The federal government acquires a wide variety of capital assets for its own use including land, structures, equipment, vehicles, and information technology. Large sums of taxpayer funds are spent on these assets, and their performance affects how well agencies achieve their missions. To directly acquire an asset, agencies generally are required to have full up- front BA for the total asset cost—usually a sizable amount. This requirement allows Congress to recognize the full budgetary impact of capital spending at the time a commitment is made; however, it also means that the full cost of an asset must be absorbed in the annual budget of an agency or program, despite the fact that benefits may accrue over many years. This up-front funding requirement has presented two challenges for capital planning and budgeting at the federal level. One challenge is how to permit “full cost” analysis and to promote more effective capital planning and budgeting by allocating capital costs on an annual basis to programs that use capital. Allocating capital costs over the assets’ useful lives ensures that the full annual cost of resources a program uses is considered when evaluating the program’s effectiveness. It can make program managers more aware of on-going capital costs, thus promoting more effective decision making for capital. It may also contribute to equalizing comparisons across different programs or different approaches to achieving similar goals. A second challenge is how to address the possible bias against the acquisition of necessary capital assets that may be created by spikes (large, temporary, year-to-year increases in BA), which can make capital assets seem prohibitively expensive in an era of resource constraints. GAO has reported in the past that agencies view up-front funding as an impediment to capital acquisition because of the resulting spike in BA. CAFs have been suggested as a capital asset financing approach that would benefit federal departments and their subunits by addressing both of these challenges. CAFs would be department-level funds that use annually appropriated authority to borrow from the Treasury to purchase federally- owned assets needed by subunits of the department. These subunits would then pay the CAF a mortgage payment sufficient to cover the principal and interest payment on the Treasury loan. The CAF would use those receipts only to repay Treasury and not to finance new assets. The CAF concept was formally proposed in the February 1999 Report of the President’s Commission to Study Capital Budgeting as a mechanism that would help improve the process by which annual budget decisions are made by promoting better planning and budgeting of capital expenditures for federally owned facilities. The report states that by ensuring that individual programs are charged the true cost of using capital assets, the CAF encourages managers to make more efficient use of those assets. The Commission report also argues that CAFs could help smooth out the spikes in BA experienced by subunits with capital project requests. By aggregating all up-front BA for capital requests at the department level, subunit budgets would reflect only an annual payment for capital. Since the Commission report, CBO, GAO, and the National Research Council (NRC) have all agreed that CAFs should be explored as a capital financing mechanism. CAFs were also discussed in the President’s Fiscal Year 2004 Budget issued in February 2003. The section on “Budget and Performance Integration” briefly described the concept and reports that draft legislation creating CAFs has been developed, discussed with agencies, and improved. It said that CAFs would be one way to show the uniform annual cost for the use of capital without changing the requirement for up-front appropriations. At this time, OMB’s interest in CAFs appears to have waned. CAFs were not mentioned in the President’s Budget in either fiscal year 2005 or 2006 and the CAF legislation described has not been introduced. To address our objectives, we reviewed the available literature describing the CAF concept. We also interviewed budget experts at OMB and CBO to gain a more thorough understanding of how CAFs would operate and discuss issues involved with their implementation. This permitted us to describe a theoretical CAF with some operational detail. Additionally, we sought the views of the many parties that would be affected if CAFs were established. Since agency and congressional officials were generally unaware of the CAF concept, we developed a brief summary describing the general mechanics of a CAF and shared that summary prior to interviews in order to generate discussion. To get the department perspective, we chose USDA and DOI as case studies. Both of these departments have substantial and varied capital needs. Capital assets acquired by USDA and DOI include land, buildings, research equipment, laboratories, quarantine facilities, dams, bridges, parklands, roads, trails, vehicles, aircraft, and information technology (hardware and software). In addition, each department has multiple subunits that use capital assets to achieve their missions—important for examining the question of subunit spikes. We interviewed officials at the department and subunit levels to gather their opinions and insights on the operation, benefits, and difficulties of CAFs. Specifically within USDA we spoke with officials in the Animal and Plant Health Inspection Service (APHIS), the Agricultural Research Service (ARS), and the Forest Service (FS). Within DOI, we spoke with officials in the National Park Service (NPS) and the Bureau of Land Management (BLM). During these discussions, agency officials also compared CAFs (as described in our summary) with current practices used for planning, budgeting, and acquisition of capital assets. Since congressional approval would be necessary for the creation and operation of CAFs, we spoke with staff on the House and Senate Budget Committees, the House and Senate Appropriations Subcommittees on the Interior, and the House Appropriations Subcommittee on Agriculture to get their opinions on the proposed CAF mechanism. We also interviewed officials at Treasury, which would be responsible for managing the borrowing authority. In addition, we spoke with officials at GSA to discuss how a CAF might affect the FBF, used by some federal agencies to acquire federal office space and the FTS, used by some federal agencies to acquire IT. Finally, we reviewed agency documents including asset management plans, accounting system descriptions, capitalization policies, and working capital fund information. We also examined our prior work, financial accounting standards, and various legal and budgetary sources specifically related to federal property management. We recognize that our findings on agency perspective, which are based on interviews with five subunits within two departments, may not be applicable to all agencies within the federal government. However, we were struck by the consistency in department and subunit reaction to the concept, especially when followed by comparable reactions from congressional officials. Our work was conducted in Washington, D.C., from May 2004 through January 2005 in accordance with generally accepted government auditing standards. Implementing CAFs would change the current process for financing new federal capital projects. In addition, if all existing capital assets of a department and its subunits were transferred to the CAF, the CAF would impute an annual capital usage charge on those assets to using agencies. This additional complication could be avoided if CAFs were limited to new assets. However, this would mean it would be decades before all programs showed the full annual cost of capital in their budgets. Although in many respects CAFs are accounting devices to record financial transactions, their creation would create new management and oversight responsibilities for many federal entities. Treasury would have primary responsibility for administering the borrowing authority. Both Treasury and those departments with CAFs would be required to keep track of the many CAF transactions. The management and oversight responsibilities of the departments would need to be clearly spelled out in order for CAFs to operate effectively. OMB would likely have to issue guidelines on operation specifics and OMB and the congressional appropriations committee staff would have to review the CAFs to ensure they were operating properly. OMB and CBO would score (estimate) the CAFs’ and subunits’ BA—both the initial authority to borrow and the subsequent appropriations used for repayment. The scoring of the annual capital usage charges, if CAFs were applied to existing capital, has not yet been developed. Although CAFs do not currently exist, we can describe how they would likely operate based on written proposals and our discussions with budget experts. CAFs would be established at the department level as separate accounts that would receive up-front authority to borrow (provided in appropriation acts) on a project-by-project basis, for the construction and acquisition of large capital projects for all of the subunits within a department. For those departments with subunits split between two appropriation subcommittees, it is likely that two CAFs would be necessary. For example, DOI receives appropriations through two subcommittees: the Energy and Water Development Subcommittee, which is responsible for Bureau of Reclamation (Reclamation) programs; and the Interior and Related Agencies Subcommittee, which is responsible for all other Interior programs. CBO, OMB, and agency officials we spoke with generally believed that having a CAF that crossed subcommittee jurisdictions would create many problems, thus it would likely be necessary for departments to have a separate CAF for each subcommittee with which they work. Using the example above, DOI would have one CAF for Reclamation and a second for the remaining subunits within DOI. Alternatively, CAFs could be situated at the appropriation subcommittee level rather than the department level, with each of the 13 subcommittees appropriating to their respective CAF for the agencies under their jurisdiction. Some congressional officials did not seem to think that this would be the most effective arrangement and raised the point that increased resources might be needed at the subcommittee level to manage CAF transactions. In addition, OMB argued that CAFs should be located at the department level because the department is the focus of accountability for planning and managing programs and capital assets, as well as for budget execution and financial reporting. The CAF would receive appropriations for the full cost of an asset (or useful segment of an asset) in the form of borrowing authority.