Analytical Perspectives - 6. Federal Investment Spending and Capital Budgeting

[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:
a 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.
The President established a Commission to Study Capital Budgeting in
1997, and the Commission is scheduled to transmit its report to the
National Economic Council in early 1999. The Administration looks
forward to receipt of the report and will review its analysis and
recommendations on how to improve the planning, budgeting, and use of
capital in the Federal Government.

Part I: DESCRIPTION OF FEDERAL INVESTMENT

For almost fifty 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 2004.
The classification of spending between 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. The budget further
classifies investments into those that are grants to State and local
governments, such as grants for highways or for elementary and secondary
education, and all other investments, called ``direct Federal
programs,'' in this analysis. This ``direct Federal'' category consists
primarily of spending for assets owned by the Federal Government, such
as defense weapons systems and general purpose office buildings, but
also includes grants to private organizations and individuals for
investment, such as capital grants to Amtrak or higher education loans
directly to individuals.
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 and education.
Focusing on the role of investment in improving national
productivity and enhancing economic growth would exclude items
such as national defense assets, the direct benefits of which
enhance national security rather than economic growth.
Concern with the efficiency of Federal operations would
confine the coverage to investments that 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

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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 grants are 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 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 $228.0 billion in 1998.
They are estimated to increase to $243.9 billion in 1999 and to increase
further to $247.3 billion in 2000. Major Federal investment will
comprise an estimated 14.0 percent of total Federal outlays in 2000 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 $121.2 billion in 2000. Physical investment outlays are
for construction and rehabilitation, the purchase of major equipment,
and the purchase or sale of land and structures. 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 $53.5 billion in 1998 and are estimated to decline slightly to
$51.6 billion in 2000. Almost all of these outlays, or $46.9 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. These outlays will begin to increase in 2001 in response to
increases in defense budget authority requested for 2000 and later years
in this budget. The increases in budget authority are discussed in
Chapter 11 of the Budget volume.

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Table 6-1. COMPOSITION OF FEDERAL INVESTMENT OUTLAYS
(In billions of dollars)
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Estimate
1998 -------------------
actual 1999 2000
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Federal Investment

Major public physical capital investment:
Direct Federal:
National defense............................................................. 53.5 53.5 51.6
Nondefense................................................................... 15.1 20.8 21.2
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Subtotal, direct major public physical capital investment.................. 68.7 74.2 72.8

Grants to State and local governments............................................. 41.1 44.9 48.4
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Subtotal, major public physical capital investment.......................... 109.8 119.1 121.2

Conduct of research and development:
National defense................................................................ 40.1 39.6 37.7
Nondefense...................................................................... 32.7 34.5 35.9
-----------------------------
Subtotal, conduct of research and development.............................. 72.8 74.2 73.6

Conduct of education and training:
Grants to State and local governments........................................... 26.5 28.8 32.4
Direct Federal................................................................. 19.0 21.8 20.0
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Subtotal, conduct of education and training................................. 45.4 50.6 52.5
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Major Federal investment outlays.................................................. 228.0 243.9 247.3

MEMORANDUM

Major Federal investment outlays:
National defense................................................................ 93.7 93.1 89.3
Nondefense...................................................................... 134.3 150.8 158.0
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Total, major Federal investment outlays....................................... 228.0 243.9 247.3

Miscellaneous physical investments:
Commodity inventories.......................................................... -0.4 0.1 -0.3
Other physical investment (direct).............................................. 3.0 3.3 3.1
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Total, miscellaneous physical investment..................................... 2.6 3.4 2.9
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Total, Federal investment outlays, including miscellaneous physical investment.... 230.6 247.3 250.1
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Outlays for direct physical investment for nondefense purposes are
estimated to be $21.2 billion in 2000. These outlays include $13.0
billion for construction and rehabilitation. This amount funds water,
power, and natural resources projects of the Army 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 $7.6 billion in 2000. The largest amounts are for the
air traffic control system and the Postal Service. For the purchase or
sale of land and structures, collections exceeded disbursements by $4.6
billion in 1998, largely due to the sale of the United States Enrichment
Corporation and the privatization of Elk Hills. These sales explain most
of the increase in outlays in this category from 1998 to 1999.
Grants to State and local governments for physical investment are
estimated to be $48.4 billion in 2000. Almost two-thirds of these
outlays, or $31.0 billion, are to assist States and localities with
transportation infrastructure, primarily highways. 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 $73.6 billion in 2000.
These outlays are devoted to increasing basic scientific knowledge and
promoting 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. Slightly more than
half of these outlays, an estimated $37.7 billion in 2000, 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 $35.9 billion in 2000. 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 $52.5 billion in 2000. 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 $32.4 billion in 2000, more than
three-fifths 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 $20.0 billion in 2000. Programs in this category are
primarily aid for 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.

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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 $0.3 billion in 2000.
Outlays for other miscellaneous physical investment are estimated to
be $3.1 billion in 2000. 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 2004. Table 6-2 displays budget authority (BA) and
outlays (O) by major programs according to defense and nondefense
categories. The greatest level of detail appears in Table 6-3, which
shows budget authority and outlays divided according to grants to State
and local governments and direct Federal spending. Miscellaneous
investment is not included in these tables because it is generally
unrelated to improving Government operations or enhancing economic
activity.

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Table 6-2. FEDERAL INVESTMENT BUDGET AUTHORITY AND OUTLAYS: DEFENSE AND NONDEFENSE PROGRAMS
(in millions of dollars)
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Estimate
Description 1998 -----------------------------------------------------------------------
Actual 1999 2000 2001 2002 2003 2004
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NATIONAL DEFENSE
Major public physical investment:
Construction and rehabilitation......... BA 4,866 4,794 2,318 7,124 3,951 4,048 4,159
O 5,092 4,716 4,461 3,882 4,988 4,693 4,326
Acquisition of major equipment.......... BA 45,263 48,915 52,833 61,789 62,115 66,369 69,033
O 48,492 48,778 47,207 51,553 55,038 59,961 63,851
Purchase or sale of land and structures. BA -34 -36 -36 -36 -36 -36 -36
O -34 -36 -36 -36 -36 -36 -36
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Subtotal, major public physical BA 50,095 53,673 55,115 68,877 66,030 70,381 73,156
investment.
O 53,550 53,458 51,632 55,399 59,990 64,618 68,141
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Conduct of research and development....... BA 39,824 39,819 37,712 37,597 37,975 37,829 38,337
O 40,141 39,612 37,662 37,764 37,779 37,792 38,091
Conduct of education and training BA 2 3 8 8 10 10 10
(civilian).
O 8 3 6 8 9 10 10
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Subtotal, national defense investment... BA 89,921 93,495 92,835 106,482 104,015 108,220 111,503
O 93,699 93,073 89,300 93,171 97,778 102,420 106,242
NONDEFENSE
Major public physical investment:
Construction and rehabilitation:
Highways.............................. BA 24,868 29,385 30,664 30,144 30,692 31,237 31,876
O 20,063 23,150 25,517 26,762 26,955 27,154 27,698
Mass transportation................... BA 4,602 4,830 5,906 6,086 6,552 7,019 7,168
O 3,892 3,789 3,960 4,763 5,299 5,984 6,404
Rail transportation................... BA 271 6 11 11 11 11 11
O 465 107 16 10 11 11 11
Air transportation.................... BA 1,657 2,336 1,616 1,617 1,618 1,619 1,619
O 1,541 1,684 1,766 1,697 1,659 1,648 1,641
Community development block grants.... BA 4,925 4,873 4,775 4,775 4,775 4,775 4,775
O 4,621 4,965 4,856 4,817 4,792 4,757 4,779
Other community and regional BA 1,465 1,560 1,669 1,669 1,669 1,669 1,669
development.
O 1,479 1,438 1,414 1,522 1,788 1,853 1,826
Pollution control and abatement....... BA 4,131 4,169 3,613 3,615 3,615 3,615 3,615
O 3,521 3,616 4,104 4,205 4,032 4,010 4,005
Water resources....................... BA 2,650 2,967 3,039 3,037 3,023 3,031 3,045
O 2,350 3,297 3,295 3,176 2,936 3,079 3,060
Housing assistance.................... BA 6,219 6,982 6,559 6,559 6,559 6,559 6,559
O 6,406 6,501 7,264 8,178 8,175 8,249 8,287
Energy................................ BA 779 960 843 721 930 892 672
O 778 961 843 719 928 890 670
Veterans hospitals and other health... BA 1,660 1,662 1,453 1,493 1,475 1,466 1,466
O 1,565 1,633 1,652 1,657 1,628 1,586 1,577
Postal Service........................ BA 1,726 1,654 1,457 1,317 1,485 1,742 1,509
O 1,528 1,032 1,225 1,344 1,457 1,574 1,609
GSA real property activities.......... BA 238 1,165 767 952 875 918 847
O 1,375 1,069 1,016 1,079 1,062 1,016 939
Other programs........................ BA 3,764 3,111 2,748 2,919 2,801 2,578 2,680
O 3,718 3,044 3,330 2,910 2,935 2,973 2,742
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Subtotal, construction and BA 58,955 65,660 65,120 64,915 66,080 67,131 67,511
rehabilitation.
O 53,302 56,286 60,258 62,839 63,657 64,784 65,248
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Acquisition of major equipment:
Air transportation.................... BA 1,948 2,096 2,320 2,486 2,626 2,792 2,927
O 2,285 1,952 2,019 2,184 2,360 2,606 2,758
Postal Service........................ BA 597 739 848 918 744 744 530
O 364 319 736 802 781 590 835
Other................................. BA 4,877 5,839 4,964 5,547 5,488 5,447 5,405
O 3,969 4,788 4,941 5,446 5,601 5,615 5,604
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Subtotal, acquisition of major BA 7,422 8,674 8,132 8,951 8,858 8,983 8,862
equipment.
O 6,618 7,059 7,696 8,432 8,742 8,811 9,197
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Purchase or sale of land and structures. BA -3,966 626 398 720 223 719 712
O -4,613 1,265 525 765 244 748 721

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Other physical assets (grants).......... BA 942 941 1,327 1,314 1,342 1,388 1,477
O 917 1,075 1,086 1,264 1,261 1,313 1,363
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Subtotal, major public physical BA 63,353 75,901 74,977 75,900 76,503 78,221 78,562
investment.
O 56,224 65,685 69,565 73,300 73,904 75,656 76,529
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Conduct of research and development:
General science, space and technology... BA 12,367 12,970 13,409 13,588 13,657 13,847 13,907
O 12,503 12,858 12,907 13,291 13,480 13,768 13,926
Energy.................................. BA 1,281 1,230 1,346 1,324 1,324 1,324 1,324
O 1,526 1,368 1,365 1,516 1,517 1,487 1,419
Transportation.......................... BA 1,826 1,678 1,581 1,597 1,640 1,662 1,687
O 1,778 1,699 1,698 1,716 1,693 1,748 1,771
Health.................................. BA 13,543 15,471 15,821 16,001 16,061 16,085 15,785
O 12,471 13,903 15,371 15,935 16,045 16,076 15,768
Natural resources and environment....... BA 1,936 2,011 1,953 1,953 1,953 1,953 1,953
O 1,653 1,785 1,767 1,757 1,758 1,768 1,770
All other research and development...... BA 2,791 3,128 2,902 2,913 3,027 2,993 3,022
O 2,731 2,931 2,834 2,886 3,053 3,011 3,031
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Subtotal, conduct of research and BA 33,744 36,488 37,012 37,376 37,662 37,864 37,678
development.
O 32,662 34,544 35,942 37,101 37,546 37,858 37,685
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Conduct of education and training:
Education, training, employment and
social services:
Elementary, secondary, and vocational BA 18,738 16,761 20,762 22,687 22,687 22,687 22,687
education.
O 16,507 16,910 20,041 22,527 22,750 22,837 22,849
Higher education...................... BA 13,818 14,248 12,332 13,610 12,666 13,954 14,599
O 12,060 14,032 11,636 13,427 12,157 13,623 14,175
Research and general education aids... BA 1,900 2,233 2,300 2,304 2,320 2,279 2,268
O 1,958 2,128 2,415 2,413 2,432 2,399 2,407
Training and employment............... BA 6,370 6,608 6,435 5,433 5,386 5,386 5,386
O 4,569 5,938 6,645 6,378 5,740 5,413 5,381
Social services....................... BA 6,994 7,366 8,026 8,087 8,149 8,213 8,279
O 6,610 7,454 7,554 7,903 7,993 8,036 8,102
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Subtotal, education, training, and BA 47,820 47,216 49,855 52,121 51,208 52,519 53,219
social services.
O 41,704 46,462 48,291 52,648 51,072 52,308 52,914
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Veterans education, training, and BA 1,568 1,357 1,652 1,908 1,902 1,901 1,927
rehabilitation.
O 1,502 1,693 1,681 1,937 1,909 1,906 1,933
Health.................................. BA 871 1,003 951 948 946 940 935
O 808 932 957 956 948 942 936
Other education and training............ BA 1,503 1,535 1,578 1,578 1,555 1,557 1,559
O 1,408 1,468 1,521 1,557 1,561 1,560 1,564
-----------------------------------------------------------------------------------
Subtotal, conduct of education and BA 51,762 51,111 54,036 56,555 55,611 56,917 57,640
training.
O 45,422 50,555 52,450 57,098 55,490 56,716 57,347
-----------------------------------------------------------------------------------
Subtotal, nondefense investment......... BA 148,859 163,500 166,025 169,831 169,776 173,002 173,880
O 134,308 150,784 157,957 167,499 166,940 170,230 171,561
===================================================================================
Total, Federal investment................. BA 238,780 256,995 258,860 276,313 273,791 281,222 285,383
O 228,007 243,857 247,257 260,670 264,718 272,650 277,803
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Table 6-3. FEDERAL INVESTMENT BUDGET AUTHORITY AND OUTLAYS: GRANT AND DIRECT FEDERAL PROGRAMS
(in millions of dollars)
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Estimate
Description 1998 -----------------------------------------------------------------------
Actual 1999 2000 2001 2002 2003 2004
--------------------------------------------------------------------------------------------------------------------------------------------------------
GRANTS TO STATE AND LOCAL GOVERNMENTS
Major public physical investments:
Construction and rehabilitation:
Highways.............................. BA 24,691 29,008 30,453 29,937 30,481 31,022 31,657
O 20,036 23,057 25,320 26,558 26,750 26,948 27,487
Mass transportation................... BA 4,602 4,834 5,906 6,086 6,552 7,019 7,168
O 3,892 3,789 3,960 4,763 5,299 5,984 6,404
Rail transportation................... BA 10 .......... .......... .......... .......... .......... ..........
O 44 47 2 .......... .......... .......... ..........
Air transportation.................... BA 1,640 2,322 1,600 1,600 1,600 1,600 1,600
O 1,511 1,670 1,750 1,680 1,641 1,628 1,620
Pollution control and abatement....... BA 2,730 2,783 2,149 2,149 2,149 2,149 2,149
O 2,084 2,188 2,558 2,675 2,493 2,435 2,394
Other natural resources and BA 43 27 26 26 26 26 26
environment.
O 65 96 67 44 34 34 34
Community development block grants.... BA 4,925 4,873 4,775 4,775 4,775 4,775 4,775
O 4,621 4,965 4,856 4,817 4,792 4,757 4,779
Other community and regional BA 1,084 1,327 1,423 1,423 1,423 1,423 1,423
development.
O 1,060 1,284 1,274 1,365 1,493 1,547 1,520
Housing assistance.................... BA 6,193 6,956 6,529 6,529 6,529 6,529 6,529
O 6,388 6,475 7,237 8,148 8,145 8,219 8,257
National defense...................... BA .......... .......... .......... .......... .......... .......... ..........
O 5 3 .......... .......... .......... .......... ..........
Other construction.................... BA 460 166 119 119 119 119 119
O 427 194 206 181 145 119 119
-----------------------------------------------------------------------------------
Subtotal, construction and BA 46,378 52,296 52,980 52,644 53,654 54,662 55,446
rehabilitation.
O 40,133 43,768 47,230 50,231 50,792 51,671 52,614
-----------------------------------------------------------------------------------
Other physical assets................... BA 996 1,027 1,402 1,462 1,480 1,515 1,533
O 972 1,161 1,178 1,348 1,373 1,436 1,485
-----------------------------------------------------------------------------------
Subtotal, major public physical BA 47,374 53,323 54,382 54,106 55,134 56,177 56,979
capital.
O 41,105 44,929 48,408 51,579 52,165 53,107 54,099
-----------------------------------------------------------------------------------
Conduct of research and development:
Agriculture............................. BA 223 253 181 189 189 189 189
O 223 226 220 237 258 254 251
Other................................... BA 121 154 168 164 167 169 172
O 79 105 182 187 188 190 193
-----------------------------------------------------------------------------------
Subtotal, conduct of research and BA 344 407 349 353 356 358 361
development.
O 302 331 402 424 446 444 444
-----------------------------------------------------------------------------------
Conduct of education and training:
Elementary, secondary, and vocational BA 17,714 15,504 18,611 20,536 20,536 20,536 20,536
education.
O 15,686 15,992 18,752 20,692 20,724 20,776 20,787
Higher education........................ BA 80 160 197 197 197 197 197
O 90 65 122 141 144 144 144
Research and general education aids..... BA 328 516 347 362 366 347 340
O 378 389 479 468 462 447 445
Training and employment................. BA 5,122 5,043 4,749 3,748 3,715 3,715 3,715
O 3,463 4,639 5,304 4,961 4,309 3,979 3,951
Social services......................... BA 6,722 7,081 7,721 7,782 7,844 7,908 7,974
O 6,354 7,153 7,258 7,598 7,688 7,731 7,797
Agriculture............................. BA 423 453 402 402 402 402 402
O 416 438 433 410 405 402 402
Other................................... BA 87 80 82 82 82 82 82
O 82 80 79 81 82 80 81
-----------------------------------------------------------------------------------
Subtotal, conduct of education and BA 30,476 28,837 32,109 33,109 33,142 33,187 33,246
training.
O 26,469 28,756 32,427 34,351 33,814 33,559 33,607
-----------------------------------------------------------------------------------
Subtotal, grants for investment......... BA 78,194 82,567 86,840 87,568 88,632 89,722 90,586
O 67,876 74,016 81,237 86,354 86,425 87,110 88,150

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DIRECT FEDERAL PROGRAMS
Major public physical investment:
Construction and rehabilitation:
National defense:
Military construction............... BA 3,281 3,309 1,433 5,328 2,646 2,742 2,852
O 3,515 3,107 2,955 2,526 3,730 3,433 3,055
Family housing...................... BA 887 739 206 937 446 447 448
O 883 966 803 602 484 489 500
Atomic energy defense activities and BA 698 746 679 859 859 859 859
other.
O 689 640 703 754 774 771 771
-----------------------------------------------------------------------------------
Subtotal, national defense........ BA 4,866 4,794 2,318 7,124 3,951 4,048 4,159
O 5,087 4,713 4,461 3,882 4,988 4,693 4,326
-----------------------------------------------------------------------------------
International affairs................. BA 213 513 341 539 639 738 837
O 150 318 392 455 488 553 639
General science, space, and technology BA 375 465 524 536 541 536 539
O 517 479 551 511 515 518 518
Water resources projects.............. BA 2,607 2,940 3,017 3,015 3,001 3,009 3,023
O 2,287 3,204 3,233 3,137 2,907 3,050 3,031
Other natural resources and BA 1,782 1,756 1,793 1,854 1,826 1,828 1,828
environment.
O 1,799 1,788 1,895 1,926 1,930 1,976 2,017
Energy................................ BA 779 960 843 721 930 892 672
O 778 961 843 719 928 890 670
Postal Service........................ BA 1,726 1,654 1,457 1,317 1,485 1,742 1,509
O 1,528 1,032 1,225 1,344 1,457 1,574 1,609
Transportation........................ BA 596 628 296 206 211 216 220
O 664 344 361 205 207 204 214
Housing assistance.................... BA 26 26 30 30 30 30 30
O 18 26 27 30 30 30 30
Veterans hospitals and other health BA 1,580 1,572 1,413 1,453 1,435 1,426 1,426
facilities.
O 1,515 1,581 1,588 1,594 1,562 1,546 1,537
Federal Prison System................. BA 151 323 439 432 342 22 22
O 33 459 414 477 477 434 186
GSA real property activities.......... BA 416 1,165 767 952 875 918 847
O 1,640 1,069 1,016 1,079 1,062 1,016 939
Other construction.................... BA 2,326 1,362 1,220 1,216 1,111 1,112 1,112
O 2,245 1,260 1,483 1,131 1,302 1,322 1,244
-----------------------------------------------------------------------------------
Subtotal, construction and BA 17,443 18,158 14,458 19,395 16,377 16,517 16,224
rehabilitation.
O 18,261 17,234 17,489 16,490 17,853 17,806 16,960
-----------------------------------------------------------------------------------
Acquisition of major equipment:
National defense:
Department of Defense............... BA 44,934 48,562 52,483 61,439 61,765 66,019 68,683
O 48,180 48,422 46,864 51,199 54,686 59,610 63,500
Atomic energy defense activities.... BA 329 353 350 350 350 350 350
O 312 356 343 354 352 351 351
-----------------------------------------------------------------------------------
Subtotal, national defense........ BA 45,263 48,915 52,833 61,789 62,115 66,369 69,033
O 48,492 48,778 47,207 51,553 55,038 59,961 63,851
-----------------------------------------------------------------------------------
General science and basic research.... BA 386 368 396 443 429 407 408
O 378 341 375 392 422 431 421
Space flight, research, and supporting BA 657 659 509 506 491 471 462
activities.
O 662 668 499 502 493 478 467
Energy................................ BA 125 125 121 118 105 72 72
O 124 125 121 118 105 72 72
Postal Service........................ BA 597 739 848 918 744 744 530
O 364 319 736 802 781 590 835
Air transportation.................... BA 1,948 2,096 2,320 2,486 2,626 2,792 2,927
O 2,285 1,952 2,019 2,184 2,360 2,606 2,758
Water transportation (Coast Guard).... BA 263 423 231 318 318 318 318
O 187 272 325 274 309 309 318
Other transportation (railroads)...... BA .......... 609 571 571 571 571 571
O 164 247 442 581 572 572 572
Social security....................... BA 50 .......... .......... .......... .......... .......... ..........

[[Page 147]]

O 87 55 30 32 34 37 40
Hospital and medical care for veterans BA 700 684 500 504 510 511 512
O 475 542 556 571 575 579 580
Department of Justice................. BA 523 464 550 551 549 549 549
O 453 436 505 560 577 580 580
Department of the Treasury............ BA 919 858 394 727 724 727 731
O 578 644 522 734 749 716 709
GSA general supply fund............... BA 513 657 657 654 681 735 737
O 493 657 657 654 681 735 737
Other................................. BA 687 906 960 1,007 972 959 989
O 313 715 817 944 972 983 986
-----------------------------------------------------------------------------------
Subtotal, acquisition of major BA 52,631 57,503 60,890 70,592 70,835 75,225 77,839
equipment.
O 55,055 55,751 54,811 59,901 63,668 68,649 72,926
-----------------------------------------------------------------------------------
Purchase or sale of land and structures:
National defense...................... BA -34 -36 -36 -36 -36 -36 -36
O -34 -36 -36 -36 -36 -36 -36
International affairs................. BA 10 19 14 19 23 27 31
O 13 19 21 23 24 28 32
Sale of the United States Enrichment BA -1,885 .......... .......... .......... .......... .......... ..........
Corporation.
O -1,885 .......... .......... .......... .......... .......... ..........
Privatization of Elk Hills............ BA -2,887 .......... -323 .......... .......... .......... ..........
O -2,887 .......... -323 .......... .......... .......... ..........
Other................................. BA 796 607 707 701 200 692 681
O 146 1,246 827 742 220 720 689
-----------------------------------------------------------------------------------
Subtotal, purchase or sale of land BA -4,000 590 362 684 187 683 676
and structures.
O -4,647 1,229 489 729 208 712 685
-----------------------------------------------------------------------------------
Subtotal, major public physical BA 66,074 76,251 75,710 90,671 87,399 92,425 94,739
investment.
O 68,669 74,214 72,789 77,120 81,729 87,167 90,571
-----------------------------------------------------------------------------------
Conduct of research and development:
National defense
Defense military...................... BA 37,230 36,895 34,794 34,679 35,057 34,911 35,419
O 37,558 36,875 34,723 34,748 34,777 34,815 35,114
Atomic energy and other............... BA 2,594 2,924 2,918 2,918 2,918 2,918 2,918
O 2,583 2,737 2,939 3,016 3,002 2,977 2,977
-----------------------------------------------------------------------------------
Subtotal, national defense.......... BA 39,824 39,819 37,712 37,597 37,975 37,829 38,337
O 40,141 39,612 37,662 37,764 37,779 37,792 38,091
-----------------------------------------------------------------------------------
International affairs................... BA 163 165 115 115 115 115 115
O 233 201 182 185 197 199 199
General science, space and technology
NASA.................................. BA 8,200 8,237 8,422 8,607 8,684 8,874 8,934
O 8,631 8,475 8,201 8,355 8,417 8,716 8,861
National Science Foundation........... BA 2,293 2,507 2,734 2,728 2,720 2,720 2,720
O 2,010 2,125 2,437 2,603 2,722 2,711 2,724
Department of Energy.................. BA 1,874 2,226 2,253 2,253 2,253 2,253 2,253
O 1,862 2,258 2,269 2,333 2,341 2,341 2,341
-----------------------------------------------------------------------------------
Subtotal, general science, space and BA 12,530 13,135 13,524 13,703 13,772 13,962 14,022
technology.
O 12,736 13,059 13,089 13,476 13,677 13,967 14,125
-----------------------------------------------------------------------------------
Energy.................................. BA 1,281 1,230 1,346 1,324 1,324 1,324 1,324
O 1,526 1,368 1,365 1,516 1,517 1,487 1,419
Transportation:
Department of Transportation.......... BA 471 416 436 431 446 466 482
O 475 424 488 526 488 510 524
NASA.................................. BA 1,262 1,144 1,020 1,043 1,068 1,068 1,074
O 1,250 1,198 1,054 1,027 1,041 1,072 1,078
-----------------------------------------------------------------------------------
Subtotal, transportation............ BA 3,014 2,790 2,802 2,798 2,838 2,858 2,880
O 3,251 2,990 2,907 3,069 3,046 3,069 3,021

[[Page 148]]

-----------------------------------------------------------------------------------
Health:
National Institutes of Health......... BA 12,898 14,783 15,150 15,150 15,150 15,124 15,124
O 11,853 13,213 14,600 15,020 15,076 15,059 15,055
All other health...................... BA 633 675 658 838 898 948 648
O 606 677 758 902 956 1,004 700
-----------------------------------------------------------------------------------
Subtotal, health.................... BA 13,531 15,458 15,808 15,988 16,048 16,072 15,772
O 12,459 13,890 15,358 15,922 16,032 16,063 15,755
-----------------------------------------------------------------------------------
Agriculture............................. BA 1,026 1,235 1,204 1,204 1,205 1,208 1,208
O 977 1,083 1,116 1,132 1,147 1,144 1,140
Natural resources and environment....... BA 1,936 2,011 1,953 1,953 1,953 1,953 1,953
O 1,653 1,785 1,767 1,757 1,758 1,768 1,770
National Institute of Standards and BA 392 395 432 432 432 432 432
Technology.
O 423 431 423 432 440 439 437
Hospital and medical care for veterans.. BA 272 316 316 316 316 316 316
O 247 305 314 315 315 315 315
All other research and development...... BA 699 741 624 629 742 705 734
O 614 670 566 574 685 649 678
-----------------------------------------------------------------------------------
Subtotal, conduct of research and BA 73,224 75,900 74,375 74,620 75,281 75,335 75,654
development.
O 72,501 73,825 73,202 74,441 74,879 75,206 75,332
-----------------------------------------------------------------------------------
Conduct of education and training:
Elementary, secondary, and vocational BA 1,024 1,257 2,151 2,151 2,151 2,151 2,151
education.
O 821 918 1,289 1,835 2,026 2,061 2,062
Higher education........................ BA 13,738 14,088 12,135 13,413 12,469 13,757 14,402
O 11,970 13,967 11,514 13,286 12,013 13,479 14,031
Research and general education aids..... BA 1,572 1,717 1,953 1,942 1,954 1,932 1,928
O 1,580 1,739 1,936 1,945 1,970 1,952 1,962
Training and employment................. BA 1,248 1,565 1,686 1,685 1,671 1,671 1,671
O 1,106 1,299 1,341 1,417 1,431 1,434 1,430
Health.................................. BA 871 1,003 951 948 946 940 935
O 808 932 957 956 948 942 936
Veterans education, training, and BA 1,568 1,357 1,652 1,908 1,902 1,901 1,927
rehabilitation.
O 1,502 1,693 1,681 1,937 1,909 1,906 1,933
General science and basic reserach...... BA 599 660 686 684 659 659 659
O 543 586 639 667 653 657 659
National defense........................ BA 2 3 8 8 10 10 10
O 8 3 6 8 9 10 10
International affairs................... BA 269 201 211 211 211 211 211
O 252 230 213 217 211 211 211
Other................................... BA 397 426 502 504 506 508 510
O 371 435 453 487 515 515 516
-----------------------------------------------------------------------------------
Subtotal, conduct of education and BA 21,288 22,277 21,935 23,454 22,479 23,740 24,404
training.
O 18,961 21,802 20,029 22,755 21,685 23,167 23,750
-----------------------------------------------------------------------------------
Subtotal, direct Federal investment..... BA 160,586 174,428 172,020 188,745 185,159 191,500 194,797
O 160,131 169,841 166,020 174,316 178,293 185,540 189,653
===================================================================================
Total, Federal investment................. BA 238,780 256,995 258,860 276,313 273,791 281,222 285,383
O 228,007 243,857 247,257 260,670 264,718 272,650 277,803
--------------------------------------------------------------------------------------------------------------------------------------------------------

[[Page 149]]

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 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.

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
the Office of Management and Budget (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 has been issued for several years,
most recently as OMB Circular A-11: Part 3: ``Planning, Budgeting, and
Acquisition

[[Page 150]]

of Capital Assets'' (July 1998) (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 executive agencies and 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. 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 2004 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.
Efforts will continue 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 to complete
acquisitions efficiently, and Part 3 encourages this. As noted, many
agencies aggregate asset ac

[[Page 151]]

quisition 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 has been reissued annually since then. The Capital Programming
Guide was issued as a Supplement to Part 3 in June 1997. 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. If the
project cannot be brought within goals, agencies should explain how and
why the goals should be revised and whether the project is still cost
beneficial and justifies continued funding, or whether the project
should be canceled. Approved acquisition goals submitted with the 2000
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 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 1999 and 2000 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 1999 and 2000.
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 encourage excellence in the
acquisition workforce; and

[[Page 152]]

(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.

Major Acquisition Proposals

For the definition of major capital assets described above this budget
requests $73.4 billion of budget authority for 2000. This includes $54.1
billion for the Department of Defense and $19.3 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.

Table 6-4. CAPITAL ASSET ACQUISITIONS
(Budget authority in billions of dollars)
------------------------------------------------------------------------
1998 1999 2000
actual proposed proposed
------------------------------------------------------------------------
MAJOR ACQUISITIONS
Construction and rehabilitation:
Defense military construction and family
housing.................................. 4.2 4.0 1.6
Army Corps of Engineers................... 2.1 2.6 2.6
Department of Energy..................... 1.1 1.1 1.1
Department of Veterans Affairs........... 1.0 1.0 0.8
General Services Administration.......... 0.4 1.2 0.8
Other agencies........................... 5.8 6.6 5.9
---------------------------
Subtotal, construction and
rehabilitation......................... 14.5 16.5 12.9

Major equipment:
Department of Defense..................... 44.9 48.6 52.5
Department of Transportation.............. 2.1 2.5 2.5
NASA...................................... 0.7 0.7 0.6
Department of Veterans Affairs............ 0.7 0.7 0.5
Department of the Treasury............... 0.9 0.9 0.4
Other agencies........................... 3.0 3.4 3.7
---------------------------
Subtotal, major equipment............... 52.4 56.7 60.1

Purchases of land and structures............ 1.2 0.6 0.7
---------------------------
Total, major acquisitions \1\............. 68.1 73.9 73.7

Sale of major assets........................ -5.2 ........ -0.3
---------------------------
Total, capital asset acquisitions 1/........ 62.9 73.9 73.4
------------------------------------------------------------------------
\1\ This total is derived from the direct Federal major public physical
investment budget authority on Table 6-3 ($75.7 billion for 2000).
Table 6-4 excludes an estimate of spending for assets not owned by the
Federal Government ($2.3 billion for 2000).

Construction and Rehabilitation

This budget includes $12.9 billion of budget authority for 2000 for
construction and rehabilitation.
Department of Defense.--The budget requests $1.6 billion for 2000 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.
Army Corps of Engineers.--This budget requests $2.6 billion for 2000
for construction and rehabilitation for the Army 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.
Department of Energy.--This budget requests $1.1 billion for 2000 for
construction and rehabilitation for the Department of Energy. The
largest item is for the National Ignition Facility, which will be used
to perform experiments, including inertial confinement fusion
experiments, at high pressures and temperatures. Some of these
investments are also discussed in the text that accompanies Table 6-5.
Department of Veterans Affairs.--The budget requests $0.8 billion for
construction and rehabilitation associated with veterans hospitals.
These funds will provide for modernization and improvements to these
facilities.
General Services Administration (GSA).--The 2000 budget includes $0.8
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 $5.9 billion for construction
and rehabilitation for other agencies in 2000. The largest items are for
the Postal Service ($1.5 billion), the Department of the Interior ($0.8
billion), and the Tennessee Valley Authority ($0.7 billion).

Major Equipment

This category covers capital purchases for major equipment, including
weapons systems; information technology, such as computer hardware,
major software, and renovations required for this equipment; and other
types of equipment. This budget requests $60.1 billion in budget
authority for 2000 for the purchase of major equipment.
Department of Defense.--The budget requests $52.5 billion for 2000 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 $2.5 billion in
budget authority for the Department of Transportation, which includes
$2.3 billion to modern

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ize the air traffic control system and $0.2 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.
National Aeronautics and Space Administration (NASA).--The budget
requests $0.6 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.
Department of Veterans Affairs.--This budget requests $0.5 billion for
medical equipment for health care facilities for veterans. These funds
will be used to continue to provide quality health care services for
veterans.
Department of the Treasury.--The budget requests $0.4 billion in
budget authority for 2000 for major equipment. These resources fund
Internal Revenue Service information systems and other Treasury
investment needs. The IRS funding and advanced appropriations ($325
million) for 2001 for the IRS information technology investment account
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. Advanced appropriations ($163
million) for the U.S. Customs Service in 2001 will fund modernization of
automated commercial operations and an international trade data system.
These investments are also discussed in the text that accompanies Table
6-5, which displays advance appropriations for capital acquisitions.
Other agencies.--This budget requests $3.7 billion for major equipment
for other agencies for 2000. The largest amount is for the Postal
Service ($0.8 billion). Other agencies include the General Services
Administration ($0.7 billion); the Department of Energy ($0.6 billion)
for science and other projects; and the Department of Commerce ($0.6
billion), for procurement of weather satellites and other equipment.

Purchase and Sale of Land and Structures

This budget includes $0.7 billion for 2000 for the purchase of land
and structures. This includes $0.2 billion for the purchase of buildings
by the General Services Administration. The sale of assets that took
place in 1998 was for proceeds from the sale of the United States
Enrichment Corporation ($1.9 billion), the privatization of Elk Hills
($2.9 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. The requests for advance
appropriations shown in Table 6-5 demonstrate the Admninistration's
continuing support for full funding of capital investments.
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
requests $5.5 billion in budget authority for 2000 and $24.6 billion in
advance appropriations for later years, for a total request of $30.1
billion for these projects for these years.

Department of Commerce

National Oceanic and Atmospheric Administration (NOAA).--This budget
requests $563 million for 2000 and $5,367 million in advance
appropriations for capital asset acquisitions in NOAA for 2001-2018.
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.
National Telecommunications and Information Administrations--The
budget requests $35 million in 2000 and $314 million in advance
appropriations for 2001-2004 to support the acquisition of digital
technology for public television.

Department of Defense

This budget requests $2,484 million in advance appropriations for 2001
to fully fund selected military construction and family housing projects
in the Department of Defense. The budget requests $1,631 million for
these projects in 2000.

Department of Energy

Defense environmental management privatization.--The budget requests
$228 million in 2000 to proceed with various projects that will treat
some of DOE's most contaminated soil and highly radioactive waste. An
additional $2,557 million in advance appropriations for 2001-2004 is
requested to provide primarily for treatment of high-level radioactive
waste stored in underground tanks at the Hanford nuclear facility in
Washington. This waste will be stabilized for safe storage and eventual
disposal.
Clean coal technology.--The clean coal technology program supports
cost-shared projects with industry to demonstrate the technical and
economic viability of environmentally friendly and efficient
technologies to extract energy from coal. Advanced appropriations for
the clean coal technology program were provided by Congress in 1984 and
1988. The budget defers the availability of $256 million of the clean
coal technology program balances in 2000 and requests an advance
appropriation to recoup the deferred budget authority in 2001-2003.
Delays in the construction of two large

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Table 6-5. PROPOSED SPENDING TO FULLY FUND SELECTED CAPITAL ASSET ACQUISITIONS
(Budget authority in millions of dollars)
----------------------------------------------------------------------------------------------------------------
Advance appropriations
Regular ------------------------------------------------------------
appropriations After Total Advance
2000 2001 2002 2003 2004 2004 Appropriations
----------------------------------------------------------------------------------------------------------------
DEPARTMENT OF COMMERCE

National Oceanic and Atmospheric
Administration: Procurement,
acquisition and construction...... 563 611 587 587 655 2,927 5,367
National Telecommunications and
Information Administration:.......
Public telecommunications
facilities, planning and
construction.................... 35 110 100 89 15 ....... 314
----------------------------------------------------------------------------
Subtotal, Department of
Commerce...................... 598 721 687 676 670 2,927 5,681

DEPARTMENT OF DEFENSE
Military construction and family
housing........................... 1,631 2,484 ....... ....... ....... ....... 2,484

DEPARTMENT OF ENERGY
Defense environmental management
privatization 1/.................. 228 671 659 633 594 ....... 2,557
Clean coal technology.............. -256 189 40 27 ....... ....... 256
----------------------------------------------------------------------------
Subtotal, Department of Energy... -28 860 699 660 594 ....... 2,813

DEPARTMENT OF HEALTH AND HUMAN
SERVICES
Indian health facilities........... 36 34 10 ....... ....... ....... 44

DEPARTMENT OF THE INTERIOR
National Park Service: Construction
and major maintenance............. 26 57 16 15 10 ....... 98

DEPARTMENT OF STATE
Security and maintenance of United
States missions................... 36 300 450 600 750 900 3,000

DEPARTMENT OF TRANSPORTATION
Federal Aviation Administration:
Facilities and equipment.......... 596 739 439 355 191 258 1,982

DEPARTMENT OF THE TREASURY
Internal Revenue Service:
Information technology investment. .............. 325 ....... ....... ....... ....... 325
United States Customs Service:
Automation modernization.......... .............. 163 ....... ....... ....... ....... 163
----------------------------------------------------------------------------
Subtotal, Department of the
Treasury........................ .............. 488 ....... ....... ....... ....... 488

GENERAL SERVICES ADMINISTRATION
Federal buildings fund............. 41 163 ....... ....... ....... ....... 163

NATIONAL AERONAUTICS AND SPACE
ADMINISTRATION
Human space flight................. 2,483 2,328 2,091 1,721 1,573 ....... 7,713

NATIONAL SCIENCE FOUNDATION
Major research equipment........... 29 58 41 15 17 ....... 131

SMITHSONIAN INSTITUTION
Construction....................... 8 17 17 18 ....... ....... 52
----------------------------------------------------------------------------
Total............................ 5,456 8,249 4,450 4,060 3,805 4,085 24,649
----------------------------------------------------------------------------------------------------------------
Note: For these capital projects, budget authority for the project is requested partly in the budget year and
partly in future years in advance appropriations.

\1\ Additional funding for this program will be needed in future years.

clean coal technology demonstration projects make the deferral possible.

Department of Health and Human Services

This budget requests $36 million for 2000 in regular appropriations
and $44 million in advance appropriations for projects in the Department
of Health and Human Services for Indian health facilities. The funds
will allow for needed improvements in these facilities.

Department of the Interior

National Park Service.--This budget requests $26 million in budget
authority for 2000 and $98 million in advance appropriations for 2001-
2004 to fully fund projects in the 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 the NPS can acquire the dams, the Secretary of the Interior must
determine that funds to complete restoration are available. In addition
to $30 million already appropriated for acquisition and $12 million in
2000, advance appropriations of $71 million in 2001 through 2004 would
fully fund the $113

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million project and provide the funding stability needed for the
Secretary to proceed with acquisition. Advance appropriations in 2001
totaling $27 million are also requested for seven parks that have an
ongoing project requiring funding for later years: Sequoia National
Park, Gettysburg National Military Park, Cape Cod National Seashore,
Statue of Liberty/Ellis Island, San Francisco Maritime National
Historical Park, George Washington Parkway/Glen Echo, and Cumberland
Island National Seashore.

Department of State

This budget requests $36 million for 2000 and advance appropriations
of $3.0 billion for 2001-2005 for embassy and consulate construction.
This request would establish a program to provide a sustained,
increasing funding path to meet overseas facility security needs.

Department of Transportation

Federal Aviation Administration.--This budget requests $596 million in
2000 and an additional $1,982 million for 2001-2007 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 $325 million in
advance appropriations for 2001 to finance information technology
investments. Budget authority enacted in 1998 and 1999 will finance the
program through 2000. 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.
United States Customs Service.--This budget requests $163 million
advance appropriations for 2001 to finance modernization of automated
commercial operations and an international trade data system. The
Customs Service must modernize its existing automated systems in order
to keep up with the increasing volume of trade and to proceed with its
recently redesigned trade process, which will deal with importers on an
account level rather than on a transaction by transaction basis. In
addition, an international trade data system will further simplify the
trade community's interactions with the Federal government by reducing
redundant data requests and processing.

General Services Administration

This budget requests $41 million for 2000 and $163 million in advance
appropriations for 2001 for the construction of a new Bureau of Alcohol,
Tobacco and Firearms headquarters and office space for the Food and Drug
Administration's Center for Drug and Evaluation Research.

National Aeronautics and Space Administration (NASA)

Human Space Flight (International Space Station).--This budget
requests $2,483 million in budget authority for 2000, and $7,713 million
in advance appropriations over the years 2001-2004 for the 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 two launches beginning
construction of the Station took place in 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 appropriated $13.5 billion through 1999.

National Science Foundation (NSF)

This budget requests $29 million in 2000 and $131 million in advance
appropriations for 2001-2004 to complete the redevelopment of the U.S.
station at the South Pole in Antarctica, NSF's contribution to the
International Large Hadron Collider, and the Network for Earthquake
Engineering Simulation.
These amounts include $5 million in 2000 and $14 million in 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 $16 million in 2000 and $43 million in 2001-2003 to complete
NSF's contribution.
The Newtwork for Earthquake Engineering Simulation is a network to
connect and integrate a distributed collection of earthquake engineering
facilities that will facilitate the future replacement of mechanical
earthquake simulation with model-based computer simulation. The budget
requests $8 million in 2000 and $74 million for 2001-2004 to complete
development of the network.

[[Page 156]]

Smithsonian Institution

The budget requests $8 million in budget authority in 2000 and $52
million in advance appropriations for 2001-2003 for the major capital
renewal of the Patent Office Building. This building houses the
Smithsonian's Museum of American Art and the National Portrait Gallery.

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

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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
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 1999 and 2000 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,'' (July 1998),
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

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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 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,

[[Page 159]]

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 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. Lhaving budget authority appropriated in separate capital asset
acquisition accounts;
2. Lapportioning budget authority for a useful segment;
3. Lestablishing 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. Lselecting 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. Lmonitoring 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''
(July 1998), Appendix 300C; and
6. Lif 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

[[Page 160]]

sheet) under Federal 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'' (July 1998), 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 use of competition and financial incentives; and
(3) es

[[Page 161]]

tablishing 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.

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 may not accurately measure 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 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 $1,838 billion in 1998 and is estimated to increase slightly
to $1,872 billion by 2000. In 1998, the national defense capital stock
accounted for $642 billion, or 35 percent of the total, and nondefense
stocks for $1,196 billion, or 65 percent of the total.
---------------------------------------------------------------------------
\3\ Constant dollar stock estimates are expressed in chained 1992
dollars, consistent with the January 1996 revisions to the National
Income and Product Accounts (NIPAs).
---------------------------------------------------------------------------
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 $1,196 billion in 1998. With the
investments proposed in the budget, nondefense stocks are estimated to
grow to $1,261 billion in 2000. 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.
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

[[Page 162]]

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
1990........................................................................ 1,692 719 973 288 166 121 685 426 136 98 24
Annual data:
1995........................................................................ 1,810 700 1,109 325 174 151 784 493 145 106 39
1996........................................................................ 1,820 679 1,141 334 175 159 807 508 148 108 44
1997........................................................................ 1,831 659 1,172 341 175 166 831 523 150 109 49
1998........................................................................ 1,838 642 1,196 343 174 169 853 537 152 110 54
1999 est.................................................................... 1,855 627 1,228 350 175 175 878 552 155 111 59
2000 est.................................................................... 1,872 611 1,261 357 176 182 904 569 158 112 65
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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 $642 billion
in 1998 to $611 billion in 2000.
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 1998, 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 increased about 30 percent
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 $817 billion in 1998 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 1998 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 development, 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.

[[Page 163]]

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
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
Annual data:
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....................................... 56.8 25.0 31.8 20.3 12.0 8.3 0.6 7.7 36.5 13.0 23.6 14.6 2.7 1.4 4.9
1997....................................... 56.6 25.8 30.8 19.7 12.5 7.3 -0.3 7.6 36.9 13.3 23.6 14.9 2.6 1.3 4.8
1998....................................... 50.9 26.5 24.4 14.9 12.7 2.2 -0.3 2.5 36.0 13.7 22.3 13.8 2.4 0.9 5.2
1999 est................................... 58.9 27.1 31.8 20.2 13.0 7.2 0.7 6.5 38.7 14.1 24.6 15.9 2.8 1.1 4.9
2000 est................................... 61.0 27.8 33.1 20.2 13.3 6.9 0.5 6.4 40.8 14.5 26.2 17.1 2.5 1.3 5.3
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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
1990................................... 357 32 325 341 205 137 699 237 462
Annual data:
1995................................... 371 38 333 407 261 146 778 298 479
1996................................... 372 39 333 418 272 146 790 311 479
1997................................... 372 40 332 431 283 148 803 323 480
1998................................... 372 41 331 445 295 150 817 336 481
1999 est............................... 370 42 328 461 308 153 831 349 482
2000 est............................... 367 43 324 476 321 156 843 364 480
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Excludes outlays for physical capital for research and development, which are included in Table 6-6.

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 $814 billion in 1998 in constant 1992 dollars, rising to
$887 billion in 2000. 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-

[[Page 164]]

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.''

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............................... 64 46 18
1965............................... 88 64 25
1970............................... 203 159 44
1975............................... 292 235 57
1980............................... 410 319 91
1985............................... 502 374 128
1990............................... 650 479 170
Annual data:
1995............................... 721 523 198
1996............................... 747 542 206
1997............................... 776 562 214
1998............................... 814 590 224
1999 est........................... 850 616 235
2000 est........................... 887 647 241
------------------------------------------------------------------------

Despite a slowdown in growth during the early 1980s, the stock grew at
an average annual rate of 5.1 percent from 1970 to 1998, 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:

Methodological issues.--The stocks of physical capital and research
and development are estimated with the perpetual inventory method. A
fundamental assumption of this method is that each dollar of investment
spending adds a dollar to the value of the capital stock as of the end
of the period in which the spending takes place. In reality, the value
of the asset created could be more or less than the investment spending.
As an extreme example, if a project were canceled before completion, the
spending on the project would not result in the creation of any asset.
Even where asset value is equal to investment spending, there might be
timing differences in spending and the creation of an asset. For
example, payments for constructing an aircraft carrier might be made
over a period of years, with the asset only created at the end of the
period.
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 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 165]]

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 depreciation as a measure of
the services provided by the existing capital stock. In addition,
estimates of depreciation were improved based on recent empirical
research.\5\
---------------------------------------------------------------------------
\5\ BEA explained its new methods in ``Improved Estimates of Fixed
Reproducible Tangible Wealth, 1929-95,'' Survey of Current Business, May
1997, pp. 69-76. BEA's most recent estimates of capital stocks appear in
``Fixed Reproducible Tangible Wealth in the United States: Revised
Estimates for 1995-97 and Summary Estimates for 1925-97,'' Survey of
Current Business, September 1998, pp. 36-46.
---------------------------------------------------------------------------
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 these reasons, OMB prepares separate estimates for budgetary
purposes, 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.

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.\6\ 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.\7\
---------------------------------------------------------------------------
\6\ See U.S. Department of Labor, Bureau of Labor Statistics, The
Impact of Research and Development on Productivity Growth, Bulletin
2331, September 1989.
\7\ 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,
including opportunity costs. 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. The stock estimates are reduced from those reported last year,
due to revisions in the estimated opportunity cost of education. 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 166]]

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, and a capital budget process may take many different
forms.
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 Part I of 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.

Table 6-10. ALTERNATIVE DEFINITIONS OF INVESTMENT OUTLAYS, 2000
(In millions of dollars)
----------------------------------------------------------------------------------------------------------------
Investment Outlays
----------------------------------
All types
of capital Federal National
\1\ capital capital
----------------------------------------------------------------------------------------------------------------
Construction and rehabilitation:
Grants:
Transportation........................................................... 31,032 ......... 31,032
Natural resources and environment........................................ 2,625 ......... 2,621
Community and regional development....................................... 6,130 ......... 1,168
Housing assistance....................................................... 7,237 ......... .........
Other grants............................................................. 206 ......... 64
Direct Federal:
National defense......................................................... 4,461 4,461 .........
General science, space, and technology................................... 551 510 551
Natural resources and environment........................................ 5,128 3,754 4,829
Energy................................................................... 843 843 843
Transportation........................................................... 361 347 361
Veterans and other health facilities..................................... 1,588 1,588 1,588
Postal Service........................................................... 1,225 1,225 1,225
GSA real property activities............................................. 1,016 1,016 .........
Other construction....................................................... 2,316 1,844 1,036
----------------------------------
Total construction and rehabilitation.................................. 64,719 15,588 45,318
Acquisition of major equipment (direct):
National defense........................................................... 47,207 47,207 .........
Postal Service............................................................. 736 736 736
Air transportation......................................................... 2,019 2,019 2,019
Other...................................................................... 4,849 4,251 2,998
----------------------------------
Total major equipment..................................................... 54,811 54,213 5,753
Purchase or sale of land and structures...................................... 489 489 .........
Other physical assets (grants)............................................... 1,178 ......... 92
----------------------------------
Total physical investment.................................................. 121,197 70,290 51,163
Research and development:
Defense.................................................................... 37,662 ......... 1,150
Nondefense................................................................. 35,942 ......... 35,460
----------------------------------
Total research and development............................................ 73,604 ......... 36,610
Education and training....................................................... 52,456 ......... 52,132
==================================
Total investment outlays..................................................... 247,257 70,290 139,905
----------------------------------------------------------------------------------------------------------------
\1\ Total outlays for ``all types of capital`` are equal to the total for ``major Federal investment outlays''
in Table 6-1. Some capital 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

[[Page 167]]

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 either for a single agency or for the Government as a
whole.
The universe of Federal capital encompasses all 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 2000 is
estimated to be $70.3 billion, or 28 percent of the total Federal
investment outlays shown in Table 6-1. Of the investment in Federal
capital, 74 percent is for defense and 26 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 the
budget for the last two years. 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 smaller
surplus than 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. Depreciation is larger than capital
expenditures by $12 billion. 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,
2000 \1\
(In billions of dollars)
------------------------------------------------------------------------

------------------------------------------------------------------------

Operating Budget

Receipts................................................ 1,883
Expenses:
Depreciation.......................................... 82
Other................................................. 1,695
---------------
Subtotal, expenses.................................. 1,777
---------------
Surplus or deficit (-)................................ 105

Capital Budget

Income: depreciation.................................... 82
Capital expenditures.................................... 70
---------------
Surplus or deficit (-)................................ 12

Unified Budget

Receipts................................................ 1,883
Outlays................................................. 1,766
---------------
Surplus or deficit (-)................................ 117
------------------------------------------------------------------------
\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.

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 a little
more than the unified budget surplus: a surplus $6 billion higher than
the unified budget surplus instead of $12 billion lower as shown above
for the complete coverage of Federal capital. Ex

[[Page 168]]

cluding 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.) As a result, capital
expenditures for defense in 2000 are estimated to be $18 billion less
than depreciation, whereas capital expenditures for nondefense purposes
(plus military family housing) are estimated to be $6 billion more.

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 that typically would be recorded as an
expense in the budget year is 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 in setting
priorities.
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,
``Capital-Investment Budgeting Process'' and ``Capital-Expenditure
Evaluation Methods,'' chap. 19 and 20 in Robert Rachlin, ed., Handbook
of Budgeting (4th ed.; New York: Wiley, 1999).
\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''

[[Page 169]]

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 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 objective 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 heritage assets, or for weapons systems
and other national defense property, plant, and equipment. 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 and other sources 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 as expenditures
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,
1998, 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, which is reflected in the credit
ratings of its bonds. Furthermore, borrowing 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. The French budget, for
example, is divided into separate titles of

[[Page 170]]

which some are for current expenditures and others for capital
expenditures. However, a recent study of European countries found only
four 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.\20\ Some countries--including
Sweden, Denmark, Finland, and the Netherlands--formerly had separate
capital budgets but abandoned them a number of years ago.\21\ The United
Kingdom has adopted a rule that it will borrow only for net investment
(after depreciation), averaged over the economic cycle; and it has
announced plans to budget on an accrual basis, including the
depreciation for capital assets, beginning with its budget for 2001-02.
---------------------------------------------------------------------------
\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.''
\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 Swed ish 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 forma

[[Page 171]]

tion 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.

Table 6-12. UNIFIED BUDGET WITH NATIONAL INVESTMENT COMPONENT, 2000
(In billions of dollars)
------------------------------------------------------------------------

------------------------------------------------------------------------

Receipts................................................. 1,883
Outlays:
National investment.................................... 140
Other.................................................. 1,626
--------------
Subtotal, outlays..................................... 1,766
--------------
Surplus or deficit (-)................................. 117
------------------------------------------------------------------------

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 $140 billion in 2000.
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 12 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.''

Table 6-13. CAPITAL, OPERATING, AND UNIFIED BUDGETS: NATIONAL CAPITAL,
2000 \1\
(In billions of dollars)
------------------------------------------------------------------------

------------------------------------------------------------------------

Operating Budget

Receipts................................................ 1,846
Expenses:
Depreciation \2\...................................... 73
Other................................................. 1,626
---------------
Subtotal, expenses.................................. 1,699
---------------
Surplus or deficit (-)................................ 147

Capital Budget

Income:
Depreciation \2\...................................... 73
Earmarked tax receipts \3\............................ 37
---------------
Subtotal, income.................................... 110
Capital expenditures.................................... 140
---------------
Surplus or deficit (-)................................ -30

Unified Budget

Receipts................................................ 1,883
Outlays................................................. 1,766
---------------
Surplus or deficit (-).............................. 117
------------------------------------------------------------------------
\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\ Excludes depreciation on capital financed by earmarked tax receipts
allocated to the capital budget.
\3\ 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.

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 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

[[Page 172]]

or deficit does not measure the Government's contribution to the
nation's net saving (i.e., saving net of depreciation). 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 16 of this volume, ``National Income and Product
Accounts,'' for the NIPA current account of the Federal Government based
on the budget estimates for 1999 and 2000, and for a discussion of the
NIPA Federal sector and its relationship to the budget.
---------------------------------------------------------------------------
Until three 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
government account: 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 1998 Federal
Government current account surplus was reduced $9.4 billion by including
depreciation rather than gross investment, because depreciation of
federally owned structures and equipment was more than gross investment.
The 2000 Federal current account surplus is estimated to be reduced $6.5
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 1989-2000 in table 16-2 of chapter
16 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 the current replacement cost, not the historical
cost. Current cost depreciation is needed in order to measure all
activities in the budget on a consistent basis, since other outlays and
receipts are automatically measured in the prices of the current year.
Current cost depreciation is also needed to obtain a valid measure of
net investment. This requires that the addition to the capital stock
from new purchases and the subtraction from depreciation on existing
assets both be measured in the prices of the same year. 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 $12 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 ($12 billion). For national capital, Table 6-
13 indicates that current

[[Page 173]]

cost depreciation (plus the excise taxes earmarked to finance capital
expenditures for highways and airports and airways \36\) is less than
gross investment but not by a great deal--the capital budget deficit is
$30 billion. The rationale of borrowing to finance net investment would
justify the Federal Government borrowing this amount ($30 billion) and
no more to finance its investment in national capital.\37\
---------------------------------------------------------------------------
\36\ The capital budget deficit would be about $26 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 12 of this
volume, ``Federal Borrowing and Debt,'' and the explanation of Table 12-
2.
---------------------------------------------------------------------------
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 government)
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.
---------------------------------------------------------------------------
From its outset, this Administration has taken major steps to increase
the saving available for private investment while also increasing
Federal investment for national capital. During the past six years, the
large deficit has been replaced by a substantial surplus, and available
resources have been shifted to investment in education and training and
in science and technology. The present budget proposes to continue to
run substantial surpluses, paying down the debt to make room for
financing private investment, while protecting high priority Federal
investment. A capital budget is not a justification to relax the budget
constraints that are contributing to this accomplishment. Any easing
would undo the gains from achieving a surplus that have already been
achieved and the further gains from the proposals in this budget.

[[Page 174]]

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 1999 enacted appropriations and adjusted for
inflation in later years. The current services concept is discussed in
Chapter 14, ``Current Services Estimates.''
Federal public physical capital spending was $109.8 billion in 1998
and is projected to increase to $146.2 billion by 2008 on a current
services basis. The largest components are for national defense and for
roadways and bridges, which together accounted for almost three-fourths
of Federal public physical capital spending in 1998.
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 $28.5
billion in 1998, and current services outlays are estimated to increase
to $42.3 billion by 2008. Outlays for nondefense housing and buildings
were $12.5 billion in 1998 and are estimated to be $15.5 billion in
2008. Physical capital outlays for other nondefense categories were
$15.2 billion in 1998 and are projected to be $26.8 billion by 2008. For
national defense, this spending was $53.6 billion in 1998 and is
estimated on a current services basis to be $61.6 billion in 2008.
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
1998 -------------------------------------------------------------------------------
Actual 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008
--------------------------------------------------------------------------------------------------------------------------------------------------------
Nondefense:
Transportation-related categories:
Roadways and bridges........................................ 20.2 23.2 25.5 26.7 27.2 27.6 28.1 28.8 29.4 30.1 30.7
Airports and airway facilities.............................. 3.8 3.6 3.9 4.0 4.2 4.3 4.4 4.5 4.6 4.7 4.9
Mass transportation systems................................. 3.9 3.8 3.9 4.6 4.9 5.4 5.5 5.6 5.7 5.9 6.0
Railroads................................................... 0.6 0.4 0.5 0.7 0.7 0.7 0.7 0.7 0.7 0.8 0.8
---------------------------------------------------------------------------------------
Subtotal, transportation.................................. 28.5 31.0 33.8 35.9 37.0 38.0 38.8 39.7 40.6 41.4 42.3
Housing and buildings categories:
Federally assisted housing.................................. 7.9 6.9 8.0 8.8 8.8 9.1 9.1 9.0 9.2 9.2 9.4
Hospitals................................................... 1.8 1.8 1.9 1.9 1.8 1.8 1.8 1.8 1.8 1.8 1.8
Public buildings \1\........................................ 2.8 3.3 3.4 3.7 3.9 4.0 4.0 4.1 4.2 4.2 4.3
---------------------------------------------------------------------------------------
Subtotal, housing and buildings categories.................. 12.5 12.1 13.3 14.3 14.6 14.9 14.9 14.9 15.2 15.3 15.5
Other nondefense categories:
Wastewater treatment and related facilities................. 2.5 2.8 2.9 3.1 3.1 3.2 3.3 3.3 3.4 3.5 3.5
Water resources projects.................................... 2.3 3.3 3.1 3.1 3.0 3.2 3.2 3.3 3.4 3.5 3.5
Space and communications facilities......................... 3.1 2.7 3.2 3.4 3.6 3.5 3.8 3.2 3.3 3.3 3.4
Energy programs............................................. 0.9 1.1 0.8 0.9 1.2 1.3 1.5 1.5 1.5 1.6 1.6
Community development programs.............................. 5.3 5.5 5.4 5.5 5.6 5.7 5.8 6.0 6.1 6.2 6.4
Other nondefense............................................ 1.1 7.2 6.6 7.2 6.8 7.5 7.6 7.7 7.9 8.2 8.4
---------------------------------------------------------------------------------------
Subtotal, other nondefense................................ 15.2 22.6 22.1 23.3 23.2 24.4 25.3 25.0 25.6 26.2 26.8
---------------------------------------------------------------------------------------
Subtotal, nondefense........................................ 56.2 65.7 69.2 73.5 74.8 77.3 79.0 79.5 81.4 82.9 84.6
National defense.............................................. 53.6 53.5 52.0 54.5 55.7 56.9 58.2 59.5 59.1 60.4 61.6
---------------------------------------------------------------------------------------
Total........................................................... 109.8 119.1 121.3 128.0 130.5 134.2 137.2 139.1 140.4 143.3 146.2
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Excludes outlays for public buildings that are included in other categories in this table.

[[Page 175]]

Table 6-15. CURRENT SERVICES OUTLAY PROJECTIONS FOR FEDERAL PHYSICAL CAPITAL SPENDING
(In billions of constant 1992 dollars)
----------------------------------------------------------------------------------------------------------------
Estimate
1998 ---------------------------------------
Actual 1999 2000 2001 2002 2003
----------------------------------------------------------------------------------------------------------------
Nondefense:
Transportation-related categories:
Roadways and bridges........................................ 17.7 20.0 21.5 21.9 21.9 21.7
Airports and airway facilities.............................. 3.6 3.4 3.5 3.5 3.6 3.7
Mass transportation systems................................. 3.4 3.3 3.3 3.8 4.0 4.2
Railroads................................................... 0.6 0.4 0.5 0.6 0.6 0.6
-----------------------------------------------
Subtotal, transportation.................................. 25.3 27.0 28.8 29.9 30.0 30.2
Housing and buildings categories:
Federally assisted housing.................................. 7.1 6.0 6.8 7.2 7.1 7.2
Hospitals................................................... 1.8 1.8 1.8 1.7 1.7 1.6
Public buildings \1\........................................ 2.8 3.3 3.3 3.4 3.6 3.6
-----------------------------------------------
Subtotal, housing and buildings categories................ 11.7 11.0 11.9 12.4 12.4 12.4
Other nondefense categories:
Wastewater treatment and related facilities................. 2.2 2.4 2.5 2.6 2.5 2.5
Water resources projects.................................... 2.2 3.2 2.9 2.9 2.7 2.8
Space and communications facilities......................... 3.0 2.6 3.1 3.2 3.3 3.1
Energy programs............................................. 0.9 1.1 0.8 0.8 1.1 1.1
Community development programs.............................. 4.7 4.7 4.6 4.5 4.5 4.5
Other nondefense............................................ 0.9 6.9 6.2 6.5 6.0 6.6
-----------------------------------------------
Subtotal, other nondefense................................ 13.9 20.9 20.0 20.6 20.2 20.7
-----------------------------------------------
Subtotal, nondefense........................................ 50.9 58.9 60.7 62.9 62.6 63.3
-----------------------------------------------
National defense.............................................. 49.5 48.7 46.5 47.7 47.7 47.8
===============================================
Total........................................................... 100.4 107.7 107.2 110.7 110.3 111.1
----------------------------------------------------------------------------------------------------------------
\1\ Excludes outlays for public buildings that are included in other categories in this table.

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 176]]

Significant Factors Affecting Infrastructure Needs Assessments

Highways

1. Projected annual average growth in travel to the year 2015. 1.96 percent
2. Annual cost to maintain overall 1995 conditions and
performance on highways eligible for Federal-aid............. $33.4 billion (1995 dollars)
3. Annual cost to maintain overall 1995 conditions on bridges. $5.6 billion (1995 dollars)

Airports and Airway Facilities

1. Airports in the National Plan of Integrated Airport Systems
with scheduled passenger traffic............................. 528
2. Air traffic control towers................................. 451
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......................... $6.1 billion (1995 dollars)
2. Yearly cost to replace and maintain the urban, rural, and
special services bus fleet and facilities.................... $3.6 billion (1995 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 $72 billion
1972 through 1999.
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 (1998)........................ 45.0 percent
2. Average length of stay, IHS hospitals (days) (1998)........ 4.1
3. Hospital admissions (1998)................................. 57,114
4. Outpatient visits (1997)................................... 4,224,095
5. Eligible population (1999)................................. 1,485,508

Department of Veterans Affairs (VA) Hospitals (1998)
1. Hospitals.................................................. 166
2. Ambulatory clinics......................................... 544
3. Domiciliaries.............................................. 40
4. Vet centers................................................ 206
5. Nursing homes.............................................. 132

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 177]]

Surface Transportation

Department of Transportation. 1997 Status of the Nation's Surface
Transportation System: Conditions and Performance: Report to Congress.
1997. This report discusses roads, bridges, and mass transit.

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--1997. 1997.
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 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.