The extent to which capital costs are reflected in the budget depends on how they are “scored.” CBO and OMB separately “score” or track budget authority, receipts, outlays, and the surplus or deficit estimated to result as legislation is considered and enacted. CBO develops estimates of the budgetary impact of bills reported by the different congressional committees. For the many individual transactions done under existing authorities (thus not requiring annual legislation), CBO’s estimates play no role in determining how much budget authority must be obligated. However, OMB interprets the scorekeeping guidelines to determine the costs that should be recognized and recorded as an obligation at the time the agency signs a contract or enters into a lease. It is not always obvious whether a transaction or activity should be included in the budget. Where there is a question, OMB normally follows the recommendation of the 1967 President’s Commission on Budget Concepts to be comprehensive of the full range of federal agencies, programs, and activities. However, under some circumstances, it may choose not to record obligations and outlays up front. Budget scorekeeping rules and OMB instructions on the budgetary treatment of lease-purchases and leases of capital assets are published in OMB Circular A-11. Revised in 2003 to address lease-backs from partnerships, among other things, these instructions consider both the government’s legal obligation and how risk is shared between the government and the contractor for three types of leases: capital leases, lease-purchases, and operating leases. The instructions state that when agencies enter into a capital lease contract or lease-purchase, budget authority is scored in the year in which the authority is first made available in the amount of the net present value of the government’s total estimated legal obligations over the life of the contract. Alternatively, for operating leases that include a cancellation clause, agencies only need budget authority sufficient to cover the first year’s lease payments, plus cancellation costs. Figure 1 summarizes the criteria and other guidelines for defining an operating lease. While we have previously reported that up-front funding permits disclosure of the full costs to which the government is being committed, OMB’s budget scorekeeping instructions allow costly operating leases to appear cheaper in the short term and have encouraged an overreliance on them for satisfying long-term needs. Partnerships must conform with OMB’s scorekeeping instructions. The instructions for partnerships consider the degree of private participation in the partnership to determine its scoring. Private participation is judged by the level of substantial private participation and private sector risk as evidenced by the absence of substantial government risk. Substantial private participation means (1) the nonfederal partner has a majority ownership share of the partnership and its revenues, (2) the nonfederal partner has contributed at least 20 percent of the total value of the assets owned by the partnership, and (3) the government has not provided indirect guarantees of the project, such as a rental agreement or a requirement to pay higher rent if it reduces its use of space. If government risk is considered high and private participation not deemed substantial, the partnership would be considered governmental for budget purposes and its transactions would be scored. Figure 2 presents OMB’s illustrative criteria for assessing private sector risk. Using ESPCs and partnerships, agencies have been allowed to spread the costs of capital assets over several years. Agencies sometimes used these financing mechanisms when they believed that timely, full, and up-front appropriations would not be made available to support capital needs. Moreover, they believe these alternative mechanisms enabled them to avoid costs, such as higher utility bills associated with waiting for appropriations. Nevertheless, several of the agencies we spoke with agree that they could acquire capital less expensively through timely, full, and up- front appropriations. ESPCs finance energy-saving capital improvements such as lighting retrofits and ventilation systems for federal facilities without the government recording the full cost up-front. According to DOE, ESPCs have been used as an alternative financing mechanism to finance over a billion dollars of energy system upgrades and installations. Federal agencies’ use of ESPCs was authorized and encouraged by both Congress and the executive branch. In Executive Order 13123, dated June 3, 1999, the executive branch defined requirements for agencies to meet specific energy reduction goals and supported the use of ESPCs to achieve them. The Energy Policy Act of 1992 and Executive Order 13123 require federal agencies to reduce their consumption of energy in federal buildings. The act set a goal for the agencies of lowering their consumption per gross square foot by 20 percent below fiscal year 1985 baseline consumption levels by fiscal year 2000. Executive Order 13123 requires a 30 percent reduction from 1985 levels by the year 2005 and a 35 percent reduction by 2010. Under the Energy Policy Act of 1992, federal agencies had the authority to enter into ESPCs for as long as 25 years with qualified ESCOs that purchase and install new energy systems in federal buildings. The ESCO assumes much of the up-front capital costs and, in return, receives a portion (nearly all) of the annual energy savings attributable to the improvements until the principal and interest have been repaid. The ESCOs guarantee the performance of the equipment installed, within certain parameters, for the term of the ESPC. The agency makes the payment to the ESCO from funds that the agency would otherwise have used to pay the higher utility costs (which are lower because of the ECM installed by the ESCO). Consequently, agencies argue that they will not need an increase in future appropriations relative to the current amount of appropriations in order to pay the ESCOs. Agencies other than DOD and GSA must transfer 50 percent of the energy savings realized from energy savings performance contracts (after paying the negotiated amount to the contractor) to the Treasury. The remaining 50 percent saved may be retained and is available for additional energy and water conservation projects until expended. According to FEMP, 18 federal agencies and departments have implemented ESPC projects worth $1.7 billion. Without ESPCs, agencies would have to reassess their budget plans to accommodate investments in ECMs and/or Congress would be asked to appropriate funds today to finance investments to meet currently required energy consumption goals. Proponents of ESPCs argue that, as an alternative financing method, these contracts help agencies overcome the problem of insufficient funding to meet federal energy reduction goals. Without ESPCs, agencies would need to adjust their program plans within expected appropriation levels to make energy efficiency improvements or possibly do nothing if the funds are unavailable in a given year. In this regard, proponents note that delays of even 1 year can result in greater utility, maintenance, and other costs. Moreover, by using ESPCs, agencies did not have to make some difficult trade-offs between purchasing ECMs and other claims on resources. Critics of ESPCs, however, point out that for any given ECM the direct purchase of more efficient energy systems would allow all future savings to accrue to the government, rather than paying out a percentage of the savings to private contractors. In addition, the government incurs certain costs in using an ESPC, such as the M&V fees paid to the contractor, that it would not necessarily incur if the energy improvements were financed up front with federal appropriations. The ESCO’s also pay a higher cost of capital than the federal government. As a result, over the long term, financing ECMs through ESPCs is likely to be more expensive than acquiring them through timely, full, and up-front appropriations. Finally, dependence on the annual budget cycle is the process by which decision makers weigh competing federal priorities. Permitting ESPCs to be recorded in the budget at less than their full cost up front affects this process, possibly resulting in lower priorities receiving funding ahead of higher priorities. Not addressing some difficult resource allocation decisions is seen as an advantage to agencies. However, long-standing budget concepts hold that a budget should be a forum for resource allocation decisions and that all competing claims should be compared on a consistent basis. CBO and OMB disagree over the appropriate budget scoring for ESPCs. CBO recognizes that the law enables agencies to use ESPCs to pay for ECMs over a period of up to 25 years without an appropriation for the full amount of the purchase price. However, the law does not prohibit scoring the full cost of the contract up front. In CBO’s view, the obligation to make payments for the energy efficient equipment and the financing costs is incurred when the government signs the ESPC. Further, CBO believes it is consistent with governmentwide accounting principles that the budget reflect this commitment as new obligations at the time that an ESPC is signed. Accordingly, CBO scored recent ESPC legislation such that the total (long-term) commitments to an ESCO would be counted in the budget at the time the ESPC delivery order is signed. In contrast, OMB recognizes obligations, budget authority, and outlays for ESPCs on a year-to-year basis. According to OMB staff, this decision was based on the savings component of ESPCs and agencies’ statutory authority to enter into a multiyear contract even if funds are available only to pay for the first year of the contract. Partnerships are designed to tap the capital and expertise of the private sector to improve or redevelop federal real property assets. Partnerships are sometimes used when excess capacity, such as unused land, exists within a federal asset. Ideally, the partnerships are designed such that each participant makes complementary contributions that offer benefits to all parties. From a budget scoring perspective, recording an agency’s full commitments up front in the budget can be difficult because the precise level of an agency’s financial commitment and control in the partnership may be unclear. Congress has enacted a variety of laws that provide agencies with authority to enter into partnerships with private firms. For instance, VA possesses enhanced use (EU) lease authority to outlease federal real property to private firms (see fig. 3). Alternatively, GSA possesses limited authority for specific situations.