[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)                                            
----------------------------------------------------------------------------------------------------------------
                                                                                                   Estimate     
                                                                                       1997  -------------------
                                                                                     actual     1998      1999  
----------------------------------------------------------------------------------------------------------------
                                Federal Investment                                                              
                                                                                                                
Major public physical capital investment:                                                                       
   Direct Federal:                                                                                              
    National defense..............................................................      52.4      48.7      50.3
    Nondefense....................................................................      19.7      15.4      18.5
                                                                                   -----------------------------
      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
                                                                                   -----------------------------
    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
                                                                                   -----------------------------
    Subtotal, conduct of education and training...................................      44.0      45.7      50.0
                                                                                   -----------------------------
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
                                                                                   -----------------------------
    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
                                                                                   -----------------------------
    Total, miscellaneous physical investment......................................       2.4       3.5       3.5
                                                                                   -----------------------------
Total, Federal investment outlays, including miscellaneous physical investment....     231.1     228.8     240.4
----------------------------------------------------------------------------------------------------------------

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)                                                                
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                 Estimate                               
                Description                                              1997    -----------------------------------------------------------------------
                                                                        Actual       1998        1999        2000        2001        2002        2003   
--------------------------------------------------------------------------------------------------------------------------------------------------------
             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 
                                                                     -----------------------------------------------------------------------------------
    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 
                                                                     -----------------------------------------------------------------------------------
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 
                                                                     -----------------------------------------------------------------------------------
  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 
                                                                     -----------------------------------------------------------------------------------
      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 
                                                                     -----------------------------------------------------------------------------------
  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 
                                                                     -----------------------------------------------------------------------------------
      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 
                                                                     -----------------------------------------------------------------------------------
    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 
                                                                     -----------------------------------------------------------------------------------
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 
                                                                     -----------------------------------------------------------------------------------
    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 
                                                                     -----------------------------------------------------------------------------------
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 
                                                                     -----------------------------------------------------------------------------------
      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 
                                                                     -----------------------------------------------------------------------------------
  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 
                                                                     -----------------------------------------------------------------------------------
    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 
                                                                     -----------------------------------------------------------------------------------
  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)                                                                
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                 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 
                                                                     -----------------------------------------------------------------------------------
      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 

[[Page 129]]

                                                                                                                                                        
                                            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 

[[Page 130]]

                                                                                                                                                        
    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.

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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.

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     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

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  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

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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

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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

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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

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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.

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               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
  U.S. Army Corps of Engineers, A Consolidated Performance Report on the 
Nation's Public Works: An Update. Report of the Federal Infrastructure 
Strategy Program. Institute for Water Resources, Alexandria, VA, 1995.

[[Page 162]]

 Surface Transportation

  Department of Transportation. 1995 Status of the Nation's Surface 
Transportation System: Conditions and Performance: Report to Congress. 
1995. This report discusses roads, bridges, mass transit, and maritime 
transportation.

 Airports and Airways Facilities

  Federal Aviation Administration. The National Plan of Integrated 
Airport Systems Report, April 1995.

 Federally Assisted Housing

  U.S. Department of Housing and Urban Development, Office of Policy 
Planning and Development, Tabulations of 1993 American Housing Survey.

 Indian Health Care Facilities

  Indian Health Service. Priority System for Health Facility 
Construction (Document Number 0820B or 2046T). September 19, 1981.
  Indian Health Service. Trends in Indian Health--1995. 1995.
  Office of Audit, Office of Inspector General, U.S. Department of 
Health and Human Services. Review of Health Facilities Construction 
Program. Indian Health Service Proposed Replacement Hospital at 
Shiprock, New Mexico (CIN A-09-88-00008). June, 1989.
  Office of Audit, Office of Inspector General, U.S. Department of 
Health and Human Services. Review of Health Facilities Construction 
Program. Indian Health Service Proposed Construction Project for the 
Alaska Native Medical Center at Anchorage Alaska (CIN A-09-89-00096). 
July, 1989.
  Office of Technology Assessment. Indian Health Care (OTA 09H 09290). 
April, 1986.

 Wastewater Treatment

  Environmental Protection Agency, Office of Water. 1996 Needs Survey 
Report to Congress. (EPA 832-R-87-003).

 Water Resources

  National Council on Public Works Improvement. The Nation's Public 
Works, Washington, D.C., May, 1987. See ``Defining the Issues--Needs 
Studies,'' Chapter II; Report on Water Resources, Shilling et al., and 
Report on Water Supply, Miller Associates.
  Frederick, Kenneth D., Balancing Water Demands with Supplies: The Role 
of Demand Management in a World of Increasing Scarcity, Report for the 
International Bank of Reconstruction and Development, Washington, D.C. 
1992.