriations, the annual capital cost incurred in carrying out a specific program is not apparent in that program’s budget. Revolving funds can ensure through their user charges that the full cost of programs—including capital usage—is borne on an annual basis by those responsible for the program rather than passed on to future users. At an agency level, revolving funds incorporate traditional capital budgeting concepts and can result in charging users for capital consumption without violating up-front funding principles for the federal government as a whole. As GPRA is implemented, full costing will take on even greater importance as managers will need to assess whether their programs are achieving goals in a cost-effective manner. When the budget does not clearly identify all costs associated with a program, including capital usage, agencies and the Congress cannot make fully informed trade-offs among programs because some programs appear cheaper than they are.
Costs tied directly to capital usage also provide an incentive for agency managers to use capital more efficiently. In some cases this may lead them to reconsider whether they need the same quantity or type of fixed assets as previously thought. For example, as rent charges for work space become a greater burden for agencies (because of stagnant or declining annual budgets), it is reasonable to expect that more agencies will become concerned about their use of space and the resources it diverts from other purposes. Establishing economic incentives for agency managers to make their own trade-offs between capital and operations based on full costs is likely to lead to more efficient decisions about appropriate levels of capital assets.
section_title: Constraints on Revolving Funds Can Impede Effectiveness
paragraphs: Officials at IFMS and PBS expressed concern over financing constraints and/or underfunded responsibilities that could impede their revolving funds’ ability to operate efficiently. The FBF in particular, has traditionally faced constraints on its ability to generate income. The FBF has also been faced recently with responsibilities that were not anticipated at the Fund’s inception.
The IFMS’ full-cost recovery pricing system has covered the costs of maintaining and replacing its fleet, but IFMS officials believe additional new requirements on IFMS may make cost recovery and remaining competitive more difficult in the future. The Energy Policy Act of 1992 requires that by fiscal year 1999, alternatively fueled vehicles must comprise at least 75 percent of the total number of new vehicles acquired by a federal fleet. Although law requires DOE to fund the incremental acquisition costs of alternatively fueled vehicles over their conventionally fueled counterparts, DOE officials indicated to IFMS that DOE had only a portion of the incremental funding needed for fiscal year 1996. Depending on the number of vehicles converted, IFMS officials thought that the remaining cost in fiscal year 1996 could be absorbed through operational efficiencies. However, the fund may not be able to accommodate future costs if advances from DOE continue to decline or cease altogether.
Although a revolving fund should fully recover its costs through user charges if it is to be self-sustaining, this has not been the case with the FBF. The imbalance between the FBF’s costs and its income lies in part in the inherent structure of the Fund. FBF rent charges to agencies are not necessarily sufficient to cover full costs because they are not based on the actual costs to PBS. In some cases, PBS’ repair and maintenance costs are higher than the average for office buildings because it must maintain some of its office buildings as heritage assets. Since FBF charges agencies for their use of owned and leased space based on market appraisals made every 5 years, actual costs to maintain the space and FBF payments to the private-sector lessor may vary from the rental income FBF collects. Adding to these constraints on PBS’ cost recovery have been caps on rent. During the 1980s, the Congress believed some PBS rental charges were too high and imposed caps on the rents of some agencies. Although only three agencies currently have rent caps, PBS estimated that the caps have caused substantial income losses over the years.
Financing office space to satisfy customer needs may also be more difficult because the FBF is not authorized to retain the proceeds from the disposal of property. When PBS property is sold, all disposal proceeds are required by law to be deposited into a land and water conservation fund.The other revolving funds operated by our case studies can retain disposal proceeds and have fewer restrictions on the disposal of assets. For the Corps of Engineers, the disposal proceeds are only a minor source of funding, but for IFMS they represent a substantial portion of operating income.
Constraints on income have been exacerbated by demands to expand PBS’ asset base. During the 1980s, demands for courthouse construction began to rise significantly. Although PBS responded to early courthouse construction demands by deferring maintenance on other assets, PBS sought and received appropriations for courthouse construction in fiscal year 1991 to supplement the Fund’s rental collections. The FBF has since continued to receive appropriations for construction of courthouses, border stations, and office space. However, PBS estimates that the present level of appropriations funds about half of construction costs. The remainder of the costs are primarily being covered by FBF rental collections, which are also used for funding repairs and modernization of the existing assets.
section_title: Several Factors Are Important for Effective Revolving Funds
paragraphs: Despite their benefits in smoothing out spikes in resource needs, revolving funds are not necessarily appropriate for all agencies or in all circumstances. Our review of case studies’ revolving funds, as well as previous analysis of specific revolving funds, has led us to draw some conclusions about the characteristics needed for successful revolving funds. First, agencies using a revolving fund need to have demonstrated a sound record of financial management. Financing capital through a revolving fund can entail a lesser degree of congressional control than direct appropriations. Not all agencies may have demonstrated a sufficient stewardship of government resources to warrant a reduction in congressional oversight. Good financial management can be even more important if revolving funds rely on charges to other agencies for income and are not subject to competition because, under such circumstances, revolving fund managers may have less incentive to control costs. Sound internal controls and oversight by management are needed to ensure that revolving fund efficiencies are not neglected because costs can be passed on to its users. When external competition that can provide an incentive for cost-consciousness is absent and when fund acquisitions are expensive, revolving funds may need a greater degree of congressional oversight.
Second, for a revolving fund to be effective, the agency must be able to identify clearly the appropriate customers to charge and the actual capital cost that each customer incurs. If this is not possible, a revolving fund is probably not practical. For example, officials at the Coast Guard indicated that because of their organizational structure and overlapping missions it would be impractical for them to use a revolving fund. They explained that many Coast Guard assets are used by units in carrying out multiple activities—such as defense operations and law enforcement—so that it is potentially more difficult to assign cost to a specific mission or activity. They also stated that it would be inappropriate to charge some users of capital. Since mission responsibilities are often tied to carrying out search and rescue, law enforcement, and maritime environmental protection activities, fees attached to those activities could create perverse incentives. Coast Guard officials want to encourage units to use the most appropriate assets for carrying out their missions and not to be inappropriately influenced by cost considerations in what is often an emergency situation.
Third, to be successful in the long-term, revolving fund managers must know their full costs and have the authority to charge fees that recover the cost of operating and replacing assets. Without replacement cost pricing, the resources of the fund would eventually be depleted by inflation. In addition, the accounting system of the agency must be able to track costs accurately. All agencies do not have adequate systems to allow them to fully allocate all costs associated with running a particular program or activity.
Fourth, to be self-sustaining, the revolving fund should be adequately funded initially and should receive additional resources when significant increases in its asset base are immediately required. If fees are established in order to meet a specific level of capital need, and that level increases, then some additional resources must be made available for the fund to remain self-sustaining. The additional resources could come from operational savings that are achieved, higher fees to users, or an external injection of funding (i.e., an appropriation). For example, IFMS must expand its service level to include more expensive, alternatively fueled vehicles but is hesitant to either delay vehicle replacements or raise rates and risk losing customers. IFMS officials believe that some of the cost can be funded through operating efficiencies but that additional funds will be necessary if the requirement cannot be modified. Likewise, if PBS must increase the size of its inventory to meet customer demand and past collections have not been designed to fund expansion, then appropriations may need to be considered. Existing reserves may be able to fund expansions of the asset base or service level in the short-term, but using these reserves would ultimately deprive the existing users from having their own assets repaired and replaced. Also, while providing a funding source for asset base expansion, increasing the fees charged to current users may make them pay more than the cost they are responsible for incurring, thus distorting the cost shown in the users’ budgets. Conversely, if demand for the revolving fund’s capital assets declines, resources could be taken out of the revolving fund to be used for other purposes across the government. This is especially the case for a revolving fund that purchases relatively large-scale and heterogeneous assets.
Fifth, if they are to provide a constant level of service, revolving funds typically need to have the flexibility to retain or dispose of assets based on their economic value and be able to reinvest the proceeds in the fund. If a revolving fund is to operate in a business-like fashion, its managers must be able to determine when it is more efficient to invest in new assets than to retain and operate existing assets. If revolving funds tasked with providing constant levels of services are not able to dispose of under-performing or unnecessary assets and retain the proceeds, capital allocation decisions may be distorted. For example, PBS officials cited an experience where their financial analysis indicated that they should sell a building and use the proceeds to acquire alternative space. Although they could still use the building, in the long-term it would have been a more efficient use of resources to purchase new space. However, because PBS is prevented by law from keeping the sale proceeds, PBS retained the building.
Finally, revolving funds, like other funding mechanisms, must operate within an environment of controls if the Congress and OMB are to ensure that resources are well spent and that capital acquisitions reflect the government’s highest priorities. Because revolving fund purchases need not be reviewed by the Congress or OMB, traditional revolving funds may not be appropriate when competition for the fund’s services is lacking and when purchases are relatively large-scale, sporadic, or heterogeneous. Under these conditions, a greater degree of oversight is warranted to ensure that the resources accumulated in the fund are used where most needed governmentwide. Such assets might include buildings and courthouses acquired through the FBF. In contrast, revolving funds that compete with private-sector service providers and that make relatively routine purchases of small-scale, homogeneous assets such as vehicles, may warrant relatively high degrees of autonomy because the external factor of competition forces revolving fund managers to control their costs and effectively allocate resources.
section_title: An Investment Component Encourages Saving for Capital Needs
paragraphs: Another mechanism being used to ameliorate agency problems with up-front funding requirements is USGS’ creation of an investment component within its working capital fund (WCF). The investment component is designed to encourage USGS managers to do better long-range planning for equipment purchases and to enable them to accumulate over time the resources they need to fund capital up-front. In this sense, the WCF investment component operates much like a savings account for a manager at any level to fund capital acquisition. In contrast to a more traditional revolving fund, users of the investment component make voluntary contributions for prospective capital purchases, rather than being charged retrospectively for capital usage. The investment component is a capital financing mechanism that could be useful for other agencies as well. However, expanded use must be accompanied by adequate controls on agency and governmentwide investment component spending to ensure that funds are used as intended and to prevent increases in the deficit.
subsections: section_title: USGS Uses an Investment Account to Accommodate Up-Front Funding
paragraphs: USGS received authority from the Congress to expand its investment component within its WCF to assist in funding laboratory operations, facilities improvements, and replacement of scientific equipment beginning in fiscal year 1995. The investment component was proposed by USGS in response to difficulties experienced in obtaining appropriations for increasingly costly equipment. Over time, USGS had found that an increasing proportion of its annual appropriation was dedicated to fixed operating expenses, such as salaries and rent, with little left for funding long-term capital purchases. Furthermore, since USGS’ appropriation was entirely one-year money—expiring at the end of the fiscal year—the agency was not able to accumulate unobligated balances over a number of years to use for occasional, expensive purchases.
To use the investment component, USGS managers at any level within the organization develop and submit an investment plan, which must be approved by a delegated authority within the respective division or the agency as a whole. The investment plan specifies the asset to be acquired, the estimated acquisition or replacement cost, the number of years required to fund the acquisition, and the schedule of deposits into the fund (annually, quarterly, or monthly, for example). After the investment plan is approved, the division periodically obligates the planned contribution amount from its annual appropriations and pays it to the investment component of the WCF, where it remains available for obligation. Once in the investment component, the contributions can be saved until a sufficient sum—as specified in the investment plan—has been accumulated to purchase the planned asset.
The USGS has imposed internal restrictions on the fund to prevent abuse of the authority. For example, the contributions must be made for at least 2 years prior to the purchase and may not be used for the construction of buildings. Once the plan is approved, contributions to the investment component are held for the specified purpose without fiscal year expiration.
section_title: Investment Components Offer Other Advantages and Limitations
paragraphs: Although it has little history thus far, the WCF investment component conceptually is a unique and useful way for individual agencies to plan for and finance capital assets. None of the officials we talked with at USGS, OMB, or the House of Representatives Appropriations Committee, Subcommittee on the Interior, were aware of any other federal organizations using a similar financing mechanism. Nevertheless, the investment component has several benefits and may be a useful tool for other agencies, especially those with annually expiring funds. First, it encourages agencies to use long-range planning to alleviate the effects of up-front funding capital. Managers must anticipate the capital needs they will have in the future and submit a plan that indicates specifically how they expect to fund the asset need. An investment plan requires the agency to justify spending in advance of receiving the appropriations that will fund contributions. It also gives agencies an incentive to make their own trade-offs between operations and capital and to strive for savings in operations. The investment component achieves this by permitting agencies to set aside annual resources for future capital purchases. While agencies may have some incentive to look for savings in operations even without an investment component, the mechanism provides an impetus to make cuts in operations that may not exist otherwise.
A third advantage of the investment component is that it facilitates agencies funding their highest priority asset needs. When agencies do not have sufficient annual resources to make a particular capital purchase, they may be inclined to devote the resources to acquiring other—possibly less critical but less expensive—capital assets rather than see the funds expire at the close of the fiscal year. And finally, the investment component would contribute toward making program and operating budgets better reflect their cost of capital usage. The investment component will not be as efficient or accurate at allocating capital costs as a revolving fund since it lacks the direct linkage between capital use and charges. However, because contributions are made from the operating budget, the mechanism does help facilitate a more systematic incorporation of capital costs into program expenses.
Despite the potential benefits from investment components, problems could arise if investment accounts were widely used throughout government without adequate controls. For example, if several agencies obtain investment components and each decides to make large purchases in the same year, total outlays could rise sharply and cause a spike in the deficit. Therefore, OMB will need to manage all investment components to ensure that the total investment component outlays do not cause such spikes, even though this may result in deviations from the schedule specified in the agency’s original investment plan.
Furthermore, if the Congress permits agencies to use such investment components, it is giving them relatively more control than they currently possess over the use of their appropriation. Investment component control issues are similar to those of revolving funds (discussed previously in this chapter); thus the Congress would need to have similar confidence in the financial management abilities of agency officials before it permits the establishment of an investment component. Once established, managers should prepare and be held accountable to investment plans to ensure investment component funds are used as intended.
The investment component concept is premised on program managers being able to plan for fixed asset acquisitions by accumulating funds over a period of years and applying them toward a future capital need. USGS officials felt that potential congressional actions to re-allocate these funds, such as rescissions and reductions in future appropriations, would create significant disincentives for managers to contribute. Likewise, these officials felt that program managers would be less likely to contribute if top-level management used contributions for purposes other than those in the investment plan.
Though a promising tool, the investment component can have limitations to its usefulness. Agencies already faced with tight operating budgets may have little to contribute to such an account without making difficult trade-offs with operations, potentially including personnel cuts. Although increasing numbers of agencies have been confronted with downsizing in recent years, some appropriations subcommittee staff still question the willingness of agencies to voluntarily trade-off personnel for capital assets. Furthermore, capital assets must still be budgeted for in advance of any savings they may generate. Capital acquisitions that could “pay for themselves” over time still could not be funded without the agency first carving out funds from elsewhere to pay for them. In an era in which agencies are already faced with budgets that require significant cuts in operations, it is unknown how much willingness may exist among agency heads to exact even deeper cuts in order to fund capital.
section_title: Agencies Can Reduce Their Need to Own Assets
paragraphs: Another way that case studies have dealt with the up-front funding requirement is to take actions that reduce their need to own fixed assets. Two of these strategies include contracting out for goods and services and cooperative arrangements to share assets. For example, officials from the Corps of Engineers have indicated that some functions for which they formerly acquired capital assets—such as producing crushed aggregate—can now be performed by the commercial market at less expense. It is likely that in other agencies as well, government managers have found that increasing specialization among contractors enables agencies to acquire some capital-intensive services more cheaply externally than they can be performed in-house. Contracting out can be useful and cost-effective when asset needs are short-term and non-recurring. However, agencies still incur expenses to monitor contractor performance, and contracting out can be misused to by-pass budget scoring rules for purchases. When the latter occurs, the long-term cost of contracting out can be higher than directly purchasing the asset.
Where practical, USGS has entered into long-term cooperative arrangements with universities and states to share the purchase and use of capital assets that are not needed full-time. Under such arrangements, USGS uses the equipment as needed without bearing the full costs of ownership. Although this arrangement has little fiscal drawback, USGS officials did indicate that some federal requirements for physical tracking of the property are harder to comply with when the assets do not reside at USGS facilities.
section_title: Operating Leases Offer Flexibility but Can Be More Costly
paragraphs: Purchasing is only one of several ways in which agencies may acquire capital assets. Agencies may also use various forms of leases to meet asset needs. The three primary types of leases are operating leases, capital leases, and lease-purchases. Each represents a different degree of risk and financial commitment borne by the government and budget scoring rules are designed to reflect these differences. Operating leases offer agencies the greatest flexibility with the least risk and financial commitment. For short-term needs, operating leases can be the most cost-effective means of acquiring capital assets. However, because of resource constraints and more favorable budget scoring rules, some agencies have substituted operating leases for more cost-effective means of meeting long-term needs. A refinement in the definition of operating leases may be needed in order to assure consistent application of the up-front funding requirement and better comparisons of financing options.
subsections: section_title: Agencies Use Operating Leases Because of Lower Up-Front Cost
paragraphs: Analyses have shown that ownership of capital assets is generally the most cost-effective method for meeting long-term capital needs. However, differences in budget scoring can sometimes affect an agency’s selection of an acquisition method. Budget authority and outlays for purchases and lease-purchases where the government assumes substantially all risk, must be scored up-front, regardless of when the actual outlays occur. Budget authority for capital leases is scored up-front with outlays scored over the lease period. These scoring conventions were adopted to recognize the full extent of the government’s commitment and to facilitate comparisons of the long-term cost of the various financing methods. Operating leases, in contrast, are intended primarily to meet short-term capital needs. Budget authority and outlays for operating leases are scored over the lease period in an amount equal to the annual lease payments. Because of these budget scoring conventions, however, a long-term operating lease will require considerably less budget authority during the initial years than would a capital lease or a lease-purchase of the same duration. This difference in up-front cost, coupled with resource constraints, has led some agencies to use operating leases to meet long-term needs—even though the long-term cost of such leases is projected to be higher.
Officials at PBS indicated that their organization has frequently used operating leases to acquire office space when budget resources were inadequate for purchases. PBS officials have been faced with customer demands for long-term office space that exceed that which PBS can purchase given its available budget resources. As a result, PBS has entered into operating leases in order to meet agency demands for space. Although such leases could be used as an interim measure until such time that a purchase is possible, in many cases the leases have become a more expensive, long-term solution to agency space needs.
IFMS officials indicated that they have also used operating leases in lieu of purchases when budget resources were insufficient. IFMS’ take-over of the management of the Department of Defense’s (DOD) fleet of vehicles placed additional demands on the resources of the IFMS. IFMS determined that sufficient resources were not available to fund replacement of the DOD vehicles and so turned to operating leases as a means to acquire new, more cost-effective vehicles for DOD until funds could be accumulated in the revolving fund for purchases. IFMS officials believe that vehicle purchases would have been more cost-effective but that leases were needed to meet immediate customer needs when budget resources were not available.
Some case studies did not consider operating leases to be a viable alternative to ownership because the assets they acquire tend to be somewhat specialized. To the extent that the commercial market for the asset is small, it is less likely that leasing will be feasible. For example, Coast Guard and USGS officials said that leasing ships and some scientific equipment, respectively, were not viable options for meeting their capital needs. These officials generally indicated that purchases are the most cost-effective method of acquiring capital assets for their organizations.
section_title: Budget Scoring of Long-Term Leases Should Reflect Their Total Cost
paragraphs: Operating leases can provide an important measure of flexibility to agencies to meet short-term capital needs without incurring the cost and long-term obligation of ownership. For federal office buildings, factors such as governmentwide downsizing, changing conditions in the real estate market, and uncertainty about agency missions all make operating leases a valuable tool for the federal government to manage its asset requirements in the face of uncertainty. PBS has maintained that part of its portfolio should be in the form of leased space in order to preserve a degree of flexibility to respond to changing needs. It is important that operating leases have a budgetary treatment that allows them to be available to meet genuine short-term needs. However, deficiencies in the current budget scoring rules have resulted in an over-reliance on operating leases and need to be rectified. Previously, we have noted that applying the principle of up-front full recognition of the long-term costs to all options for satisfying long-term space needs—purchases, lease-purchases, or operating leases—is more likely to result in selecting the most cost-effective alternative than applying the current scoring rules.
Operating leases were not intended to be used as a substitute for ownership. When operating leases are used to meet long-term needs, the total cost of the project decision—spread over many years as lease payments—is understated in the first-year’s budget. When operating leases are used to avoid up-front budget scoring, the agency may be using a financing method that is more costly in the long-run. Ideally, budget scoring should be neutral in its effect on decision-making. However, current scoring rules are driving some decisions to use operating leases. For space acquisition, neutrality would be better accomplished by recording in the budget the long-term cost of space regardless of the type of financing. If this is done, the agency’s decision-making about which financing option is used would be driven by what makes the most sense economically and programmatically, not by what scores most favorably in the budget.
PBS officials have suggested that there would be less need to use more expensive operating leases if budget authority for lease-purchases was still scored over the term of the lease, as it was prior to BEA. However, the change in scoring for lease-purchases was necessary to recognize the full commitment of the government and to ensure compliance with the requirement of up-front funding. The budget now recognizes the higher cost typically associated with lease-purchases compared to direct purchases. Officials at OMB stated that some operating leases currently in use for long-term needs are really more like capital leases because the buildings have been or will likely be leased for the bulk of the asset’s life. They indicated that such leases ought to have budget authority scored up-front. Although it may be difficult for policy makers to know for certain when a capital need will be long-term, some OMB officials believe that a tightening of the definition of an operating lease is warranted to ensure that the budget process leads to better economic decisions.
section_title: Case Studies Seek Additional Tools for Responding to Up-Front Funding
paragraphs: Officials at some case study organizations indicated that they would be able to better meet their capital needs and the requirements of up-front funding if they had additional financing tools available. IFMS officials, for example, believe that authority to borrow from the Treasury against the value of the fleet would help them manage resources more efficiently. Similarly, PBS officials desired authority to borrow against future rental income to finance space acquisition. On the other hand, legislation has been enacted that would allow the Coast Guard to offer loan guarantees and to enter into limited partnerships with nongovernmental entities in order to finance construction of employee housing without bearing the full cost up-front. Officials at OMB and the appropriations subcommittee staffs expressed concern that allowing agencies to borrow against their assets would pose a threat to governmentwide fiscal control by permitting agencies to create budget authority without receiving appropriations. These officials had mixed opinions about the Coast Guard’s loan guarantee and limited partnership proposals and believe that further information would be needed to evaluate their soundness. We agree with their conclusions.
subsections: section_title: Borrowing Authority Is Sought by IFMS and PBS
paragraphs: An IFMS official stated that current budget rules do not lend themselves to the efficient financial management of business-oriented revolving funds, and that IFMS would like to manage its revolving fund on a “balance-sheet basis” instead. The official stated that limiting the revolving fund’s obligations to those that can be made with the unobligated balances of its budget authority constrains capital spending when balance sheet analysis would suggest that the fund possesses highly liquid resources that could be made available to fund capital acquisition. Managing on a balance sheet basis means that budgetary resources would be re-defined to include the book value of vehicles. Allowing IFMS to manage on a balance sheet basis would be comparable to giving it a line of credit or authority to borrow from the Treasury. This would enable IFMS to purchase vehicles when expanding the fleet, rather than using more costly operating leases. The IFMS official indicated that, in general, authority to borrow would enable them to hold lower cash balances and to manage the fleet in ways that more closely parallel those of private-sector rental car companies.
PBS would also like to use borrowing authority to fund capital assets. One PBS official noted that although PBS is often compared with private-sector real estate providers, PBS lacks the financing tools the private sector uses to manage efficiently. For example, private-sector real estate companies can borrow against the value of their long-term leases, but PBS cannot. If PBS could borrow from the Treasury to finance a purchase, PBS officials believe that budgetary resources spent on operating leases could instead be used to repay the mortgage—and at less cost to the government in the long-run. PBS has found that lease-purchases can be more cost-effective in the long-term than operating leases and had used them prior to BEA to finance asset acquisition over time. Borrowing from the Treasury would enable PBS to do the same but at lower cost.
Permitting agencies to borrow against the value of their assets is, in effect, allowing them to create budget authority, thus diminishing congressional control and oversight. Officials at OMB and appropriations committee staffs felt that such a practice would inhibit control of total federal expenditures and increase government borrowing. Officials also expressed concern about the consequences if an agency were unable to repay a loan from rental collections and was forced to sell agency assets to make repayments. While the sale of a vehicle raised less concern than the sale of a building, officials felt that regardless of the asset in question, the practice would be difficult to control. The Congress could also be forced into making an appropriation in order to compensate for the shortfall in income.
With regard to PBS specifically, OMB examiners felt that the resources going into the FBF were adequate to meet PBS’ needs—given government downsizing and the moratorium on new office space construction. They indicated that if there are needs that cannot be met with the available resources—possibly courthouse construction—the agency should request an appropriation, and that request should compete with other budgetary options. If PBS’ request is not funded, it reflects the fact that OMB and the Congress have established higher priorities elsewhere. Borrowing authority should not be used to circumvent the appropriations process. While PBS, unlike the private sector, may not borrow against the value of its assets, it does receive financing through appropriations. An appropriation would be viewed as a gift in the private sector since it does not have to be repaid nor is it required to produce returns to investors.
section_title: The Coast Guard Received Authority for Equity Partnerships and Loan Guarantees
paragraphs: Recently enacted legislations gives the Coast Guard authority to enter into certain financial arrangements with private-sector developers. This authority, modeled after similar legislation enacted for DOD, provides a variety of tools for the Coast Guard to draw upon. These new tools include authority to enter into limited partnerships and to offer loan guarantees. Each of these could be used as an inducement for private developers to construct housing in remote locations. By underwriting the cost to the developer, Coast Guard officials believe that housing can be obtained for considerably less than if the Coast Guard were to build it directly.
Under the equity partnership arrangement, the Coast Guard would pay up to one-third of the cost rather than the full cost of construction. An early DOD’s proposal implied that under this arrangement the developer would receive no rental guarantees but would recoup its investment through rent paid by employees and members of the general public who use the facilities. The government would also be repaid its investment through rental charges. Under the loan guarantee program, the Coast Guard would guarantee loans made to a developer if the proceeds are used to acquire or construct certain Coast Guard housing. Coast Guard officials believe that guarantees could be necessary because of the perceived risk by lenders that the Coast Guard will not be in an area long enough for the developer’s loan to be repaid. Under both of these methods, Coast Guard officials believe they also save by having private developers provide the housing and avoiding expenses that would be incurred complying with construction regulations for federal projects.
OMB analyzed the scoring implications of the original DOD proposal in May 1995. This analysis suggested that with equity partnerships, only the government’s equity investment would be scored up-front. It also suggested that only the subsidy cost of the loan guarantee program would be scored up-front. However, more recent discussion with OMB officials has raised questions about whether such arrangements resemble capital leases, and therefore whether a different scoring would apply. An OMB official also suggested that because Coast Guard housing is often in more remote areas than DOD’s, the authority may be less suitable for the Coast Guard than it is for DOD. Where the Coast Guard is virtually the only user of the property, the arrangement more closely parallels a capital lease than an operating lease. This is because there is no private-sector market for the housing and the Coast Guard is providing financing mechanisms that presume it will occupy the housing for more than 75 percent of its economic life. Both of these are key features of a capital lease. It is clear that more detail would need to be available about any specific agreements before a definitive conclusion can be drawn about the appropriate scoring of these proposals or their economic value to the government.
section_title: Certain Mechanisms Enabled Case Studies to Deal With Other Capital Spending Impediments
paragraphs: In addition to up-front funding, case studies found other features of the budget process and their accounts impaired their ability to acquire capital. Uncertainty over future missions and funding levels, account features that affect trade-offs between operating and capital needs, and constraints on the use of proceeds from asset sales may be impediments from an agency’s perspective. However, the Congress needs flexibility to ensure that the government’s overall spending decisions reflect the nation’s current priorities. Our case studies illustrate that a variety of strategies are available to mitigate impediments for agencies without diminishing opportunities for congressional oversight or flexibility to change funding levels.
subsections: section_title: Case Studies Find Various Tools Useful for Managing Changes in Missions and Funding Levels
paragraphs: The Congress and the administration must continually assert control over agency planning and funding decisions to ensure that the nation’s priorities are met. Changes in missions and funding uncertainty are inevitable and justifiable if the Congress is to respond to the nation’s priorities. However, such changes make planning and conducting cost-effective capital acquisitions more difficult for case study managers. Our case studies used mechanisms discussed previously, such as revolving funds and budgeting for stand-alone stages, as well as reprogramming authority, to respond to changes in their political and fiscal environments while preserving Congress’ ability to direct such changes and oversee agency responses.
subsections: section_title: Changes in Missions and Funding Uncertainty Can Hamper Capital Planning
paragraphs: The Congress cannot guarantee steady annual funding streams (beyond that provided for stand-alone stages) if it is to be responsive to changing priorities and resource levels, but the prospect of mission or funding changes can increase the difficulty associated with planning and managing multiyear or risky capital purchases. For example, the Corps can successfully plan cost-effective construction projects only by assuming future funding levels. However, if planned funding fails to materialize, the Corps may have to deviate from these plans, and the project may become more expensive than estimated.
Uncertainty over future responsibilities and funding can affect less expensive capital acquisitions with shorter completion times too. For instance, USGS officials speculated that managers may not feel comfortable committing to future WCF contributions for equipment purchases when they cannot predict how much of their future budgets these contributions will absorb. USGS officials also suggested that managers may be reluctant to contribute to the WCF if they believe the Secretary of the Interior might use contributions to meet other priorities.
Funding delays or shortfalls can also affect agencies’ abilities to design effective and efficient fixed asset procurement. Although such delays may be warranted by the emergence of higher priorities, the cost of the postponed project is likely to increase. For example, the Coast Guard structures its acquisition strategies to assure contractors of minimum levels of production that will keep costs low. In their response to OMB Bulletin 94-08, Coast Guard officials wrote that funding that is insufficient to support acquisition strategies or rescissions can cause contractor shut-downs and make designs obsolete, adding to projected costs. For example, the response says that, when acquiring the HH-60 helicopter, the Coast Guard paid a premium of $1 million to $2 million per aircraft because funding was not provided to purchase a number of aircraft that would enable the contractor’s production line to operate efficiently. FDA officials said they have been reluctant to fund repairs and maintenance on some current work space because of the agency’s planned consolidation into fewer locations. They also stated that FDA will incur expensive repairs if the existing space continues to be used.
section_title: Some Tools Balance Agency Flexibility With Congressional Control
paragraphs: As noted previously, revolving funds can provide a steady and secure stream of funding and encourage long-term planning for capital acquisitions while allowing opportunity for some congressional oversight. For example, by recovering depreciation and an inflation increment from users over an asset’s useful life, the Corps’ revolving fund helps ensure that funds will be available to replace the asset when needed and that program budgets absorb the cost of capital. Consequently, managers must plan what and when acquisitions will be made in order to maintain a self-sustaining revolving fund. However, the Corps’ appropriations subcommittees exercise oversight responsibilities by approving every revolving-fund, fixed-asset acquisition of $700,000 or more and implicitly approving all acquisitions through an annual target on revolving fund obligations for capital assets.
When agencies experience changes in mission or funding needs, reprogramming can be used to move funds between projects. Because funds are appropriated for specific purposes, the Congress wants to know when substantial deviations from the intended use of funds are made or when needs no longer exist. Therefore, the Congress may place limits on the amount of reprogramming that can be done without its prior approval. In certain situations, these limits may be necessary if the Congress is to provide effective oversight.
Reprogramming can be an effective management tool if used as intended by the Congress. Reprogramming authority allows funds to flow to new priorities or can help complete projects when actual costs exceed original estimates. For example, the Corps revolving fund has used reprogramming authority to accommodate fluctuations between anticipated and actual bids of contractors on fixed asset acquisitions. Up to 10 percent of the funds within the Corps’ fixed asset categories can be diverted from one acquisition to another without prior approval by the Corps’ appropriations subcommittees. When reprogramming requires the subcommittees’ approval, informal relationships between Corps officials and congressional staff help the Corps receive a quick response to reprogramming requests. The Coast Guard has also taken advantage of reprogramming authority to respond to variances between estimated and actual costs for construction projects. Nevertheless, Coast Guard officials feel they are constrained in addressing some new and changing priorities because of limits on their reprogramming authority. (The Coast Guard needs its appropriations subcommittees’ approval to reprogram more than the lesser of $1 million or 15 percent of the total amount appropriated for a project and cannot reprogram between categories of appropriations in the Acquisition, Construction, and Improvements account (AC&I).) Officials at Coast Guard and NOAA expressed concern about the time involved in seeking reprogramming authority. Some of the time involved in reprogramming is due to obtaining approval within the agency, and it is unclear to what extent agencies inhibit use of reprogramming by designing cumbersome, internal procedures for requesting the authority.
Agencies can also attempt to manage funding uncertainty by dividing multiyear capital projects into stand-alone stages that can be acquired and budgeted for separately. For example, Coast Guard acquisitions are sometimes structured as a base-year contract for a limited quantity of items with options to buy between a minimum and maximum quantity in future years. This structure permits the contractor to produce economically while acknowledging the inherent uncertainty of future funding levels. This acquisition strategy does not ensure that multiyear acquisitions will be completed as planned but attempts to balance agency desires for certainty with the Congress’ responsibility to allocate resources in a changing environment. With this strategy, the Congress indicates an initial agreement to the total purchase but still has the prerogative to fund less than the minimum quantity.
section_title: Account Features Affect How Trade-Offs Between Capital and Other Expenditures Are Made
paragraphs: Various features of an account—its congressional and executive review structures, its purpose, and the period for which its funds are available—can affect an agency’s ability to justify and make effective capital purchases. Each can influence how lawmakers view the trade-offs between types of capital spending or between capital and operations spending. Where certain account features seemed to discourage what case studies perceived to be prudent capital decisions, case studies sought other features, such as longer periods of funding availability and separate appropriations accounts for capital. Although certain account features may facilitate justifying or executing fixed asset purchases, case study officials stated that some types of asset purchases tend to be more difficult to support regardless of an account’s features. As a result, case studies have developed strategies unrelated to account features, such as more comprehensive budget justifications, to better explain capital needs.
subsections: section_title: Congressional and Executive Review Structures May Affect Consideration of Capital Expenditures
paragraphs: Congressional committee jurisdictions and executive organizational budget review structures have developed over time to fulfill a variety of needs and purposes. When these are different, a competitive conflict could arise. For example, FDA faces two different sets of competitors in the budget process. OMB includes FDA’s budget within the spending cap applied to FDA’s parent agency, the Department of Health and Human Services (HHS), even though FDA is not funded by the same appropriations subcommittee as HHS. As a result, during the administration’s budget formulation, FDA competes against other HHS programs which are not reviewed by FDA’s appropriations subcommittee. The difference in executive and congressional review structures might result in a proposed capital project being eliminated under one set of competitors when it might have survived amongst another set.
section_title: Purpose of Account Affects Justification of Capital Expenditures
paragraphs: Some capital expenditures can be more difficult to justify when funded from an account whose primary purpose differs from that of the capital spending request, such as a salaries and expense account that funds mostly operational expenditures. Most capital spending across the government occurs from accounts whose primary purpose is to fund capital assets. However, where dual-purpose accounts exist, they can distort the cost of capital in the budget year relative to other expenditures or affect perceptions of the capital spending’s acceptability. Dual-purpose accounts can also result in operating expenditures obscuring capital needs in some instances.
subsections: section_title: Distortions in the Cost of Capital
paragraphs: Capital projects funded in accounts comprised largely of operating activities may seem more expensive than capital projects funded in other types of accounts in the budget year. This occurs because, when scoring outlays, accounts that contain mostly salaries and operating expenses have a first-year spend-out rate closer to 100 percent when capital expenditures have historically been a relatively small or sporadic component of the account’s spending. Conversely, accounts that have traditionally funded mostly capital expenditures receive a low, first-year spend-out rate that reflects the typical multiyear pattern of construction cash flows. For example, the Coast Guard’s Operating Expenses account has a first-year spend-out rate of 80 percent; the AC&I account has a first-year spend-out rate of 17 percent. When outlay constraints are tight and capital is a relatively small or nonrecurring expense, capital expenditures funded in operating accounts may yield higher first-year outlay estimates than capital expenditures in capital accounts and, therefore, may be less likely to be funded.
On the other hand, the use of predominantly capital accounts with lower first-year spend-out rates can protect new construction when budgetary cuts are being made. A new $100 million construction project makes fewer outlays in the first-year, and thus can produce fewer outlay savings in that year, than a $100 million operating account. Therefore, a much larger amount of new construction budget authority would have to be cut to achieve a given amount of outlay savings than if operating funds were cut. Accordingly, when outlay savings are needed, capital accounts may have an advantage over operating accounts.
Spend-out rates may also potentially affect the trade-offs between different types of capital expenditure when they are funded out of the same accounts but outlay at different rates. For example, PBS funds all capital expenditures from the same account, but each type of expenditure has a different outlay rate. Purchases of existing buildings have a 100 percent first-year outlay rate, repairs and alterations have a 20 percent rate, and new construction a 3 percent rate. The remaining outlays for repairs, alterations, and construction will be scored in subsequent years. While many factors, including future years’ outlays, affect how capital is acquired, outlay scoring would appear to make new construction considerably more attractive than buying an existing building. Though market conditions may make the purchase of existing buildings more economical than constructing new ones, the outlays of the former will be higher in the budget year. Likewise, repairs and alterations can initially appear more expensive than new construction. Extensive budget justifications showing the most effective use of capital are particularly important in such cases.
section_title: Perceptions of Acceptability
paragraphs: The purpose of the account may also affect perceptions of the acceptability of capital expenditures. A congressional staff member explained that recent Treasury secretaries may have been reluctant to request funding to repair the Treasury building. The staff member opined that because such repairs would traditionally be funded from the Office of the Secretary’s discretionary budget account, the secretaries may have believed they would be criticized for increasing their office budgets. To make the purpose of the funding more readily apparent and to achieve a lower first-year spend-out rate for the repairs, the subcommittee created a separate account for Treasury repairs and maintenance in Treasury’s fiscal year 1996 appropriations act. Separate repairs and maintenance accounts were also created for the White House and the National Archives.
section_title: Obscured Capital Needs
paragraphs: Placing operating and capital expenses in a single account may help simplify oversight and can encourage agencies to take the initiative in making trade-offs between capital and operating expenditures. However, such dual-purpose accounts can hinder agencies’ capital requests when operating expenses are large enough to obscure capital needs. For example, USGS justifies the budget for its Surveys, Investigations, and Research account by program. Program line items generally represent USGS activities, such as water resources investigations, rather than the types of items USGS would like to fund, such as fixed assets. USGS officials believe this budget structure hides the increasing cost of scientific equipment by combining these expenditures with large program operating costs.
Although combining capital and operating expenses in one account may hide some capital needs, agencies have other means to illuminate them. Budget justifications can be used to highlight capital needs and costs of alternatives if capital is not visible in the account structure. To help emphasize capital needs, USGS created a separate “digital mapping” modernization line item in its budget justification. In another instance, USGS explained to the Congress that leasing a mainframe computer would cost over 20 percent more than purchasing.
Other case study officials feel separate capital accounts are needed to protect or raise the visibility of capital. The Coast Guard stated that its dedicated capital account has helped mitigate a crowding out of fixed asset acquisitions and has focused attention on capital. OMB proposed that PBS’ construction and acquisitions be placed in an account separate from the FBF to highlight the magnitude of these needs and to prevent them from crowding out repairs and alterations.
However, a separate appropriations account for agency capital may inhibit collection and knowledge of the total costs of each of an agency’s programs. If capital appropriations are not charged back to managers’ budgets, capital may seem inexpensive and, thus, be used inefficiently. Segregating capital into a separate appropriation account may also discourage trade-offs between related capital and operating spending. However, such trade-offs can be promoted by the use of separate revolving funds for capital assets. Rather than relying on appropriations, revolving funds charge program managers for their use of capital assets, as discussed in chapter 3.
section_title: Length of Fund Availability Affects Agencies’ Ability to Make Capital Acquisitions
paragraphs: Some agencies are able to justify acquisitions but may have difficulty executing them when funds expire before projects can be completed. Multiyear and no-year funding help agencies accommodate capital’s longer acquisition cycle. For example, Coast Guard and Corps construction projects generally need multiyear appropriations because their acquisition cycles can last several years. No-year funding is commonly provided through revolving funds. Through charges to users, revolving funds convert annual or multiyear appropriations into no-year funding that an agency can accumulate for large-scale acquisitions. All of our case studies had the opportunity to fund capital through multiyear appropriations or a revolving fund. However, even with multiyear funding, the period of availability may not always be appropriate. For example, the Congress and the Coast Guard have had difficulty agreeing on the period of fund availability that is long enough to complete the agency’s projects and short enough to discourage delays.
The Congress has been fine-tuning the Coast Guard’s fund availability over the last several years. For fiscal year 1992, the Congress shortened the availability of shore, other equipment, and aircraft funds from 5 to 3 years to encourage quicker completion of projects. The House of Representatives Committee on Appropriations, Subcommittee on Transportation, reasoned that Coast Guard’s funding availability should be patterned after an agency that makes similar acquisitions, DOD, especially since DOD’s acquisitions are generally more complex. However, on some occasions in the past, Coast Guard officials have found it difficult to obligate funding for shore facilities within 3 years. Because shore projects are sometimes linked to vessel projects which have 5-year availability, vessel design changes could delay the obligation of shore funds. If a vessel project were delayed too long, funding for completion of the related shore facility could expire. In cases where the timing of one project affects another, it is important for the affected agency to work with its appropriations subcommittee to ensure that funds are available during the period needed.
In addition, agencies with one-year appropriations cannot annually set aside and accumulate funds needed to make expensive fixed asset acquisitions. Prior to creating a WCF investment component, USGS had to fund all capital acquisitions with annually expiring appropriations. USGS had no ability to spread the cost of an expensive purchase over a number of years by saving some funds each year. Without a significant increase in appropriations, only relatively inexpensive purchases could be made.
The Congress can maintain control over no- and multiyear funding through a variety of means. For example, the Congress encourages timely completion of projects and exercises control over the Coast Guard’s multiyear appropriations by requiring quarterly reports of progress on major acquisitions and by sometimes limiting funding of projects to stand-alone stages. Recent legislation may also help the Congress oversee the use of no- and multiyear funding governmentwide. The Federal Acquisition Streamlining Act requires that executive agency heads (1) set cost, performance, and schedule goals for major acquisition programs, (2) monitor the programs to ensure they are achieving, on average 90 percent of the established goals, and (3) take corrective actions, including termination, on programs that do not remain within the permitted tolerances. FASA also requires OMB to report to the Congress on agencies’ progress in meeting these cost, schedule, and performance goals.
section_title: Agencies Believe Some Capital Expenditures Are Inherently More Difficult to Justify
paragraphs: Regardless of any account features that affect capital—congressional or executive review structures, purpose, or period of availability—case study officials felt capital expenditures with less visible benefits are inherently more difficult to justify. Explaining the costs and benefits of less tangible assets is difficult, and the Congress may have more difficulty understanding the explanation. The Coast Guard and NOAA indicated that needs for visible, safety-related assets are easier to articulate than needs for information technology or research projects. Congressional staff generally agreed but noted that agencies sometimes poorly explain the need for information technology. Congressional staff acknowledged that spending for assets with visible and tangible benefits, such as new construction, may be favored over less visible assets, such as major modernization or repairs. However, some staff also perceived agencies as being unwilling to cut personnel costs to free funds for capital in general.
Agency problems in justifying assets with administrative or intangible benefits emphasize the importance of adequate budget support for all capital asset acquisitions. Such support should include risk and cost-benefit analyses of alternative acquisition methods and show scenarios of long-run spending under various operating and capital spending levels. Inherently risky or intangible assets may require the agency to provide additional documentation or presentations to their appropriations subcommittees.
section_title: Asset Sales Questions Pit Managerial Autonomy Against Congressional Control
paragraphs: Agencies and the Congress tend to take different sides on the question of whether agencies should retain proceeds from the sale of their assets. Officials at our case studies feel the ability to keep proceeds can provide the incentive needed to dispose of properties that are no longer needed or costly to maintain. Therefore, they would like to reinvest disposal proceeds in maintenance or acquisition of new assets. Some in the Congress are concerned that agencies might use asset sales as a means of skirting the appropriations process. Despite these concerns, the Congress allows some agencies, especially those with revolving funds, to retain asset sale proceeds. Our case studies illustrate that allowing agencies to retain disposal proceeds may be warranted under limited circumstances.
subsections: section_title: The Congress Determines Whether Agencies Can Retain Proceeds From Asset Sales
paragraphs: The Congress has selectively determined which organizations or funds can keep disposal proceeds. Some revolving funds, such as those of the Corps and IFMS, are permitted to retain asset sale proceeds; but some, such as that of PBS, are not. Where assets have been acquired through appropriations, such as at the Coast Guard, agencies have usually not been permitted to keep sales proceeds. Whether they have revolving funds or receive appropriations, our case studies cite the inability to retain disposal proceeds as an impediment to capital acquisition and a disincentive for asset disposal.
PBS officials cite the inability to obtain and keep proceeds from the sale of GSA properties as one factor that keeps the FBF from being self-sufficient. Any proceeds from asset sales must be deposited into a land and water conservation fund. PBS officials indicated that this can create a disincentive to dispose of less cost-effective properties. The other revolving funds operated by our case studies can retain disposal proceeds and have fewer restrictions on disposal of assets. Although the Corps considers disposal proceeds a minor source of funding, IFMS relies heavily upon proceeds from the sale of vehicles to sustain operations and keep rates competitive with the private sector.
Similarly, Coast Guard officials were supportive of recently enacted legislation that allows the agency to keep proceeds from the sale of housing and reinvest them in maintenance or new housing. Coast Guard officials say the agency’s employees have difficulty finding affordable, local housing to rent in remote or resort areas and, therefore, the Coast Guard often needs to construct housing for them. The Coast Guard would like to be able to enhance its ability to meet new construction and repair needs by disposing of less important or less cost-effective properties and investing the proceeds in higher priority areas. Currently, the Coast Guard generally cannot dispose of one property in order to invest in another unless specifically provided by law. When housing property has been disposed of, proceeds have been returned to the Treasury.
Recently enacted legislation establishes a Housing Improvement Fund for the Coast Guard. Appropriations and proceeds from the sale or lease of Coast Guard property or facilities would be deposited into the fund. The Coast Guard would be authorized to use the fund for acquiring housing to the extent provided in appropriations acts. If the Coast Guard is expected to maintain a constant level of housing, this authority appears appropriate because the Congress retains control and oversight, and proceeds can be used to reduce future appropriations requests.
section_title: Circumstances May Justify Some Agencies Retaining Proceeds
paragraphs: The Congress permits most agencies with revolving funds to keep proceeds from the disposal of assets but generally does not allow agencies that finance capital from appropriations to retain disposal proceeds. This dichotomy occurs because revolving funds are established for the business-type activities of the federal government and must retain some business-like tools if they are to be self-sustaining. Prohibiting a revolving fund from retaining disposal proceeds may impede the fund’s ability to cover all of its costs and encourage fund managers to seek additional sources of financing, such as appropriations or increased user charges. In contrast, agencies that acquire capital with appropriated funds do not retain disposal proceeds under most circumstances because they are expected to request appropriations for regular maintenance and replacement of assets.
Under some conditions, revolving funds may not need to retain proceeds from the sale of assets. If a fund no longer needs to replace some assets, because of agency downsizing, for example, the proceeds may be more appropriately returned to the Treasury to reduce federal borrowing or to fund other needs instead of being spent by the fund. If the proceeds are relatively large, the Congress may wish to weigh the needs of the fund with the needs of other activities that could benefit from additional funding.
section_title: OMB’s Effort to Improve Planning and Budgeting for Fixed Assets
paragraphs: In July 1994, OMB began an effort to identify issues related to planning and budgeting for fixed assets. This effort was spurred, in part, by National Performance Review (NPR) recommendations aimed at improving fixed-asset planning and budgeting. OMB requested information regarding agencies’ fixed-asset needs and concerns and used that information to assess governmentwide and agency-specific planning and budgeting practices. Responses to OMB’s request, which varied in completeness, revealed that agencies were using a variety of practices to plan and budget for fixed assets. The responses also provided OMB with insights into issues of concern, such as up-front funding. Up-front funding became the focus of OMB’s follow-up effort in 1995. As a result, the President proposed, for fiscal year 1997, full funding for several new and ongoing capital projects that otherwise would have been incrementally funded. For the fiscal year 1998 budget, OMB is requiring that agencies request full up-front funding for all capital acquisitions and that agencies show how their capital plans relate to the goals and plans of three performance-related initiatives—GPRA, the Federal Acquisition Streamlining Act of 1994 (FASA), and the Information Technology Management Reform Act of 1996 (ITMRA).
subsections: section_title: Agency Restructuring and Increasingly Limited Resources Prompted Review of Planning and Budgeting for Fixed Assets
paragraphs: OMB issued Bulletin 94-08, “Planning and Budgeting for the Acquisition of Fixed Assets” in July 1994 as an initiative to improve the acquisition of fixed assets. The Bulletin emphasized the importance of effective fixed-asset acquisitions in an era of declining resources. Restructuring and downsizing pressures may tempt agencies to forego or neglect fixed-asset acquisitions; but, certain purchases, such as information technology, may be critical in enabling agencies to do more with less.
OMB also acknowledged that certain aspects of the budget process may exacerbate these tendencies. Recognizing many of the financing issues raised by our case studies, the Bulletin suggested that one-year funding may not allow sufficient time to complete the acquisition process, that one-time, large increases in appropriations requests for asset acquisitions (lumpiness) may make capital spending relatively less attractive, and that combining spending for capital and operating expenses in one account may crowd out fixed-asset purchases. The Bulletin emphasized that agency planning and budgeting, as well as OMB’s review process, must be improved.
As a first step toward making such improvements, the Bulletin required agencies to prepare and justify 5-year spending plans for the acquisition of fixed assets and to conduct a review of funding mechanisms for fixed-asset purchases. The Bulletin stated that the 5-year plans would be used to develop the fiscal year 1996 President’s budget and to discuss fixed-asset acquisitions in the budget. Agency review of funding mechanisms was intended to assess the adequacy of current funding mechanisms for fixed assets and to consider whether the full cost of fixed-asset acquisitions was being recognized in budget requests. Agencies were asked to consider expanding the use of multiyear appropriations, asset acquisition accounts (either revolving fund or appropriation accounts), and other mechanisms that might alleviate funding difficulties.
section_title: Completeness of Bulletin Responses Varied
paragraphs: OMB received data from most agencies expected to respond to the Bulletin, but the completeness of the responses varied. OMB officials expected 14 executive branch agencies would respond to the Bulletin on the basis of previously reported spending on fixed assets. Of these 14, 4 did not respond. Conversely, OMB received responses from three agencies not expected to respond. All of our case studies responded to the Bulletin, but the content of their submissions varied. The Corps’ and USGS’ responses were limited because neither agency had many fixed-asset purchases that met the Bulletin’s reporting threshold. The Coast Guard and PBS used budget justifications and other previously prepared documents to support their 5-year plans and fulfill the Bulletin’s request for a description of the planning process. Of the 13 agencies responding to the Bulletin, only the Department of Veterans Affairs (VA) and the Coast Guard extensively discussed their evaluation of particular funding mechanisms for fixed asset purchases.
section_title: Two Agencies Discussed Funding Mechanisms for Fixed Assets
paragraphs: VA’s response stated that “significant savings to the government could be realized if the type of acquisition was not determined prior to preparation of the budget.” Noting that economic conditions can change in the minimum of 3 years between budget preparation and appropriation, VA explained that the acquisition method initially selected may not be economically viable or ideal at the time of purchase. To address this situation, VA managers discussed creating a single real property acquisition account where space need and budget authority need are identified in the budget prospectus and the particular acquisition strategy is determined upon execution of the purchase.
The Coast Guard discussed its ability to mitigate crowding out of fixed assets and its concern over the length of its fund availability. Funding both capital projects and the personnel needed to implement those projects as separate appropriation categories within a single account protects fixed-asset categories from competing with each other or non-capital expenditures. By forecasting and ranking long-term capital needs, the Coast Guard’s capital investment plan allows the agency to control the frequency with which large spikes in appropriations are needed. Funding spikes are also managed by dividing acquisitions into stand-alone stages or components that can be budgeted for separately and over a period of years. However, the Coast Guard stated that the 1- and 3-year availability of capital personnel and shore funding, respectively, was inadequate to accommodate mission changes.
section_title: Case Studies Found Bulletin’s Requirements Easy to Meet With Previously Reported Data
paragraphs: Officials of case study organizations indicated that they made no significant changes in their capital budgeting practices as a result of the Bulletin. These officials also did not perceive any differences in the way OMB viewed their budget request as a result of the Bulletin responses. However, PBS officials felt the Bulletin was a constructive step in acknowledging their concerns over scoring inconsistencies and encouraging their efforts to focus on multiyear financial planning and the type of space being acquired. The Bulletin also prompted PBS to begin to focus on the outlay impact of their capital acquisitions.
Officials from our case studies generally felt the Bulletin response was easy to prepare because some fixed-asset data were being reported to OMB or the Congress in other formats. Officials from the Corps of Engineers, the Coast Guard, and USGS stated that the 5-year spending plans contained data that OMB or the Congress had previously seen in other reports.
Therefore, these officials easily prepared Bulletin responses but thought the requirements were already being met through other submissions to OMB or Congress. For example, USGS had already provided detailed justification materials on its two purchases that met the Bulletin’s reporting threshold under other OMB mandates.
section_title: Bulletin Responses Helped Identify Problems With Planning and Budgeting for Fixed Assets as Well as Mitigating Strategies
paragraphs: An OMB official who helped develop the Bulletin acknowledged that the comprehensiveness of Bulletin responses varied but felt that the responses were useful in identifying issues for further consideration. This official speculated that the content and completeness of agency submissions may have been affected by the short time frame agencies had to respond and by the fact that agencies were being asked to supply fixed-asset data for the first time. Concerned with balancing its need for information and the agencies’ burden in supplying the information, OMB accommodated nonresponses through subsequent data requests by its program examiners. These requests and the formal Bulletin responses supported a narrative summary and 3-year table of “Fixed Asset Acquisitions” in the President’s fiscal year 1996 budget.
The responses also supported the first-ever OMB Director’s review of fixed assets. Director’s reviews, at which the Director of OMB discusses and decides upon recommendations made by OMB examiners, are held on a limited number of topics each year. These discussions are significant because they can shape the content and presentation of the President’s budget. The Director’s review of fixed assets identified problems in planning and budgeting for fixed assets as well as mitigating strategies. The review found that some agencies lacked an integrated planning and budgeting process for fixed assets. For example, some agencies did not reflect operational changes that would occur from information technology acquisition in their long-range plans and budgets. Some agencies planned and budgeted for the acquisition of assets but did not fully plan and budget for related maintenance. The review also found that agencies were using a variety of account structures and strategies to justify fixed-asset acquisitions. Multiyear funding was widely used, especially for construction-related projects. Revolving funds were also widely used, although OMB did not receive any new requests for such funds. Some agencies tried to overcome difficulty in justifying large spending increases for capital by segregating all capital funding into one account to smooth annual changes in outlays and prevent the crowding-out of capital. Other agencies found that such accounts were not needed; spending increases for capital had been obtained when justified.
However, the primary focus of the OMB Director’s review was up-front funding. Bulletin responses indicated that some capital spending was not fully funded. Specifically, capital projects of the Corps of Engineers, NASA, DOE, and the Bureau of Reclamation were incrementally funded. Some congressional staff acknowledged that such projects have traditionally been incrementally funded and indicated satisfaction with this practice. Until 1995, OMB explicitly permitted water resource projects to be incrementally funded. However, OMB is concerned that inconsistent scoring of fixed assets may unfairly bias some acquisitions and that incremental funding may understate the cost of acquisitions.
section_title: OMB’s Second-Year Effort Results in a Proposal to Expand the Use of Full Funding
paragraphs: In June 1995, OMB replaced Bulletin 94-08 with Bulletin 95-03. The two bulletins were nearly identical except that Bulletin 95-03 broadened the definition of fixed assets and added two reporting requirements. The definition of fixed assets was expanded to conform with the Federal Accounting Standards Advisory Board’s (FASAB) recommended definition of general property, plant, and equipment. In addition to assets meeting FASAB’s definition, space exploration facilities and equipment and all DOE facilities were deemed fixed assets for purposes of the Bulletin. As a result, agencies were to consider nearly all construction, major rehabilitation, and purchases of fixed assets owned by the federal government in completing the Bulletin’s reporting requirements.
Bulletin 95-03 required agencies to provide information on the progress of acquisitions of $20 million or more and requested agencies to identify separable, stand-alone stages of fixed asset acquisitions. Information on acquisition progress was to be used to assess agencies’ progress in meeting the cost and schedule goals of their acquisitions as required by the FASA. Information on stages of fixed-asset acquisitions was to be used for identifying those separable, stand-alone phases of an acquisition that should be fully funded up-front. Bulletin 95-03 suggested what constituted separable, stand-alone phases for buildings and information technology, but asked agencies to identify such stages for other assets.
Only eight agencies formally responded to all aspects of Bulletin 95-03. An OMB official attributed the low response partly to the lack of fiscal year 1996 appropriations for many agencies at the time submissions were due. However, the official noted that, as in 1994, OMB program examiners sought fixed-asset data from agencies when discussing overall budget requests. Therefore, OMB felt it had sufficient data to hold another Director’s review of fixed assets. This second-year review focused primarily on the extent to which agencies were requesting full up-front funding for capital projects and how to encourage such requests. Although most agencies were requesting full funding for capital projects, the review identified some large capital projects that were not fully funded and prompted OMB officials to encourage full up-front funding when discussing budget requests with agencies.
OMB also determined that the discretionary spending caps on budget authority could accommodate full funding of some capital projects that would otherwise be incrementally funded. Full funding of these projects requires additional budget authority in the budget year but generally does not require additional outlays in the budget year. Because the sum of the President’s discretionary spending proposals was less than the discretionary spending caps, OMB was able to request $1.4 billion in budget authority in the President’s fiscal year 1997 budget to fully fund capital projects at the DOE and NASA. In addition, OMB presented budget schedules showing the cost to fully fund ongoing and new capital projects at the Corps of Engineers and the Bureau of Reclamation. Although full funding was not requested for these agencies’ capital projects, the schedules indicated the cost of fully funding ongoing and new projects for these agencies would be about $23 billion in fiscal year 1997, and OMB stated that efforts would be made to fully fund all new projects in the fiscal year 1998 budget.
section_title: OMB’s Third-Year Effort Attempts to Link Fixed-Asset Planning and Budgeting With Performance Initiatives
paragraphs: OMB officials felt that responses to Bulletins 94-08 and 95-03 helped them move from information gathering to the development of guidance regarding the implementation of full funding. To guide agencies in submitting their fiscal year 1998 budgets and to raise the visibility of its fixed-asset effort among agencies, OMB replaced these bulletins with a new Part 3 to OMB Circular A-11. Like the previous bulletins, the new Part 3 requires agencies to submit 5-year spending plans for major fixed-asset acquisitions and encourages agencies to consider the use of flexible funding mechanisms. In addition, it requires agencies to request full up-front funding for stand-alone stages of all ongoing and new fixed-asset acquisitions and outlines broad principles for planning and monitoring such acquisitions. Part 3 also attempts to streamline reporting requirements for three performance-related initiatives—FASA, ITMRA, and GPRA.
OMB officials believe that FASA, ITMRA, and GPRA share the objective of its fixed-asset reviews—to improve fixed asset planning and budgeting. FASA requires that executive agency heads (1) set cost, performance, and schedule goals for major acquisition programs, (2) monitor the programs to ensure they are achieving, on average, 90 percent of the established goals, and (3) take corrective actions, including termination, on programs that do not remain within the permitted tolerances. FASA also requires OMB to report to the Congress on agencies’ progress in meeting these cost, schedule, and performance goals. ITMRA requires agency heads to establish goals for improving the efficiency and effectiveness of agency operations through effective use of information technology and to acquire information technology systems in successive acquisitions of interoperable increments. Under ITMRA, when the President submits the budget to the Congress, the OMB Director is to submit a report to the Congress on the net program performance benefits achieved as a result of agencies’ major information systems projects and on how the benefits of such projects relate to agencies’ goals. Under GPRA, agencies must develop, no later than by the end of fiscal year 1997, strategic plans that cover a period of at least 5 years and include the agency’s mission statement; identify the agency’s long-term strategic goals; and describe how the agency intends to achieve those goals through its activities and through its human, capital, information, and other resources. GPRA also requires each agency to submit to OMB, beginning for fiscal year 1999, an annual performance plan. In essence, the annual performance plan is to contain the annual performance goals the agency will use to gauge its progress toward accomplishing its strategic goals and identify the performance measures the agency will use to assess its progress. In issuing Part 3, OMB sought to centralize its information requests to fulfill FASA and ITMRA reporting requirements and to ensure that fixed-asset acquisition plans support the plans and goals developed for these initiatives and GPRA.
Because the planning requirements of GPRA are not yet effective and have not yet been fully implemented, the new Part 3 of Circular A-11 requires agencies to describe how ongoing or proposed capital acquisitions relate to the agency’s mission and goals being defined under GPRA. It outlines broad principles for linking long-range planning and budgeting for fixed assets to the strategic and annual performance plans agencies develop for GPRA. For example, OMB advises agencies to develop long-range fixed-asset plans by ranking long-term goals and considering the most efficient and effective means of achieving those goals within budgetary constraints. Part 3 also urges agencies to monitor whether fixed-asset acquisitions are helping achieve their goals.
section_title: Observations and Conclusions
paragraphs: While capital spending is important to efficient long-term government operations, a goal of the budget process should be to assist the Congress in allocating resources efficiently by ensuring that various spending options can be compared impartially—not necessarily to increase capital spending. The requirement of full up-front funding is an essential tool in helping the Congress make trade-offs among various spending alternatives. However, in an environment of constrained budgetary resources, agencies need tools that can help facilitate these trade-offs and that enable them to accommodate up-front funding. Furthermore, to successfully implement GPRA’s requirement for program performance measures, managers will also need to know the full costs of their programs—including capital usage.
Some have recommended that the government adopt a full-scale capital budget, but this raises major budget control issues and may not be necessary to address agency-identified impediments to capital spending. Rather, our case studies demonstrate that more modest tools, such as revolving funds, investment components, and budgeting for stand-alone stages, can help accommodate up-front funding without raising the congressional or fiscal control issues of a separate capital budget. Though each of the strategies has limitations, when accompanied by good financial management and appropriate congressional oversight, they can be useful in facilitating effective capital acquisition within the current unified budget context. In addition, one strategy, using a revolving fund, can be effective in helping to make managers aware of the full cost of their programs.
subsections: section_title: The Budget Process Should Encourage Prudent Capital Decisions
paragraphs: The budget process must balance several sometimes conflicting goals to facilitate effective trade-offs among various spending options. First, it is important that the budget process reveal the entire cost of operating particular programs—including the cost of capital assets used by the program. Knowledge of full program costs is especially significant as agencies and the Congress begin to implement GPRA’s requirements for performance measurement and budgeting. For example, if both capital and operating costs are not attributed to programs over time, programs may appear deceptively inexpensive. In addition, the cost of replacing assets is borne entirely by future agency managers and Congresses that may not have been responsible for asset consumption. Second, the budget process ought to enable lawmakers to compare the full, long-term costs of various spending alternatives. Thus, long-term commitments, such as purchases or lease-purchases, are scored up-front in the budget. Third, the Congress needs to be assured that agencies are spending funds as directed by law and be able to control total federal spending. Fourth, agencies need the flexibility and incentives to make economic decisions regarding capital acquisition and usage.
Full up-front funding is one of the tools that has been important to facilitating fiscal control and comparisons of the long-term costs of spending alternatives. An essential part of prudent capital planning must be an adherence to full up-front funding. When full up-front funding is not practiced, the Congress risks committing the government to capital acquisitions without determining whether the project is affordable over the long-term. Incremental funding also compels future Congresses to fund a project in order to prevent wasting resources previously appropriated. As budgetary constraints continue, incremental funding may lock the Congress into future spending patterns and reduce flexibility to respond to new needs. In the budget process, fully funded projects may be disadvantaged in competition with incrementally funded projects—even when the fully funded projects actually cost less in the long-run.
However, full up-front funding can impede agencies’ ability to economically acquire capital in an environment of resource constraints. Full up-front funding of relatively expensive capital acquisitions can consume a large share of an agency’s annual budget, thereby forcing today’s decision-makers to pay all at once for projects with long-lived benefits. While various capital budgeting proposals have been advanced to address this, the proposals themselves have raised significant concern because of their potential diminution of fiscal accountability and control. Consequently, agencies need financing tools that can provide the fiscal control of up-front funding and can enable them to make prudent capital decisions within the current unified budget frame work.
section_title: Agencies and the Congress Must Work Together to Find Tools That Encourage Prudent Capital Decisions
paragraphs: Our case studies provide some examples of tools that can encourage effective capital decisions. Several use revolving funds to help accumulate resources for capital replacement and to help incorporate capital costs into program budgets. This will become of increasing importance as implementation of GPRA will require managers to know the full annual cost of their programs and to evaluate the performance of programs based on the full cost. Because revolving funds charge users for the cost of capital, managers have an incentive to regularly assess their need for and use of assets. By providing managers with a predictable stream of funding, revolving funds also encourage long-range capital planning. Our work indicates that revolving funds are most effective when (1) agencies have a sound record of financial management, (2) costs can be tracked to users, (3) replacement cost is recovered, (4) appropriations are available to fund significant or immediate expansions of the fund’s asset base, (5) proceeds from the disposal of fund assets are retained by the fund if the fund is expected to provide a constant level of service, and (6) used to finance small-scale, ongoing capital needs. Our case studies also indicate that revolving funds can provide varying degrees of congressional control. IFMS has few restrictions on the type of vehicles it can purchase; in contrast, the Congress approves every large purchase by the Corps’ and PBS’ revolving funds. Oversight by the Congress is important to ensuring that agency acquisitions are well-planned and justified and that the agency’s overall level of capital spending is appropriate given other competing capital and operating needs across the government.
An investment component within a working capital fund generates many of the same benefits as revolving funds. In addition, an investment component may encourage agency managers to fund their voluntary contributions by making tradeoffs between capital and operational spending. Although the investment component is a recent development and used by only one of our case studies, it seems especially helpful for agencies that would otherwise fund capital with annually expiring funds. USGS’ investment component operates with few restrictions apart from prohibitions against building construction and using funds within 2 years of their placement in the investment component. However, expanding the use of an investment component to other agencies may require other limitations. For example, if several agencies obtain investment components and each decides to make large purchases in the same year, total outlays could rise sharply and cause a spike in the deficit. Therefore, OMB would need to manage all investment components to ensure total investment component outlays do not cause such spikes. The Congress must also be aware that an investment component may encourage agencies to build unobligated balances and that agencies would need to be held accountable to their investment plans.
In addition to using revolving funds or an investment component, some case studies budget for stand-alone stages of capital acquisitions and use reprogramming authority. Budgeting for stand-alone stages makes capital acquisition affordable by limiting the budget authority needed at one time. It may also increase opportunities for oversight and permit adjustment of capital funding levels when other needs emerge. This tool can be used when parts of an acquisition can be useful without the whole being completed. If used as intended, reprogramming authority also helps agencies respond when changes in funding or mission leave inadequate funding to complete a capital acquisition or create new capital needs. Congressional control is maintained by limiting the amount of such authority.
Multiyear and no-year funding help agencies accommodate capital’s longer acquisition cycle. All of our case studies had the opportunity to fund capital through multiyear appropriations or a revolving fund. However, agencies and the Congress must work together to find a period of fund availability that is long enough to complete the agency’s projects and short enough to discourage delays. The Congress can maintain control over no- and multiyear funding through individual agency reporting and FASA requirements.
The strategies used by our case studies may not be all inclusive of those available to all federal agencies but are indicative of the kinds of tools agencies find useful. Some of these mechanisms, such as revolving funds and investment components, share to varying degrees common characteristics that help agencies make effective capital acquisitions. For example,
They enable agencies to accumulate resources without fiscal year limitations in order to finance capital needs.
They promote full costing of programs and activities by including costs related to capital usage in operating budgets.
They provide a degree of predictability to funding levels that aids in long-range planning.
In addition to considering the provision of tools with these characteristics, the Congress and OMB should continue to encourage agencies to improve capital planning. Three recent legislative initiatives—GPRA, FASA, and ITMRA—seek to improve agency planning for programs and capital acquisitions. OMB’s bulletins and guidance on fixed-asset planning and budgeting have been valuable contributions toward promoting agency capital planning. Also, given the governmentwide trend in downsizing, agencies may need to consider alternatives to ownership of capital assets. For example, agencies may purchase the use of assets through service contracts with private-sector organizations or other agencies. In other instances, agencies may need to explore creative ways of leveraging resources with the private sector, such as limited partnerships and loan guarantees, in order to meet their specific asset requirements.
While agencies are concerned that the budget process facilitate capital acquisitions, it should be understood that agencies must ensure that capital projects are properly selected and well-managed. Flexible financing mechanisms and up-front funding can help to improve the chances that agencies can fully fund capital projects and will select financing methods that are most economical for the government. However, to ensure that funds are well used, it is imperative that agencies have a sound process for selecting which capital projects to fund and to manage those projects well. We have shown that many information technology projects undertaken by agencies have been poorly managed and wasted federal resources. Agencies could benefit from viewing capital projects—especially information technology—as investments that require explicit decision criteria and performance measures that assess risks, costs, and benefits. Long-range risks, costs, and benefits of various capital spending alternatives should be presented in budget justifications to the Congress. None of the budget tools discussed can be a substitute for good cost-benefit analysis and well-managed project implementation.
section_title: Recommendations to the Office of Management and Budget
paragraphs: GAO recommends that the Director of the Office of Management and Budget continue OMB’s top-level focus on fixed-asset acquisitions to include working with agencies and the Congress to promote flexible budgetary mechanisms that help agencies accommodate the consistent application of up-front funding requirements while maintaining opportunities for appropriate congressional oversight and control.
As OMB continues to integrate GPRA requirements into the budget process, GAO recommends that the Director of the Office of Management and Budget, ensure that agencies’ capital plans flow from and are based upon their strategic and annual performance plans. In addition, OMB should continue its efforts to ensure that cost, schedule, and performance goals are monitored as required by FASA.
section_title: Matter for Congressional Consideration
paragraphs: Although requiring that budget authority for the full cost of acquisitions be provided before an acquisition is made allows the Congress to control capital spending at the time a commitment is made, it also presents challenges. Because the entire cost for these relatively expensive acquisitions must be absorbed in the annual budget of an agency or program, fixed assets may seem prohibitively expensive despite their long-term benefits.
This report describes some strategies that a number of agencies have used to manage this dilemma. The Congress should consider enabling agencies to use more flexible budgeting mechanisms that accommodate up-front funding over the longer term while providing appropriate oversight and control. For agencies having proven financial management and capital planning capabilities and relatively small and ongoing capital needs, these techniques could include revolving funds and investment components. Such techniques enable agencies to accumulate resources over a period of years in order to finance certain capital needs, promote full costing of programs and activities by including costs related to capital usage in program budgets, and provide a degree of funding predictability to aid in long-range planning. As GPRA moves toward full implementation, these and other tools may take on increasing importance in helping managers and the Congress to identify program costs and to more efficiently manage capital assets.
section_title: Agency Comments and Our Evaluation
paragraphs: Officials from our case studies and OMB agreed with this report’s conclusions and recommendations. They also provided technical corrections which have been incorporated in this report where appropriate. In commenting on a draft of this report, OMB and GSA officials raised issues which required clarification and elaboration in some sections of the report.
OMB officials agreed with the report’s support for up-front funding of capital assets but expressed concern that the use of intragovernmental revolving funds to fund capital acquisitions in some circumstances would undermine the up-front funding principle and reduce budgetary control. OMB proposed that a revolving fund could be used to fund relatively large, sporadic, or heterogeneous purchases if the revolving fund borrowed from Treasury and charged users to recover the principal and interest payments. This would facilitate congressional and executive review of such purchases while allocating capital costs to users. However, unless a relatively constant amount of capital spending is undertaken by the fund each year, such a revolving fund would cause a spike in budget authority each time an asset is purchased. Therefore, to clarify that revolving funds are not always appropriate for making capital acquisitions, references were added throughout the report to indicate their appropriateness for relatively small and ongoing capital needs.
GSA officials expressed a desire for some discussion of proposed changes in scoring operating leases. Reference to previous GAO testimony on this matter was added to chapter 3. GSA officials also expressed their belief that congressional control could be maintained if the FBF retained proceeds from the disposal of PBS properties. The officials suggested that, because all funds deposited in the FBF must now be appropriated before use, the Congress would have an opportunity to determine how disposal proceeds should be used. This report provides observations on circumstances which affect whether agencies should retain proceeds, such as the need to provide a constant level of services. It was not intended to address whether such circumstances exist in any specific agency. Each agency’s situation would need to be assessed individually to select the appropriate financing mechanism and to determine how to handle disposal proceeds. Therefore, the report was not altered to address this comment.