[Analytical Perspectives]
[Special Analyses and Presentations]
[6. Federal Investment Spending and Capital Budgeting]
[From the U.S. Government Publishing Office, www.gpo.gov]
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SPECIAL ANALYSES AND PRESENTATIONS
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6. FEDERAL INVESTMENT SPENDING AND CAPITAL BUDGETING
Investment spending is spending that yields long-term benefits. Its
purpose may be to improve the efficiency of internal Federal agency
operations or to increase the Nation's overall stock of capital for
economic growth. The spending can be direct Federal spending or grants
to State and local governments. It can be for physical capital, which
yields a stream of services over a period of years, or for research and
development or education and training, which are intangible but also
increase income in the future or provide other long-term benefits.
Most presentations in the Federal budget combine investment spending
with spending for current use. This chapter focuses solely on Federal
and federally financed investment. These investments are discussed in
the following sections:
description of the size and composition of Federal
investment spending;
a discussion of capital assets used to provide Federal
services, and efforts to improve planning and budgeting for
these assets. An Appendix to Part II presents the ``Principles
of Budgeting for Capital Asset Acquisitions,'' which are being
used to guide the analysis of Administration requests for
spending for capital assets.
a presentation of trends in the stock of federally financed
physical capital, research and development, and education;
alternative capital budget and capital expenditure
presentations; and
projections of Federal physical capital outlays and recent
assessments of public civilian capital needs, as required by
the Federal Capital Investment Program Information Act of
1984.
Part I: DESCRIPTION OF FEDERAL INVESTMENT
For more than forty years, a chapter in the budget has shown Federal
investment outlays--defined as those outlays that yield long-term
benefits--separately from outlays for current use. Again this year the
discussion of the composition of investment includes estimates of budget
authority as well as outlays and extends these estimates four years
beyond the budget year, to 2003.
The classification of spending into investment and current outlays is
a matter of judgment. The budget has historically employed a relatively
broad classification, including physical investment, research,
development, education, and training. But presentations for particular
purposes could adopt different definitions of investment:
To suit the purposes of a traditional balance sheet,
investment might include only those physical assets owned by
the Federal Government, excluding capital financed through
grants and intangible assets such as research, education, and
training.
Focusing on the role of investment in improving national
productivity and enhancing economic growth would exclude items
such as national defense assets, the benefits of which are
enhanced national security rather than economic growth.
Concern with the efficiency of Federal operations would lead
to a focus solely on investments to reduce costs or improve
the effectiveness of internal Federal agency operations, such
as computer systems.
A ``social investment'' perspective might broaden the
coverage of investment beyond what is included in this chapter
to encompass programs such as childhood immunization, maternal
health, certain nutrition programs, and substance abuse
treatment, which are designed in part to prevent more costly
health problems in future years.
The relatively broad definition of investment used in this section
provides consistency over time: historical figures on investment outlays
back to 1940 can be found in the separate Historical Tables volume. The
detailed tables at the end of this section allow disaggregation of the
data to focus on those investment outlays that best suit a particular
purpose.
In addition to this basic issue of definition, there are two technical
problems in the classification of investment data, involving the
treatment of grants to State and local governments and the
classification of spending that could be shown in more than one
category.
First, for some grants to State and local governments it is the
recipient jurisdiction, not the Federal Government, that ultimately
determines whether the money is used to finance investment or current
purposes. This analysis classifies all of the outlays in the category
where the recipient jurisdictions are expected to spend most of the
money. Hence, the community development block grant is classified as
physical investment, although some may be spent for current purposes.
General purpose fiscal assistance is classified as current spending,
although some may be spent by recipient jurisdictions on physical
investment.
Second, some spending could be classified in more than one category of
investment. For example, outlays
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for construction of research facilities finance the acquisition of
physical assets, but they also contribute to research and development.
To avoid double counting, the outlays are classified in the category
that is most commonly recognized as investment. Consequently outlays for
the conduct of research and development do not include outlays for
research facilities, because these outlays are included in the category
for physical investment. Similarly, physical investment and research and
development related to education and training are included in the
categories of physical assets and the conduct of research and
development.
When direct loans and loan guarantees are used to fund investment, the
subsidy value is included as investment. The subsidies are classified
according to their program purpose, such as construction, education and
training, or non-investment outlays. For more information about the
treatment of Federal credit programs, refer to Chapter 8, ``Underwriting
Federal Credit and Insurance.''
This section presents spending for gross investment, without adjusting
for depreciation. A subsequent section discusses depreciation, shows
investment both gross and net of depreciation, and displays net capital
stocks.
Composition of Federal Investment Outlays
Major Federal Investment
The composition of major Federal investment outlays is summarized in
Table 6-1. They include major public physical investment, the conduct of
research and development, and the conduct of education and training.
Defense and nondefense investment outlays were $228.8 billion in 1997.
They are estimated to decline to $225.3 billion in 1998 and to increase
to $236.9 billion in 1999. Major Federal investment will comprise an
estimated 13.7 percent of total Federal outlays in 1999 and 2.7 percent
of the Nation's gross domestic product (GDP). Greater detail on Federal
investment is available in tables 6-2 and 6-3 at the end of this
section. Those tables include both budget authority and outlays.
Physical investment.--Outlays for major public physical capital
investment (hereafter referred to as physical investment outlays) are
estimated to be $113.2 billion in 1999. Physical investment outlays are
for construction and rehabilitation, the purchase of major equipment,
and the purchase or sale of land and structures. Slightly more than
three-fifths of these outlays are for direct physical investment by the
Federal Government, with the remaining being grants to State and local
governments for physical investment.
Direct physical investment outlays by the Federal Government are
primarily for national defense. Defense outlays for physical investment
were $52.4 billion in 1997 and are estimated to be $50.3 billion in
1999. Almost all of these outlays, or $45.7 billion, are for the
procurement of weapons and other defense equipment, and the remainder is
primarily for construction on military bases, family housing for
military personnel, and Department of Energy defense facilities.
Outlays for direct physical investment for nondefense purposes are
estimated to be $18.5 billion in 1999. These outlays include $12.0
billion for construction and rehabilitation. This amount funds water,
power, and natural resources projects of the Corps of Engineers, the
Bureau of Reclamation within the Department of the Interior, the
Tennessee Valley Authority, and the power administrations in the
Department of Energy; construction and rehabilitation of veterans
hospitals and Postal Service facilities; and facilities for space and
science programs. Outlays for the acquisition of major equipment are
estimated to be $6.5 billion in 1999. The largest amounts are for the
air traffic control system and the Postal Service. For the purchase or
sale of land and structures, collections are expected to exceed
disbursements by $3.6 billion in 1998, largely due to the sale of the
United States Enrichment Corporation and the privatization of Elk Hills.
Sale of these assets has been enacted. These sales explain most of the
decline in outlays in this category from 1997 to 1998.
Grants to State and local governments for physical investment are
estimated to be $44.4 billion in 1999. More than three-fifths of these
outlays, or $27.6 billion, are to assist States and localities with
transportation infrastructure. Other major grants for physical
investment fund sewage treatment plants, community development, and
public housing.
Conduct of research and development.--Outlays for the conduct of
research and development are estimated to be $73.7 billion in 1999.
These outlays are devoted to increasing basic scientific knowledge and
promoting related research and development. They increase the Nation's
security, improve the productivity of capital and labor for both public
and private purposes, and enhance the quality of life. More than half of
these outlays, an estimated $39.4 billion in 1999, are for national
defense. Physical investment for research and development facilities and
equipment is included in the physical investment category.
Nondefense outlays for the conduct of research and development are
estimated to be $34.3 billion in 1999. This is almost entirely direct
spending by the Federal Government, and is largely for the space
programs, the National Science Foundation, the National Institutes of
Health, and research for nuclear and non-nuclear energy programs.
Conduct of education and training.--Outlays for the conduct of
education and training are estimated to be $50.0 billion in 1999. These
outlays add to the stock of human capital by developing a more skilled
and productive labor force. Grants to State and local governments for
this category are estimated to be $29.8 billion in 1999, more than half
of the total. They include education programs for the disadvantaged and
the handicapped, vocational and adult education programs, training
programs in the Department of Labor, and Head Start. Direct education
and training outlays by the Federal Government are estimated to be $20.1
billion in 1999. Programs in this category are primarily aid for
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Table 6-1. COMPOSITION OF FEDERAL INVESTMENT OUTLAYS
(In billions of dollars)
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Estimate
1997 -------------------
actual 1998 1999
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Federal Investment
Major public physical capital investment:
Direct Federal:
National defense.............................................................. 52.4 48.7 50.3
Nondefense.................................................................... 19.7 15.4 18.5
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Subtotal, direct major public physical capital investment................... 72.2 64.1 68.8
Grants to State and local governments........................................... 41.5 44.1 44.4
-----------------------------
Subtotal, major public physical capital investment.......................... 113.6 108.2 113.2
Conduct of research and development:
National defense................................................................ 40.2 39.0 39.4
Nondefense...................................................................... 30.9 32.4 34.3
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Subtotal, conduct of research and development................................. 71.1 71.4 73.7
Conduct of education and training:
Grants to State and local governments........................................... 25.0 26.3 29.8
Direct Federal.................................................................. 19.0 19.5 20.1
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Subtotal, conduct of education and training................................... 44.0 45.7 50.0
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Major Federal investment outlays.................................................. 228.8 225.3 236.9
MEMORANDUM
Major Federal investment outlays:
National defense................................................................ 92.6 87.7 89.7
Nondefense...................................................................... 136.2 137.6 147.2
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Total, major Federal investment outlays....................................... 228.8 225.3 236.9
Miscellaneous physical investments:
Commodity inventories........................................................... -1.0 -0.3 -0.2
Other physical investment (direct).............................................. 3.4 3.9 3.8
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Total, miscellaneous physical investment...................................... 2.4 3.5 3.5
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Total, Federal investment outlays, including miscellaneous physical investment.... 231.1 228.8 240.4
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higher education through student financial assistance, loan subsidies,
the veterans GI bill, and health training programs.
This category does not include outlays for education and training of
Federal civilian and military employees. Outlays for education and
training that are for physical investment and for research and
development are in the categories for physical investment and the
conduct of research and development.
Miscellaneous Physical Investment Outlays
In addition to the categories of major Federal investment, several
miscellaneous categories of investment outlays are shown at the bottom
of Table 6-1. These items, all for physical investment, are generally
unrelated to improving Government operations or enhancing economic
activity.
Outlays for commodity inventories are for the purchase or sale of
agricultural products pursuant to farm price support programs and the
purchase and sale of other commodities such as oil and gas. Sales are
estimated to exceed purchases by $0.2 billion in 1999.
Outlays for other miscellaneous physical investment are estimated to
be $3.8 billion in 1999. This category includes primarily conservation
programs. These outlays are entirely for direct Federal spending.
Detailed Tables on Investment Spending
This section provides data on budget authority as well as outlays for
major Federal investment. These estimates extend four years beyond the
budget year to 2003. Table 6-2 displays budget authority (BA) and
outlays (O) by major programs according to defense and nondefense
categories. The greatest level of detail appears in Table 6-3, which
shows budget authority and outlays divided according to grants to State
and local governments and direct Federal spending. Miscellaneous
investment is not included in these tables because it is generally
unrelated to improving Government operations or enhancing economic
activity.
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Table 6-2. FEDERAL INVESTMENT BUDGET AUTHORITY AND OUTLAYS: DEFENSE AND NONDEFENSE PROGRAMS
(in millions of dollars)
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Estimate
Description 1997 -----------------------------------------------------------------------
Actual 1998 1999 2000 2001 2002 2003
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NATIONAL DEFENSE
Major public physical investment:
Construction and rehabilitation......... BA 4,805 4,504 3,857 4,387 4,151 4,336 4,680
O 4,710 4,776 4,605 3,947 4,118 4,227 4,386
Acquisition of major equipment.......... BA 42,993 45,189 48,784 54,838 61,966 61,363 64,246
O 47,778 44,020 45,730 48,203 51,058 53,974 58,977
Purchase or sale of land and structures. BA -85 -76 -77 -80 -80 -80 -65
O -85 -76 -77 -80 -80 -80 -65
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Subtotal, major public physical BA 47,713 49,617 52,564 59,145 66,037 65,619 68,861
investment.
O 52,403 48,720 50,258 52,070 55,096 58,121 63,298
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Conduct of research and development....... BA 39,591 39,873 39,716 36,770 35,839 36,359 37,253
O 40,177 39,024 39,417 37,407 36,339 36,186 36,669
Conduct of education and training BA 5 2 5 10 10 10 10
(civilian).
O 7 3 4 8 10 10 10
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Subtotal, national defense investment... BA 87,309 89,492 92,285 95,925 101,886 101,988 106,124
O 92,587 87,747 89,679 89,485 91,445 94,317 99,977
NONDEFENSE
Major public physical investment:
Construction and rehabilitation:
Highways.............................. BA 21,373 22,374 22,101 22,010 21,955 21,935 21,935
O 20,502 21,751 22,319 22,331 22,197 22,045 21,980
Mass transportation................... BA 3,757 4,460 4,635 4,636 4,636 4,636 4,636
O 4,041 3,753 3,660 3,998 4,298 4,611 4,791
Rail transportation................... BA 263 264 632 582 532 524 522
O 372 236 500 539 577 545 528
Air transportation.................... BA 1,487 1,714 1,714 1,716 1,717 1,719 1,721
O 1,514 1,609 1,650 1,689 1,715 1,726 1,722
Water transportation.................. BA 136 142 119 109 102 102 102
O 111 136 96 66 66 76 82
Community development block grants.... BA 4,854 4,924 4,725 4,015 3,981 3,933 4,040
O 4,517 4,989 4,959 4,959 4,639 4,155 4,026
Other community and regional BA 1,308 1,459 2,023 1,563 1,388 1,362 1,388
development.
O 1,507 1,666 1,399 1,555 1,743 1,615 1,534
Pollution control and abatement....... BA 3,764 4,127 4,464 3,609 3,392 3,344 3,343
O 3,646 3,504 3,955 4,124 4,043 3,689 3,557
Water resources....................... BA 2,366 2,487 1,632 1,959 1,856 1,863 2,076
O 2,078 2,757 2,021 1,880 2,319 1,633 1,965
Housing assistance.................... BA 917 6,219 5,890 5,191 4,793 4,786 4,882
O 6,849 6,812 6,864 7,000 6,726 6,311 5,955
Energy................................ BA 1,098 1,046 1,042 1,196 1,165 1,142 1,232
O 1,128 1,051 1,005 1,186 1,153 1,132 1,217
Veterans hospitals and other health... BA 1,684 1,732 1,485 1,503 1,524 1,550 1,611
O 1,538 1,845 1,715 1,686 1,647 1,619 1,663
Postal Service........................ BA 1,595 1,971 1,439 932 799 686 846
O 1,261 1,243 1,355 1,231 1,026 891 850
GSA real property activities.......... BA 1,381 242 712 702 821 934 750
O 1,362 1,080 885 895 1,001 940 844
Other programs........................ BA 2,449 2,502 2,702 2,400 2,130 2,115 2,021
O 2,610 2,675 2,793 2,952 2,895 2,390 2,264
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Subtotal, construction and BA 48,432 55,663 55,315 52,123 50,791 50,631 51,105
rehabilitation.
O 53,036 55,107 55,176 56,091 56,045 53,378 52,978
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Acquisition of major equipment:
Air transportation.................... BA 1,969 1,923 2,167 2,422 2,686 2,948 3,214
O 2,350 1,825 1,838 1,945 2,129 2,350 2,773
Postal Service........................ BA 1,360 1,298 1,320 1,144 846 424 93
O 905 649 617 1,448 1,447 806 365
Other................................. BA 4,529 5,137 5,130 5,061 5,079 5,065 5,100
O 3,638 4,367 4,169 4,628 4,778 4,847 4,882
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Subtotal, acquisition of major BA 7,858 8,358 8,617 8,627 8,611 8,437 8,407
equipment.
O 6,893 6,841 6,624 8,021 8,354 8,003 8,020
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Purchase or sale of land and structures. BA 335 -3,237 -183 635 682 140 671
O 334 -3,616 -12 736 760 185 723
Other physical assets (grants).......... BA 943 937 1,200 1,293 1,183 1,191 1,209
O 969 1,142 1,144 1,221 1,230 1,221 1,224
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Subtotal, major public physical BA 57,568 61,721 64,949 62,678 61,267 60,399 61,392
investment.
O 61,232 59,474 62,932 66,069 66,389 62,787 62,945
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Conduct of research and development:
General science, space, and technology.. BA 10,813 12,427 12,703 12,822 13,113 13,397 13,589
O 10,855 11,524 11,974 12,530 12,828 13,165 13,376
Energy.................................. BA 2,388 1,303 1,460 1,310 1,306 1,271 1,279
O 2,641 1,527 1,573 1,634 1,608 1,481 1,483
Transportation.......................... BA 1,780 1,916 1,900 1,830 1,816 1,796 1,796
O 1,782 1,920 2,255 2,028 1,972 1,984 1,954
Health.................................. BA 12,655 13,534 14,820 15,692 16,662 17,643 19,721
O 11,223 12,799 13,794 14,794 15,692 16,417 17,887
Natural resources and environment....... BA 1,861 1,983 1,990 1,984 2,005 2,030 2,007
O 1,590 1,734 1,785 1,793 1,799 1,829 1,808
All other research and development...... BA 2,674 2,764 2,939 2,973 2,976 3,007 3,016
O 2,805 2,851 2,906 2,975 3,013 3,042 3,081
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Subtotal, conduct of research and BA 32,171 33,927 35,812 36,611 37,878 39,144 41,408
development.
O 30,896 32,355 34,287 35,754 36,912 37,918 39,589
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Conduct of education and training:
Education, training, employment and
social services:
Elementary, secondary, and vocational BA 16,997 18,737 20,751 21,003 21,122 20,895 20,843
education.
O 15,025 15,310 18,183 20,477 20,836 21,063 20,955
Higher education...................... BA 13,513 13,080 13,784 13,756 14,146 13,516 14,841
O 12,290 12,403 12,445 12,381 12,621 11,999 13,390
Research and general education aids... BA 1,991 1,866 2,195 2,246 2,299 2,297 2,309
O 1,769 2,109 2,027 2,214 2,315 2,321 2,340
Training and employment............... BA 5,675 6,378 6,723 5,218 5,240 5,310 5,382
O 4,769 5,448 6,163 6,058 5,492 5,238 5,304
Social services....................... BA 6,515 6,988 7,368 7,689 7,893 8,104 8,168
O 6,435 6,767 7,308 7,433 7,659 7,859 8,013
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Subtotal, education, training, and BA 44,691 47,049 50,821 49,912 50,700 50,122 51,543
social services.
O 40,288 42,037 46,126 48,563 48,923 48,480 50,002
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Veterans education, training, and BA 1,499 1,496 1,313 1,477 1,576 1,578 1,589
rehabilitation.
O 1,477 1,499 1,513 1,482 1,604 1,583 1,591
Health.................................. BA 880 894 981 1,010 1,046 1,097 1,195
O 880 860 927 965 999 1,039 1,101
Other education and training............ BA 1,447 1,376 1,467 1,483 1,465 1,482 1,498
O 1,396 1,349 1,388 1,433 1,458 1,468 1,478
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Subtotal, conduct of education and BA 48,517 50,815 54,582 53,882 54,787 54,279 55,825
training.
O 44,041 45,745 49,954 52,443 52,984 52,570 54,172
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Subtotal, nondefense investment......... BA 138,256 146,463 155,343 153,171 153,932 153,822 158,625
O 136,169 137,574 147,173 154,266 156,285 153,275 156,706
===================================================================================
Total, Federal investment................. BA 225,565 235,955 247,628 249,096 255,818 255,810 264,749
O 228,756 225,321 236,852 243,751 247,730 247,592 256,683
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Table 6-3. FEDERAL INVESTMENT BUDGET AUTHORITY AND OUTLAYS: GRANT AND DIRECT FEDERAL PROGRAMS
(in millions of dollars)
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Estimate
Description 1997 -----------------------------------------------------------------------
Actual 1998 1999 2000 2001 2002 2003
--------------------------------------------------------------------------------------------------------------------------------------------------------
GRANTS TO STATE AND LOCAL GOVERNMENTS
Major public physical investments:
Construction and rehabilitation:
Highways.............................. BA 21,372 22,372 22,101 22,010 21,955 21,935 21,935
O 20,498 21,742 22,312 22,326 22,195 22,043 21,978
Mass transportation................... BA 3,757 4,460 4,635 4,636 4,636 4,636 4,636
O 4,041 3,753 3,660 3,998 4,298 4,611 4,791
Rail transportation................... BA 78 .......... .......... .......... .......... .......... ..........
O 30 35 41 6 .......... .......... ..........
Air transportation.................... BA 1,460 1,700 1,700 1,700 1,700 1,700 1,700
O 1,489 1,554 1,636 1,674 1,699 1,708 1,700
Pollution control and abatement....... BA 2,430 2,655 2,424 2,095 1,984 1,934 1,934
O 2,319 2,086 2,286 2,469 2,476 2,173 2,059
Other natural resources and BA 269 47 51 49 49 49 49
environment.
O 179 283 71 67 57 50 50
Community development block grants.... BA 4,854 4,924 4,725 4,015 3,981 3,933 4,040
O 4,517 4,989 4,959 4,959 4,639 4,155 4,026
Other community and regional BA 1,185 1,138 1,813 1,372 1,190 1,161 1,162
development.
O 1,224 1,233 1,226 1,404 1,550 1,413 1,307
Housing assistance.................... BA 891 6,193 5,864 5,165 4,767 4,760 4,856
O 6,015 6,790 6,841 6,976 6,702 6,285 5,929
Other construction.................... BA 129 460 113 113 113 113 113
O 149 430 134 134 135 113 113
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Subtotal, construction and BA 36,425 43,949 43,426 41,155 40,375 40,221 40,425
rehabilitation.
O 40,461 42,895 43,166 44,013 43,751 42,551 41,953
-----------------------------------------------------------------------------------
Other physical assets................... BA 993 997 1,251 1,346 1,238 1,248 1,268
O 1,024 1,217 1,220 1,277 1,283 1,274 1,279
-----------------------------------------------------------------------------------
Subtotal, major public physical BA 37,418 44,946 44,677 42,501 41,613 41,469 41,693
capital.
O 41,485 44,112 44,386 45,290 45,034 43,825 43,232
-----------------------------------------------------------------------------------
Conduct of research and development:
Agriculture............................. BA 237 223 235 237 217 217 217
O 208 229 234 247 255 246 243
Other................................... BA 109 113 148 147 149 149 151
O 82 72 192 190 191 192 193
-----------------------------------------------------------------------------------
Subtotal, conduct of research and BA 346 336 383 384 366 366 368
development.
O 290 301 426 437 446 438 436
-----------------------------------------------------------------------------------
Conduct of education and training:
Elementary, secondary, and vocational BA 16,149 17,703 19,551 19,827 19,945 19,718 19,666
education.
O 14,212 14,471 17,185 19,331 19,666 19,890 19,784
Higher education........................ BA 83 80 39 44 50 53 54
O 75 84 69 42 40 39 39
Research and general education aids..... BA 440 296 472 489 502 497 496
O 277 456 318 454 488 498 497
Training and employment................. BA 4,513 5,135 5,197 3,639 3,634 3,684 3,734
O 3,769 4,261 4,745 4,495 3,914 3,630 3,672
Social services......................... BA 6,229 6,685 7,057 7,368 7,564 7,767 7,826
O 6,185 6,484 6,986 7,117 7,337 7,529 7,676
Agriculture............................. BA 448 423 455 453 423 423 423
O 420 429 432 439 444 439 432
Other................................... BA 79 84 82 82 81 81 81
O 89 82 82 83 77 75 73
-----------------------------------------------------------------------------------
Subtotal, conduct of education and BA 27,941 30,406 32,853 31,902 32,199 32,223 32,280
training.
O 25,027 26,267 29,817 31,961 31,966 32,100 32,173
-----------------------------------------------------------------------------------
Subtotal, grants for investment......... BA 65,705 75,688 77,913 74,787 74,178 74,058 74,341
O 66,802 70,680 74,629 77,688 77,446 76,363 75,841
DIRECT FEDERAL PROGRAMS
Major public physical investment:
Construction and rehabilitation:
National defense:
Military construction............... BA 3,220 2,938 2,430 3,250 3,015 3,205 3,514
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O 3,161 3,108 2,900 2,652 2,811 2,919 3,060
Family housing...................... BA 1,014 887 623 333 334 330 354
O 1,012 991 901 481 494 496 506
Atomic energy defense activities and BA 571 679 804 804 802 801 812
other.
O 537 677 804 814 813 812 820
-----------------------------------------------------------------------------------
Subtotal, national defense........ BA 4,805 4,504 3,857 4,387 4,151 4,336 4,680
O 4,710 4,776 4,605 3,947 4,118 4,227 4,386
-----------------------------------------------------------------------------------
International affairs................. BA 209 218 448 309 313 303 281
O 315 260 261 263 262 258 235
General science, space, and technology BA 374 410 477 475 488 503 503
O 615 492 506 455 462 479 482
Water resources projects.............. BA 2,101 2,440 1,583 1,910 1,807 1,814 2,027
O 1,904 2,478 1,953 1,814 2,263 1,584 1,916
Other natural resources and BA 1,881 1,812 2,316 1,842 1,785 1,771 1,736
environment.
O 1,691 1,789 2,023 2,041 1,932 1,894 1,881
Energy................................ BA 1,098 1,046 1,042 1,196 1,165 1,142 1,232
O 1,128 1,051 1,005 1,186 1,153 1,132 1,217
Postal Service........................ BA 1,595 1,971 1,439 932 799 686 846
O 1,261 1,243 1,355 1,231 1,026 891 850
Transportation........................ BA 349 422 765 707 651 645 645
O 482 401 576 619 661 641 634
Housing assistance.................... BA 26 26 26 26 26 26 26
O 834 22 23 24 24 26 26
Veterans hospitals and other health BA 1,637 1,652 1,448 1,466 1,487 1,513 1,574
facilities.
O 1,497 1,798 1,663 1,630 1,588 1,582 1,626
Federal Prison System................. BA 350 151 326 328 90 90 90
O 307 22 499 602 750 349 265
GSA real property activities.......... BA 1,381 423 712 702 821 934 750
O 1,514 1,370 885 895 1,001 940 844
Other construction.................... BA 1,006 1,143 1,307 1,075 984 983 970
O 1,027 1,286 1,261 1,318 1,172 1,051 1,049
-----------------------------------------------------------------------------------
Subtotal, construction and BA 16,812 16,218 15,746 15,355 14,567 14,746 15,360
rehabilitation.
O 17,285 16,988 16,615 16,025 16,412 15,054 15,411
-----------------------------------------------------------------------------------
Acquisition of major equipment:
National defense:
Department of Defense............... BA 42,789 44,861 48,463 54,519 61,653 61,054 63,925
O 47,563 43,699 45,411 47,887 50,745 53,664 58,660
Atomic energy defense activities.... BA 204 328 321 319 313 309 321
O 215 321 319 316 313 310 317
-----------------------------------------------------------------------------------
Subtotal, national defense........ BA 42,993 45,189 48,784 54,838 61,966 61,363 64,246
O 47,778 44,020 45,730 48,203 51,058 53,974 58,977
-----------------------------------------------------------------------------------
General science and basic research.... BA 243 338 376 380 392 400 401
O 275 315 392 425 458 465 467
Space flight, research, and supporting BA 592 640 658 641 628 609 591
activities.
O 607 641 654 649 632 614 596
Energy................................ BA 182 128 143 138 135 121 88
O 192 125 139 137 133 120 87
Postal Service........................ BA 1,360 1,298 1,320 1,144 846 424 93
O 905 649 617 1,448 1,447 806 365
Air transportation.................... BA 1,969 1,923 2,167 2,422 2,686 2,948 3,214
O 2,350 1,825 1,838 1,945 2,129 2,350 2,773
Water transportation (Coast Guard).... BA 245 255 268 244 231 231 231
O 232 181 214 152 189 227 243
Other transportation (railroads)...... BA 304 .......... 3 .......... .......... .......... ..........
O 297 145 26 1 .......... .......... ..........
Social security....................... BA 89 50 .......... .......... .......... .......... ..........
O 52 89 69 73 78 84 91
Hospital and medical care for veterans BA 876 861 605 609 612 615 638
O 469 1,101 586 587 593 596 616
Department of Justice................. BA 543 603 667 667 667 668 669
O 337 266 325 404 381 381 381
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Department of the Treasury............ BA 329 1,004 962 929 934 937 944
O 297 632 696 832 886 893 898
General supply fund................... BA 541 565 573 613 636 666 696
O 541 565 573 613 636 666 696
Other................................. BA 535 633 824 787 789 761 783
O 284 232 419 699 739 748 752
-----------------------------------------------------------------------------------
Subtotal, acquisition of major BA 50,801 53,487 57,350 63,412 70,522 69,743 72,594
equipment.
O 54,616 50,786 52,278 56,168 59,359 61,924 66,942
-----------------------------------------------------------------------------------
Purchase or sale of land and structures:
National defense...................... BA -85 -76 -77 -80 -80 -80 -65
O -85 -76 -77 -80 -80 -80 -65
International affairs................. BA 11 10 18 12 12 12 11
O 11 10 18 19 19 18 17
Sale of the United States Enrichment BA .......... -1,600 .......... .......... .......... .......... ..........
Corporation.
O .......... -1,600 .......... .......... .......... .......... ..........
Privatization of Elk Hills............ BA .......... -2,415 -728 .......... .......... .......... ..........
O .......... -2,415 -728 .......... .......... .......... ..........
Other................................. BA 324 768 527 623 670 128 660
O 323 389 698 717 741 167 706
-----------------------------------------------------------------------------------
Subtotal, purchase or sale of land BA 250 -3,313 -260 555 602 60 606
and structures.
O 249 -3,692 -89 656 680 105 658
-----------------------------------------------------------------------------------
Subtotal, major public physical BA 67,863 66,392 72,836 79,322 85,691 84,549 88,560
investment.
O 72,150 64,082 68,804 72,849 76,451 77,083 83,011
-----------------------------------------------------------------------------------
Conduct of research and development:
National defense
Department of Defense................. BA 37,116 37,295 36,891 33,953 33,043 33,583 34,398
O 37,702 36,446 36,593 34,570 33,511 33,376 33,813
Atomic energy and other............... BA 2,475 2,578 2,825 2,817 2,796 2,776 2,855
O 2,475 2,578 2,824 2,837 2,828 2,810 2,856
-----------------------------------------------------------------------------------
Subtotal, national defense.......... BA 39,591 39,873 39,716 36,770 35,839 36,359 37,253
O 40,177 39,024 39,417 37,407 36,339 36,186 36,669
-----------------------------------------------------------------------------------
International affairs................... BA 191 172 176 173 176 180 185
O 394 333 264 272 282 294 302
General science, space, and technology
NASA.................................. BA 7,845 8,193 8,038 8,060 8,162 8,306 8,427
O 8,137 7,975 7,880 8,098 8,023 8,209 8,327
National Science Foundation........... BA 2,272 2,381 2,671 2,756 2,844 2,931 3,025
O 2,015 2,111 2,360 2,548 2,698 2,817 2,920
Department of Energy.................. BA 696 1,853 1,994 2,006 2,107 2,160 2,137
O 703 1,438 1,734 1,884 2,107 2,139 2,129
-----------------------------------------------------------------------------------
Subtotal, general science, space, BA 11,004 12,599 12,879 12,995 13,289 13,577 13,774
and technology.
O 11,249 11,857 12,238 12,802 13,110 13,459 13,678
-----------------------------------------------------------------------------------
Energy.................................. BA 2,388 1,303 1,460 1,310 1,306 1,271 1,279
O 2,641 1,527 1,573 1,634 1,608 1,481 1,483
Transportation:
Department of Transportation.......... BA 505 569 672 678 641 600 577
O 492 457 747 776 766 735 686
NASA.................................. BA 1,194 1,264 1,147 1,071 1,094 1,115 1,138
O 1,237 1,424 1,370 1,114 1,068 1,111 1,130
-----------------------------------------------------------------------------------
Subtotal, transportation............ BA 4,087 3,136 3,279 3,059 3,041 2,986 2,994
O 4,370 3,408 3,690 3,524 3,442 3,327 3,299
-----------------------------------------------------------------------------------
Health:
National Institutes of Health......... BA 12,023 12,894 13,943 14,754 15,668 16,951 19,011
O 10,599 12,171 13,066 14,038 14,866 15,879 17,346
All other health...................... BA 622 630 838 899 955 653 671
O 614 618 694 722 792 504 507
-----------------------------------------------------------------------------------
[[Page 131]]
Subtotal, health.................... BA 12,645 13,524 14,781 15,653 16,623 17,604 19,682
O 11,213 12,789 13,760 14,760 15,658 16,383 17,853
-----------------------------------------------------------------------------------
Agriculture............................. BA 971 1,024 1,039 1,054 1,050 1,053 1,052
O 970 999 1,013 1,035 1,036 1,033 1,032
Natural resources and environment....... BA 1,858 1,980 1,987 1,981 2,002 2,027 2,004
O 1,589 1,732 1,783 1,791 1,797 1,827 1,806
National Institute of Standards and BA 392 371 447 474 497 516 522
Technology.
O 399 394 423 434 452 479 503
Hospital and medical care for veterans.. BA 263 272 300 300 300 300 300
O 235 270 293 300 301 301 301
All other research and development...... BA 605 685 717 711 710 715 712
O 581 605 661 671 670 671 681
-----------------------------------------------------------------------------------
Subtotal, conduct of research and BA 71,416 73,464 75,145 72,997 73,351 75,137 78,293
development.
O 70,783 71,078 73,278 72,724 72,805 73,666 75,822
-----------------------------------------------------------------------------------
Conduct of education and training:
Elementary, secondary, and vocational BA 848 1,034 1,200 1,176 1,177 1,177 1,177
education.
O 813 839 998 1,146 1,170 1,173 1,171
Higher education........................ BA 13,430 13,000 13,745 13,712 14,096 13,463 14,787
O 12,215 12,319 12,376 12,339 12,581 11,960 13,351
Research and general education aids..... BA 1,551 1,570 1,723 1,757 1,797 1,800 1,813
O 1,492 1,653 1,709 1,760 1,827 1,823 1,843
Training and employment................. BA 1,162 1,243 1,526 1,579 1,606 1,626 1,648
O 1,000 1,187 1,418 1,563 1,578 1,608 1,632
Health.................................. BA 880 894 981 1,010 1,046 1,097 1,195
O 880 860 927 965 999 1,039 1,101
Veterans education, training, and BA 1,499 1,496 1,313 1,477 1,576 1,578 1,589
rehabilitation.
O 1,477 1,499 1,513 1,482 1,604 1,583 1,591
General science and basic reserach...... BA 519 526 570 585 601 617 633
O 483 478 512 547 575 591 610
National defense........................ BA 5 2 5 10 10 10 10
O 7 3 4 8 10 10 10
International affairs................... BA 220 199 200 200 200 200 200
O 247 214 202 201 201 201 201
Other................................... BA 467 447 471 484 489 498 503
O 407 429 482 479 483 492 499
-----------------------------------------------------------------------------------
Subtotal, conduct of education and BA 20,581 20,411 21,734 21,990 22,598 22,066 23,555
training.
O 19,021 19,481 20,141 20,490 21,028 20,480 22,009
-----------------------------------------------------------------------------------
Subtotal, direct Federal investment..... BA 159,860 160,267 169,715 174,309 181,640 181,752 190,408
O 161,954 154,641 162,223 166,063 170,284 171,229 180,842
===================================================================================
Total, Federal investment................. BA 225,565 235,955 247,628 249,096 255,818 255,810 264,749
O 228,756 225,321 236,852 243,751 247,730 247,592 256,683
--------------------------------------------------------------------------------------------------------------------------------------------------------
[[Page 132]]
Part II: PLANNING, BUDGETING, AND ACQUISITION OF CAPITAL ASSETS
The previous section discussed Federal investment broadly defined. The
focus of this section is much narrower--the review of planning and
budgeting for capital assets during the past year and the resultant
budget proposals for capital assets owned by the Federal Government and
used to deliver Federal services. Capital assets consist of Federal
buildings, information technology, and other facilities and major
equipment, including weapons systems, federally owned infrastructure,
and space satellites.\1\ With proposed major agency restructuring,
organizational streamlining, and other reforms, good planning may
suggest reduced spending for some assets, such as office buildings, and
increased spending for others, such as information technology, to
increase the productivity of a smaller workforce.
---------------------------------------------------------------------------
\1\ This is almost the same as the definition in Part I of this
chapter for spending for direct Federal construction and rehabilitation,
major equipment, and purchase of land, except that capital assets
excludes grants to private groups for these purposes (e.g., grants to
universities for research equipment and grants to AMTRAK). A more
complete definition can be found in the glossary to the ``Principles of
Budgeting for Capital Asset Acquisitions,'' which is at the end of this
Part.
---------------------------------------------------------------------------
In recent years the Administration and the Congress have reviewed the
Federal Government's performance in planning, budgeting, risk
management, and the acquisition of capital assets. The reviews indicate
that the performance is uneven across the Government; the problems have
many causes and as a result, there is no single solution. However, in
meeting the objective of improving the Government's performance, it is
essential that the caliber of Government planning and budgeting for
capital assets be improved. The Administration, working with the
Congress, is on course to make capital management in the Federal
Government a model worthy of emulation.
Improving Planning, Budgeting, and Acquisition of Capital Assets
Risk Management.--Recent Executive Branch reviews have found a
recurring theme in many capital asset acquisitions--that risk management
should become more central to the planning, budgeting, and acquisition
process. Failure to analyze and manage the inherent risk in all capital
asset acquisitions may have contributed to cost overruns, schedule
shortfalls, and acquisitions that fail to perform as expected. Failure
to adopt capital asset requirements that are within the capabilities of
the market and budget limitations may also have contributed to these
problems. For each major project a risk analysis that includes how risks
will be isolated, minimized, monitored, and controlled may help prevent
these problems. The proposals in this budget, together with recent
legislation enacted by Congress, are designed to help the Government
manage better its portfolio of capital assets.
Long-Term Planning and Analysis.--Planning and managing capital
assets, especially better management of risk, has historically been a
low priority for some agencies. Attention focuses on coming-year
appropriations, and justifications are often limited to lists of desired
projects. The increased use of long-range planning linked to performance
goals required by the Government Performance and Results Act would
provide a better basis for justifications. It would increase foresight
and improve the odds for cost-effective investments.
A need for better risk management, integrated life-cycle planning, and
operation of capital assets at many agencies was evident in the
Executive Branch reviews. Research equipment was acquired with
inadequate funding for its operation. New medical facilities sometimes
were built without funds for maintenance and operation. New information
technology sometimes was acquired without planning for associated
changes in agency operations.
Congressional concern.--Congress has expressed its concern about
planning for capital assets with legislation and other actions that
complement Administration efforts to ensure better performance:
The Government Performance and Results Act of 1993 (GPRA) is
designed to help ensure that program objectives are more
clearly defined and resources are focused on meeting these
objectives.
The Federal Acquisition Streamlining Act of 1994 (FASA),
Title V, requires agencies to improve the management of large
acquisitions. Title V requires agencies to institute a
performance-based planning, budgeting, and management approach
to the acquisition of capital assets. As a result of improved
planning efforts, agencies are required to establish cost,
schedule, and performance goals that have a high probability
of successful achievement. For projects that are not achieving
90 percent of original goals, agencies are required to discuss
corrective actions taken or planned to bring the project
within goals. If they cannot be brought within goals, agencies
should identify how and why the goals should be revised,
whether the project is still cost beneficial and justified for
continued funding, or whether the project should be canceled.
The Clinger-Cohen Act of 1996 is designed to ensure that
information technology acquisitions support agency missions
developed pursuant to GPRA. The Clinger-Cohen Act also
requires a performance-based planning, budgeting, and
management approach to the acquisition of capital assets.
The General Accounting Office published a study, Budget
Issues: Budgeting for Federal Capital (November 1996), written
in response to a congressional request, which recommended that
OMB continue its focus on capital assets.
Administration concern.--Since 1994, the Administration has devoted
particular attention to improving the process of planning, budgeting,
and acquiring capital assets. After seeking out and analyzing the
problems, which differed from agency to agency, OMB issued guidance on
this issue in 1994. This guidance was re
[[Page 133]]
peated in 1995 and reissued in 1996 and 1997 as OMB Circular A-11: Part
3: ``Planning, Budgeting, and Acquisition of Capital Assets'' (June
1997) (hereafter referred to as Part 3). Part 3 identified other OMB
guidance on this issue.\2\
---------------------------------------------------------------------------
\2\ Other guidance published by OMB with participation by other
agencies includes: (1) OMB Circular No. A-109, Major System
Acquisitions, which establishes policies for planning major systems that
are generally applicable to capital asset acquisitions. (2) OMB Circular
No. A-94, Guidelines and Discount Rates for Benefit-Cost Analysis of
Federal Programs, which provides guidance on benefit-cost, cost-
effectiveness, and lease-purchase analysis to be used by agencies in
evaluating Federal activities including capital asset acquisition. It
includes guidelines on the discount rate to use in evaluating future
benefits and costs, the measurement of benefits and costs, the treatment
of uncertainty, and other issues. This guidance must be followed in all
analyses in support of legislative and budget programs. (3) Executive
Order No. 12893, ``Principles for Federal Infrastructure Investments,''
which provides principles for the systematic economic analysis of
infrastructure investments and their management. (4) OMB Bulletin No.
94-16, Guidance on Executive Order No. 12893, ``Principles for Federal
Infrastructure Investments,'' which provides guidance for implementing
this order and appends the order itself. (5) the revision of OMB
Circular A-130, Management of Federal Information Resources (February
20, 1996), which provides principles for internal management and
planning practices for information systems and technology; and (6) OMB
Circular No. A-127, Financial Management Systems, which prescribes
policies and standards for executive departments and agencies to follow
in developing, evaluating, and reporting on financial management
standards.
---------------------------------------------------------------------------
Part 3 requests agencies to approach planning for capital assets in
the context of strategic plans to carry out their missions, and to
consider alternative methods of meeting their goals. Systematic analysis
of the full life-cycle expected costs and benefits is required, along
with risk analysis and assessment of alternative means of acquiring
assets. The Administration proposes to make agencies responsible for
using good capital programming principles for managing the capital
assets they use, and to work throughout the coming year to improve
agency practices in risk management, planning, budgeting, acquisition,
and operation of these assets. In support of this, in July 1997 OMB
issued a Capital Programming Guide. This Guide was developed by an
interagency task force with representation from 14 agencies along with
participation from the General Accounting Office. The Guide's purpose is
to provide professionals in the Federal Government a basic reference on
capital assets management principles to assist them in planning,
budgeting, acquiring, and managing the asset once in use. The Guide
emphasizes risk management and the importance of analyzing capital
assets as a portfolio. In addition, other recent actions by the
Administration include:
OMB memorandum 97-02, ``Funding Information Systems
Investments'' (October 25, 1996) was issued to establish clear
and concise decision criteria regarding investments in major
information technology investments.
As part of this Budget, the Administration is:
--requesting full funding in regular or advance appropriations for
new capital projects and for many capital projects formerly
funded incrementally. These requests are shown in Table 6-5 and
discussed in the accompanying text.
--reissuing the ``Principles of Budgeting for Capital Asset
Acquisitions,'' which appear at the end of this Part and are
also available as a separate publication. These principles
offer guidelines to agencies to help carry out better planning,
analysis, risk management, and budgeting for capital asset
acquisitions.
From Planning to Budgeting.--Long-range agency plans should channel
fully justified budget-year and out-year capital acquisition proposals
into the budget process. Agencies were asked to submit projections of
both budget authority and outlays for high-priority capital asset
proposals not only for the budget year but for the four subsequent years
through 2003 as well. In addition, agency-specific capital asset issues
were highlighted in the agency reviews.
Attention was given to whether the ``lumpiness'' of some capital
assets--large one-year temporary increases in funding--disadvantaged
them in the budget review process. In some cases, agencies aggregate
capital asset acquisitions into budget accounts containing only such
acquisitions; such accounts tend to smooth out year-to-year changes in
budget authority and outlays and avoid crowding other expenditures. In
other cases, agencies or program managers do not hesitate to request
``spikes'' in spending for asset acquisitions, and the review process
accommodates them. But some agencies go out of their way to avoid such
spikes, and some agencies have trouble accommodating them. Part 3
encouraged agencies to accommodate justified spikes in their own
internal reviews.
Full Funding of Capital Assets.--Good budgeting requires that
appropriations for the full costs of asset acquisition be provided up
front to help ensure that all costs and benefits are fully taken into
account when decisions are made about providing resources. Full funding
was endorsed by the General Accounting Office in its report, Budgeting
for Federal Capital (November 1996). This rule is followed for most
Department of Defense procurement and construction programs and for
General Services Administration buildings. In other areas, however, too
often it is not. When it is not followed and capital assets are funded
in increments, without certainty if or when future funding will be
available, it can and occasionally does result in poor risk management,
weak planning, acquisition of assets not fully justified, higher
acquisition costs, cancellation of major projects, the loss of sunk
costs, and inadequate funding to maintain and operate the assets. Full
funding is also an important element in managing large acquisitions
effectively and holding management responsible for achieving goals.
This budget requests full funding with regular or advance
appropriations for new capital projects and for many capital projects
funded incrementally in the past. Projects that might have been funded
in increments in past years and are fully funded in this budget are
identified below in Table 6-5 and discussed in the accompanying text.
Next year additional effort will be made to include full funding for all
new capital projects, or at least economically and programmatically
viable segments (or modules) of new projects.
Other Budgeting Issues.--Other budgeting decisions can also aid in
acquiring capital assets. Availability of funds for one year often may
not be enough time to complete the acquisition process. Most agencies
request that funds be available for more than one year
[[Page 134]]
to complete acquisitions efficiently, and Part 3 encouraged this. As
noted, many agencies aggregate asset acquisition in budget accounts to
avoid lumpiness. In some cases, these are revolving funds that ``rent''
the assets to the agency's programs.
To promote better program performance, agencies are also being
encouraged by OMB to examine their budget account structures to align
them better with program outputs and outcomes and to charge the
appropriate account with significant costs used to achieve these
results. The asset acquisition rental accounts, mentioned above, would
contribute to this. Budgeting this way would provide information and
incentives for better resource allocation among programs and a continual
search for better ways to deliver services. It would also provide
incentives for efficient capital asset acquisition and management.
Acquisition of Capital Assets.--Improved planning, budgeting, and
acquisition strategies are necessary to increase the ability of agencies
to acquire capital assets within, or close to, the original estimates of
cost, schedule, and performance used to justify project budgets and to
maintain budget discipline. The Administration initiative along with
enactment of FASA (Title V) and the Clinger-Cohen Act require agencies
to institute a performance-based planning, budgeting, and management
approach to the acquisition of capital assets.
OMB, working with the agencies over the last several years, began
separate but related efforts to develop an integrated management
approach that employs performance based acquisition management as part
of a disciplined capital programming process. The Administration also
wants the capital asset acquisition goals incorporated into the annual
performance plan called for by GPRA so that a unified picture of agency
management activities is presented and acquisition performance goals are
linked to the achievement of program and policy goals. This integrated
approach will not only eliminate duplication in reporting agency actions
but, most importantly, will foster more effective implementation of
performance-based acquisition management.
The first effort was the issuance of OMB Circular A-11, Part 3,
``Planning, Budgeting and Acquisition of Capital Assets,'' in July 1996.
Part 3 was reissued in June 1997 with the Capital Programming Guide as a
supplement. These documents present unified guidance on planning,
budgeting, acquisition, and management of capital assets. It also
presents unified guidance designed to coordinate the collection of
agency information for reports to the Congress required by FASA Title V.
Part 3 for this year asked agencies to report on all major acquisitions
and provide information on the extent of planning and risk mitigation
efforts accomplished for new projects to ensure a high probability that
the cost, schedule and performance goals established will be
successfully achieved. For ongoing projects agencies are to provide
information on the achievement of, or deviation from, goals. For
projects that are not achieving 90 percent of original goals, agencies
are required to discuss corrective actions taken, or contemplated, to
bring the project within goals or, if not, how and why the goals should
be revised and whether the project is still cost beneficial and
justified for continued funding or should be canceled. Approved
acquisition goals submitted with the 1999 Budget are the baseline goals
for all future monitoring of project progress for both management
purposes and reporting to Congress as required by FASA Title V. This
more disciplined capital management approach is new to many agencies,
and some agencies were not yet able to provide all the required
information for all major acquisitions for this year. OMB expects that
agencies will be able to meet the requirements for next year's budget.
Part 3 complements OMB memorandum 97-02, ``Funding Information Systems
Investments'' (October 25, 1996), which was issued to establish clear
and concise decision criteria regarding investments in major information
technology investments. These policy documents establish the general
presumption that OMB will recommend new or continued funding only for
those major investments in assets that comply with good capital
programming principles.
At the Appendix to this Part are the ``Principles of Budgeting for
Capital Asset Acquisitions,'' which incorporate the above criteria and
expand coverage to all capital investments. The Administration
recognizes that many agencies are in the middle of ongoing projects
initiated prior to enactment of the Clinger-Cohen Act and FASA Title V,
and may not be able to satisfy the criteria immediately. For those
systems that do not satisfy the criteria, the Administration considered
requests to use 1998 and 1999 funds to support reevaluation and
replanning of the project as necessary to achieve compliance with the
criteria or to determine that the project would not meet the criteria
and should be canceled.
As a result of these two initiatives, capital asset acquisitions are
to have baseline cost, schedule, and performance goals for future
tracking purposes or they are to be either reevaluated and changed or
canceled if no longer cost beneficial.
Outlook.--The effort to improve planning and budgeting for capital
assets will continue in 1998 and 1999.
The Administration will work with the Congress to increase
the number of projects that are fully funded with regular or
advance appropriations.
OMB will be working with congressional committees, the
President's Management Council, the Chief Financial Officers
Council, and the Chief Information Officers Council to help
agencies with their responsibility for capital assets through
the alignment of budgetary resources with program results. OMB
will also work with these groups to implement the ``Principles
of Budgeting for Capital Asset Acquisitions,'' which are shown
as an Appendix to this Part.
Interagency working groups will be established to address:
(1) program manager qualification standards; (2) enhanced
systems of incentives to encour
[[Page 135]]
age excellence in the acquisition workforce; and (3)
government-wide implementation of performance-based management
systems (e.g., earned value or similar systems) to monitor
achievement or deviation from goals of in-process
acquisitions.
In the review process, proposals for the acquisition of
capital assets and related issues of lumpiness or ``spikes''
will continue to receive special attention. Agencies will be
encouraged to give the same special attention to future asset
acquisition proposals.
To ensure that the full costs and benefits of all budget
proposals are fully taken into account in allocating
resources, agencies will be required to propose full funding
for acquisitions in their budget requests.
OMB will issue a revised Capital Programming Guide that will
incorporate specific examples of good capital programming
practices found by the GAO in a study of State and local
government and private industry practices and by Federal
agencies as a result of the new, more stringent requirements.
Major Acquisition Proposals
For the definition of major capital assets described above this budget
requests $69.7 billion of budget authority for 1999. This includes $51.6
billion for the Department of Defense and $18.1 billion for other
agencies. The major requests are shown in the accompanying Table 6-4:
``Capital Asset Acquisitions,'' which distributes the funds according to
the categories for construction and rehabilitation, major equipment, and
purchases of land and structures.
Construction and Rehabilitation
This budget includes $12.7 billion of budget authority for 1999 for
construction and rehabilitation.
Department of Defense.--The budget requests $3.1 billion for 1999 for
general construction on military bases and family housing. This funding
will be used to:
support the fielding of new systems;
enhance operational readiness, including deployment and
support of military forces;
provide housing for military personnel and their families;
implement base closure and realignment actions; and
correct safety deficiencies and environmental problems.
Department of Energy.--This budget requests $1.4 billion for 1999 for
construction and rehabilitation for the Department of Energy. The
largest item is a request for $284 million for the National Ignition
Facility, which will be used to perform experiments, including inertial
confinement fusion experiments, at high pressures and temperatures.
These investments are also discussed in the text that accompanies Table
6-5.
Corps of Engineers.--This budget requests $1.2 billion for 1999 for
construction and rehabilitation for the
Table 6-4. CAPITAL ASSET ACQUISITIONS
(Budget authority in billions of dollars)
------------------------------------------------------------------------
1997 1998 1999
actual proposed proposed
------------------------------------------------------------------------
MAJOR ACQUISITIONS
Construction and rehabilitation:
Defense military construction and family
housing.................................. 4.2 3.8 3.1
Department of Energy...................... 1.2 1.2 1.4
Corps of Engineers........................ 1.6 2.0 1.2
Department of the Interior................ 1.0 0.8 0.8
General Services Administration........... 1.4 0.4 0.7
Other agencies............................ 5.6 7.2 7.1
---------------------------
Subtotal, construction and
rehabilitation......................... 15.1 14.2 12.7
Major equipment:
Department of Defense..................... 42.8 44.9 48.5
Department of Transportation.............. 2.2 2.1 2.4
Department of the Treasury................ 0.3 1.0 1.0
NASA...................................... 0.6 0.7 0.7
Other agencies........................... 5.1 5.4 5.4
---------------------------
Subtotal, major equipment............... 50.3 53.3 57.2
Purchases of land and structures............ 0.3 1.1 0.5
---------------------------
Total, major acquisitions................. 65.7 68.7 70.4
Sale of major assets........................ -* -4.4 -0.7
---------------------------
Total, capital asset acquisitions \1\....... 65.7 64.2 69.7
------------------------------------------------------------------------
* Indicates $50 million or less.
\1\ This total is derived from the direct Federal major public physical
investment budget authority on Table 6-3 ($72.8 billion for 1999).
Table 6-4 excludes an estimate of spending for assets not owned by the
Federal Government ($3.2 billion for 1999).
Corps of Engineers. These funds
finance construction, rehabilitation, and related activity for water
resources development projects that provide navigation, flood control,
environmental restoration, and other benefits. Table 6-5 identifies the
advance appropriations requested for programs that can be completed by
2003.
Department of the Interior.--This budget requests $0.8 billion for
construction and rehabilitation for the Department of the Interior. The
largest items are for water resources projects for the Bureau of
Reclamation and construction for the National Parks. Advance
appropriations requested for these programs are shown in Table 6-5 and
discussed in the accompanying text.
General Services Administration (GSA).--The 1999 budget includes $0.7
billion in budget authority for GSA for the construction or renovation
of buildings. These funds will allow for new construction and the
acquisition of border stations and general purpose office space in
locations where long-term needs show that ownership is preferable to
leasing.
Other agencies.--This budget includes $7.1 billion for construction
and rehabilitation for other agencies. The largest items are for the
Postal Service ($1.4 billion in 1999) and the Tennessee Valley Authority
($0.7 billion in 1999).
Major Equipment
This category covers capital purchases for major equipment, including
information technology, such as computer hardware, major software, and
renovations required for this equipment. This budget includes $57.2
[[Page 136]]
billion in budget authority for 1999 for the purchase of major
equipment.
Department of Defense.--The budget requests $48.5 billion for 1999 to
procure or modify weapons systems, related support equipment, and
purchase of other capital goods. This includes tactical fighter
aircraft, airlift aircraft, naval vessels, tanks, helicopters, missiles,
and vehicles.
Department of Transportation.--The budget requests $2.4 billion in
budget authority for the Department of Transportation, which includes
$2.1 billion to modernize the air traffic control system and $0.3
billion for the Coast Guard to acquire vessels and other equipment.
Requests for advance appropriations for the air traffic control system
in the Federal Aviation Administration are discussed with Table 6-5.
Department of the Treasury.--The budget requests $1.0 billion in
budget authority for 1999 for major equipment, primarily information
technology investments for the Internal Revenue Service.. These efforts
and proposed advance appropriations for 2000 will help the IRS improve
customer service by providing alternative means of filing returns and
paying taxes, improve telephone service for taxpayers; and give
employees immediate access to complete information and modern tools to
do their jobs. These investments are also discussed in the text that
accompanies Table 6-5, which displays advance appropriations for capital
acquisitions.
National Aeronautics and Space Administration (NASA).--The budget
requests $0.7 billion in budget authority to procure major equipment for
programs in human space flight, science, aeronautics, and technology.
Most of the equipment is to be acquired for Space Shuttle upgrades, such
as orbiter improvements, Space Shuttle main engines, solid rocket
booster improvements, and launch site equipment.
Other agencies.--This budget requests $5.4 billion for major equipment
for other agencies. The largest part of this is for the Postal Service
($1.3 billion in 1999). Other agencies include the Department of Energy
($0.7 billion), for science and other projects; the Department of
Justice ($0.7 billion), primarily for the FBI; and the Department of
Veterans Affairs ($0.6 billion), for hospital equipment.
Purchase and Sale of Land and Structures
This budget includes $0.5 billion for 1999 for the purchase of land
and structures. This is primarily $0.2 billion for the purchase of
buildings by the General Services Administration. The budget also
includes $4.4 billion in 1998 for proceeds from the sale of the United
States Enrichment Corporation ($1.6 billion), the Privatization of Elk
Hills ($2.4 billion), and other assets.
Full Funding of Major Projects
This budget proposes full funding for new capital projects and for
many projects formerly funded incrementally. This funding is shown in
Table 6-5.
The importance of full funding was discussed earlier in this Part and
is also explained in the ``Principles of Budgeting for Capital Asset
Acquisitions,'' which appears as an Appendix to this Part. This budget
proposes to use this principle more consistently than in past years.
This budget requests $5.3 billion in budget authority for 1999, $14.8
billion in advance appropriations for 2000-2003, and $2.1 billion in
advance appropriations for later years, for a total request of $22.1
billion for these projects for these years.
Department of Commerce
This budget requests $590 million in regular appropriations and $2.9
billion in advance appropriations for the Department of Commerce for
projects in the National Oceanic and Atmospheric Administration (NOAA)
and the National Institute of Standards and Technology (NIST).
NOAA.--This budget requests $550 million for 1999 and $1,462 million
in advance appropriations for 1999-2003 for capital asset acquisitions
in NOAA. An additional $1,336 million is requested for 2004-2011.
These acquisitions support the largest modernization in the history of
the National Weather Service. The modernization is well underway and
demonstrating improvements in weather forecasts and warnings that lead
to lives and property saved. The budget supports this multi-year effort
to develop and deploy advanced technology, including advanced radar
equipment, other ground observing systems, and geostationary and polar-
orbiting satellites that will greatly improve the timeliness and
accuracy of severe weather and flood warnings while reducing staffing
requirements.
NIST.--The request includes $40 million in 1999 and $115 million in
2000-2002 in advance appropriations to complete funding for construction
of a $218 million Advanced Measurement Laboratory in Gaithersburg,
Maryland. This facility will provide stringent controls for particulate
matter, temperature, vibration, and humidity that are unattainable in
current NIST buildings. Such conditions are vital for NIST to keep pace
with rapid developments in semiconductors, precision instruments,
industrial robots, computers, chemicals, pharmaceuticals, building
materials, and emerging technologies requiring molecular and atomic-
level precision.
Department of Defense
This budget requests $569 million in advance appropriations for 2000-
2002 to fully fund selected military construction projects in the Army
and Navy. The budget requests $225 million for these projects in 1999.
Department of Energy
The budget proposes $2,304 million in advance appropriations for 2000-
2003 and an additional $213 million for 2004-2006 for design and
construction of facilities for defense and science activities in the
Department of Energy. The budget requests $717 million for these
projects for 1999.
Weapons activities.--The budget requests $482 million in regular
appropriations for 1999, $974 million in advance appropriation for 2000-
2003, and an additional $38 million for 2004-2006 in advance appropria
[[Page 137]]
Table 6-5. PROPOSED SPENDING TO FULLY FUND SELECTED CAPITAL ASSET ACQUISITIONS
(Budget authority in millions of dollars)
----------------------------------------------------------------------------------------------------------------
Advance appropriations
Regular ----------------------------------------------
appropriations Sum 2000-
1999 2000 2001 2002 2003 2003
----------------------------------------------------------------------------------------------------------------
DEPARTMENT OF COMMERCE
National Oceanic and Atmospheric Administration:
\1\ Procurement, acquisition and construction... 550 451 419 307 285 1,462
National Institute of Standards and Technology:
Construction of research activities............. 40 40 40 35 ....... 115
--------------------------------------------------------------
Subtotal, Department of Commerce............... 590 491 459 342 285 1,577
DEPARTMENT OF DEFENSE
Military construction, Navy...................... 32 14 ....... ....... ....... 14
Military construction, Army...................... 193 293 190 72 ....... 555
--------------------------------------------------------------
Subtotal, Department of Defense................ 225 307 190 72 ....... 569
DEPARTMENT OF ENERGY
Weapons activities \1\........................... 482 519 251 146 58 974
Other defense activities......................... 66 58 13 5 ....... 76
Science \1\...................................... 169 318 353 333 250 1,254
--------------------------------------------------------------
Subtotal, Department of Energy................. 717 895 617 484 308 2,304
DEPARTMENT OF HEALTH AND HUMAN SERVICES
Indian health facilities......................... 39 28 28 ....... ....... 56
National Institutes of Health.................... 90 40 ....... ....... ....... 40
--------------------------------------------------------------
Subtotal, Department of Health and Human
Services...................................... 129 68 28 ....... ....... 96
DEPARTMENT OF THE INTERIOR
Bureau of Reclamation: Water and related
resources....................................... 7 9 6 8 1 24
National Park Service: Construction.............. 14 40 12 ....... ....... 52
--------------------------------------------------------------
Subtotal, Department of the Interior........... 21 49 18 8 1 76
DEPARTMENT OF TRANSPORTATION
Federal Aviation Administration: Facilities and
equipment \1\................................... 775 700 475 329 248 1,752
DEPARTMENT OF THE TREASURY
Internal Revenue Service: Information technology
investments..................................... 323 323 ....... ....... ....... 323
CORPS OF ENGINEERS
Construction..................................... 184 244 163 92 32 531
ENVIRONMENTAL PROTECTION AGENCY
Buildings and facilities: Research Triangle Park. 32 41 ....... ....... ....... 41
NATIONAL AERONAUTICS AND SPACE ADMINISTRATION
Human space flight \1\........................... 2,270 2,134 1,933 1,766 1,546 7,379
NATIONAL SCIENCE FOUNDATION
Major research equipment......................... 44 38 30 17 10 95
SMITHSONIAN INSTITUTION
Construction..................................... 16 19 ....... ....... ....... 19
--------------------------------------------------------------
Total.......................................... 5,325 5,309 3,913 3,110 2,430 14,762
----------------------------------------------------------------------------------------------------------------
Note: For these capital projects, budget authority for the entire project is requested partly in the budget year
and partly in future years in advance appropriations.
\1\ This budget also requests advance appropriations for years beyond 2003.
tions to complete useful segments of all new and ongoing construction
projects supporting the nuclear weapons Stockpile Stewardship and
Management Program. Advance appropriations are requested for twenty two
projects that support this program. The largest project is the National
Ignition Facility (NIF), which will be used to perform experiments,
including inertial confinement fusion experiments, at high pressures and
temperatures. The budget requests $284 million in 1999 for NIF and $394
million in advance appropriations for 2000-2003 to complete the project,
which is under construction at the Lawrence Livermore National
Laboratory. Other major projects include the Dual Axis Radiographic
Hydrodynamic Facility at the Los Alamos National Laboratory; a computing
laboratory, a systems testing center, and a processing laboratory at the
Sandia National Laboratory; and major reconstruction projects at the
Pantex, Kansas City, and Y-12 facilities.
Other defense activities.--The budget requests $66 million in 1999 and
an additional $76 million in advance appropriations to complete useful
segments of all new and ongoing construction projects in support of the
Fissile Materials Disposition and Naval Reactors programs. For Fissile
Materials Disposition, the budget requests $25 million in 1999 and $22
million in 2000 to design a facility to take apart plutonium pits from
nuclear weapons and convert the material to a non-classified form and
requests $28 million in 1999 and
[[Page 138]]
$22 million in 2000 to design a facility to fabricate excess plutonium
into mixed-oxide fuel for commercial nuclear reactors. For Naval
Reactors, the budget requests $13 million in 1999 and $32 million in
advance appropriations to upgrade laboratory facilities and expand a
facility for storage of spent nuclear fuel from naval vessels.
Science.-- The budget requests $169 million in 1999, $1,254 million in
advance appropriation for 2000-2003, and an additional $175 million in
advance appropriations for 2004-2005 for various science-related
projects. The largest project is the Spallation Neutron Source (SNS),
for which $157 million is requested in 1999 and a total of $814 million
in advance appropriations in subsequent years. The SNS will be a world-
class facility enabling researchers in academia, industry, and
government to conduct cutting-edge research into new materials,
semiconductors, and structural biology.
Department of Health and Human Services
This budget requests $129 million for 1999 in regular appropriations
and $96 million in advance appropriations for projects in the Department
of Health and Human Services. Funds for National Institutes of Health
(NIH) support an advanced clinical research facility that will house
laboratories and hospital beds under one roof. This will allow the
continuation of the best possible clinical research at NIH.
Funds for Indian health facilities will allow for needed improvements
in these facilities.
Department of the Interior
This budget requests $21 million in budget authority for 1999 and $76
million in advance appropriations for 2000-2003 to fully fund projects
in the Bureau of Reclamation and the National Park Service.
Bureau of Reclamation.--This budget requests $7 million in regular
appropriations for 1999 for the Bureau of Reclamation and $24 million
over the years 2000-2003 in advance appropriations to fully fund three
water resources projects. These funds will finance the modification of
an existing dam to meet current safety criteria, a project to reduce
flood damage on the Upper Colorado River, and one to prevent further
degradation of an aquifer in eastern Idaho.
National Park Service.--The National Park Service needs to build or
restore its buildings and other structures over the next few years.
Funding stability is particularly needed for the National Park Service
(NPS) to restore the Elwha River in Olympic National Park, Washington,
by acquiring and removing two dams. Before NPS can acquire the dams, the
Secretary of the Interior must determine that funds to complete
restoration are available. In addition to $11 million already
appropriated and $86 million in 1998 from priority Federal land
acquisitions and exchanges, advance appropriations of $16 million in
2000 would fully fund the $113 million project and provide the funding
stability needed for the Secretary to proceed with acquisition. Advance
appropriations are also requested for four other parks that have an
ongoing project requiring funding for later years: Sequoia National Park
($13 million); Riis Park in Gateway National Recreation Area ($5.5
million); Shiloh National Military Park ($10 million); and Lake Mead
National Recreation Area ($7.5 million). For 1999 the budget requests
$14 million in regular appropriations for these projects.
Department of Transportation
Federal Aviation Administration.--This Budget requests $775 million in
1999, an additional $1,752 million for 2000-2003, with additional
requests of $160 million for 2004-2006, for 11 multi-year capital
projects to improve and modernize the FAA's air traffic control,
communications, and aviation weather information systems. These projects
are: Aviation Weather Services Improvements, Terminal Digital Radar,
Terminal Automation (STARS), Wide Area Augmentation System for GPS,
Display System Replacement, Weather and Radar Processor, Voice Switching
and Control System, Oceanic Automation, Aeronautical Data Link,
Operational and Supportability Implementation System (OASIS), and Beacon
Interrogation Replacement.
Department of the Treasury
Internal Revenue Service (IRS).--This budget requests $323 million in
budget authority for 1999 and $323 million in advance appropriations for
2000 to finance information technology investments. The IRS and the
Treasury Department are significantly modifying the business plans for
modernizing the IRS tax administration and systems by focusing on
reengineering work processes and exploring private sector technology
opportunities. These efforts will ensure that future capital investments
by the IRS will improve customer service by providing alternative means
of filing returns and paying taxes, improve telephone service for
taxpayers; and give employees immediate access to complete information
and modern tools to do their jobs.
Corps of Engineers
This budget requests $184 million in 1999 and $531 million for 2000-
2003 to fully fund ongoing projects that can be completed in 2003 or
earlier. These funds finance construction, rehabilitation, and related
activity for water resources development projects that provide
navigation, flood control, environmental restoration, and other
benefits.
Environmental Protection Agency
This budget requests $32 million in 1999 and $41 million in advance
appropriations in 2000 for construction of the EPA's new research and
office facility in Research Triangle Park in North Carolina. The total
cost of the facility is $273 million. This state-of-the-art facility
will consolidate nine leased spaces spread across three metropolitan
areas. This project has been the Agency's top laboratory construction
project for many years and will prove instrumental in achieving many
national environmental goals.
[[Page 139]]
National Aeronautics and Space Administration (NASA)
Human Space Flight (International Space Station).--This budget
requests $2,270 million in budget authority for 1999, $7,379 million in
advance appropriations over the years 1999-2003, and an additional $350
million in 2004 to fully fund the remaining costs of the International
Space Station. This will be an international laboratory in low earth
orbit on which American, Russian, Canadian, European, and Japanese
astronauts will conduct unique scientific and technological
investigations in a microgravity environment. During 1993 the program
underwent a major redesign to reduce program costs. The first launch to
begin construction of the Station is scheduled for mid-1998 and final
assembly will be complete by 2004. Advance appropriations will enable
NASA to complete the development program on schedule and at minimal
total cost. Since the redesign, Congress has already appropriated $11.1
billion through 1998.
National Science Foundation (NSF)
This budget requests $44 million in 1999 and $95 million in advance
appropriations for 2000-2003 to complete the redevelopment of the U.S.
station at the South Pole in Antarctica and to complete NSF's
contribution to the International Large Hadron Collider.
These amounts include $22 million in 1999 and $36 million for 2000-
2001 to complete the redevelopment of the South Pole station. This will
provide a platform for scientific activities, provide a safe working and
living environment, and maintain a U.S. presence in the Antarctica in
accordance with national policy.
The Large Hadron Collider will be the largest particle accelerator in
the world, and will be owned and operated by the European Laboratory for
Particle Physics (CERN). NSF is collaborating with the Department of
Energy in the development of detectors for the project. The budget
requests $22 million in 1999 and $59 million in 2000-2003 to complete
NSF's contribution.
Smithsonian Institution
This budget requests $16 million in budget authority for regular
appropriations in 1999 and $19 million in advance appropriations for
2000 to complete construction of the National Museum of the American
Indian. Congress has already appropriated $38 million through 1998.
[[Page 140]]
Appendix to Part II: PRINCIPLES OF BUDGETING FOR CAPITAL ASSET
ACQUISITIONS
Introduction and Summary
The Administration plans to use the following principles in budgeting
for capital asset acquisitions. These principles address planning, costs
and benefits, financing, and risk management requirements that should be
satisfied before a proposal for the acquisition of capital assets can be
included in the Administration's budget. A Glossary describes key terms.
A Capital Programming Guide has been published that provides detailed
information on planning and acquisition of capital assets.
The principles are organized in the following four sections:
A. Planning. This section focuses on the need to ensure that capital
assets support core/priority missions of the agency; the assets have
demonstrated a projected return on investment that is clearly equal to
or better than alternative uses of available public resources; the risk
associated with the assets is understood and managed at all stages; and
the acquisition is implemented in phased, successive segments, unless it
can be demonstrated there are significant economies of scale at
acceptable risk from funding more than one segment or there are multiple
units that need to be acquired at the same time.
B. Costs and Benefits. This section emphasizes that the asset should
be justified primarily by benefit-cost analysis, including life-cycle
costs; that all costs are understood in advance; and that cost,
schedule, and performance goals are identified that can be measured
using an earned value management system or similar system.
C. Principles of Financing. This section stresses that useful segments
are to be fully funded with regular or advance appropriations; that as a
general rule, planning segments should be financed separately from
procurement of the asset; and that agencies are encouraged to aggregate
assets in capital acquisition accounts and take other steps to
accommodate lumpiness or ``spikes'' in funding for justified
acquisitions.
D. Risk Management. This section is to help ensure that risk is
analyzed and managed carefully in the acquisition of the asset.
Strategies can include separate accounts for capital asset acquisitions,
the use of apportionment to encourage sound management, and the
selection of efficient types of contracts and pricing mechanisms in
order to allocate risk appropriately between the contractor and the
Government. In addition cost, schedule, and performance goals are to be
controlled and monitored by using an earned value management system or a
similar system; and if progress toward these goals is not met there is a
formal review process to evaluate whether the acquisition should
continue or be terminated.
A Glossary defines key terms, including capital assets. As defined
here, capital assets are land, structures, equipment, and intellectual
property (including software) that are used by the Federal Government,
including weapon systems. Not included are grants to States or others
for their acquisition of capital assets.
A. Planning
Investments in major capital assets proposed for funding in the
Administration's budget should:
1. Lsupport core/priority mission functions that need to be performed
by the Federal Government;
2. Lbe undertaken by the requesting agency because no alternative
private sector or governmental source can support the function more
efficiently;
3. Lsupport work processes that have been simplified or otherwise
redesigned to reduce costs, improve effectiveness, and make maximum use
of commercial, off-the-shelf technology;
4. Ldemonstrate a projected return on the investment that is clearly
equal to or better than alternative uses of available public resources.
Return may include: improved mission performance in accordance with
measures developed pursuant to the Government Performance and Results
Act; reduced cost; increased quality, speed, or flexibility; and
increased customer and employee satisfaction. Return should be adjusted
for such risk factors as the project's technical complexity, the
agency's management capacity, the likelihood of cost overruns, and the
consequences of under- or non-performance;
5. Lfor information technology investments, be consistent with
Federal, agency, and bureau information architectures which: integrate
agency work processes and information flows with technology to achieve
the agency's strategic goals; reflect the agency's technology vision and
year 2000 compliance plan; and specify standards that enable information
exchange and resource sharing, while retaining flexibility in the choice
of suppliers and in the design of local work processes;
6. Lreduce risk by: avoiding or isolating custom-designed components
to minimize the potential adverse consequences on the overall project;
using fully tested pilots, simulations, or prototype implementations
when necessary before going to production; establishing clear measures
and accountability for project progress; and, securing substantial
involvement and buy-in throughout the project from the program officials
who will use the system;
7. Lbe implemented in phased, successive segments as narrow in scope
and brief in duration as practicable, each of which solves a specific
part of an overall mission problem and delivers a measurable net benefit
independent of future segments, unless it can be demonstrated that there
are significant economies of scale at acceptable risk from funding more
than one segment or there are multiple units that need to be acquired at
the same time; and
[[Page 141]]
8. Lemploy an acquisition strategy that appropriately allocates risk
between the Government and the contractor, effectively uses competition,
ties contract payments to accomplishments, and takes maximum advantage
of commercial technology.
Prototypes require the same justification as other capital assets.
As a general presumption, the Administration will recommend new or
continued funding only for those capital asset investments that satisfy
good capital programming policies. Funding for those projects will be
recommended on a phased basis by segment, unless it can be demonstrated
that there are significant economies of scale at acceptable risk from
funding more than one segment or there are multiple units that need to
be acquired at the same time. (For more information, see the Glossary
entry, ``capital project and useful segments of a capital project.'')
The Administration recognizes that many agencies are in the middle of
ongoing projects, and they may not be able immediately to satisfy the
criteria. For those projects that do not satisfy the criteria, OMB will
consider requests to use 1998 and 1999 funds to finance additional
planning, as necessary, to support the establishment of realistic cost,
schedule, and performance goals for the completion of the project. This
planning could include: the redesign of work processes, the evaluation
of alternative solutions, the development of information system
architectures, and, if necessary, the purchase and evaluation of
prototypes. Realistic goals are necessary for agency portfolio analysis
to determine the viability of the project, to provide the basis for
fully funding the project to completion, and setting the baseline for
management accountability to deliver the project within goals.
Because the Administration considers this information essential to
agencies' long-term success, the Administration will use this
information both in preparing its budget and, in conjunction with cost,
schedule, and performance data, as apportionments are made. Agencies are
encouraged to work with their OMB representative to arrive at a mutually
satisfactory process, format, and timetable for providing the requested
information.
B. Costs and Benefits
The justification of the project should evaluate and discuss the
extent to which the project meets the above criteria and should also
include:
1. Lan analysis of the project's total life-cycle costs and benefits,
including the total budget authority required for the asset, consistent
with policies described in OMB Circular A-94: ``Guidelines and Discount
Rates for Benefit-Cost Analysis of Federal Programs'' (October 1992);
2. Lan analysis of the risk of the project including how risks will
be isolated, minimized, monitored, and controlled, and, for major
programs, an evaluation and estimate by the Chief Financial Officer of
the probability of achieving the proposed goals;
3. Lif, after the planning phase, the procurement is proposed for
funding in segments, an analysis showing that the proposed segment is
economically and programmatically justified--that is, it is
programmatically useful if no further investments are funded, and in
this application its benefits exceed its costs; and
4. Lshow cost, schedule, and performance goals for the project (or
the useful segment being proposed) that can be measured throughout the
acquisition process using an earned value management system or similar
system. Earned value is described in OMB Circular A-11, Part 3,
``Planning, Budgeting and Acquisition of Capital Assets,'' (June 1997),
Appendix 300C.
C. Principles of Financing
Principle 1: Full Funding
Budget authority sufficient to complete a useful segment of a capital
project (or the entire capital project, if it is not divisible into
useful segments) must be appropriated before any obligations for the
useful segment (or project) may be incurred.
Explanation: Good budgeting requires that appropriations for the full
costs of asset acquisition be enacted in advance to help ensure that all
costs and benefits are fully taken into account at the time decisions
are made to provide resources. Full funding with regular appropriations
in the budget year also leads to tradeoffs within the budget year with
spending for other capital assets and with spending for purposes other
than capital assets. Full funding increases the opportunity to use
performance-based fixed price contracts, allows for more efficient work
planning and management of the capital project, and increases the
accountability for the achievement of the baseline goals.
When full funding is not followed and capital projects or useful
segments are funded in increments, without certainty if or when future
funding will be available, the result is sometimes poor planning,
acquisition of assets not fully justified, higher acquisition costs,
cancellation of major projects, the loss of sunk costs, or inadequate
funding to maintain and operate the assets.
Principle 2: Regular and Advance Appropriations
Regular appropriations for the full funding of a capital project or a
useful segment of a capital project in the budget year are preferred. If
this results in spikes that, in the judgment of OMB, cannot be
accommodated by the agency or the Congress, a combination of regular and
advance appropriations that together provide full funding for a capital
project or a useful segment should be proposed in the budget.
Explanation: Principle 1 (Full Funding) is met as long as a
combination of regular and advance appropriations provide budget
authority sufficient to complete the capital project or useful segment.
Full funding
[[Page 142]]
in the budget year with regular appropriations alone is preferred
because it leads to tradeoffs within the budget year with spending for
other capital assets and with spending for purposes other than capital
assets. In contrast, full funding for a capital project over several
years with regular appropriations for the first year and advance
appropriations for subsequent years may bias tradeoffs in the budget
year in favor of the proposed asset because with advance appropriations
the full cost of the asset is not included in the budget year. Advance
appropriations, because they are scored in the year they become
available for obligation, may constrain the budget authority and outlays
available for regular appropriations of that year.
If, however, the lumpiness caused by regular appropriations cannot be
accommodated within an agency or Appropriations Subcommittee, advance
appropriations can ameliorate that problem while still providing that
all of the budget authority is enacted in advance for the capital
project or useful segment. The latter helps ensure that agencies develop
appropriate plans and budgets and that all costs and benefits are
identified prior to providing resources. In addition, amounts of advance
appropriations can be matched to funding requirements for completing
natural components of the useful segment. Advance appropriations have
the same benefits as regular appropriations for improved planning,
management, and accountability of the project.
Principle 3: Separate Funding of Planning Segments
As a general rule, planning segments of a capital project should be
financed separately from the procurement of a useful asset.
Explanation: The agency must have information that allows it to plan
the capital project, develop the design, and assess the benefits, costs,
and risks before proceeding to procurement of the useful asset. This is
especially important for high risk acquisitions. This information comes
from activities, or planning segments, that include but are not limited
to market research of available solutions, architectural drawings,
geological studies, engineering and design studies, and prototypes. The
construction of a prototype that is a capital asset, because of its cost
and risk, should be justified and planned as carefully as the project
itself. The process of gathering information for a capital project may
consist of one or more planning segments, depending on the nature of the
asset. Funding these segments separately will help ensure that the
necessary information is available to establish cost, schedule, and
performance goals before proceeding to procurement.
If budget authority for planning segments and procurement of the
useful asset are enacted together, the Administration may wish to
apportion budget authority for one or several planning segments
separately from procurement of the useful asset.
Principle 4: Accommodation of Lumpiness or ``Spikes'' and Separate
Capital Acquisition Accounts
To accommodate lumpiness or ``spikes'' in funding justified capital
acquisitions, agencies, working with OMB, are encouraged to aggregate
financing for capital asset acquisitions in one or several separate
capital acquisition budget accounts within the agency, to the extent
possible within the agency's total budget request.
Explanation: Large, temporary, year-to-year increases in budget
authority, sometimes called lumps or spikes, may create a bias against
the acquisition of justified capital assets. Agencies, working with OMB,
should seek ways to avoid this bias and accommodate such spikes for
justified acquisitions. Aggregation of capital acquisitions in separate
accounts may:
reduce spikes within an agency or bureau by providing
roughly the same level of spending for acquisitions each year;
help to identify the source of spikes and to explain them.
Capital acquisitions are more lumpy than operating expenses;
and with a capital acquisition account, it can be seen that an
increase in operating expenses is not being hidden and
attributed to one-time asset purchases;
reduce the pressure for capital spikes to crowd out
operating expenses; and
improve justification and make proposals easier to evaluate,
since capital acquisitions are generally analyzed in a
different manner than operating expenses (e.g., capital
acquisitions have a longer time horizon of benefits and life-
cycle costs).
D. Risk Management
Risk management should be central to the planning, budgeting, and
acquisition process. Failure to analyze and manage the inherent risk in
all capital asset acquisitions may contribute to cost overruns, schedule
shortfalls, and acquisitions that fail to perform as expected. For each
major capital project a risk analysis that includes how risks will be
isolated, minimized, monitored, and controlled may help prevent these
problems.
The project cost, schedule and performance goals established through
the planning phase of the project are the basis for approval to procure
the asset and the basis for assessing risk. During the procurement phase
performance-based management systems (earned value or similar system)
must be used to provide contractor and Government management visibility
on the achievement of, or deviation from, goals until the asset is
accepted and operational. If goals are not being met, performance-based
management systems allow for early identification of problems, potential
corrective actions, and changes to the original goals needed to complete
the project and necessary for agency portfolio analysis decisions. These
systems also allow for Administration decisions to recommend meaningful
modifications for increased funding to the Congress, or termination of
[[Page 143]]
the project, based on its revised expected return on investment in
comparison to alternative uses of the funds. Agencies must ensure that
the necessary acquisition strategies are implemented to reduce the risk
of cost escalation and the risk of failure to achieve schedule and
performance goals. These strategies may include:
1. having budget authority appropriated in separate capital asset
acquisition accounts;
2. apportioning budget authority for a useful segment;
3. establishing thresholds for cost, schedule, and performance goals
of the acquisition, including return on investment, which if not met may
result in cancellation of the acquisition;
4. selecting types of contracts and pricing mechanisms that are
efficient and that provide incentives to contractors in order to
allocate risk appropriately between the contractor and the Government;
5. monitoring cost, schedule, and performance goals for the project
(or the useful segment being proposed) using an earned value management
system or similar system. Earned value is described in OMB Circular A-
11, Part 3, ``Planning, Budgeting and Acquisition of Capital Assets''
(June 1997), Appendix 300C; and
6. if progress is not within 90 percent of goals, or if new
information is available that would indicate a greater return on
investment from alternative uses of funds, institute senior management
review of the project through portfolio analysis to determine the
continued viability of the project with modifications, or the
termination of the project, and the start of exploration for alternative
solutions if it is necessary to fill a gap in agency strategic goals and
objectives.
E. Glossary
Appropriations
An appropriation provides budget authority that permits Government
officials to incur obligations that result in immediate or future
outlays of Government funds.
Regular annual appropriations: These appropriations are:
enacted normally in the current year;
scored entirely in the budget year; and
available for obligation in the budget year and subsequent
years if specified in the language. (See ``Availability,''
below.)
Advance appropriations: Advance appropriations may be accompanied by
regular annual appropriations to provide funds available for obligation
in the budget year as well as subsequent years. Advance appropriations
are:
enacted normally in the current year;
scored after the budget year (e.g., in each of one, two, or
more later years, depending on the language); and
available for obligation in the year scored and subsequent
years if specified in the language. (See ``Availability,''
below.)
Availability: Appropriations made in appropriations acts are
available for obligation only in the budget year unless the
language specifies that an appropriation is available for a
longer period. If the language specifies that the funds are to
remain available until the end of a certain year beyond the
budget year, the availability is said to be ``multi-year.'' If
the language specifies that the funds are to remain available
until expended, the availability is said to be ``no-year.''
Appropriations for major procurements and construction
projects are typically made available for multiple years or
until expended.
Capital Assets
Capital assets are land, structures, equipment, and intellectual
property (including software) that are used by the Federal Government
and have an estimated useful life of two years or more. Capital assets
exclude items acquired for resale in the ordinary course of operations
or held for the purpose of physical consumption such as operating
materials and supplies. The cost of a capital asset includes both its
purchase price and all other costs incurred to bring it to a form and
location suitable for its intended use.
Capital assets may be acquired in different ways: through purchase,
construction, or manufacture; through a lease-purchase or other capital
lease, regardless of whether title has passed to the Federal Government;
through an operating lease for an asset with an estimated useful life of
two years or more; or through exchange. Capital assets include leasehold
improvements and land rights; assets owned by the Federal Government but
located in a foreign country or held by others (such as Federal
contractors, state and local governments, or colleges and universities);
and assets whose ownership is shared by the Federal Government with
other entities. Capital assets include not only the assets as initially
acquired but also additions; improvements; replacements; rearrangements
and reinstallations; and major repairs but not ordinary repairs and
maintenance.
Examples of capital assets include the following, but are not limited
to them:
office buildings, hospitals, laboratories, schools, and
prisons;
dams, power plants, and water resources projects;
furniture, elevators, and printing presses;
motor vehicles, airplanes, and ships;
satellites and space exploration equipment;
information technology hardware and software; and
Department of Defense weapons systems.
Capital assets may or may not be capitalized (i.e., recorded in an
entity's balance sheet) under Federal
[[Page 144]]
accounting standards. Examples of capital assets not capitalized are
Department of Defense weapons systems, heritage assets, stewardship
land, and some software.
Capital assets do not include grants for acquiring capital assets made
to state and local governments or other entities (such as National
Science Foundation grants to universities or Department of
Transportation grants to AMTRAK). Capital assets also do not include
intangible assets such as the knowledge resulting from research and
development or the human capital resulting from education and training,
although capital assets do include land, structures, equipment, and
intellectual property (including software) that the Federal Government
uses in research and development and education and training.
Capital Project and Useful Segments of a Capital Project
The total capital project, or acquisition of a capital asset, includes
useful segments that are either planning segments or useful assets.
Planning segments: A planning segment of a capital project provides
information that allows the agency to develop the design; assess the
benefits, costs, and risks; and establish realistic baseline cost,
schedule, and performance goals before proceeding to full acquisition of
the useful asset (or canceling the acquisition). This information comes
from activities, or planning segments, that include but are not limited
to market research of available solutions, architectural drawings,
geological studies, engineering and design studies, and prototypes. The
process of gathering information for a capital project may consist of
one or more planning segments, depending on the nature of the asset. If
the project includes a prototype that is a capital asset, the prototype
may itself be one segment or may be divisible into more than one
segment. Because of uncertainty regarding the identification of separate
planning segments for research and development activities, the
application of full funding concepts to research and development
planning will need more study.
Useful asset: A useful asset is an economically and programmatically
separate segment of the asset procurement stage of the capital project
that provides an asset for which the benefits exceed the costs, even if
no further funding is appropriated. The total capital asset procurement
may include one or more useful assets, although it may not be possible
to divide all procurements in this way. Illustrations follow:
Illustration 1: If the construction of a building meets the
justification criteria and has benefits greater than its costs without
further investment, then the construction of that building is a ``useful
segment.'' Excavation is not a useful segment because no useful asset
results from the excavation alone if no further funding becomes
available. For a campus of several buildings, a useful segment is one
complete building if that building has programmatic benefits that exceed
its costs regardless of whether the other buildings are constructed,
even though that building may not be at its maximum use.
Illustration 2: If the full acquisition is for several items (e.g.,
aircraft), the useful segment would be the number of complete aircraft
required to achieve benefits that exceed costs even if no further
funding becomes available. In contrast, some portion of several aircraft
(e.g., engines for five aircraft) would not be a useful segment if no
further funding is available, nor would one aircraft be a useful segment
if two or more are required for benefits to exceed costs.
Illustration 3: For information technology, a module (the information
technology equivalent of ``useful segment'') is separable if it is
useful in itself without subsequent modules. The module should be
designed so that it can be enhanced or integrated with subsequent
modules if future funding becomes available.
Earned Value
Earned value refers to a performance-based management system for
establishing baseline cost, schedule, and performance goals for a
capital project and measuring progress against the goals. Earned value
is described in OMB Circular A-11, Part 3, ``Planning, Budgeting and
Acquisition of Capital Assets'' (June 1997), Appendix 300C.
Funding
Full funding: Full funding means that appropriations--regular
appropriations or advance appropriations--are enacted that are
sufficient in total to complete a useful segment of a capital project
before any obligations may be incurred for that segment. Full funding
for an entire capital project is required if the project cannot be
divided into more than one useful segment. If the asset can be divided
into more than one useful segment, full funding for a project may be
desirable, but is not required to constitute full funding.
Incremental (partial) funding: Incremental (partial) funding means that
appropriations--regular appropriations or advance appropriations--are
enacted for just part of a useful segment of a capital project, if the
project has useful segments, or for part of the capital project as a
whole, if it is not divisible into useful segments. Under incremental
funding for a capital asset, which is not permitted under these
principles, the funds could be obligated to start the segment (or
project) despite the fact that they are insufficient to complete a
useful segment or project.
Risk Management
Risk management is an organized method of identifying and measuring
risk and developing, selecting, and managing options for handling these
risks. Before beginning any procurement, managers should review and
revise as needed the acquisition plan to ensure that risk management
techniques considered in the planning phase are still appropriate.
There are three key principles for managing risk when procuring
capital assets: (1) avoiding or limiting the amount of development work;
(2) making effective
[[Page 145]]
use of competition and financial incentives; and (3) establishing a
performance-based acquisition management system that provides for
accountability for program successes and failures, such as an earned
value system or similar system.
There are several types of risk an agency should consider as part of
risk management. The types of risk include:
schedule risk;
cost risk;
technical feasibility;
risk of technical obsolescence;
dependencies between a new project and other projects or
systems (e.g., closed architectures); and
risk of creating a monopoly for future procurement.
[[Page 146]]
Part III: FEDERALLY FINANCED CAPITAL STOCKS
Federal investment spending creates a ``stock'' of capital that is
available in the future for productive use. Each year, Federal
investment outlays add to the stock of capital. At the same time,
however, wear and tear and obsolescence reduce it. This section presents
very rough measures over time of three different kinds of capital stocks
financed by the Federal Government: public physical capital, research
and development (R&D), and education.
Federal spending for physical assets adds to the Nation's capital
stock of tangible assets, such as roads, buildings, and aircraft
carriers. These assets deliver a flow of services over their lifetime.
The capital depreciates as the asset ages, wears out, is accidentally
damaged, or becomes obsolete.
Federal spending for the conduct of research, development, and
education adds to an ``intangible'' asset, the Nation's stock of
knowledge. Although financed by the Federal Government, the research and
development or education can be performed by Federal or State government
laboratories, universities and other nonprofit organizations, or private
industry. Research and development covers a wide range of activities,
from the investigation of subatomic particles to the exploration of
outer space; it can be ``basic'' research without particular
applications in mind, or it can have a highly specific practical use.
Similarly, education includes a wide variety of programs, assisting
people of all ages beginning with pre-school education and extending
through graduate studies and adult education. Like physical assets, the
capital stocks of R&D and education provide services over a number of
years and depreciate as they become outdated.
For this analysis, physical and R&D capital stocks are estimated using
the perpetual inventory method. In this method, the estimates are based
on the sum of net investment in prior years. Each year's Federal outlays
are treated as gross investment, adding to the capital stock;
depreciation reduces the capital stock. Gross investment less
depreciation is net investment. A limitation of the perpetual inventory
method is that investment spending is not necessarily an accurate
measure of the value of the asset created. However, alternative methods
for measuring asset value, such as direct surveys of current market
worth or indirect estimation based on an expected rate of return, are
especially difficult to apply to assets that do not have a private
market, such as highways or weapons systems.
In contrast to physical and R&D stocks, the estimate of the education
stock is based on the replacement cost method. Data on the total years
of education of the U.S. population are combined with data on the cost
of education and the Federal share of education spending to yield the
cost of replacing the Federal share of the Nation's stock of education.
Additional detail about the methods used to estimate capital stocks
appears in a methodological note at the end of this section. It should
be stressed that these estimates are rough approximations, and provide a
basis only for making broad generalizations. Errors may arise from
uncertainty about the useful lives and depreciation rates of different
types of assets, incomplete data for historical outlays, and imprecision
in the deflators used to express costs in constant dollars. The
substantial upward revisions in the estimates of physical capital stocks
this year, discussed below, provide an example of the impact of changes
in underlying assumptions.
The Stock of Physical Capital
This section presents data on stocks of physical capital assets and
estimates of the depreciation on these assets.
Trends.--Table 6-6 shows the value of the net federally financed
physical capital stock since 1960, in constant fiscal year 1992
dollars.\3\ After rising in the 1960s, the total stock held constant
through the 1970s and began rising again in the early 1980s. The stock
amounted to $1,827 billion in 1997 and is estimated to increase slightly
to $1,839 billion by 1999. In 1997, the national defense capital stock
accounted for $657 billion, or 36 percent of the total, and nondefense
stocks for $1,170 billion, or 64 percent of the total.
---------------------------------------------------------------------------
\3\ Constant dollar stock estimates are expressed in chained 1992
dollars, consistent with the revisions to the National Income and
Product Accounts (NIPAs) released in January 1996.
---------------------------------------------------------------------------
The stock data shown here are revised significantly from the figures
reported in the budget last year, because of changes in estimating
techniques to conform to the changes in depreciation methods in the
recent revision of the National Income and Product Accounts. As
described in the technical note at the end of this section, the new
methods result in reduced depreciation estimates and therefore larger
stocks. The total physical capital stock reported last year for 1996 was
$1,491 billion, compared to $1,820 billion now estimated for that year,
an increase of 22 percent. The largest revisions were in the stocks for
grant-financed capital, which increased 43 percent relative to the
earlier figures. Direct stocks increased by 31 percent for nondefense
and only 1 percent for defense capital. Stocks of direct defense and
nondefense equipment fell from the previous estimate, by 24 percent and
42 percent respectively.
Real stocks of defense and nondefense capital show very different
trends. Nondefense stocks have grown consistently since 1970, increasing
from $476 billion in 1970 to $1,170 billion in 1997. With the
investments proposed in the budget, nondefense stocks are estimated to
grow to $1,224 billion in 1999. During the 1970s, the nondefense capital
stock grew at an average annual rate of 4.5 percent. In the 1980s,
however, the growth rate slowed to 2.8 percent annually, with growth
continuing at about that rate since then.
[[Page 147]]
Table 6-6. NET STOCK OF FEDERALLY FINANCED PHYSICAL CAPITAL
(In billions of 1992 dollars)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Nondefense
----------------------------------------------------------------------------------------------
Direct Federal Capital Capital Financed by Federal Grants
Fiscal Year Total National ----------------------------------------------------------------------------------
Defense Total Water Community
Nondefense Total and Other Total Transportation and Natural Other
Power Regional Resources
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Five year intervals:
1960........................................................................ 895 633 262 128 78 50 134 82 24 19 9
1965........................................................................ 964 599 365 160 96 64 205 145 29 20 11
1970........................................................................ 1,098 621 476 182 109 72 295 211 42 24 18
1975........................................................................ 1,142 553 589 203 124 79 386 260 67 37 22
1980........................................................................ 1,237 498 738 230 145 85 508 313 104 68 23
1985........................................................................ 1,442 587 855 256 157 99 599 365 126 86 22
Annual data:
1990........................................................................ 1,692 719 973 288 166 121 685 426 136 98 24
1991........................................................................ 1,729 733 996 295 168 127 702 438 138 100 26
1992........................................................................ 1,760 736 1,024 304 171 134 719 451 139 102 28
1993........................................................................ 1,783 733 1,051 312 172 140 738 464 141 103 30
1994........................................................................ 1,797 719 1,078 318 173 145 760 478 142 105 34
1995........................................................................ 1,810 700 1,109 325 174 151 784 493 145 106 39
1996........................................................................ 1,820 679 1,141 333 175 159 807 508 148 108 44
1997........................................................................ 1,827 657 1,170 340 174 165 831 522 150 109 49
1998 est.................................................................... 1,831 634 1,196 342 174 167 855 537 153 110 55
1999 est.................................................................... 1,839 615 1,224 346 174 172 878 552 155 111 60
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Real national defense stocks began in 1970 at a relatively high level,
and declined steadily throughout the decade, as depreciation from the
Vietnam era exceeded new investment in military construction and weapons
procurement. Starting in the early 1980s, however, a large defense
buildup began to increase the stock of defense capital. By 1987, the
defense stock had exceeded its size at the height of the Vietnam War. In
the last few years, depreciation on this increased stock and a slower
pace of defense investment have begun to reduce the stock from its
recent levels. The stock is estimated to fall from $657 billion in 1997
to $615 billion in 1999.
Another trend in the Federal physical capital stocks is the shift from
direct Federal assets to grant-financed assets. In 1960, 49 percent of
federally financed nondefense capital was owned by the Federal
Government, and 51 percent was owned by State and local governments but
financed by Federal grants. Expansion in Federal grants for highways and
other state and local capital, coupled with relatively slow growth in
direct Federal investments by agencies such as the Bureau of Reclamation
and Corps of Engineers, shifted the composition of the stock
substantially. In 1997, 29 percent of the nondefense stock was owned by
the Federal Government and 71 percent by State and local governments.
The growth in the stock of physical capital financed by grants has
come in several areas. The growth in the stock for transportation is
largely grants for highways, including the Interstate Highway System.
The growth in community and regional development stocks occurred largely
with the enactment of the community development block grant in the early
1970s. The value of this capital stock has grown only slowly in the past
few years. The growth in the natural resources area occurred primarily
because of construction grants for sewage treatment facilities. The
value of this federally financed stock has also been relatively stable
since the mid-1980s.
Table 6-7 shows nondefense physical capital outlays both gross and net
of depreciation since 1960. Total nondefense net investment has been
consistently positive over the period covered by the table, indicating
that new investment has exceeded depreciation on the existing stock. The
reduced amount of net investment in 1998 reflects the sale of the United
States Enrichment Corporation and the privatization of Elk Hills. For
some categories in the table, such as water and power programs, net
investment has been negative in some years, indicating that new
investment has not been sufficient to offset estimated depreciation. The
net investment in this table is the change in the net nondefense
physical capital stock displayed in Table 6-6.
The Stock of Research and Development Capital
This section presents data on the stock of research and development,
taking into account adjustments for its depreciation.
Trends.--As shown in Table 6-8, the R&D capital stock financed by
Federal outlays is estimated to be $801 billion in 1997 in constant 1992
dollars. About two-fifths is the stock of basic research knowledge;
about three-fifths is the stock of applied research and development.
The total federally financed R&D stock in 1997 was about evenly
divided between defense and nondefense. Although investment in defense
R&D has exceeded that of nondefense R&D in every year since 1979, the
nondefense R&D stock is actually the larger of the two, because of the
different emphasis on basic research and applied research and
development. Defense R&D spending is heavily concentrated in applied
research and de
[[Page 148]]
Table 6-7. COMPOSITION OF GROSS AND NET FEDERAL AND FEDERALLY FINANCED NONDEFENSE PUBLIC PHYSICAL INVESTMENT
(In billions of 1992 dollars)
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Total nondefense Direct Federal investment Investment financed by Federal grants
investment ----------------------------------------------------------------------------------------------------------------------
---------------------------- Composition Composition of net investment
of net ------------------------------------------------
Fiscal Year investment
Gross Depreciation Net -------------- Gross Depreciation Net Transportation Community Natural
Gross Depreciation Net Water (mainly and resources Other
and Other highways) regional and
power development environment
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Five year intervals:
1960....................................... 23.7 5.0 18.7 8.7 2.9 5.8 3.0 2.7 15.0 2.1 12.9 12.3 0.1 0.1 0.5
1965....................................... 31.6 7.0 24.6 10.4 3.8 6.6 3.1 3.5 21.2 3.2 18.0 15.2 2.0 0.4 0.4
1970....................................... 30.6 9.1 21.5 6.9 4.4 2.4 2.0 0.5 23.7 4.7 19.1 11.9 4.8 0.9 1.5
1975....................................... 31.9 11.0 20.8 9.6 4.9 4.8 3.7 1.1 22.2 6.2 16.1 7.3 4.0 4.1 0.6
1980....................................... 45.0 13.5 31.5 11.5 5.4 6.0 3.9 2.1 33.5 8.1 25.5 12.3 7.0 6.3 -0.2
1985....................................... 43.2 16.4 26.7 13.8 6.9 6.9 2.3 4.6 29.4 9.6 19.8 13.1 3.8 3.0 -0.1
Annual data:
1990....................................... 43.5 20.6 22.9 15.7 9.6 6.1 2.0 4.1 27.8 11.0 16.8 12.1 1.5 1.9 1.3
1991....................................... 45.3 21.3 24.0 16.9 10.0 6.9 1.5 5.4 28.3 11.3 17.1 12.1 1.4 2.0 1.5
1992....................................... 49.3 22.0 27.3 20.3 10.5 9.8 2.9 6.9 29.1 11.6 17.5 12.3 1.5 1.9 1.9
1993....................................... 49.6 22.8 26.8 19.0 11.0 8.1 1.6 6.5 30.6 11.9 18.7 13.4 1.3 1.6 2.4
1994....................................... 50.7 23.5 27.2 16.9 11.3 5.6 0.5 5.0 33.8 12.2 21.6 14.1 1.9 1.4 4.3
1995....................................... 55.5 24.1 31.4 18.8 11.6 7.3 1.5 5.8 36.7 12.6 24.1 15.0 2.5 1.8 4.9
1996....................................... 56.7 24.9 31.7 20.2 12.0 8.2 0.6 7.6 36.5 13.0 23.5 14.6 2.7 1.4 4.9
1997....................................... 55.4 25.8 29.6 18.8 12.4 6.4 -0.5 6.9 36.6 13.3 23.2 14.7 2.5 1.3 4.8
1998 est................................... 52.4 26.4 26.1 14.4 12.6 1.7 -* 1.8 38.1 13.7 24.3 14.8 2.8 1.2 5.5
1999 est................................... 54.4 26.9 27.5 17.0 12.8 4.2 -0.6 4.9 37.4 14.1 23.3 14.6 2.6 1.0 5.1
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
* $50 million or less.
velopment, which depreciates much more quickly than basic research. The
stock of applied research and development is assumed to depreciate at a
ten percent geometric rate, while basic research is assumed not to
depreciate at all.
The defense R&D stock rose slowly during the 1970s, as gross outlays
for R&D trended down in constant dollars and the stock created in the
1960s depreciated. A renewed emphasis on defense R&D spending from 1980
through 1989 led to a more rapid growth of the R&D stock. Since then,
defense R&D outlays have tapered off, depreciation has grown, and, as a
result, the net defense R&D stock has stabilized.
The growth of the nondefense R&D stock slowed from the 1970s to the
late 1980s, from an annual rate of 3.8 percent in the 1970s to a rate of
1.7 percent from 1980 to 1988. Gross investment in real terms fell
during much of the 1980s, and about three-fourths of new outlays went to
replacing depreciated R&D. Since 1988, however, nondefense R&D outlays
have been on an upward trend while depreciation has edged down. As a
result, the net nondefense R&D capital stock has grown more rapidly.
The Stock of Education Capital
This section presents estimates of the stock of education capital
financed by the Federal government.
As shown in Table 6-9, the federally financed education stock is
estimated at $842 billion in 1997 in constant 1992 dollars, rising to
$920 billion in 1999. The vast majority of the Nation's education stock
is financed by State and local governments, and by students and their
families themselves. This federally financed portion of the stock
represents about 3 percent of the Nation's total education stock.\4\
Nearly three-quarters is for elementary and secondary education, while
the remaining one quarter is for higher education.
---------------------------------------------------------------------------
\4\ For estimates of the total education stock, see Table 2-4 in
Chapter 2, ``Stewardship: Toward a Federal Balance Sheet.''
------------------------------------------------------------------------
Despite a slowdown in growth during the early 1980s, the stock grew at
an average annual rate of 5.0 percent from 1970 to 1997, and the
expansion of the education stock is projected to continue under this
budget.
Note on Estimating Methods
This note provides further technical detail about the estimation of
the capital stock series presented in Tables 6-6 through 6-9.
As stated previously, the capital stock estimates are very rough
approximations. Sources of possible error include:
The historical outlay series.--The historical outlay series for
physical capital was based on budget records since 1940 and was extended
back to 1915 using data from selected sources. There are no consistent
outlay data on physical capital for this earlier period, and the
estimates are approximations. In addition, the historical outlay series
in the budget for physical capital extending back to 1940 may be
incomplete. The historical outlay series for the conduct of research and
development began in the early 1950s and required selected sources to be
extended back to 1940. In addition, separate outlay data for basic
research and applied R&D were not available for any years and had to be
estimated from obligations and budget authority. For education, data for
Federal outlays from the budget were combined with data for non-Federal
spending from the
[[Page 149]]
Table 6-8. NET STOCK OF FEDERALLY FINANCED RESEARCH AND DEVELOPMENT \1\
(In billions of 1992 dollars)
--------------------------------------------------------------------------------------------------------------------------------------------------------
National Defense Nondefense Total Federal
--------------------------------------------------------------------------------------------------------------
Applied Applied Applied
Fiscal Year Basic Research Basic Research Basic Research
Total Research and Total Research and Total Research and
Development Development Development
--------------------------------------------------------------------------------------------------------------------------------------------------------
Five year intervals:
1970................................... 235 14 221 194 60 133 429 74 354
1975................................... 249 19 231 237 88 149 486 106 380
1980................................... 252 22 229 280 118 162 532 141 391
1985................................... 288 27 260 304 156 148 592 184 408
Annual data:
1990................................... 357 32 325 341 205 137 699 237 462
1991................................... 361 33 328 354 216 138 715 249 466
1992................................... 365 34 331 366 227 140 732 261 471
1993................................... 368 36 333 380 238 142 748 274 474
1994................................... 371 37 334 393 249 144 764 286 477
1995................................... 370 38 333 407 261 146 777 298 479
1996................................... 370 39 331 420 272 148 790 311 479
1997................................... 368 40 328 433 283 149 801 323 477
1998 est............................... 365 41 324 446 295 151 811 336 475
1999 est............................... 362 42 320 461 308 153 823 349 473
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Excludes outlays for physical capital for research and development, which are included in Table 6-6.
Table 6-9. NET STOCK OF FEDERALLY FINANCED EDUCATION CAPITAL
(In billions of 1992 dollars)
Elementary
Total and Higher
Fiscal Year Education Secondary Education
Stock Education
------------------------------------------------------------------------
Five year intervals:
1960............................... 70 52 18
1965............................... 100 73 27
1970............................... 225 179 46
1975............................... 308 251 57
1980............................... 414 326 88
1985............................... 510 383 126
Annual data:
1990............................... 662 490 171
1991............................... 682 504 179
1992............................... 701 515 186
1993............................... 727 528 199
1994............................... 749 544 205
1995............................... 780 559 220
1996............................... 809 577 232
1997............................... 842 595 247
1998 est........................... 878 617 260
1999 est........................... 920 647 273
------------------------------------------------------------------------
institution or jurisdiction receiving Federal funds, which may introduce
error because of differing fiscal years and confusion about whether the
Federal Government was the original source of funding.
Price adjustments.--The prices for the components of the Federal stock
of physical, R&D, and education capital have increased through time, but
the rates of increase are not accurately known. Estimates of costs in
fiscal year 1992 prices were made through the application of price
deflators from the National Income and Product Accounts (NIPAs), but
these should be considered only approximations of the costs of these
assets in 1992 prices.
Depreciation.--The useful lives of physical, R&D, and education
capital, as well as the pattern by which they depreciate, are very
uncertain. This is compounded by using depreciation rates for broad
classes of assets, which do not apply uniformly to all the components of
each group. As a result, the depreciation estimates should also be
considered approximations. This limitation is especially important in
capital financed by grants, where the specific asset financed with the
grant is often subject to the discretion of the recipient jurisdiction.
Research continues on the best methods to estimate these capital
stocks. The estimates presented in the text could change as better
information becomes available on the underlying investment data and as
improved methods are developed for estimating the stocks based on those
data.
[[Page 150]]
Physical Capital Stocks
For many years, current and constant-cost data on the stock of most
forms of public and private physical capital--e.g., roads, factories,
and housing--have been estimated annually by the Bureau of Economic
Analysis (BEA) in the Department of Commerce. With the January 1996
comprehensive revision of the NIPAs, government investment has taken
increased prominence. Government investment in physical capital is now
reported separately from government consumption expenditures, and
government consumption expenditures include a measure of depreciation as
the consumption of the existing capital stock. In addition, estimates of
depreciation are improved based on recent empirical research.\5\
---------------------------------------------------------------------------
\5\ BEA explained its new methods and presented its revised estimates
of capital stocks in ``Improved Estimates of Fixed Reproducible Tangible
Wealth, 1929-95'', Survey of Current Business, May 1997, pp. 69-92.
Updated estimates incorporating BEA's annual revision appear in ``Fixed
Reproducible Tangible Wealth in the United States: Revised Estimates for
1993-95 and Summary Estimates for 1925-96'', Survey of Current Business,
September 1997, pp. 37-47.
---------------------------------------------------------------------------
The BEA data are not directly linked to the Federal budget, do not
extend to the years covered by the budget, and do not separately
identify the capital financed but not owned by the Federal Government.
For budgetary purposes, OMB prepares separate estimates, using
techniques that roughly follow the BEA methods.
Method of estimation.--The estimates were developed from the OMB
historical data base for physical capital outlays and grants to State
and local governments for physical capital. These are the same major
public physical capital outlays presented in Part I. This data base
extends back to 1940 and was supplemented by rough estimates for 1915-
1939.
The deflators used to convert historical outlays to constant 1992
dollars were based on composite NIPA deflators for Federal, State, and
local consumption of durables and gross investment. For 1915 through
1929, deflators were estimated from Census Bureau historical statistics
on constant price public capital formation.
The resulting capital stocks were aggregated into nine categories and
depreciated using geometric rates roughly following those of BEA, which
estimates depreciation using much more detailed categories. The
geometric rates were 1.9 percent for water and power projects; 2.4
percent for other direct non-defense construction and rehabilitation;
20.3 percent for non-defense equipment; 14.0 percent for defense
equipment; 2.1 percent for defense structures; 1.6 percent for
transportation grants; 1.7 percent for community and regional
development grants; 1.5 percent for natural resources and environment
grants; and 1.8 percent for other nondefense grants. In previous
estimates of physical capital stocks, OMB used straight-line
depreciation with useful lives roughly based on BEA's methods prior to
its comprehensive revision.\6\ The new rates result in slower
depreciation and hence larger stocks over time for all categories except
equipment, where the rates result in smaller stocks than before.
---------------------------------------------------------------------------
\6\ The straight-line depreciation estimates were based on the
following assumed useful lives: 46 years for water and power projects;
40 years for other direct Federal construction and all grant-financed
capital; and 16 years for defense procurement and major nondefense
equipment.
---------------------------------------------------------------------------
Research and Development Capital Stocks
Method of estimation.--The estimates were developed from a data base
for the conduct of research and development largely consistent with the
data in the Historical Tables. Although there is no consistent time
series on basic and applied R&D for defense and nondefense outlays back
to 1940, it was possible to estimate the data using obligations and
budget authority. The data are for the conduct of R&D only and exclude
outlays for physical capital for research and development, because those
are included in the estimates of physical capital. Nominal outlays were
deflated by the chained price index for gross domestic product (GDP) in
fiscal year 1992 dollars to obtain estimates of constant dollar R&D
spending.
The appropriate depreciation rate of intangible R&D capital is even
more uncertain than that of physical capital. Empirical evidence is
inconclusive. It was assumed that basic research capital does not
depreciate and that applied research and development capital has a ten
percent geometric depreciation rate. These are the same assumptions used
in a study published by the Bureau of Labor Statistics estimating the
R&D stock financed by private industry.\7\ More recent experimental work
at BEA, extending estimates of tangible capital stocks to R&D, used
slightly different assumptions. This work assumed straight-line
depreciation for all R&D over a useful life of 18 years, which is
roughly equivalent to a geometric depreciation rate of 11 percent. The
slightly higher depreciation rate and its extension to basic research
would result in smaller stocks than the method used here.\8\
---------------------------------------------------------------------------
\7\ See U.S. Department of Labor, Bureau of Labor Statistics, The
Impact of Research and Development on Productivity Growth, Bulletin
2331, September 1989.
\8\ See ``A Satellite Account for Research and Development'', Survey
of Current Business, November 1994, pp. 37-71.
---------------------------------------------------------------------------
Education Capital Stocks
Method of estimation.--The estimates of the federally financed
education capital stock in Table 6-9 were calculated by first estimating
the Nation's total stock of education capital, based on the current
replacement cost of the total years of education of the population. To
derive the Federal share of this total stock, the Federal share of total
educational expenditures was applied to the total amount. The percent in
any year was estimated by averaging the prior years' share of Federal
education outlays in total education costs. For more information, refer
to the technical note in Chapter 2, ``Stewardship: Toward a Federal
Balance Sheet.''
The stock of capital estimated in Table 6-9 is based only on spending
for education. Stocks created by other human capital investment outlays
included in Table 6-1, such as job training and vocational
rehabilitation, were not calculated because of the lack of historical
data prior to 1962 and the absence of estimates of depreciation rates.
[[Page 151]]
Part IV: ALTERNATIVE CAPITAL BUDGET AND CAPITAL EXPENDITURE
PRESENTATIONS
A capital budget would separate Federal expenditures into two
categories: spending for investment and all other spending. In this
sense, Part I of the present chapter provides a capital budget for the
Federal Government, distinguishing outlays that yield long-term benefits
from all others. But alternative capital budget presentations have also
been suggested. The subject is currently being examined by the
President's Commission to Study Capital Budgeting.
The Federal budget mainly finances investment for two quite different
types of reasons. It invests in capital--such as office buildings,
computers, and weapons systems--that primarily contributes to its
ability to provide governmental services to the public; some of these
services, in turn, are designed to increase economic growth. And it
invests in capital--such as highways, education, and research--that
contributes more directly to the economic growth of the Nation. Most of
the capital in the second category, unlike the first, is not owned or
controlled by the Federal Government. In the discussion that follows,
the first is called ``Federal capital'' and the second is called
``national capital.'' Table 6-10 compares total Federal investment as
defined in this chapter with investment in Federal capital, which was
defined as ``capital assets'' in Part II of this chapter, and with
investment in national capital. Some Federal investment is not
classified as either Federal or national capital, and a relatively small
part is included in both categories.
Capital budgets and other changes in Federal budgeting have been
suggested from time to time for the Government's investment in both
Federal and national capital. These proposals differ widely in coverage,
depending on the rationale for the suggestion. Some would include all
the investment shown in Table 6-1, or more, whereas others would be
narrower in various ways. These proposals also differ in other respects,
such as whether investment would be financed by borrowing
Table 6-10. ALTERNATIVE DEFINITIONS OF INVESTMENT OUTLAYS, 1999 \1\
(In millions of dollars)
----------------------------------------------------------------------------------------------------------------
Total
investment Federal National
outlays capital capital
----------------------------------------------------------------------------------------------------------------
Construction and rehabilitation:
Grants:
Transportation............................................................ 27,649 ......... 27,649
Natural resources and environment......................................... 2,357 ......... 2,355
Community and regional development........................................ 6,185 ......... 1,152
Housing assistance........................................................ 6,841 ......... .........
Other grants.............................................................. 134 ......... 52
Direct Federal:
National defense.......................................................... 4,605 4,605 .........
General science, space, and technology.................................... 506 413 506
Natural resources and environment......................................... 3,976 2,465 3,666
Energy.................................................................... 1,005 1,005 1,005
Transportation............................................................ 576 117 576
Veterans and other health facilities...................................... 1,663 1,663 1,663
Postal Service............................................................ 1,355 1,355 1,355
GSA real property activities.............................................. 885 885 .........
Other construction........................................................ 2,044 1,593 972
---------------------------------
Total construction and rehabilitation................................... 59,781 14,101 40,951
Acquisition of major equipment (direct):
National defense............................................................ 45,730 45,730 .........
Postal Service.............................................................. 617 617 617
Air transportation.......................................................... 1,838 1,838 1,838
Other....................................................................... 4,093 3,913 2,311
---------------------------------
Total major equipment...................................................... 52,278 52,098 4,766
Purchase or sale of land and structures....................................... -89 -89 .........
Other physical assets (grants)................................................ 1,220 ......... .........
---------------------------------
Total physical investment................................................... 113,190 66,110 45,793
Research and development:
Defense..................................................................... 39,417 ......... 1,121
Nondefense.................................................................. 34,287 ......... 33,728
---------------------------------
Total research and development............................................. 73,704 ......... 34,849
Education and training........................................................ 49,958 ......... 49,628
=================================
Total investment outlays...................................................... 236,852 66,110 130,270
----------------------------------------------------------------------------------------------------------------
\1\ Total Federal investment is the same as ``total, major Federal investment outlays'' in Table 6-1. Some
Federal investment is not classified as either Federal or national capital, and a relatively small part is
included in both categories.
[[Page 152]]
and whether the non-investment budget would necessarily be balanced.
Some of these proposals are discussed below and illustrated by
alternative capital budget and other capital expenditure presentations,
although the discussion does not address matters of implementation such
as the effect on the Budget Enforcement Act. The planning and budgeting
process for capital assets, which is a different subject, is discussed
in Part II of this chapter together with the steps this Administration
is taking to improve it.
Investment in Federal Capital
The goal of investment in Federal capital is to deliver the right
amount of Government services as efficiently and effectively as
possible. The Congress allocates resources to Federal agencies to
accomplish a wide variety of programmatic goals. Because these goals are
diverse and most are not measured in dollars, they are difficult to
compare with each other. Policy judgments must be made as to their
relative importance.
Once amounts have been allocated for one of these goals, however,
analysis may be able to assist in choosing the most efficient and
effective means of delivering service. This is the context in which
decisions are made on the amount of investment in Federal capital. For
example, budget proposals for the Department of Justice must consider
whether to increase the number of FBI agents, the amount of justice
assistance grants to State and local governments, or the number of
Federal prisons in order to accomplish the department's objectives. The
optimal amount of investment in Federal capital derives from these
decisions. There is no efficient target for total investment in Federal
capital as such.
The universe of Federal capital encompasses federally owned capital
assets. It excludes Federal grants to States for infrastructure, such as
highways, and it excludes intangible investment, such as education and
research. Investment in Federal capital in 1999 is estimated to be $66
billion, or 28 percent of the total Federal investment outlays shown in
Table 6-1. Of the investment in Federal capital, 76 percent is for
defense and 24 percent for nondefense purposes.
A Capital Budget for Capital Assets
Discussion of a capital budget has often centered on Federal capital,
called ``capital assets'' in Part II of this chapter--buildings, other
construction, and equipment that support the delivery of Federal
services. This includes capital commonly available from the commercial
sector, such as office buildings, computers, military family housing,
veterans hospitals, research and development facilities, and associated
equipment; it also includes special purpose capital such as weapons
systems, military bases, the space station, and dams. This definition
excludes capital that the Federal Government has financed but does not
own.\8\
---------------------------------------------------------------------------
\8\ This definition of ``capital assets'' is the same as used in last
year's budget. Narrower definitions of ``fixed assets'' were used in
earlier budgets.
---------------------------------------------------------------------------
Some capital budget proposals would partition the unified budget into
a capital budget, an operating budget, and a total budget. Table 6-11
illustrates such a capital budget for capital assets as defined above.
It is accompanied by an operating budget and a total budget. The
operating budget consists of all expenditures except those included in
the capital budget, plus depreciation on the stock of assets of the type
purchased through the capital budget. The capital budget consists of
expenditures for capital assets and, on the income side of the account,
depreciation. The total budget is the present unified budget, largely
based on cash for its measure of transactions, which records all outlays
and receipts of the Federal Government. It consolidates the operating
and capital budgets by adding them together and netting out depreciation
as an intragovernmental transaction. The operating budget has a small
deficit, compared to a small surplus in the unified budget. This
reflects both the relatively small Federal investment in new capital
assets and the offsetting effect of depreciation on the existing stock.
The figures in Table 6-11 and the subsequent tables of this section are
rough estimates, intended only to be illustrative and to provide a basis
for broad generalizations.
Table 6-11. CAPITAL, OPERATING, AND UNIFIED BUDGETS: FEDERAL CAPITAL,
1999 \1\, \2\
(In billions of dollars)
------------------------------------------------------------------------
Operating Budget
Receipts................................................ 1,743
Expenses:
Depreciation.......................................... 85
Other................................................. 1,667
---------------
Subtotal, expenses.................................. 1,752
Surplus or deficit (-)................................ -10
Capital Budget
Income: depreciation.................................... 85
Capital expenditures.................................... 66
---------------
Surplus or deficit (-)................................ 19
Unified Budget
Receipts................................................ 1,743
Outlays................................................. 1,733
---------------
Surplus or deficit (-)................................ 10
------------------------------------------------------------------------
\1\ Historical data to estimate the capital stocks and calculate
depreciation are not readily available for Federal capital.
Depreciation estimates were based on the assumption that outlays for
Federal capital were a constant percentage of the larger categories in
which such outlays were classified. They are also subject to the
limitations explained in Part III of this chapter. Depreciation is
measured in terms of current cost, not historical cost.
\2\ The method of estimating depreciation was revised in this year's
budget, as explained in the previous section of this chapter.
Some proposals for a capital budget would exclude defense capital
(other than military family housing). These exclusions--weapons systems,
military bases, and so forth--would comprise three-fourths of the
expenditures shown in the capital budget of Table 6-11. If they were
excluded, the operating budget would have a surplus that was essentially
the same size as the unified budget surplus: a surplus $2 billion higher
than the unified budget surplus, instead of a deficit that
[[Page 153]]
was $20 billion lower as shown above for the complete coverage of
Federal capital. Excluding defense makes such a large difference because
of its large relative size and the recent pattern of capital asset
purchases. The large defense buildup that began in the early 1980s
raised the capital stock and depreciation; the buildup was followed by a
sharp decline in purchases, while the capital stock and depreciation
have declined more slowly. (See the previous section of this chapter.)
Budget Discipline and a Capital Budget
Many proposals for a capital budget, though not all, would effectively
dispense with the unified budget and make expenditure decisions on
capital asset acquisitions in terms of the operating budget instead.
When the Government proposed to purchase a capital asset, the operating
budget would include only the estimated depreciation. For example,
suppose that an agency proposed to buy a $50 million building at the
beginning of the year with an estimated life of 25 years and with
depreciation calculated by the straightline method. Operating expense in
the budget year would increase by $2 million, or only 4 percent of the
asset cost. The same amount of depreciation would be recorded as an
increase in operating expense for each year of the asset's life.\9\
---------------------------------------------------------------------------
\9\ The amount of depreciation recorded as an expense in the budget
year might be overstated by this illustration. First, most assets are
purchased after the beginning of the year, in which case less than a
full year's depreciation would be recorded. Second, assets may be
constructed or built to order, in which case no depreciation would be
recorded until the work was completed and the asset put into service.
This could be several years after the initial expenditure.
---------------------------------------------------------------------------
Recording the annual depreciation in the operating budget each year
would provide little control over the decision about whether to invest
in the first place. Most Federal investments are sunk costs and as a
practical matter cannot be recovered by selling or renting the asset. At
the same time, there is a significant risk that the need for a capital
asset may change over a period of years, because either the need was not
permanent, it was initially misjudged, or other needs become more
important. Since the cost is sunk, however, control cannot be exercised
later on by comparing the annual benefit of the asset services with
depreciation and interest and then selling the asset if its annual
services are not worth this expense. Control can only be exercised up
front when the Government commits itself to the full sunk cost. By
spreading the real cost of the project over time, however, use of the
operating budget for expenditure decisions would make the budgetary cost
of the capital asset appear very cheap when decisions were being made
that compared it to alternative expenditures. As a result, there would
be an incentive to purchase capital assets with little regard for need,
and also with little regard for the least-cost method of acquisition.
A budget is a financial plan for allocating resources--deciding how
much the Federal Government should spend in total, program by program,
and for the parts of each program. The budgetary system provides a
process for proposing policies, making decisions, implementing them, and
reporting the results. The budget needs to measure costs accurately so
that decision makers can compare the cost of a program with its benefit,
the cost of one program with another, and the cost of alternative
methods of reaching a specified goal. These costs need to be fully
included in the budget up front, when the spending decision is made, so
that executive and congressional decision makers have the information
and the incentive to take the total costs into account.
The unified budget does this for investment. By recording investment
on a cash basis, it causes the total cost to be compared up front in a
rough and ready way with the total expected future net benefits. Since
the budget measures only cost, the benefits with which these costs are
compared, based on policy makers' judgment, must be presented in
supplementary materials. Such a comparison of total cost with benefits
is consistent with the formal method of cost-benefit analysis of capital
projects in government, in which the full cost of a capital asset as the
cash is paid out is compared with the full stream of future benefits
(all in terms of present values).\10\ This comparison is also consistent
with common business practice, in which capital budgeting decisions for
the most part are made by comparing cash flows. The cash outflow for the
full purchase price is compared with expected future cash inflows,
either through a relatively sophisticated technique of discounted cash
flows--such as net present value or internal rate of return--or through
cruder methods such as payback periods.\11\ Regardless of the specific
technique adopted, it usually requires comparing future returns with the
entire cost of the asset up front--not spread over time through annual
depreciation.\12\
---------------------------------------------------------------------------
\10\ For example, see Edward M. Gramlich, A Guide to Benefit-Cost
Analysis (2nd ed.; Englewood Cliffs: Prentice Hall, 1990), chap. 6; or
Joseph E. Stiglitz, Economics of the Public Sector (2nd ed.; New York:
Norton, 1988), chap. 10. This theory is applied in formal OMB
instructions to Federal agencies in OMB Circular No. A-94, Guidelines
and Discount Rates for Benefit-Cost Analysis of Federal Programs
(October 29, 1992). General Accounting Office, Discount Rate Policy,
GAO/OCE-17.1.1 (May 1991), discusses the appropriate discount rate for
such analysis but not the foundation of the analysis itself, which is
implicitly assumed.
\11\ For a full textbook analysis of capital budgeting techniques in
business, see Harold Bierman, Jr., and Seymour Smidt, The Capital
Budgeting Decision (8th ed.; Saddle River, N.J.: Prentice-Hall, 1993).
Shorter analyses from the standpoints of corporate finance and cost
accounting may be found, for example, in Richard A. Brealey and Stewart
C. Myers, Principles of Corporate Finance (5th ed.; New York: McGraw-
Hill, 1996), chap. 2, 5, and 6; Charles T. Horngren et al., Cost
Accounting (9th ed.; Upper Saddle River, N.J.: Prentice-Hall, 1997),
chap. 22 and 23; Jerold L. Zimmerman, Accounting for Decision Making and
Control (Chicago: Irwin, 1995), chap. 3; and Surendra S. Singhvi, ``The
Capital Budgeting Process'' and ``The Capital Expenditure Evaluation
Methods,'' chap. 19 and 20 in Robert Rachlin and H.W. Allen Sweeny,
Handbook of Budgeting (3rd ed.; New York: Wiley, 1993).
\12\ Two surveys of business practice conducted a few years ago found
that such techniques are predominant. See Thomas Klammer et al.,
``Capital Budgeting Practices--A Survey of Corporate Use,'' Journal of
Management and Accounting Research, vol. 3 (Fall 1991), pp. 113-30; and
Glenn H. Petry and James Sprow, ``The Theory and Practice of Finance in
the 1990s,'' The Quarterly Review of Economics and Finance, vol. 33
(Winter 1993), pp. 359-82. Petry and Sprow also found that discounted
cash flow techniques are recommended by the most widely used textbooks
in managerial finance.
---------------------------------------------------------------------------
Practice Outside the Federal Government
The proponents of making investment decisions on the basis of an
operating budget with depreciation have sometimes claimed that this is
the common practice outside the Federal Government. However, while the
practice of others may differ from the Federal budget and the terms
``capital budget'' and ``capital budgeting'' are often used, these terms
do not normally mean that capital asset acquisitions are decided on the
basis of annual depreciation cost. The use of these terms in
[[Page 154]]
business and State government also does not mean that businesses and
States finance all their investment by borrowing. Nor does it mean that
under a capital budget the extent of borrowing by the Federal Government
to finance investment would be limited by the same forces that constrain
business and State borrowing for investment.
Private business firms call their investment decision making process
``capital budgeting,'' and they record the resulting planned
expenditures in a ``capital budget.'' However, decisions are normally
based on up-front comparisons of the cash outflows needed to make the
investment with the resulting cash inflows expected in the future, as
explained above, and the capital budget records the period-by-period
cash outflows proposed for capital projects.\13\ This supports the
business's goal of deciding upon and controlling the use of its
resources.
---------------------------------------------------------------------------
\13\ A business capital budget is depicted in Glenn A. Welsch et al.,
Budgeting: Profit Planning and Control (5th ed.; Englewood Cliffs:
Prentice Hall, 1988), pp. 396-99.
---------------------------------------------------------------------------
The cash-based focus of business budgeting for capital is in contrast
to business financial statements--the income statement and balance
sheet--which use accrual accounting for a different purpose, namely to
record how well the business is meeting its objectives of earning profit
and accumulating wealth for its owners. For this purpose, the income
statement shows the profit in a year from earning revenue net of the
expenses incurred. These expenses include depreciation, which is an
allocation of the cost of capital assets over their estimated useful
life. With similar objectives in mind, the Office of Management and
Budget, the Treasury Department, and the General Accounting Office have
adopted the use of depreciation on general property, plant, and
equipment owned by the Federal Government as a measure of expense in
financial statements and cost accounting for Federal agencies.\14\
---------------------------------------------------------------------------
\14\ Office of Management and Budget, Statement of Federal Financial
Accounting Standards No. 6, Accounting for Property, Plant, and
Equipment (November 30, 1995), pp. 5-14 and 34-35. Depreciation is not
used as a measure of expense for weapons systems, space exploration
equipment, and other ``Federal mission property'' or for heritage
assets. Depreciation also is not used as a measure of expense for
physical property financed by the Federal Government but owned by State
and local governments, or for investment that the Federal Government
finances in human capital and research and development.
---------------------------------------------------------------------------
Businesses finance investment from net income as well as borrowing.
When they borrow to finance investment, they are constrained in ways
that Federal borrowing is not. The amount that a business borrows is
limited by its own profit motive and the market's assessment of its
capacity to repay. The greater a business's indebtedness, other things
equal, the more risky is any additional borrowing and the higher is the
cost of funds it must pay. Since the profit motive ensures that a
business will not want to borrow unless the expected return is at least
as high as the cost of funds, the amount of investment that a business
will want to finance is limited; it has an incentive to borrow only for
projects where the expected return is as high or higher than the cost of
funds. Furthermore, if the risk is great enough, a business may not be
able to find a lender.
No such constraint limits the Federal Government--either in the total
amount of its borrowing for investment, or in its choice of which assets
to buy--because of its sovereign power to tax and the wide economic base
that it taxes. It can tax to pay for investment; and, if it borrows, its
power to tax ensures that the credit market will judge U.S. Treasury
securities free from any risk of default even if it borrows
``excessively'' or for projects that do not seem worthwhile.
Most States also have a ``capital budget,'' but the operating budget
is not like the operating budget envisaged by proponents of making
Federal investment decisions on the basis of depreciation. State capital
budgets differ widely in many respects but generally relate some of the
State's purchases of capital assets to borrowing and other earmarked
means of financing. For the debt-financed portion of investment, the
interest and repayment of principal are usually recorded in the
operating budget. For the portion of investment purchased in the capital
budget but financed by Federal grants or by taxes, which may be
substantial, State operating budgets do not record any amount. No State
operating budget is charged for depreciation.\15\
---------------------------------------------------------------------------
\15\ The characteristics of State capital budgets were examined in a
survey of State budget officers for all 50 States in 1986. See Lawrence
W. Hush and Kathleen Peroff, ``The Variety of State Capital Budgets: A
Survey,'' Public Budgeting and Finance (Summer 1988), pp. 67-79. More
detailed results are available in an unpublished OMB document, ``State
Capital Budgets'' (July 7, 1987). Two GAO reports examined State capital
budgets and reached similar conclusions on the issues in question. See
Budget Issues: Capital Budgeting Practices in the States, GAO/AFMD-86-
63FS (July 1986), and Budget Issues: State Practices for Financing
Capital Projects, GAO/AFMD-89-64 (July 1989). For further information
about state capital budgeting, see National Association of State Budget
Officers, Capital Budgeting in the States (September 1997).
---------------------------------------------------------------------------
States also do not record depreciation expense in the financial
accounting statements for governmental funds. They record depreciation
expense only in their proprietary (commercial-type) funds and in those
trust funds where net income, expense, or capital maintenance is
measured.\16\ Under a proposed change in financial reporting standards,
however, depreciation on general capital assets would be recognized as
an expense in entity-wide financial statements.\17\
---------------------------------------------------------------------------
\16\ Governmental Accounting Standards Board (GASB), Codification of
Governmental Accounting and Financial Reporting Standards as of June 30,
1996, sections 1100.107 and 1400.114-1400.118.
\17\ Governmental Accounting Standard Board, Exposure Draft, Basic
Financial Statements--and Management's Discussion and Analysis--for
State and Local Governments (January 31, 1997), paragraphs 33-37 and
273-81.
---------------------------------------------------------------------------
State borrowing to finance investment, like business borrowing, is
subject to limitations that do not apply to Federal borrowing. Like
business borrowing, it is constrained by the credit market's assessment
of the State's capacity to repay. Furthermore, it is usually designated
for specified investments, and it is almost always subject to
constitutional limits or referendum requirements.
Other developed nations tend to show a more systematic breakdown
between investment and operating expenditures within their budgets than
does the United States, even while they record capital expenditures on a
cash basis within the same budget totals. For example, the United
Kingdom shows the capital spending within each agency total and displays
the sum of capital spending for the government as a whole. However, a
recent study of European countries found only four
[[Page 155]]
that had a real difference between a current budget and a capital budget
(Greece, Ireland, Luxembourg, and Portugal); \18\ and a survey by the
Congressional Budget Office in 1993 found only two developed nations,
Chile and New Zealand, that recognize depreciation in their budgets.\19\
New Zealand, moreover, while budgeting on an accrual basis that
generally includes depreciation, requires the equivalent of
appropriations for the full cost up front before a department can make
net additions to its capital assets; and it budgets for infrastructure
assets that it owns on the basis of cash expenditure rather than
depreciation.\20\ Some countries--including Sweden, Denmark, Finland,
and the Netherlands--formerly had separate capital budgets but abandoned
them a number of years ago.\21\
---------------------------------------------------------------------------
\18\ M. Peter van der Hoek, ``Fund Accounting and Capital Budgeting:
European Experience,'' Public Budgeting and Financial Management, vol. 8
(Spring 1996), pp. 39- 40.
\19\ Robert W. Hartman, Statement before the Subcommittee on Economic
Development, Committee on Public Works and Transportation, U.S. House of
Representatives (May 26, 1993). Hartman stated: ``to our knowledge, only
two developed countries, Chile and New Zealand, recognize depreciation
in their budgets.'' The United Kingdom has announced plans to budget on
an accrual basis, including the depreciation for capital assets,
beginning with its budget for 2001-02.
\20\ New Zealand's use of depreciation in its budget is discussed in
GAO, Budget Issues: The Role of Depreciation in Budgeting for Certain
Federal Investments, GAO/AIMD-95-34 (February 1995), pp. 13 and 16-17.
\21\ The budgets in Sweden, Great Britain, Germany, and France are
described in GAO, Budget Issues: Budgeting Practices in West Germany,
France, Sweden, and Great Britain, GAO/AFMD-87-8FS (November 1986).
Sweden had separate capital and operating budgets from 1937 to 1981,
together with a total consolidated budget from 1956 onwards. The reasons
for abandoning the capital budget are discussed briefly in the GAO
report and more extensively by a government commission established to
recommend changes in the Swedish budget system. One reason was that
borrowing was no longer based on the distinction between current and
capital budgets. See Sweden, Ministry of Finance, Proposal for a Reform
of the Swedish Budget System: A Summary of the Report of the Budget
Commission Published by the Ministry of Finance (Stockholm, 1974),
chapter 10.
---------------------------------------------------------------------------
Conclusions
It is for reasons such as these that the General Accounting Office
issued a report in 1993 that criticized budgeting for capital in terms
of depreciation. Although the criticisms were in the context of what is
termed ``national capital'' in this chapter, they apply equally to
``Federal capital.''
``Depreciation is not a practical alternative for the Congress and
the administration to use in making decisions on the appropriate
level of spending intended to enhance the nation's long-term
economic growth for several reasons. Currently, the law requires
agencies to have budget authority before they can obligate or spend
funds. Unless the full amount of budget authority is appropriated up
front, the ability to control decisions when total resources are
committed to a particular use is reduced. Appropriating only annual
depreciation, which is only a fraction of the total cost of an
investment, raises this control issue.'' \22\
---------------------------------------------------------------------------
\22\ GAO, Budget Issues: Incorporating an Investment Component in the
Federal Budget, GAO/AIMD-94-40 (November 1993), p. 11. GAO had made the
same recommendation in earlier reports but with less extensive analysis.
After further study of the role of depreciation in budgeting for
national capital, GAO reiterated that conclusion in another study in
1995.\23\ ``The greatest disadvantage . . . was that depreciation would
result in a loss of budgetary control under an obligation-based
budgeting system.'' \24\ Although that study also focused primarily on
what is termed ``national capital'' in this chapter, its analysis
applies equally to ``Federal capital.'' In 1996 GAO extended its
conclusions to Federal capital as well. ``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 a decision was made to acquire it.'' \25\
---------------------------------------------------------------------------
\23\ GAO, Budget Issues: The Role of Depreciation in Budgeting for
Certain Federal Investments, GAO/AIMD-95-34 (February 1995), pp. 1 and
19-20.
\24\ Ibid., p. 17. Also see pp. 1-2 and 16-19.
\25\ GAO, Budget Issues: Budgeting for Federal Capital, GAO/AIMD-97-5
(November 1996), p. 28. Also see p. 4.
---------------------------------------------------------------------------
Investment in National Capital
A Target for National Investment
The Federal Government's investment in national capital has a much
broader and more varied form than its investment in Federal capital. The
Government's goal is to support and accelerate sustainable economic
growth for the Nation as a whole and in some instances for specific
regions or groups of people. The Government's investment concerns for
the Nation are two-fold:
The effect of its own investment in national capital on the
output and income that the economy can produce. Reducing
expenditure on consumption and increasing expenditure on
investment that supports economic growth is a major priority
for the Administration. It has reordered priorities in its
budgets by proposing increases in selected investments.
The effect of Federal taxation, borrowing, and other
policies on private investment. The Administration's deficit
reduction policy has brought about an expansion of private
investment, most notably in producers' durable equipment.
In its 1993 report, Incorporating an Investment Component in the
Federal Budget, the General Accounting Office (GAO) recommended
establishing an investment component within the unified budget--but not
a separate capital budget or the use of depreciation--for this type of
investment.\26\ GAO defined this investment as ``federal spending,
either direct or through grants, that is directly intended to enhance
the private sector's long-term productivity.'' \27\ To increase
investment--both public and private--GAO recommended establishing
targets for the level of Federal investment and for a declining path of
unified budget deficits over time.\28\ Such a target for investment in
national capital would focus attention on policies for growth, encourage
a conscious decision about the overall level of growth-enhancing
investment, and make it easier to set spending priorities in terms of
policy goals for aggregate formation of national capital. GAO reiterated
its recommendation in another report in 1995.\29\
---------------------------------------------------------------------------
\26\ Incorporating an Investment Component in the Federal Budget, pp.
1-2, 9-10, and 15.
\27\ Ibid., pp. 1 and 5.
\28\ Ibid., pp. 2 and 13-16.
\29\ The Role of Depreciation in Budgeting for Certain Investments,
pp. 2 and 19-20.
[[Page 156]]
Table 6-12. UNIFIED BUDGET WITH NATIONAL INVESTMENT COMPONENT, 1999
(In billions of dollars)
------------------------------------------------------------------------
Receipts................................................. 1,743
Outlays:
National investment.................................... 130
Other.................................................. 1,603
--------------
Subtotal, outlays..................................... 1,733
--------------
Surplus or deficit (-)................................. 10
------------------------------------------------------------------------
Table 6-12 illustrates the unified budget reorganized as GAO
recommends to have a separate component for investment in national
capital. This component is roughly estimated to be $130 billion in 1999.
It includes infrastructure outlays financed by Federal grants to State
and local governments, such as highways and sewer projects, as well as
direct Federal purchases of infrastructure, such as electric power
generation equipment. It also includes intangible investment for
nondefense research and development, for basic research financed through
defense, and for education and training. Much of this expenditure
consists of grants and credit assistance to State and local governments,
nonprofit organizations, or individuals. Only 9 percent of national
investment consists of assets to be owned by the Federal Government.
Military investment and some other ``capital assets'' as defined
previously are excluded, because that investment does not primarily
enhance economic growth.
A Capital Budget for National Investment
Table 6-13 roughly illustrates what a capital budget and operating
budget would look like under this definition of investment--although it
must be emphasized that this is not GAO's recommendation. Some
proponents of a capital budget would make spending decisions within the
framework of such a capital budget and operating budget. But the
limitations that apply to the use of depreciation in deciding on
investment decisions for Federal capital apply even more strongly in
deciding on investment decisions for national capital. Most national
capital is neither owned nor controlled by the Federal Government. Such
investments are sunk costs completely and can be controlled only by
decisions made up front when the Government commits itself to the
expenditure.\30\
---------------------------------------------------------------------------
\30\ GAO's conclusions about the loss of budgetary control that were
quoted at the end of the section on Federal capital came from studies
that predominantly considered ``national capital.''
In addition to these basic limitations, the definition of investment
is more malleable for national capital than Federal capital. Many
programs promise long-term intangible benefits to the Nation, and
depreciation rates are much more difficult to determine for intangible
investment such as research and education than they are for physical
investment such as highways and office buildings. These and other
definitional questions are hard to resolve. The answers could
significantly affect
Table 6-13. CAPITAL, OPERATING, AND UNIFIED BUDGETS: NATIONAL CAPITAL,
1999 \1\, \2\
(In billions of dollars)
------------------------------------------------------------------------
Operating Budget
Receipts................................................ 1,697
Expenses:
Depreciation \3\...................................... 72
Other................................................. 1,603
---------------
Subtotal, expenses.................................. 1,675
Surplus or deficit (-)................................ 22
Capital Budget
Income:
Depreciation \3\...................................... 72
Earmarked tax receipts \4\............................ 46
---------------
Subtotal, income.................................... 118
Capital expenditures.................................... 130
---------------
Surplus or deficit (-)................................ -12
Unified Budget
Receipts................................................ 1,743
Outlays................................................. 1,733
---------------
Surplus or deficit (-).............................. 10
------------------------------------------------------------------------
\1\ For the purpose of this illustrative table only, education and
training outlays are arbitrarily depreciated over 30 years by the
straight-line method. This differs from the treatment of education and
training elsewhere in this chapter and in Chapter 2. All depreciation
estimates are subject to the limitations explained in Part III of this
chapter. Depreciation is measured in terms of current cost, not
historical cost.
\2\ The method of estimating depreciation was revised in this year's
budget, as explained in the previous section of this chapter.
\3\ Excludes depreciation on capital financed by earmarked tax receipts
allocated to the capital budget.
\4\ Consists of tax receipts of the highway and airport and airways
trust funds, less trust fund outlays for operating expenditures. These
are user charges earmarked for financing capital expenditures.
budget decisions, because they would determine
whether the budget would record all or only a small part of the cost of
a decision when policy makers were comparing the budgetary cost of a
project with their judgment of its benefits. The process of reaching an
answer with a capital budget would open the door to manipulation,
because there would be an incentive to make the operating expenses and
deficit look smaller by classifying outlays as investment and using low
depreciation rates. This would ``justify'' more spending by the program
or the Government overall.\31\
---------------------------------------------------------------------------
\31\ These problems are also pointed out in GAO, Incorporating an
Investment Component in the Federal Budget, pp. 11-12. They are
discussed more extensively with respect to highway grants, research and
development, and human capital in GAO, The Role of Depreciation in
Budgeting for Certain Federal Investments, pp. 11-14. GAO found no
government that budgets for the depreciation of infrastructure (whether
or not owned by that government), human capital, or research and
development (except that New Zealand budgets for the depreciation of
research and development if it results in a product that is intended to
be used or marketed).
---------------------------------------------------------------------------
A Capital Budget and the Analysis of Saving and Investment
Data from the Federal budget may be classified in many different ways,
including analyses of the Government's direct effects on saving and
investment. As Parts I and III of this chapter have shown, the unified
budget provides data that can be used to calculate Federal investment
outlays and federally financed capital stocks. However, the budget
totals themselves do not make this distinction. In particular, the
budget surplus or deficit does not measure the Government's contribution
to the nation's net saving (i.e., saving net of depre
[[Page 157]]
ciation). A capital budget, it is sometimes contended, is needed for
this purpose.
This purpose, however, is now fulfilled by the Federal sector of the
national income and product accounts (NIPAs) according to one definition
of investment. The NIPA Federal sector measures the impact of Federal
receipts, expenditures, and deficit on the national economy. It is part
of an integrated set of measures of aggregate U.S. economic activity
that is prepared by the Bureau of Economic Analysis in the Department of
Commerce in order to measure gross domestic product (GDP), the income
generated in its production, and many other variables used in
macroeconomic analysis. The NIPA Federal sector for recent periods is
published monthly in the Survey of Current Business with separate
releases for historical data. Estimates for the President's proposed
budget through the budget year are normally published in the budget
documents. The NIPA translation of the budget, rather than the budget
itself, is ordinarily used by economists to analyze the effect of
Government fiscal policy on the aggregate economy.\32\
---------------------------------------------------------------------------
\32\ See chapter 18 of this volume, ``National Income and Product
Accounts,'' for the NIPA current account of the Federal Government based
on the budget estimates for 1998 and 1999, and for a discussion of the
NIPA Federal sector and its relationship to the budget.
---------------------------------------------------------------------------
Until two years ago the NIPA Federal sector did not divide government
purchases of goods and services between consumption and investment. With
the comprehensive revision of the national income and product accounts
in early 1996, it now makes that distinction.\33\ The revised NIPA
Federal Government account for receipts and expenditures is a current
account or an operating account for the Federal Government. The current
account excludes expenditures for structures and equipment owned by the
Federal Government; it includes depreciation on the federally owned
stock of structures and equipment as a measure of the cost of using
capital assets and thus as part of the Federal Government's current
expenditures. It applies this treatment to a comprehensive definition of
federally owned structures and equipment, both defense and nondefense,
similar to the definition of ``capital assets'' in this chapter.\34\
---------------------------------------------------------------------------
\33\ This distinction is also made in the national accounts of most
other countries and in the System of National Accounts (SNA), which is
guidance prepared by the United Nations and other international
organizations. Definitions of investment may vary. Other countries and
the SNA do not include the purchase of military equipment as investment.
\34\ The revised NIPA Federal sector is explained in Survey of Current
Business, ``Preview of the Comprehensive Revision of the National Income
and Product Accounts: Recognition of Government Investment and
Incorporation of a New Methodology for Calculating Depreciation''
(September 1995), pp. 33-39. As is the case of private sector
investment, government investment does not include expenditures on
research and development or on education and training. Government
purchases of structures and equipment remain a part of gross domestic
product (GDP) as a separate component. The NIPA State and local
government account has been revised in the same way and includes
depreciation on structures and equipment owned by State and local
governments that were financed by Federal grants as well as by their own
resources. Depreciation is not displayed as a separate line item in the
Federal sector: depreciation on general government capital assets is
included in government ``consumption expenditures''; and depreciation on
the capital assets of government enterprises is subtracted in
calculating the ``current surplus of government enterprises.''
---------------------------------------------------------------------------
The NIPA ``current surplus or deficit'' of the Federal Government thus
measures the Government's direct contribution to the Nation's net saving
(given the definition of investment that is employed). The 1997 Federal
Government current account deficit was increased $10 billion by
including depreciation rather than gross investment, because
depreciation of federally owned structures and equipment was more than
gross investment. The 1999 Federal current account deficit is estimated
to be increased $14 billion. This is unlike a few years earlier, when
the Federal current account deficit was reduced, in some years
substantially.\35\ A capital budget is not needed to capture this
effect.
---------------------------------------------------------------------------
\35\ See actuals and estimates for 1988-99 in table 18-2 of chapter 18
of this volume, ``National Income and Product Accounts.''
---------------------------------------------------------------------------
Borrowing to Finance a Capital Budget
A further issue raised by a capital budget is the financing of capital
expenditures. Some have argued that the Government ought to balance the
operating budget and borrow to finance the capital budget--capital
expenditures less depreciation. The rationale is that if the Government
borrows for net investment and the rate of return exceeds the interest
rate, the additional debt does not add a burden onto future generations.
Instead, the burden of paying interest on the debt and repaying its
principal is spread over the generations that will benefit from the
investment. The additional debt is ``justified'' by the additional
assets.
This argument is at best a justification to borrow to finance net
investment, after depreciation is subtracted from gross outlays, not to
borrow to finance gross investment. To the extent that capital is used
up during the year, there are no additional assets to justify additional
debt. If the Government borrows to finance gross investment, the
additional debt exceeds the additional capital assets. The Government is
thus adding onto the amount of future debt service without providing the
additional capital that would produce the additional income needed to
service that debt.
This justification, furthermore, requires that depreciation be
measured in terms of current cost, not historical cost. When prices
change, historical cost depreciation does not measure the extent to
which the capital stock is used up each year.
As a broad generalization, Tables 6-11 and 6-13 suggest that this
rationale would not currently justify much Federal borrowing, if any at
all, under the two capital budgets roughly illustrated in this chapter.
For Federal capital, Table 6-11 indicates that current cost depreciation
is more than gross investment for Federal capital--the capital budget
surplus is $19 billion. The rationale of borrowing to finance net
investment would not justify the Federal Government borrowing at all to
finance its investment in Federal capital; instead, it would have to
repay this amount of debt ($19 billion). For national capital, Table 6-
13 indicates that current cost depreciation (plus the excise taxes
earmarked to finance capital expenditures for highways and airports and
airways \36\) is less than gross investment but almost as large--the
capital budget deficit is $12 billion. The rationale of borrowing to
finance net investment would justify the Federal Government borrowing
this amount ($12 billion) and no more to finance its investment in
national capital.\37\
---------------------------------------------------------------------------
\36\ The capital budget deficit would be about $35 billion larger if
current cost depreciation were used instead of earmarked excise taxes
for investment in highways and airports and airways.
\37\ This discussion abstracts from non-budgetary transactions that
affect Federal borrowing requirements, such as changes in the Treasury
operating cash balance and the net financing disbursements of the direct
loan and guaranteed loan financing accounts. See chapter 13 of this
volume, ``Federal Borrowing and Debt,'' and the explanation of Table 13-
2.
---------------------------------------------------------------------------
[[Page 158]]
Even with depreciation calculated in current cost, the rationale for
borrowing to finance net investment is not persuasive. The Federal
Government, unlike a business or household, is responsible not only for
its own affairs but also for the general welfare of the Nation. To
maintain and accelerate national economic growth and development, the
Government needs to sustain private investment as well as its own
national investment. For more than a decade, however, net national
saving has been low, both by historical standards and in comparison to
the amounts needed to meet the challenges expected in the decades ahead.
To the extent that the Government finances its own investment in a way
that results in lower private investment, the net increase of total
investment in the economy is less than the increase from the additional
Federal capital outlays alone. The net increase in total investment is
significantly less if the Federal investment is financed by borrowing
than if it is financed by taxation, because borrowing primarily draws
upon the saving available for private (and State and local) investment
whereas much of taxation instead comes out of private consumption.
Therefore, the net effect of Federal investment on economic growth would
be reduced if it were financed by borrowing. This would be the result
even if the rate of return on Federal investment was higher than the
rate of return on private investment. For example, if a Federal
investment that yielded a 15 percent rate of return crowded out private
investment that yielded 10 percent, the net social return would still be
positive but it would only be 5 percent.\38\
---------------------------------------------------------------------------
\38\ GAO considered deficit financing of investment but did not
recommend it. See Incorporating an Investment Component in the Federal
Budget, pp. 12-13.
---------------------------------------------------------------------------
The first budget of this Administration was a bold step to increase
the saving available for private investment while also increasing
Federal investment for national capital. The deficit has been cut by
over nine-tenths during the past five years, and available resources
have been shifted to investment in education and training and in science
and technology. The present budget goes further, proposing budget
balance by 1999 while protecting high priority investments. A capital
budget is not a justification to relax current and proposed budget
constraints. Any easing would undo the gains from the deficit reduction
already achieved and the further gains from balancing the budget.
[[Page 159]]
Part V: SUPPLEMENTAL PHYSICAL CAPITAL INFORMATION
The Federal Capital Investment Program Information Act of 1984 (Title
II of Public Law 98-501; hereafter referred to as the Act) requires that
the budget include projections of Federal physical capital spending and
information regarding recent assessments of public civilian physical
capital needs. This section is submitted to fulfill that requirement.
This part is organized in two major sections. The first section
projects Federal outlays for public physical capital and the second
section presents information regarding public civilian physical capital
needs.
Projections of Federal Outlays For Public Physical Capital
Federal public physical capital spending is defined here to be the
same as the ``major public physical capital investment'' category in
Part I of this chapter. It covers spending for construction and
rehabilitation, acquisition of major equipment, and other physical
assets. This section excludes outlays for human capital, such as the
conduct of education and training, and outlays for the conduct of
research and development.
The projections are done generally on a current services basis, which
means they are based on 1998 enacted appropriations and adjusted for
inflation in later years. The current services concept is discussed in
Chapter 16, ``Current Services Estimates.''
Federal public physical capital spending was $113.6 billion in 1997
and is projected to increase to $132.4 billion by 2007 on a current
services basis. The largest components are for national defense and for
roadways and bridges, which together accounted for almost two-thirds of
Federal public physical capital spending in 1997.
Table 6-14 shows projected current services outlays for Federal
physical capital by the major categories specified in the Act. Total
Federal outlays for transportation-related physical capital were $29.1
billion in 1997, and current services outlays are estimated to increase
to $36.1 billion by 2007. Outlays for nondefense housing and buildings
were $12.1 billion in 1997 and are estimated to be $13.3 billion in
2007. Physical capital outlays for other nondefense categories were
$20.0 billion in 1997 and are projected to be $25.7 billion by 2007. For
national defense, this spending was $52.4 billion in 1997 and is
estimated on a current services basis to be $57.4 billion in 2007.
Table 6-15 shows current services projections on a constant dollar
basis, using fiscal year 1992 as the base year.
Table 6-14. CURRENT SERVICES OUTLAY PROJECTIONS FOR FEDERAL PHYSICAL CAPITAL SPENDING
(In billions of dollars)
--------------------------------------------------------------------------------------------------------------------------------------------------------
Estimate
1997 -------------------------------------------------------------------------------
Actual 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007
--------------------------------------------------------------------------------------------------------------------------------------------------------
Nondefense:
Transportation-related categories:
Roadways and bridges........................................ 20.5 21.7 22.7 23.2 23.6 23.9 24.3 24.7 25.3 25.8 26.3
Airports and airway facilities.............................. 3.9 3.4 3.5 3.5 3.6 3.7 3.9 4.0 4.1 4.2 4.3
Mass transportation systems................................. 4.0 3.8 3.6 4.0 4.2 4.5 4.6 4.7 4.8 4.9 5.0
Railroads................................................... 0.7 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4 0.4
---------------------------------------------------------------------------------------
Subtotal, transportation.................................. 29.1 29.3 30.2 31.0 31.7 32.4 33.2 33.9 34.6 35.3 36.1
Housing and buildings categories:
Federally assisted housing.................................. 7.2 7.3 7.3 7.4 7.3 7.2 7.4 7.0 7.2 7.3 7.5
Hospitals................................................... 1.8 2.6 2.3 2.4 2.4 2.5 2.6 2.6 2.7 2.8 2.9
Public buildings \1\........................................ 3.1 2.9 2.6 2.7 2.8 2.8 2.8 2.8 2.8 2.9 2.9
---------------------------------------------------------------------------------------
Subtotal, housing and buildings........................... 12.1 12.8 12.2 12.4 12.6 12.5 12.8 12.4 12.7 13.0 13.3
Other nondefense categories:
Wastewater treatment and related facilities................. 2.1 1.9 2.1 2.4 2.6 2.5 2.6 2.7 2.7 2.8 2.8
Water resources projects.................................... 2.0 2.7 2.4 2.5 2.5 2.5 2.7 2.7 2.8 2.8 2.9
Space and communications facilities......................... 3.3 2.9 3.2 4.0 3.9 3.1 2.7 2.8 2.8 2.9 3.0
Energy programs............................................. 1.3 1.2 1.1 1.3 1.2 1.2 1.3 1.4 1.4 1.5 1.5
Community development programs.............................. 5.9 6.5 6.2 6.3 6.4 6.4 6.5 6.6 6.8 6.9 7.1
Other nondefense............................................ 5.3 2.1 5.8 6.8 7.0 6.7 7.5 7.7 7.9 8.1 8.3
---------------------------------------------------------------------------------------
Subtotal, other nondefense................................ 20.0 17.4 20.8 23.3 23.6 22.5 23.3 23.9 24.5 25.1 25.7
---------------------------------------------------------------------------------------
Subtotal, nondefense........................................ 61.2 59.4 63.2 66.7 67.9 67.4 69.3 70.1 71.7 73.4 75.0
National defense.............................................. 52.4 48.7 49.4 49.2 49.8 50.3 52.3 53.7 55.0 56.1 57.4
---------------------------------------------------------------------------------------
Total........................................................... 113.6 108.2 112.6 116.0 117.7 117.7 121.6 123.8 126.7 129.6 132.4
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Excludes outlays for public buildings that are included in other categories in this table.
[[Page 160]]
Table 6-15. CURRENT SERVICES OUTLAY PROJECTIONS FOR FEDERAL PHYSICAL CAPITAL SPENDING
(In billions of constant 1992 dollars)
----------------------------------------------------------------------------------------------------------------
Estimate
1997 ---------------------------------------
Actual 1998 1999 2000 2001 2002
----------------------------------------------------------------------------------------------------------------
Nondefense:
Transportation-related categories:
Roadways and bridges........................................ 18.1 18.8 19.2 19.1 18.9 18.7
Airports and airway facilities.............................. 3.6 3.1 3.0 3.0 3.0 3.0
Mass transportation systems................................. 3.6 3.2 3.0 3.3 3.3 3.5
Railroads................................................... 0.6 0.4 0.4 0.3 0.3 0.3
-----------------------------------------------
Subtotal, transportation.................................... 25.8 25.4 25.6 25.7 25.6 25.6
Housing and buildings categories:
Federally assisted housing.................................. 6.5 6.3 6.2 6.1 5.9 5.7
Hospitals................................................... 1.7 2.5 2.1 2.1 2.1 2.1
Public buildings \1\........................................ 2.9 2.7 2.4 2.4 2.5 2.4
-----------------------------------------------
Subtotal, housing and buildings............................. 11.1 11.5 10.7 10.6 10.6 10.3
Other nondefense categories:
Wastewater treatment and related facilities................. 1.9 1.6 1.8 2.0 2.1 2.0
Water resources projects.................................... 1.9 2.5 2.2 2.3 2.2 2.1
Space and communications facilities......................... 3.2 2.7 3.0 3.6 3.4 2.7
Energy programs............................................. 1.3 1.1 1.0 1.1 1.1 1.0
Community development programs.............................. 5.2 5.7 5.3 5.2 5.1 5.0
Other nondefense............................................ 5.0 1.9 5.2 6.0 6.0 5.7
-----------------------------------------------
Subtotal, other nondefense.................................. 18.4 15.5 18.4 20.2 20.0 18.5
-----------------------------------------------
Subtotal, nondefense........................................ 55.4 52.4 54.7 56.5 56.1 54.4
National defense.............................................. 47.0 42.9 42.7 41.6 41.2 40.7
-----------------------------------------------
Total........................................................... 102.5 95.4 97.4 98.1 97.4 95.1
----------------------------------------------------------------------------------------------------------------
\1\ Excludes outlays for public buildings that are included in other categories in this this table.
For budget authority and outlay details for most programs on a policy
basis, see the items included in major public physical capital in tables
6-2 and 6-3.
Public Civilian Capital Needs Assessments
The Act requires information regarding the state of major Federal
infrastructure programs, including highways and bridges, airports and
airway facilities, mass transit, railroads, federally assisted housing,
hospitals, water resources projects, and space and communications
investments. Funding levels, long-term projections, policy issues, needs
assessments, and critiques, are required for each category.
Capital needs assessments change little from year to year, in part due
to the long-term nature of the facilities themselves, and in part due to
the consistency of the analytical techniques used to develop the
assessments and the comparatively steady but slow changes in underlying
demographics. As a result, the practice has arisen in reports in
previous years to refer to earlier discussions, where the relevant
information had been carefully presented and changes had been minimal.
The needs assessment material in reports of earlier years is
incorporated this year largely by reference to earlier editions and by
reference to other needs assessments. The needs analyses, their major
components, and their critical evaluations have been fully covered in
past Supplements, such as the 1990 Supplement to Special Analysis D.
It should be noted that the needs assessment data referenced here have
not been determined on the basis of cost-benefit analysis. Rather, the
data reflect the level of investment necessary to meet a predefined
standard (such as maintenance of existing highway conditions). The
estimates do not address whether the benefits of each investment would
actually be greater than its cost or whether there are more cost-
effective alternatives to capital investment, such as initiatives to
reduce demand or use existing assets more efficiently. Before investing
in physical capital, it is necessary to compare the cost of each project
with its estimated benefits, within the overall constraints on Federal
spending.
[[Page 161]]
Significant Factors Affecting Infrastructure Needs Assessments
Highways
1. Projected annual growth in travel to the year 2011......... 2.15 percent
2. Annual cost to maintain overall 1993 conditions and
performance on highways eligible for Federal-aid............. $42.8 billion (1993 dollars)
3. Annual cost to maintain overall 1994 conditions on bridges. $5.1 billion (1993 dollars)
Airports and Airway Facilities
1. Airports in the National Plan of Integrated Airport Systems
with scheduled passenger traffic............................. 540
2. Air traffic control towers................................. 476
3. Airport development eligible under airport improvement
program for period 1993-1997................................. $29.7 billion ($9.4 billion for capacity) (1992
dollars)
Mass Transportation Systems
1. Yearly cost to maintain condition and performance of rail
facilities over a period of 20 years......................... $4.2 billion (1993 dollars)
2. Yearly cost to replace and maintain the urban, rural, and
special services bus fleet and facilities.................... $3.7 billion (1993 dollars)
Wastewater Treatment
1. Total remaining needs of sewage treatment facilities....... $128 billion (1996 dollars)
2. Total Federal expenditures under the Clean Water Act of $68 billion
1972 through 1998.
3. The population served by centralized treatment facilities:
percentage that benefits from at least secondary sewage
treatment systems (1996)..................................... 91 percent
4. States and territories served by State Revolving Funds..... 51
Housing
1. Total unsubsidized very low income renter households with
worst case needs (5.3 million*)
A. In severely substandard units............................ 0.4 million
B. With a rent burden greater than 50 percent............... 5.0 million
* The total is less than the sum because some renter families
have both problems.
Indian Health (IHS) Care Facilities
1. IHS hospital occupancy rates (1997)........................ 45.3 percent
2. Average length of stay, IHS hospitals (days) (1997)........ 4.2
3. Hospital admissions (1997)................................. 56,219
4. Outpatient visits (1996)................................... 4,118,800
5. Eligible population (1998)................................. 1,463,938
Department of Veterans Affairs (VA) Hospitals (1996)
1. Hospitals.................................................. 172
2. Outpatient clinics......................................... 439
3. Domiciliaries.............................................. 40
4. Centers for veterans....................................... 206
5. Nursing homes.............................................. 131
Water Resources
Water resources projects include navigation (deepwater ports and inland waterways); flood and storm damage
protection; irrigation; hydropower; municipal and industrial water supply; recreation; fish and wildlife
mitigation, enhancement, and restoration; and soil conservation.
Potential water resources investment needs typically consist of the set of projects that pass both a benefit-
cost test for economic feasibility and a test for environmental acceptability. In the case of fish and wildlife
mitigation or restoration projects, the set of eligible projects includes those that pass a cost-effectiveness
test.
Investment Needs Assessment References
General
U.S. Advisory Commission on Intergovernmental Relations (ACIR). High
Performance Public Works: A New Federal Infrastructure Investment
Strategy for America, Washington, D.C., 1993.
U.S. Advisory Commission on Intergovernmental Relations (ACIR). Toward
a Federal Infrastructure Strategy: Issues and Options, A-120,
Washington, D.C., 1992.
U.S. Army Corps of Engineers, Living Within Constraints: An Emerging
Vision for High Performance Public Works. Concluding Report of the
Federal Infrastructure Strategy Programs. Institute for Water Resources,
Alexandria, VA, 1995
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