[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.

                                     

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          The President's Commission to Study Capital Budgeting




  The President established the Commission to Study Capital Budgeting in
1997 with a charge to prepare a wide-ranging report on different aspects
of capital budgeting including practices outside the Federal Government,
the definition of capital, the role of depreciation, and the effect of a
capital budget on budgeting choices, macroeconomic stabilization, and
budgetary discipline. The Commission issued its report in February 1999.
The Commission proposed a series of recommendations to improve each part
of the budget process: setting priorities, making current budget
decisions, reporting on these decisions, and subsequently evaluating
them.

  The Commission's broadest and most fundamental conclusion was that
insufficient attention is paid to the long-run consequences of all
budget decisions. The report included two recommendations to facilitate
the setting of priorities among all programs, not just those involving
capital expenditures. The first recommended integration of the planning
under the Government Performance and Results Act (GPRA) with budgeting
in the form of annually revised five-year plans, and greater emphasis by
decision-makers in the Executive Branch and Congress on the longer-run
implications of current year decisions. The second recommended an
ongoing effort within the Federal government to analyze the benefits and
costs of all major government programs as a guide to future policies.
The report also recommended evaluating the benefits and costs of major
investment projects undertaken in the past.

  In the instructions for the FY 2001 budget, the Administration
encouraged agencies to integrate their annual performance plan and
budget justification. Although time for this undertaking was short,
several agencies submitted integrated documents or more information on
the budgetary resources to be applied to specific performance
objectives. The same instructions provided guidance for the first annual
performance reports due to Congress this March. They are to include, not
only comparisons of actual performance with the projected levels that
had been set forth in agency performance plans and analysis of those
comparisons, but also summaries of all program evaluations, cost-benefit
studies, and other policy, program, and management analyses. As noted in
Section V of the Budget, the Admini-

                        (Continued on next page)


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                        The President's Commission to Study Capital Budgeting--Continued




stration's Priority Management Objective #1 includes implementing greater integration of planning with

  The Commission did not endorse a single definition of capital, but said distinctions among different types of
capital spending were warranted for different purposes. It did not recommend changing the budget to make the
size of the deficit or surplus depend on the amount of expenditures defined as capital, to finance capital
spending by borrowing, or to make a single decision about how much to spend for ``capital'' under some
definition. The Commission found that the current system has biases toward both too much and too little capital
spending, but did not believe anyone could say authoritatively which effect was stronger. It recommended up-
front full funding for capital projects, or usable segments thereof, and strict adherence to existing rules that
govern the scoring of leases. The Administration plans to continue these policies.

  However, the Commission concluded that capital spending is inefficiently allocated among projects, and that
the current process shortchanges the maintenance of existing assets. To promote better planning and budgeting of
capital expenditures for federally owned facilities, the Commission recommended that the Executive Branch and
the Congress experiment with capital acquisition funds (CAFs) that would help smooth lumpiness in appropriations
by aggregating capital requests for the agency, and match cost with program results by a capital usage charge on
the asset-using programs. Another recommendation was to experiment with incentives for agencies to manage their
assets more efficiently, for example by permitting them to keep a limited portion of revenues from selling
assets. Other recommendations concerned developing and publishing more detailed information about the
composition and condition of capital assets, and retrospectively assessing the extent to which major investment
projects have produced returns in excess of the cost of capital.

  The Administration is exploring options for capital acquisition funds as part of its effort to integrate
planning and budgeting, and to charge for resources in alignment with their use to achieve program results.
Implementation would require better information on existing assets, and would provide an incentive for more
attention to efficient asset management. The Capital Programming Guide is being updated to provide specific
examples and to improve understanding of the linkages between its four stages: planning, budgeting, acquisition,
and management-in-use. In particular, this will emphasize how knowledge of the condition, maintenance, use, and
value of existing assets feed back into the next cycle of planning. An inter-agency task force is working to
develop standardized methods to estimate deferred maintenance. Meanwhile, a variety of other efforts are ongoing
to improve information on existing assets and new capital projects and to more fully implement existing guidance
on improving capital planning and acquisition. Furthermore, the General Services Administration has developed a
draft legislative proposal allowing agencies to keep a share of the proceeds from disposing of real property,
which should give them an incentive to dispose of real property they no longer need.

1 The Report of the President's Commission to Study Capital Budgeting (February 1999) was published by the U.S.
 Government Printing Office and is also available, together with testimony and other supporting materials, on
 the Internet at http:/www.whitehouse.gov/pcscb.



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                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 2005.
  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 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 24, ``Budget 
System and Concepts and Glossary.''
  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 $240.2 billion in 1999. 
They are estimated to increase to $254.3 billion in 2000 and to increase 
further to $267.2 billion in 2001. Major Federal investment will 
comprise an estimated 14.6 percent of total Federal outlays in 2001 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.

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  Physical investment.--Outlays for major public physical capital 
investment (hereafter referred to as physical investment outlays) are 
estimated to be $130.2 billion in 2001. Physical investment outlays are 
for construction and rehabilitation, the purchase of major equipment, 
and the purchase or sale of land and structures. An estimated 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 $53.9 billion in 1999 and are estimated to increase to $56.2 
billion in 2001. Almost all of these outlays, or $51.1 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 are estimated to increase in 2002 and beyond 
in response to increases in defense budget authority enacted for 2000 
and requested for 2001 and later years in this budget.

                              Table 6-1.  COMPOSITION OF FEDERAL INVESTMENT OUTLAYS
                                            (In billions of dollars)
----------------------------------------------------------------------------------------------------------------
                                                                                                   Estimate
                                                                                       1999  -------------------
                                                                                     actual     2000      2001
----------------------------------------------------------------------------------------------------------------
                                Federal Investment

Major public physical capital investment:
  Direct Federal:
    National defense..............................................................      53.9      53.3      56.2
    Nondefense....................................................................      20.8      22.4      22.4
                                                                                   -----------------------------
      Subtotal, direct major public physical capital investment...................      74.7      75.7      78.5

Grants to State and local governments.............................................      43.9      48.7      51.7
                                                                                   -----------------------------
       Subtotal, major public physical capital investment.........................     118.6     124.4     130.2

Conduct of research and development:
  National defense................................................................      40.3      40.4      40.9
  Nondefense......................................................................      33.9      36.1      39.4
                                                                                   -----------------------------
      Subtotal, conduct of research and development...............................      74.1      76.5      80.4

Conduct of education and training:
  Grants to State and local governments...........................................      28.4      33.1      34.9
  Direct Federal..................................................................      19.0      20.3      21.7
                                                                                   -----------------------------
      Subtotal, conduct of education and training.................................      47.4      53.4      56.6
                                                                                   -----------------------------
Total, major Federal investment outlays...........................................     240.2     254.3     267.2

                                    MEMORANDUM

Major Federal investment outlays:
  National defense................................................................      94.2      93.7      97.1
  Nondefense......................................................................     146.0     160.6     170.1
                                                                                   -----------------------------
Total, major Federal investment outlays...........................................     240.2     254.3     267.2
Miscellaneous physical investments:
  Commodity inventories...........................................................        -*      -0.2      -0.3
  Other physical investment (direct)..............................................       2.6       3.3       4.1
                                                                                   -----------------------------
    Total, miscellaneous physical investment......................................       2.5       3.1       3.8
                                                                                   -----------------------------
Total, Federal investment outlays, including miscellaneous physical investment....     242.7     257.4     271.0
----------------------------------------------------------------------------------------------------------------
* Indicates $50 million or less.

  Outlays for direct physical investment for nondefense purposes are 
estimated to be $22.4 billion in 2001. These outlays include $13.3 
billion for construction and rehabilitation. This amount includes funds 
for 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; facilities for space and 
science programs, and Indian Health Service hospitals and clinics. 
Outlays for the acquisition of major equipment are estimated to be $8.2 
billion in 2001. The largest amounts are for the air traffic control 
system and the Postal Service. For the purchase or sale of land and 
structures, disbursements are estimated to exceed collections by $0.8 
billion in 2001. These purchases are largely for buildings and land for 
parks and other recreation purposes.
  Grants to State and local governments for physical investment are 
estimated to be $51.7 billion in 2001. Almost two-thirds of these 
outlays, or $33.6 billion, are to assist States and localities with 
transportation infra

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structure, 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 $80.4 billion in 2001. 
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 $40.9 billion in 2001, 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 $39.4 billion in 2001. This 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 $56.6 billion in 2001. 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 $34.9 billion in 2001, 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 Federal education and training outlays are estimated to be $21.7 
billion in 2001. 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.
  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 2001.
  Outlays for other miscellaneous physical investment are estimated to 
be $4.1 billion in 2001. This category includes primarily conservation 
programs. These are entirely direct Federal outlays.

                 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 2005. Table 6-2 displays budget authority (BA) and 
outlays (O) by major programs according to defense and nondefense 
categories. The greatest level of detail appears in Table 6-3, which 
shows budget authority and outlays divided according to grants to State 
and local governments and direct Federal spending. Miscellaneous 
investment is not included in these tables because it is generally 
unrelated to improving Government operations or enhancing economic 
activity.

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                               Table 6-2. FEDERAL INVESTMENT BUDGET AUTHORITY AND OUTLAYS: DEFENSE AND NONDEFENSE PROGRAMS
                                                                (in millions of dollars)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                 Estimate
                Description                                              1999    -----------------------------------------------------------------------
                                                                        Actual       2000        2001        2002        2003        2004        2005
--------------------------------------------------------------------------------------------------------------------------------------------------------
             NATIONAL DEFENSE
Major public physical investment:
  Construction and rehabilitation.........  BA                            5,083       5,556       4,568       4,775       4,434       4,590       4,810
                                            O                             4,871       4,915       5,120       4,577       4,471       4,444       4,588
  Acquisition of major equipment..........  BA                           51,165      54,351      60,045      62,276      65,915      67,063      70,444
                                            O                            49,040      48,444      51,076      53,405      59,248      62,874      65,607
  Purchase or sale of land and structures.  BA                              -31         -30         -27         -29         -29         -29         -29
                                            O                               -31         -30         -27         -29         -29         -29         -29
                                                                     -----------------------------------------------------------------------------------
    Subtotal, major public physical         BA                           56,217      59,877      64,586      67,022      70,320      71,624      75,225
     investment.
                                            O                            53,880      53,329      56,169      57,953      63,690      67,289      70,166
                                                                     -----------------------------------------------------------------------------------
Conduct of research and development.......  BA                           41,275      41,263      41,369      41,867      41,096      40,890      39,794
                                            O                            40,276      40,409      40,914      40,990      40,827      40,621      39,987
Conduct of education and training           BA                                3           8           7          10          10          10          10
 (civilian).
                                            O                                 6           8           7          10          10          10          10
                                                                     -----------------------------------------------------------------------------------
  Subtotal, national defense investment...  BA                           97,495     101,148     105,962     108,899     111,426     112,524     115,029
                                            O                            94,162      93,746      97,090      98,953     104,527     107,920     110,163
                NONDEFENSE
Major public physical investment:
  Construction and rehabilitation:
    Highways..............................  BA                           29,164      31,115      33,339      30,579      30,595      31,192      31,802
                                            O                            22,723      25,420      27,210      27,875      27,348      27,166      27,184
    Mass transportation...................  BA                            4,753       5,513       6,136       6,558       7,025       7,166       7,309
                                            O                             4,024       4,301       4,466       5,223       5,740       6,403       6,755
    Rail transportation...................  BA                                6          11          37          37          37          18          18
                                            O                                61          61          10          26          32          32          27
    Air transportation....................  BA                            2,382       1,973       2,037       2,088       2,142       2,198       2,254
                                            O                             1,619       1,969       1,984       2,031       2,086       2,144       2,191
    Community development block grants....  BA                            4,893       4,781       4,900       4,900       4,959       5,077       5,188
                                            O                             4,804       4,856       4,826       4,957       4,998       5,073       4,979
    Other community and regional            BA                            1,552       1,523       2,015       2,015       2,034       2,085       2,124
     development.
                                            O                             1,289       1,512       1,572       1,713       1,868       2,019       2,078
    Pollution control and abatement.......  BA                            4,118       4,064       3,505       3,505       3,545       3,628       3,706
                                            O                             3,749       3,917       4,111       4,065       4,013       4,012       4,045
    Water resources.......................  BA                            3,176       3,166       3,782       3,819       3,866       3,965       4,056
                                            O                             2,845       3,771       3,740       3,821       3,974       4,009       4,106
    Housing assistance....................  BA                            6,982       6,849       7,196       7,196       7,282       7,463       7,627
                                            O                             6,389       7,122       7,675       7,479       7,779       8,443       8,656
    Energy................................  BA                              957         977         865         906         892       1,128       1,200
                                            O                               955         975         863         903         889       1,126       1,198
    Veterans hospitals and other health...  BA                            1,479       1,237       1,323       1,325       1,316       1,345       1,376
                                            O                             1,427       1,302       1,402       1,399       1,350       1,352       1,368
    Postal Service........................  BA                            1,629       1,457       1,017       1,485       1,742       1,509       1,625
                                            O                             1,675       1,225       1,044       1,457       1,574       1,609       1,580
    GSA real property activities..........  BA                            1,452         753       1,501       1,199       1,180       1,189       1,154
                                            O                               958         976       1,116       1,155       1,295       1,387       1,324
    Other programs........................  BA                            3,760       2,815       3,932       4,125       4,024       3,721       3,768
                                            O                             2,884       3,734       3,644       3,711       3,993       3,950       3,756
                                                                     -----------------------------------------------------------------------------------
      Subtotal, construction and            BA                           66,303      66,234      71,585      69,737      70,639      71,684      73,207
       rehabilitation.
                                            O                            55,402      61,141      63,663      65,816      66,939      68,726      69,249
                                                                     -----------------------------------------------------------------------------------
  Acquisition of major equipment:
    Air transportation....................  BA                            2,130       2,032       2,455       2,505       2,567       2,643       2,733
                                            O                             2,234       1,806       1,965       2,294       2,410       2,576       2,650
    Postal Service........................  BA                              580         848         818         745         744         530         610
                                            O                               467         736         714         778         588         832         520
    Other.................................  BA                            5,754       5,230       6,422       6,384       6,388       6,398       6,490
                                            O                             4,598       5,480       5,568       5,953       6,207       6,217       6,340
                                                                     -----------------------------------------------------------------------------------
      Subtotal, acquisition of major        BA                            8,464       8,110       9,695       9,634       9,699       9,571       9,833
       equipment.
                                            O                             7,299       8,022       8,247       9,025       9,205       9,625       9,510
                                                                     -----------------------------------------------------------------------------------
  Purchase or sale of land and structures.  BA                              676         921         688         365         375         700         704
                                            O                             1,014         910         866         581         640         896         921

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  Other physical assets (grants)..........  BA                              990       1,074       1,481       1,504       1,555       1,587       1,629
                                            O                             1,048       1,023       1,280       1,314       1,379       1,446       1,491
                                                                     -----------------------------------------------------------------------------------
    Subtotal, major public physical         BA                           76,433      76,339      83,449      81,240      82,268      83,542      85,373
     investment.
                                            O                            64,763      71,096      74,056      76,736      78,163      80,693      81,171
                                                                     -----------------------------------------------------------------------------------
Conduct of research and development:
  General science, space and technology...  BA                           12,983      13,386      14,355      14,792      15,297      15,928      16,345
                                            O                            12,547      13,100      13,564      14,327      15,098      15,638      16,191
  Energy..................................  BA                            1,196       1,259       1,340       1,341       1,356       1,401       1,432
                                            O                             1,285       1,373       1,543       1,660       1,667       1,660       1,658
  Transportation..........................  BA                            1,665       1,495       1,534       1,524       1,557       1,583       1,601
                                            O                             1,582       1,249       1,507       1,531       1,558       1,581       1,597
  Health..................................  BA                           15,476      17,683      18,634      18,626      18,821      19,283      19,706
                                            O                            13,696      15,448      17,703      18,759      18,652      18,895      19,284
  Natural resources and environment.......  BA                            1,997       1,911       1,941       1,943       1,967       2,017       2,062
                                            O                             1,732       1,671       1,689       1,748       1,797       1,825       1,852
  All other research and development......  BA                            3,245       3,294       3,504       3,379       3,423       3,506       3,581
                                            O                             3,018       3,213       3,441       3,560       3,712       3,793       3,873
                                                                     -----------------------------------------------------------------------------------
    Subtotal, conduct of research and       BA                           36,562      39,028      41,308      41,605      42,421      43,718      44,727
     development.
                                            O                            33,860      36,054      39,447      41,585      42,484      43,392      44,455
                                                                     -----------------------------------------------------------------------------------
Conduct of education and training:
  Education, training, employment and
   social services:
    Elementary, secondary, and vocational   BA                           16,804      17,113      26,744      26,742      26,876      27,161      27,419
     education.
                                            O                            17,530      21,240      22,406      24,088      26,590      26,916      27,170
    Higher education......................  BA                           13,674      12,356      13,448      14,849      16,046      16,436      17,086
                                            O                            11,773      11,634      12,387       4,043       5,130      15,833      16,397
    Research and general education aids...  BA                            2,277       2,303       2,424       2,439       2,477       2,504       2,560
                                            O                             2,036       2,409       2,427       2,389       2,407       2,463       2,514
    Training and employment...............  BA                            6,683       2,849       5,997       5,950       6,022       6,171       6,306
                                            O                             4,890       6,024       6,441       5,930       6,186       6,108       6,152
    Social services.......................  BA                            7,371       6,668       9,187       8,910       9,060       9,299       9,524
                                            O                             7,178       7,708       8,277       8,697       8,715       8,841       9,033
                                                                     -----------------------------------------------------------------------------------
      Subtotal, education, training, and    BA                           46,809      41,289      57,800      58,890      60,481      61,571      62,895
       social services.
                                            O                            43,407      49,015      51,938      45,147      49,028      60,161      61,266
                                                                     -----------------------------------------------------------------------------------
  Veterans education, training, and         BA                            1,360       1,697       1,886       1,906       1,909       1,925       1,955
   rehabilitation.
                                            O                             1,643       1,737       1,937       1,904       1,909       1,923       1,968
  Health..................................  BA                            1,021       1,090       1,067       1,067       1,079       1,103       1,125
                                            O                               891       1,007       1,050       1,083       1,071       1,083       1,104
  Other education and training............  BA                            1,663       1,680       1,824       1,724       1,745       1,790       1,835
                                            O                             1,453       1,641       1,658       1,717       1,755       1,761       1,779
                                                                     -----------------------------------------------------------------------------------
    Subtotal, conduct of education and      BA                           50,853      45,756      62,577      63,587      65,214      66,389      67,810
     training.
                                            O                            47,394      53,400      56,583      49,851      53,763      64,928      66,117
                                                                     -----------------------------------------------------------------------------------
  Subtotal, nondefense investment.........  BA                          163,848     161,123     187,334     186,432     189,903     193,649     197,910
                                            O                           146,017     160,550     170,086     168,172     174,410     189,013     191,743
                                                                     ===================================================================================
Total, Federal investment.................  BA                          261,343     262,271     293,296     295,331     301,329     306,173     312,939
                                            O                           240,179     254,296     267,176     267,125     278,937     296,933     301,906
--------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 150]]


                              Table 6-3. FEDERAL INVESTMENT BUDGET AUTHORITY AND OUTLAYS: GRANT AND DIRECT FEDERAL PROGRAMS
                                                                (in millions of dollars)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                 Estimate
                Description                                              1999    -----------------------------------------------------------------------
                                                                        Actual       2000        2001        2002        2003        2004        2005
--------------------------------------------------------------------------------------------------------------------------------------------------------
   GRANTS TO STATE AND LOCAL GOVERNMENTS
Major public physical investments:
  Construction and rehabilitation:
    Highways..............................  BA                           28,964      31,115      33,339      30,579      30,595      31,192      31,802
                                            O                            22,722      25,416      27,205      27,875      27,348      27,166      27,184
    Mass transportation...................  BA                            4,753       5,517       6,136       6,558       7,025       7,166       7,309
                                            O                             4,024       4,301       4,466       5,223       5,740       6,403       6,755
    Rail transportation...................  BA                        ..........  ..........  ..........  ..........  ..........  ..........  ..........
                                            O                                32          17   ..........  ..........  ..........  ..........  ..........
    Air transportation....................  BA                            2,322       1,896       1,950       1,999       2,050       2,103       2,158
                                            O                             1,565       1,896       1,899       1,943       1,994       2,049       2,095
    Pollution control and abatement.......  BA                            2,769       2,787       2,071       2,071       2,096       2,147       2,195
                                            O                             2,180       2,470       2,726       2,656       2,551       2,486       2,466
    Other natural resources and             BA                               52          46          17          17          17          18          18
     environment.
                                            O                                53          72          59          39          34          26          27
    Community development block grants....  BA                            4,893       4,781       4,900       4,900       4,959       5,077       5,188
                                            O                             4,804       4,856       4,826       4,957       4,998       5,073       4,979
    Other community and regional            BA                            1,208       1,210     T21,435       1,435       1,449       1,483       1,511
     development.
                                            O                               983       1,252       1,222       1,307       1,356       1,447       1,493
    Housing assistance....................  BA                            6,956       6,821       7,156       7,156       7,242       7,422       7,585
                                            O                             6,368       7,096       7,643       7,440       7,739       8,402       8,614
    Other construction....................  BA                              166         264         251         253         254         260         264
                                            O                               126         220         294         305         295         283         287
                                                                     -----------------------------------------------------------------------------------
      Subtotal, construction and            BA                           52,083      54,437      57,255      54,968      55,687      56,868      58,028
       rehabilitation.
                                            O                            42,857      47,596      50,340      51,745      52,055      53,335      53,900
                                                                     -----------------------------------------------------------------------------------
  Other physical assets...................  BA                            1,050       1,121       1,639       1,662       1,694       1,691       1,737
                                            O                             1,081       1,102       1,344       1,416       1,505       1,581       1,609
                                                                     -----------------------------------------------------------------------------------
    Subtotal, major public physical         BA                           53,133      55,558      58,894      56,630      57,381      58,559      59,767
     capital.
                                            O                            43,938      48,698      51,684      53,161      53,560      54,916      55,509
                                                                     -----------------------------------------------------------------------------------
Conduct of research and development:
  Agriculture.............................  BA                              239         257         273         258         261         268         273
                                            O                               210         233         255         239         256         261         261
  Other...................................  BA                              178         209         239         228         227         230         233
                                            O                                98         134         222         227         232         234         236
                                                                     -----------------------------------------------------------------------------------
    Subtotal, conduct of research and       BA                              417         466         512         486         488         498         506
     development.
                                            O                               308         367         477         466         488         495         497
                                                                     -----------------------------------------------------------------------------------
Conduct of education and training:
  Elementary, secondary, and vocational     BA                           15,548      15,336      22,582      22,441      22,549      22,776      22,983
   education.
                                            O                            16,684      20,035      20,804      21,267      22,789      22,793      22,969
  Higher education........................  BA                              157         190         233         233         236         242         248
                                            O                                65         157         190         168         175         220         225
  Research and general education aids.....  BA                              573         438         508         524         532         522         532
                                            O                               389         592         501         476         479         490         497
  Training and employment.................  BA                            5,110       1,774       3,882       3,852       3,898       3,995       4,082
                                            O                             3,712       4,558       4,938       4,394       4,585       4,465       4,476
  Social services.........................  BA                            7,072       6,340       8,814       8,753       8,901       9,136       9,358
                                            O                             7,027       7,235       7,933       8,485       8,560       8,691       8,880
  Agriculture.............................  BA                              437         434         443         428         433         444         454
                                            O                               416         460         432         433         438         444         451
  Other...................................  BA                              114         114         119         117         117         121         123
                                            O                                92         107         108         114         111         111         113
                                                                     -----------------------------------------------------------------------------------
    Subtotal, conduct of education and      BA                           29,011      24,626      36,581      36,348      36,666      37,236      37,780
     training.
                                            O                            28,385      33,144      34,906      35,337      37,137      37,214      37,611
                                                                     -----------------------------------------------------------------------------------
  Subtotal, grants for investment.........  BA                           82,561      80,650      95,987      93,464      94,534      96,293      98,051
                                            O                            72,631      82,209      87,067      88,964      91,185      92,625      93,617
          DIRECT FEDERAL PROGRAMS
Major public physical investment:
  Construction and rehabilitation:
    National defense:
      Military construction...............  BA                            3,553       4,053       3,193       3,625       3,255       3,376       3,568

[[Page 151]]


                                            O                             3,369       3,274       3,660       3,468       3,335       3,292       3,407
      Family housing......................  BA                              709         772         752         527         549         566         581
                                            O                               731         898         801         445         464         467         481
      Atomic energy defense activities and  BA                              821         731         623         623         630         648         661
       other.
                                            O                               771         743         659         664         672         685         700
                                                                     -----------------------------------------------------------------------------------
        Subtotal, national defense........  BA                            5,083       5,556       4,568       4,775       4,434       4,590       4,810
                                            O                             4,871       4,915       5,120       4,577       4,471       4,444       4,588
                                                                     -----------------------------------------------------------------------------------
    International affairs.................  BA                              544         370         726         824         922       1,021       1,021
                                            O                               368         395         455         565         650         732         782
    General science, space, and technology  BA                              424         377         612         621         625         632         640
                                            O                               413         494         616         634         641         646         655
    Water resources projects..............  BA                            3,124       3,125       3,765       3,802       3,849       3,947       4,038
                                            O                             2,793       3,705       3,682       3,783       3,941       3,984       4,080
    Other natural resources and             BA                            1,818       1,699       1,810       1,813       1,828       1,867       1,903
     environment.
                                            O                             1,809       1,845       1,742       1,756       1,800       1,871       1,926
    Energy................................  BA                              957         977         865         906         892       1,128       1,200
                                            O                               955         975         863         903         889       1,126       1,198
    Postal Service........................  BA                            1,629       1,457       1,017       1,485       1,742       1,509       1,625
                                            O                             1,675       1,225       1,044       1,457       1,574       1,609       1,580
    Transportation........................  BA                              501         224         284         286         292         280         285
                                            O                               242         309         269         287         287         294         296
    Housing assistance....................  BA                               26          28          40          40          40          41          42
                                            O                                21          26          32          39          40          41          42
    Veterans hospitals and other health     BA                            1,389       1,147       1,263       1,265       1,255       1,283       1,312
     facilities.
                                            O                             1,387       1,238       1,317       1,314       1,275       1,292       1,308
    Federal Prison System.................  BA                              364         441         713         807         590         137         140
                                            O                               387         365         568         650         811         650         376
    GSA real property activities..........  BA                            1,452         753       1,501       1,199       1,180       1,189       1,154
                                            O                               958         976       1,116       1,155       1,295       1,387       1,324
    Other construction....................  BA                            1,992       1,199       1,734       1,721       1,738       1,783       1,819
                                            O                             1,537       1,992       1,619       1,528       1,681       1,759       1,782
                                                                     -----------------------------------------------------------------------------------
      Subtotal, construction and            BA                           19,303      17,353      18,898      19,544      19,387      19,407      19,989
       rehabilitation.
                                            O                            17,416      18,460      18,443      18,648      19,355      19,835      19,937
                                                                     -----------------------------------------------------------------------------------
  Acquisition of major equipment:
    National defense:
      Department of Defense...............  BA                           50,983      54,191      59,890      62,121      65,760      66,902      70,281
                                            O                            48,824      48,282      50,918      53,243      59,082      62,706      65,436
      Atomic energy defense activities....  BA                              182         160         155         155         155         161         163
                                            O                               216         162         158         162         166         168         171
                                                                     -----------------------------------------------------------------------------------
        Subtotal, national defense........  BA                           51,165      54,351      60,045      62,276      65,915      67,063      70,444
                                            O                            49,040      48,444      51,076      53,405      59,248      62,874      65,607
                                                                     -----------------------------------------------------------------------------------
    General science and basic research....  BA                              398         410         476         481         477         482         488
                                            O                               372         382         411         448         473         481         488
    Space flight, research, and supporting  BA                              666         582         587         586         558         559         555
     activities.
                                            O                               662         581         575         581         562         554         551
    Energy................................  BA                              123         121         118         241         247         165         187
                                            O                               123         121         118         241         247         165         187
    Postal Service........................  BA                              580         848         818         745         744         530         610
                                            O                               467         736         714         778         588         832         520
    Air transportation....................  BA                            2,130       2,032       2,455       2,505       2,567       2,643       2,733
                                            O                             2,234       1,806       1,965       2,294       2,410       2,576       2,650
    Water transportation (Coast Guard)....  BA                              418         254         343         343         347         356         364
                                            O                               266         282         269         313         317         328         340
    Other transportation (railroads)......  BA                              609         571         989         521         527         540         552
                                            O                               244         597         598         686         901         958       1,025
    Social security.......................  BA                        ..........  ..........  ..........  ..........  ..........  ..........  ..........
                                            O                                72          44          21          22          24          26          27
    Hospital and medical care for veterans  BA                              253         550         626         626         634         649         663
                                            O                               172         474         561         555         562         574         587
    Department of Justice.................  BA                              389         566         612         613         619         636         650
                                            O                               338         686         570         628         644         659         673

[[Page 152]]


    Department of the Treasury............  BA                              852         293         403         571         574         581         588
                                            O                               594         489         406         452         516         530         539
    GSA general supply fund...............  BA                              585         610         644         676         709         744         781
                                            O                               534         610         644         676         709         744         781
    Other.................................  BA                            1,401       1,226       1,466       1,568       1,557       1,582       1,554
                                            O                             1,188       1,135       1,331       1,249       1,126       1,063       1,024
                                                                     -----------------------------------------------------------------------------------
      Subtotal, acquisition of major        BA                           59,569      62,414      69,582      71,752      75,475      76,530      80,169
       equipment.
                                            O                            56,306      56,387      59,259      62,328      68,327      72,364      74,999
                                                                     -----------------------------------------------------------------------------------
  Purchase or sale of land and structures:
    National defense......................  BA                              -31         -30         -27         -29         -29         -29         -29
                                            O                               -31         -30         -27         -29         -29         -29         -29
    International affairs.................  BA                               83         254          27          31          35          38          38
                                            O                                83         167         177         195         204         186         194
    Privatization of Elk Hills............  BA                        ..........  ..........  ..........  ..........       -323   ..........  ..........
                                            O                         ..........  ..........  ..........  ..........       -323   ..........  ..........
    Other.................................  BA                              593         667         661         334         663         662         666
                                            O                               931         743         689         386         759         710         727
                                                                     -----------------------------------------------------------------------------------
      Subtotal, purchase or sale of land    BA                              645         891         661         336         346         671         675
       and structures.
                                            O                               983         880         839         552         611         867         892
                                                                     -----------------------------------------------------------------------------------
    Subtotal, major public physical         BA                           79,517      80,658      89,141      91,632      95,208      96,608     100,833
     investment.
                                            O                            74,705      75,728      78,541      81,526      88,293      93,065      95,828
                                                                     -----------------------------------------------------------------------------------
Conduct of research and development:
  National defense
    Defense military......................  BA                           38,569      38,471      38,254      38,752      37,945      37,633      36,492
                                            O                            37,571      37,619      37,805      37,845      37,653      37,364      36,691
    Atomic energy and other...............  BA                            2,706       2,792       3,115       3,115       3,151       3,257       3,302
                                            O                             2,705       2,790       3,109       3,145       3,174       3,257       3,296
                                                                     -----------------------------------------------------------------------------------
      Subtotal, national defense..........  BA                           41,275      41,263      41,369      41,867      41,096      40,890      39,794
                                            O                            40,276      40,409      40,914      40,990      40,827      40,621      39,987
                                                                     -----------------------------------------------------------------------------------
  International affairs...................  BA                              190         142         114         114         115         118         120
                                            O                               220         179         189         304         329         342         365
  General science, space and technology
    NASA..................................  BA                            8,281       8,481       8,813       9,240       9,732      10,291      10,614
                                            O                             8,316       8,479       8,503       8,849       9,419       9,938      10,388
    National Science Foundation...........  BA                            2,477       2,676       3,193       3,189       3,227       3,306       3,378
                                            O                             2,144       2,364       2,701       3,010       3,196       3,229       3,323
    Department of Energy..................  BA                            2,225       2,229       2,349       2,363       2,338       2,331       2,353
                                            O                             2,087       2,257       2,360       2,468       2,483       2,471       2,480
                                                                     -----------------------------------------------------------------------------------
      Subtotal, general science, space and  BA                           13,173      13,528      14,469      14,906      15,412      16,046      16,465
       technology.
                                            O                            12,767      13,279      13,753      14,631      15,427      15,980      16,556
                                                                     -----------------------------------------------------------------------------------
  Energy..................................  BA                            1,196       1,259       1,340       1,341       1,356       1,401       1,432
                                            O                             1,285       1,373       1,543       1,660       1,667       1,660       1,658
  Transportation:
    Department of Transportation..........  BA                              428         422         566         535         542         555         571
                                            O                               395         403         511         540         516         527         538
    NASA..................................  BA                            1,098         924         819         851         877         888         887
                                            O                             1,117         759         826         815         869         883         887
                                                                     -----------------------------------------------------------------------------------
      Subtotal, transportation............  BA                            2,722       2,605       2,725       2,727       2,775       2,844       2,890
                                            O                             2,797       2,535       2,880       3,015       3,052       3,070       3,083
                                                                     -----------------------------------------------------------------------------------
  Health:
    National Institutes of Health.........  BA                           14,778      16,900      17,909      17,909      18,098      18,546      18,953
                                            O                            13,027      14,702      16,932      18,025      17,930      18,172      18,553
    All other health......................  BA                              688         772         714         706         712         725         741
                                            O                               659         735         760         723         711         711         719
                                                                     -----------------------------------------------------------------------------------
      Subtotal, health....................  BA                           15,466      17,672      18,623      18,615      18,810      19,271      19,694

[[Page 153]]


                                            O                            13,686      15,437      17,692      18,748      18,641      18,883      19,272
                                                                     -----------------------------------------------------------------------------------
  Agriculture.............................  BA                            1,049       1,148       1,177       1,117       1,133       1,158       1,181
                                            O                               990       1,069       1,139       1,147       1,168       1,178       1,188
  Natural resources and environment.......  BA                            1,997       1,911       1,941       1,943       1,967       2,017       2,062
                                            O                             1,732       1,671       1,689       1,748       1,797       1,825       1,852
  National Institute of Standards and       BA                              392         336         449         449         454         466         476
   Technology.
                                            O                               404         377         412         387         441         458         468
  Hospital and medical care for veterans..  BA                              641         652         652         652         660         676         691
                                            O                               637         643         666         658         663         678         693
  All other research and development......  BA                              705         710         760         710         722         742         762
                                            O                               539         676         739         785         807         825         846
                                                                     -----------------------------------------------------------------------------------
    Subtotal, conduct of research and       BA                           77,420      79,825      82,165      82,986      83,029      84,110      84,015
     development.
                                            O                            73,828      76,096      79,884      82,109      82,823      83,518      83,945
                                                                     -----------------------------------------------------------------------------------
Conduct of education and training:
  Elementary, secondary, and vocational     BA                            1,256       1,777       4,162       4,301       4,327       4,385       4,436
   education.
                                            O                               846       1,205       1,602       2,821       3,801       4,123       4,201
  Higher education........................  BA                           13,517      12,166      13,215      14,616      15,810      16,194      16,838
                                            O                            11,708      11,477      12,197       3,875       4,955      15,613      16,172
  Research and general education aids.....  BA                            1,704       1,865       1,916       1,915       1,945       1,982       2,028
                                            O                             1,647       1,817       1,926       1,913       1,928       1,973       2,017
  Training and employment.................  BA                            1,573       1,075       2,115       2,098       2,124       2,176       2,224
                                            O                             1,178       1,466       1,503       1,536       1,601       1,643       1,676
  Health..................................  BA                            1,007       1,076       1,053       1,053       1,065       1,088       1,110
                                            O                               877         993       1,036       1,068       1,056       1,068       1,088
  Veterans education, training, and         BA                            1,360       1,697       1,886       1,906       1,909       1,925       1,955
   rehabilitation.
                                            O                             1,643       1,737       1,937       1,904       1,909       1,923       1,968
  General science and basic reserach......  BA                              673         684         750         725         734         752         768
                                            O                               560         649         680         691         709         720         736
  National defense........................  BA                                3           8           7          10          10          10          10
                                            O                                 6           8           7          10          10          10          10
  International affairs...................  BA                              293         209         226         226         229         234         239
                                            O                               273         247         226         231         235         236         238
  Other...................................  BA                              459         581         673         399         405         417         432
                                            O                               277         665         570         475         432         415         410
                                                                     -----------------------------------------------------------------------------------
    Subtotal, conduct of education and      BA                           21,845      21,138      26,003      27,249      28,558      29,163      30,040
     training.
                                            O                            19,015      20,264      21,684      14,524      16,636      27,724      28,516
                                                                     -----------------------------------------------------------------------------------
  Subtotal, direct Federal investment.....  BA                          178,782     181,621     197,309     201,867     206,795     209,880     214,888
                                            O                           167,548     172,087     180,109     178,161     187,752     204,308     208,289
                                                                     ===================================================================================
Total, Federal investment.................  BA                          261,343     262,271     293,296     295,331     301,329     306,173     312,939
                                            O                           240,179     254,296     267,176     267,125     278,937     296,933     301,906
--------------------------------------------------------------------------------------------------------------------------------------------------------


[[Page 154]]

     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

[[Page 155]]

issued for several years, most recently as OMB Circular A-11: Part 3: 
``Planning, Budgeting, and Acquisition of Capital Assets'' (July 1999) 
(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 (a further 
revision is currently under review); 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 systems.
---------------------------------------------------------------------------
  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, a Supplement to Part 3. 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. This guidance is now part 
          OMB Circular A-11.
    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 2005 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. As 
noted at the beginning of this chapter, the Report of the President's 
Commission to Study Capital Budgeting endorsed full funding of capital 
assets.
  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 continue to include full funding for new capital projects, or at 
least economically

[[Page 156]]

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 acquisition in budget accounts to avoid 
lumpiness. In some cases, these are revolving funds that ``rent'' the 
assets to the agency's programs.
  To promote better program performance, agencies are also being 
encouraged by OMB to examine their budget account structures to align 
them better with program outputs and outcomes and to charge the 
appropriate account with significant costs used to achieve these 
results. The asset acquisition rental accounts, mentioned above, would 
contribute to this. Budgeting this way would provide information and 
incentives for better resource allocation among programs and a continual 
search for better ways to deliver services. It would also provide 
incentives for efficient capital asset acquisition and management.

                                           Acquisition of Capital Assets

  Improved planning, budgeting, and acquisition strategies are necessary 
to increase the ability of agencies to acquire capital assets within, or 
close to, the original estimates of cost, schedule, and performance used 
to justify project budgets and to maintain budget discipline. The 
Administration initiative along with enactment of FASA (Title V) and the 
Clinger-Cohen Act require agencies to institute a performance-based 
planning, budgeting, and management approach to the acquisition of 
capital assets.
  OMB, working with the agencies over the last several years, began 
separate but related efforts to develop an integrated management 
approach that employs performance based acquisition management as part 
of a disciplined capital programming process. The Administration also 
wants the capital asset acquisition goals incorporated into the annual 
performance plan called for by GPRA so that a unified picture of agency 
management activities is presented and acquisition performance goals are 
linked to the achievement of program and policy goals. This integrated 
approach will not only eliminate duplication in reporting agency actions 
but, most importantly, will foster more effective implementation of 
performance-based acquisition management.
  One of the first efforts 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. They also present 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 2001 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 incorporates 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 2000 and 2001 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 2000 and 2001.
    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, the Chief Infor

[[Page 157]]

          mation Officers Council, the Procurement Executives Council, 
          and other groups 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 (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 $86.0 billion of budget authority for 2001. This 
includes $63.8 billion for the Department of Defense and $22.2 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)
------------------------------------------------------------------------
                                               1999     2000      2001
                                              actual  estimate  proposed
------------------------------------------------------------------------
             MAJOR ACQUISITIONS
Construction and rehabilitation:
  Defense military construction and family      4.3      4.8       3.9
   housing..................................
  Corps of Engineers........................    2.7      2.7       3.4
  General Services Administration...........    1.5      0.8       1.5
  Department of Energy......................    1.2      1.1       1.2
  Other agencies............................    7.8      6.4       7.0
                                             ---------------------------
    Subtotal, construction and                 17.4     15.8      17.0
     rehabilitation.........................

Major equipment:
  Department of Defense.....................   51.0     54.2    \1\ 59.9
  Department of Transportation..............    2.5      2.2       2.8
  General Services Administration...........    0.6      0.6       0.7
  Department of Justice.....................    0.4      0.6       0.6
  NASA......................................    0.7      0.6       0.6
  Department of Commerce....................    0.6      0.6       0.6
  Department of Veterans Affairs............    0.3      0.6       0.6
  Other agencies............................    2.7      2.2       2.5
                                             ---------------------------
    Subtotal, major equipment...............   58.8     61.6      68.4

Purchases of land and structures............    0.6      0.9       0.7
                                             ---------------------------
Total, major acquisitions \2\...............   76.9     78.3      86.0
------------------------------------------------------------------------
\1\ Does not include $0.4 billion of non-equipment expenditures related
  to procurement for 2001. The 2001 request for total Procurement for
  the Department of Defense is $60.3 billion.

\2\ This total is derived from the direct Federal major public physical
  investment budget authority on Table 6-3 ($89.1 billion for 2001).
  Table 6-4 excludes an estimate of spending for assets not owned by the
  Federal Government ($3.1 billion for 2001).

                                         Construction and Rehabilitation

  This budget includes $17.0 billion of budget authority for 2001 for 
construction and rehabilitation.
  Department of Defense.--The budget requests $3.9 billion for 2001 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.
  Corps of Engineers.--This budget requests $3.4 billion for 2001 for 
construction and rehabilitation for the 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.
  General Services Administration (GSA).--The 2001 budget includes $1.5 
billion in budget authority for GSA for the construction or major 
renovation of buildings. These funds will allow for new construction and 
the acquisition of courthouses, border stations, and general purpose 
office space in locations where long-term needs show that ownership is 
preferable to leasing.
  Department of Energy.--This budget requests $1.2 billion for 2001 for 
construction and rehabilitation for the Department of Energy. One of the 
largest projects is the National Ignition Facility, which will be used 
to perform experiments, including inertial confinement fusion 
experiments, at high pressures and temperatures. The Spallation Neutron 
Source is discussed in the text that accompanies Table 6-5.
  Other agencies.--This budget includes $7.0 billion for construction 
and rehabilitation for other agencies in 2001. The largest items are for 
the Postal Service ($1.0 billion); the Department of the Interior ($1.0 
billion), largely for the Bureau of Indian Affairs, water resources, and 
parks; and the Department of Justice ($0.8 billion), mostly for prisons.

                                                         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 $68.4 billion in budget 
authority for 2001 for the purchase of major equipment. For information 
on information technology investments, see Chapter 23 in this volume, 
``Program

[[Page 158]]

Performance Benefits from Major Information Technology Investments.''
  Department of Defense.--The budget includes $59.9 billion for 
equipment purchases and $0.4 billion for non-equipment purchases related 
to procurement for 2001 of 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 $2.8 billion in 
budget authority for the Department of Transportation for major 
equipment, which includes $2.4 billion to modernize the air traffic 
control system and $0.3 billion for the Coast Guard to acquire vessels 
and other equipment. Requests for advance appropriations for the air 
traffic control system in the Federal Aviation Administration are 
discussed with Table 6-5.
  Department of Justice.--The budget requests $0.6 billion for the 
Department of Justice, largely for the Federal Bureau of Investigation 
and the Drug Enforcement Administration.
  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 Commerce.--The budget requests $0.6 billion for the 
Department of Commerce, largely for the continued acquisition of more 
sophisticated and advanced weather satellites and related technology.
  Department of Veterans Affairs.--This budget requests $0.6 billion for 
medical equipment for health care facilities. These funds will be used 
to continue to provide quality health care services for veterans.
  Other agencies.--This budget requests $2.5 billion for major equipment 
for other agencies for 2001. The largest amount is for the Postal 
Service ($0.8 billion). Other agencies include the General Services 
Administration ($0.7 billion), largely for vehicles; and the Department 
of Energy ($0.5 billion) for science and other projects.

                                Purchase and Sale of Land and Structures

  This budget includes $0.7 billion for 2001 for the purchase of land 
and structures. This includes $0.4 billion for purchases by the 
Department of the Interior for parks and other recreational purposes.

                     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 Administration'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. Full funding 
was also supported by the Report of the President's Commission to Study 
Capital Budgeting, as noted at the beginning of this chapter.
  This budget requests $5.9 billion in budget authority for 2001 and 
$22.9 billion in advance appropriations for later years, for a total 
request of $28.8 billion for these projects for these years.

                                                  Department of Commerce

  National Oceanic and Atmospheric Administration (NOAA).--This budget 
requests $635 million for 2001 and $6,417 million in advance 
appropriations for capital asset acquisitions in NOAA for 2002-2019.
  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.

                                                   Department of Defense

  This budget requests $821million in advance appropriations for 2002-
2005 to fully fund selected military construction and family housing 
projects in the Department of Defense. The budget requests $414 million 
for these projects in 2001. 

                 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
                                          2001         2002     2003     2004     2005     2005   Appropriations
----------------------------------------------------------------------------------------------------------------
       DEPARTMENT OF COMMERCE

National Oceanic and Atmospheric             635         732      705      706      657    3,617        6,417
 Administration Procurement,
 acquisition and construction......

       DEPARTMENT OF DEFENSE

Military construction and family             414         510      231       61       19  .......          821
 housing...........................

        DEPARTMENT OF ENERGY

Science programs...................          281         300      232      150      115  .......          797

   DEPARTMENT OF HEALTH AND HUMAN
              SERVICES

Food and Drug Administration.......           20          23  .......  .......  .......  .......           23
Indian Health Service..............           65          18  .......  .......  .......  .......           18
Centers for Disease Control and              127          21       21  .......  .......  .......           42
 Prevention........................
National Institutes of Health......           47          26  .......  .......  .......  .......           26
                                    ----------------------------------------------------------------------------
  Subtotal, Department of Health             259          88       21  .......  .......  .......          109
   and Human Services..............

     DEPARTMENT OF THE INTERIOR

National Park Service: Construction           20          21       17       11  .......  .......           49
 and major maintenance.............

       DEPARTMENT OF JUSTICE

Federal Prison System buildings and          713         791      535  .......  .......  .......        1,326
 facilities........................

        DEPARTMENT OF STATE

Embassy security, construction, and          500         650      800      950      950  .......        3,350
 maintenance.......................

    DEPARTMENT OF TRANSPORTATION

Federal Aviation Administration:             622         638      590      565      537      614        2,944
 Facilities and equipment..........

     DEPARTMENT OF THE TREASURY
Internal Revenue Service:                    119         375  .......  .......  .......  .......          375
 Information technology investments

     DEFENSE CIVILIAN PROGRAMS
Armed forces retirement home.......            8           6  .......  .......  .......  .......            6

  GENERAL SERVICES ADMINISTRATION

Federal buildings fund.............          101         219      163       96  .......  .......          478

   NATIONAL AERONAUTICS AND SPACE
           ADMINISTRATION

Human space flight.................        2,115       1,859    1,452    1,327    1,275  .......        5,913

    NATIONAL SCIENCE FOUNDATION

Major research equipment...........          119         144       58       50       14  .......          266

      SMITHSONIAN INSTITUTION

Repair, restoration, and alteration           17          17       18  .......  .......  .......           35
 of facilities.....................
Construction.......................            2           2  .......  .......  .......  .......            2
                                    ----------------------------------------------------------------------------
  Subtotal, Smithsonian Institution           19          19       18  .......  .......  .......           37
                                    ----------------------------------------------------------------------------
  Total............................        5,925       6,352    4,822    3,916    3,567    4,231       22,888
----------------------------------------------------------------------------------------------------------------
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.

                                                    Department of Energy

  This budget requests $281 million in 2001 and $797 million in advance 
appropriations to finance the Spallation Neutron Source (SNS). This 
facility is being built at Oak Ridge National Laboratory in Tennessee 
and will deliver the world's highest power neutron pulse to a suite of 
``best of class'' scientific instruments. Neutron scattering and 
materials irradiation research helps scientists design higher performing 
electronic, magnetic, ceramic, and plastic materials and design better 
pharmaceuticals by providing information about the shapes of biological 
molecules.

                                 Department of Health and Human Services

  This budget requests $259 million for 2001 in regular appropriations 
and $109 million in advance appropriations for projects in the 
Department of Health and Human Services for the Food and Drug 
Administration, the Indian Health Service, the Centers for Disease 
Control and Prevention, and the National Institutes of Health. The funds 
will allow for the construction of new facilities and improvements to 
existing facilities.

                                              Department of the Interior

  National Park Service.--This budget requests $20 million in budget 
authority for 2001 and $49 million in advance appropriations for 2002-
2004 to fully fund projects in the National Park Service.

[[Page 159]]

                                                   Department of Justice

  This budget requests $713 million in 2001 and advanced appropriations 
of $791 million in 2002 and $535 million in 2003 for the Federal Prison 
System to support a multi-year prison construction program aimed at 
reversing worsening overcrowding in Federal facilities.

                                                     Department of State

  This budget requests $500 million in regular appropriations in 2001 
and $3,350 million in advance appropriations for 2002-2005 for embassy 
and consultate construction. This request would support a program to 
provide a sustained, increasing funding path to meet overseas facility 
security needs.

[[Page 160]]

                                            Department of Transportation

  Federal Aviation Administration.--This budget requests $622 million in 
2001 and an additional $2,944 million for 2002-2008 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 $119 million in 
2001 and $375 million in advance appropriations for 2002 to finance 
information technology investments. The IRS and the Treasury Department 
are significantly modifying the business plans for modernizing the IRS 
tax administration and systems by focusing on reengineering work 
processes and exploring private sector technology opportunities. These 
efforts will ensure that future capital investments by the IRS will 
improve customer service by providing alternative means of filing 
returns and paying taxes, improve telephone service for taxpayers; and 
give employees immediate access to complete information and modern tools 
to do their jobs.

                                               Defense Civilian Programs

  Armed Forces Retirement Home. This request for $8 million in regular 
appropriations in 2001 and $6 million in 2002 in advance appropriations 
will allow for construction of a 110-bed health care addition to the 
Naval home in Gulfport, Mississippi.

                                         General Services Administration

  This budget requests $101 million for 2001 and $478 million in advance 
appropriations for 2002-2004. The Budget requests $219 million in 
advance appropriations for 2002, including $185 million for the 
construction of new laboratory and office space for the Food and Drug 
Administration's Center for Devices and Radiological Health in White 
Oak, Maryland, and $34 million for construction of a new office building 
to replace the deteriorating National Oceanic and Atmospheric 
Administration building in Suitland, Maryland. In addition, advance 
appropriations of $163 million in 2003 and $96 million in 2004 are 
provided for the FDA consolidation project in White Oak, MD.

                    National Aeronautics and Space Administration (NASA)

  Human Space Flight (International Space Station).--This budget 
requests $2,115 million in budget authority for 2001, and $5,913 million 
in advance appropriations over the years 2002-2005 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 2005. Advance appropriations will enable NASA to complete 
the development program on schedule and at minimal total cost.

                                       National Science Foundation (NSF)

  This budget requests $119 million in 2001 and $266 million in advance 
appropriations for 2002-2005 for five NSF projects.
  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 Network 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 Terascale Computing System will provide two sites in the United 
States with supercomputer capability of at least 10 teraflops that will 
be available for use by U.S. researchers through a merit-based, 
competitive process.
  Earthscope: SAFOD/U.S. Array is an array of seismic instruments that 
will be displayed at depth in the San Andreas fault and on the surface 
throughout the United States to greatly improve resolution of subsurface 
and fault structure.
  The National Ecological Observatory Network is a pole-to-pole network 
of research sites with state-of-the-art platforms and equipment to 
enable ecological and biocomplexity research.

                                                 Smithsonian Institution

  The budget requests $19 million in budget authority in 2001 and $37 
million in advance appropriations for 2002-2003 primarily 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.

[[Page 161]]

     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 
compliance plan for this budget year; and specify standards that enable 
information exchange and resource sharing, while retaining flexibility 
in the choice of suppliers and in the design of local work processes;
  6. Lreduce risk by: avoiding or isolating custom-designed components 
to minimize the potential adverse consequences on the overall project; 
using fully tested pilots, simulations, or prototype implementations 
when necessary before going to production; establishing clear measures 
and accountability for project progress; and, securing substantial 
involvement and buy-in throughout the project from the program officials 
who will use the system;
  7. Lbe implemented in phased, successive segments as narrow in scope 
and brief in duration as practicable, each of which solves a specific 
part of an overall mission problem and delivers a measurable net benefit 
independent of future segments, unless it can be demonstrated that there 
are significant economies of scale at acceptable risk from funding more 
than one segment or there are multiple units that need to be acquired at 
the same time; and

[[Page 162]]

  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 2000 and 2001 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 1999), 
Appendix 300C.

                       C. Principles of Financing

                                               Principle 1: Full Funding

  Budget authority sufficient to complete a useful segment of a capital 
project (or the entire capital project, if it is not divisible into 
useful segments) must be appropriated before any obligations for the 
useful segment (or project) may be incurred.
  Explanation: Good budgeting requires that appropriations for the full 
costs of asset acquisition be enacted in advance to help ensure that all 
costs and benefits are fully taken into account at the time decisions 
are made to provide resources. Full funding with regular appropriations 
in the budget year also leads to tradeoffs within the budget year with 
spending for other capital assets and with spending for purposes other 
than capital assets. Full funding increases the opportunity to use 
performance-based fixed price contracts, allows for more efficient work 
planning and management of the capital project, and increases the 
accountability for the achievement of the baseline goals.
  When full funding is not followed and capital projects or useful 
segments are funded in increments, without certainty if or when future 
funding will be available, the result is sometimes poor planning, 
acquisition of assets not fully justified, higher acquisition costs, 
cancellation of major projects, the loss of sunk costs, or inadequate 
funding to maintain and operate the assets.

                         Principle 2: Regular and Advance Appropriations

  Regular appropriations for the full funding of a capital project or a 
useful segment of a capital project in the budget year are preferred. If 
this results in spikes that, in the judgment of OMB, cannot be 
accommodated by the agency or the Congress, a combination of regular and 
advance appropriations that together provide full

[[Page 163]]

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, 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

[[Page 164]]

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 1999), 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 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

[[Page 165]]

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 1999), 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) establishing a performance-based acquisition management system that 
provides for accountability for program successes and failures, such as 
an earned value system or similar system.
  There are several types of risk an agency should consider as part of 
risk management. The types of risk include:

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    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 1996 
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 $2,013 billion in 1999 and is estimated to increase slightly 
to $2,065 billion by 2001. In 1999, the national defense capital stock 
accounted for $671 billion, or 33 percent of the total, and nondefense 
stocks for $1,342 billion, or 67 percent of the total.
---------------------------------------------------------------------------
  \3\ Constant dollar stock estimates are expressed in chained 1996 
dollars, consistent with the October 1999 revisions to the National 
Income and Product Accounts (NIPAs). The shift to a more recent base 
year changes the reported level of real stocks, but leaves the year-to-
year trends largely the same. 

                                                                  Table 6-6.  NET STOCK OF FEDERALLY FINANCED PHYSICAL CAPITAL
                                                                                  (In billions of 1996 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........................................................................      978       682        296       145       89       56      151           93           27         21        10
  1965........................................................................    1,056       644        412       181      108       72      231          163           33         23        12
  1970........................................................................    1,200       664        536       205      123       82      331          237           47         27        20
  1975........................................................................    1,245       587        658       226      139       88      432          291           75         41        25
  1980........................................................................    1,338       518        820       253      159       94      567          350          116         76        26
  1985........................................................................    1,550       606        944       278      171      107      666          406          140         96        25
  1990........................................................................    1,823       756      1,068       309      180      129      759          473          151        108        27
Annual data:
  1995........................................................................    1,956       742      1,214       347      187      160      867          546          160        117        44
  1996........................................................................    1,969       721      1,248       355      188      168      893          562          163        119        49
  1997........................................................................    1,982       701      1,281       362      187      175      919          578          166        120        54
  1998........................................................................    1,993       685      1,308       364      187      178      944          594          169        121        60
  1999........................................................................    2,013       671      1,342       372      187      185      970          611          171        123        65
  2000 est....................................................................    2,038       658      1,380       380      188      192    1,000          631          174        124        71
  2001 est....................................................................    2,065       648      1,417       387      189      199    1,030          651          177        125        77
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

  Real stocks of defense and nondefense capital show very different 
trends. Nondefense stocks have grown consistently since 1970, increasing 
from $536 billion in 1970 to $1,342 billion in 1999. With the 
investments proposed in the budget, nondefense stocks are estimated to 
grow to $1,417 billion in 2001. During the 1970s, the nondefense capital 
stock grew at an average annual rate of 4.3 percent. In the 1980s, 
however, the growth rate slowed to 2.7 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 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 $671 billion in 1999 
to $648 billion in 2001.

[[Page 167]]

  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 1999, 28 percent of the nondefense stock was owned by 
the Federal Government and 72 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. For 
some categories in the table, such as water and power programs, however, 
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. 

                                          Table 6-7.  COMPOSITION OF GROSS AND NET FEDERAL AND FEDERALLY FINANCED NONDEFENSE PUBLIC PHYSICAL INVESTMENT
                                                                                  (In billions of 1996 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.......................................   26.6        5.7      21.0    9.8        3.3       6.4    3.4    3.0   16.9        2.3      14.5        13.8           0.1         0.1        0.5
  1965.......................................   35.4        7.8      27.6   11.7        4.3       7.4    3.4    4.0   23.8        3.6      20.2        17.0           2.2         0.4        0.5
  1970.......................................   33.9       10.2      23.7    7.4        5.0       2.5    2.0    0.4   26.5        5.2      21.3        13.3           5.4         1.0        1.7
  1975.......................................   34.8       12.3      22.4   10.1        5.4       4.7    3.7    1.0   24.6        6.9      17.7         8.0           4.4         4.6        0.7
  1980.......................................   49.2       15.0      34.2   12.0        6.0       6.1    3.9    2.1   37.1        9.0      28.1        13.6           7.7         7.0       -0.2
  1985.......................................   46.2       18.0      28.1   14.1        7.4       6.7    2.2    4.6   32.1       10.7      21.4        14.2           4.1         3.2       -0.1
  1990.......................................   46.5       22.4      24.1   16.2       10.2       6.1    1.9    4.1   30.3       12.2      18.1        13.0           1.6         2.0        1.4
Annual data:
  1995.......................................   59.9       26.1      33.9   19.5       12.2       7.4    1.4    6.0   40.4       13.9      26.5        16.4           2.7         2.0        5.4
  1996.......................................   61.1       26.9      34.1   20.7       12.6       8.1    0.4    7.7   40.3       14.3      26.0        16.1           3.0         1.5        5.5
  1997.......................................   60.9       27.8      33.1   20.0       13.1       6.9   -0.5    7.5   40.9       14.8      26.1        16.5           2.8         1.4        5.3
  1998.......................................   55.7       28.5      27.2   15.5       13.3       2.2   -0.4    2.6   40.2       15.2      25.0        15.5           2.7         1.0        5.8
  1999.......................................   63.1       29.2      33.9   21.1       13.6       7.4    0.2    7.2   42.1       15.6      26.5        17.4           2.7         1.1        5.2
  2000 est...................................   67.7       30.1      37.6   22.3       14.0       8.3    1.1    7.2   45.4       16.1      29.3        19.5           2.7         1.3        5.7
  2001 est...................................   68.8       31.1      37.7   21.9       14.5       7.4    0.8    6.6   46.9       16.6      30.3        20.1           2.5         1.5        6.2
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

              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 $898 billion in 1999 in constant 1996 
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 1999 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 1981, 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. 

                                        Table 6-8.  NET STOCK OF FEDERALLY FINANCED RESEARCH AND DEVELOPMENT \1\
                                                              (In billions of 1996 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...................................         245          15          231         202          63          139         447          78          370
  1975...................................         260          19          240         247          91          155         507         111          396
  1980...................................         263          23          240         292         124          169         555         147          408
  1985...................................         302          28          274         319         164          155         621         192          429
  1990...................................         379          34          345         360         215          145         739         249          490
Annual data:
  1995...................................         398          40          358         434         277          157         832         317          515
  1996...................................         400          41          359         447         289          157         847         331          516
  1997...................................         402          42          359         461         303          158         863         345          518
  1998...................................         403          43          359         477         315          161         879         359          521
  1999...................................         404          44          360         494         329          165         898         373          524
  2000 est...............................         405          46          359         512         343          169         917         389          528
  2001 est...............................         405          47          359         532         359          173         938         406          532
--------------------------------------------------------------------------------------------------------------------------------------------------------
\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 1990 led to a more rapid growth of the R&D stock. Since then, 
real 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

[[Page 168]]

3.8 percent in the 1970s to a rate of 1.8 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 $964 billion in 1999 in constant 1996 dollars, rising to 
$1,085 billion in 2001. The vast majority of the Nation's education 
stock is financed by State and local governments, and by students and 
their families themselves. This federally financed portion of the stock 
represents about 3 percent of the Nation's total education stock.\4\ 
Nearly three-quarters is for elementary and secondary education, while 
the remaining one quarter is for higher education.
---------------------------------------------------------------------------
  \4\ For estimates of the total education stock, see Table 2-4 in 
Chapter 2, ``Stewardship: Toward a Federal Balance Sheet.'' 

      Table 6-9.  NET STOCK OF FEDERALLY FINANCED EDUCATION CAPITAL
                      (In billions of 1996 dollars)
------------------------------------------------------------------------
                                                  Elementary
                                        Total         and        Higher
            Fiscal Year               Education    Secondary   Education
                                        Stock      Education
------------------------------------------------------------------------
Five year intervals:
  1960.............................          66            48         19
  1965.............................          92            66         26
  1970.............................         212           166         46
  1975.............................         305           245         60
  1980.............................         432           336         96
  1985.............................         533           397        136
  1990.............................         701           517        184
Annual data:
  1995.............................         791           574        217
  1996.............................         822           596        226
  1997.............................         859           623        237
  1998.............................         912           663        249
  1999.............................         964           705        260
  2000 est.........................       1,027           756        271
  2001 est.........................       1,085           804        282
------------------------------------------------------------------------

  Despite a slowdown in growth during the early 1980s, the stock grew at 
an average annual rate of 5.4 percent from 1970 to 1999, and the 
expansion of the education stock is projected to continue under this 
budget.

[[Page 169]]

                       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 in 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, in cases where a project is canceled before completion, 
the spending on the project does 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 a capital 
asset. For example, payments for constructing an aircraft carrier might 
be made over a period of years, with the capital 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 1996 prices were made through the application of price 
measures from the National Income and Product Accounts (NIPAs), but 
these should be considered only approximations of the costs of these 
assets in 1996 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.

                                                 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 two recent 
comprehensive revisions of the NIPAs in January 1996 and October 1999, 
government investment has taken

[[Page 170]]

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. Government 
purchases of software are now included as investment.\5\ In addition, as 
part of the most recent revisions, a new table will explicitly link 
investment and capital stocks by reporting the net stock of Government 
physical capital and decomposing the annual change in the stock into 
investment, depreciation, extraordinary changes such as disasters, and 
revaluation.\6\
---------------------------------------------------------------------------
  \5\ This change aligns BEA's treatment of software with OMB's 
definitions, which include purchase and in-house development of major 
software as investment.
  \6\ BEA's most recent estimates of capital stocks, prepared prior to 
the October 1999 comprehensive revisions, 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. Estimates reflecting the October 1999 revisions are 
tentatively scheduled for publication in the March 2000 Survey of 
Current Business.
---------------------------------------------------------------------------
  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 1996 
dollars were based on composite NIPA deflators for Federal, State, and 
local consumption of durables and gross investment, as revised in BEA's 
October 1999 comprehensive NIPA revisions. Because BEA had not yet 
released certain revised data prior to calendar year 1959, deflators 
were estimated for 1930 to 1959 based on the growth rates in BEA's pre-
revision data. 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.\7\ 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.
---------------------------------------------------------------------------
  \7\ BEA presented its depreciation methods and rates in ``Improved 
Estimates of Fixed Reproducible Tangible Wealth, 1929-95,'' Survey of 
Current Business, May 1997, pp. 69-76.
---------------------------------------------------------------------------

                                 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 1996 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.\8\ 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.\9\
---------------------------------------------------------------------------
  \8\ See U.S. Department of Labor, Bureau of Labor Statistics, The 
Impact of Research and Development on Productivity Growth, Bulletin 
2331, September 1989.
  \9\ 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. 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 171]]

      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, 2001
                                            (In millions of dollars)
----------------------------------------------------------------------------------------------------------------
                                                                                       Investment Outlays
                                                                              ----------------------------------
                                                                                All types
                                                                                of capital   Federal    National
                                                                                   \1\       capital    capital
----------------------------------------------------------------------------------------------------------------
Construction and rehabilitation:
  Grants:
    Transportation...........................................................      33,570   .........     33,570
    Natural resources and environment........................................       2,785   .........      2,785
    Community and regional development.......................................       6,048   .........      1,009
    Housing assistance.......................................................       7,643   .........  .........
    Other grants.............................................................         294   .........        182
  Direct Federal:
    National defense.........................................................       5,120       5,120  .........
    General science, space, and technology...................................         616         584        616
    Natural resources and environment........................................       5,424       4,128      5,129
    Energy...................................................................         863         863        863
    Transportation...........................................................         269         259        269
    Veterans and other health facilities.....................................       1,317       1,317      1,317
    Postal Service...........................................................       1,044       1,044      1,044
    GSA real property activities.............................................       1,116       1,116  .........
    Other construction.......................................................       2,674       2,193      1,237
                                                                              ----------------------------------
      Total construction and rehabilitation..................................      68,783      16,624     48,021
Acquisition of major equipment (direct):
  National defense...........................................................      51,076      51,076  .........
  Postal Service.............................................................         714         714        714
  Air transportation.........................................................       1,965       1,965      1,965
  Other......................................................................       5,504       4,728      3,333
                                                                              ----------------------------------
   Total major equipment.....................................................      59,259      58,483      6,012
Purchase or sale of land and structures......................................         839         839  .........
Other physical assets (grants)...............................................       1,344   .........         64
                                                                              ----------------------------------
  Total physical investment..................................................     130,225      75,946     54,097
Research and development:
  Defense....................................................................      40,914   .........      1,184
  Nondefense.................................................................      39,447   .........     38,889
                                                                              ----------------------------------
   Total research and development............................................      80,361   .........     40,073
Education and training.......................................................      56,590   .........     56,214
                                                                              ==================================
Total investment outlays.....................................................     267,176      75,946    150,384
----------------------------------------------------------------------------------------------------------------
\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

[[Page 172]]

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 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.
  As discussed at the beginning of this chapter, the Report of the 
President's Commission to Study Capital Budgeting considered both 
capital budgets and the broader question of the planning and budgeting 
process for capital assets. It made a series of recommendations to 
improve budgeting for capital and setting priorities for the Federal 
Government, but it did not recommend changing the budget to make the 
size of the deficit or surplus depend on the amount of expenditures 
defined as capital, to finance capital spending by borrowing, or to make 
a single decision about how much to spend for ``capital'' under some 
definition.

                      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 2001 is 
estimated to be $75.9 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, equipment, and software 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.\10\
---------------------------------------------------------------------------
  \10\ This definition of ``capital assets'' is the same as used in the 
budget in recent 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 $4 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,
                                2001 \1\
                        (In billions of dollars)
------------------------------------------------------------------------

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

                    Operating Budget

Receipts................................................       2,019
Expenses:
  Depreciation..........................................          80
  Other.................................................       1,759
                                                         ---------------
    Subtotal, expenses..................................       1,839
                                                         ---------------
  Surplus or deficit (-)................................         180

                     Capital Budget

Income: depreciation....................................          80
Capital expenditures....................................          76
                                                         ---------------
  Surplus or deficit (-)................................           4

                     Unified Budget

Receipts................................................       2,019
Outlays.................................................       1,835
                                                         ---------------
  Surplus or deficit (-) \2\............................         184
------------------------------------------------------------------------
\1\ Historical data to estimate the capital stocks and calculate
  depreciation are not readily available for Federal capital.
  Depreciation estimates were based on the assumption that outlays for
  Federal capital were a constant percentage of the larger categories in
  which such outlays were classified. They are also subject to the
  limitations explained in Part III of this chapter. Depreciation is
  measured in terms of current cost, not historical cost.
\2\ The surplus allocation for debt reduction is part of the President's
  overall budgetary framework to extend the solvency of Social Security
  and Medicare, and is shown in Table S-1 in Part 6 of the 2001 Budget.

  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 $4 billion lower as shown above 
for the complete coverage of Federal capital. Excluding defense makes 
such a large difference because of its large relative size and the 
recent pattern of capital asset purchases. The large defense buildup 
that began in the early 1980s raised the capital stock and depreciation; 
the buildup was followed by a sharp decline in purchases, while the 
capital stock and depreciation have declined more slowly. (See the 
previous sec

[[Page 173]]

tion of this chapter.) As a result, capital expenditures for defense in 
2001 are estimated to be $10 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.\11\
---------------------------------------------------------------------------
  \11\ 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).\12\ 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.\13\ Regardless of the

[[Page 174]]

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.\14\
---------------------------------------------------------------------------
  \12\ 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.
  \13\ 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).
  \14\ Two surveys of business practice conducted a few years ago found 
that such techniques are predominant. See Thomas Klammer et al., 
``Capital Budgeting Practices--A Survey of Corporate Use,'' Journal of 
Management and Accounting Research, vol. 3 (Fall 1991), pp. 113-30; and 
Glenn H. Petry and James Sprow, ``The Theory and Practice of Finance in 
the 1990s,'' The Quarterly Review of Economics and Finance, vol. 33 
(Winter 1993), pp. 359-82. Petry and Sprow also found that discounted 
cash flow techniques are recommended by the most widely used textbooks 
in managerial finance.
---------------------------------------------------------------------------

                                 Practice Outside the Federal Government

  The proponents of making investment decisions on the basis of an 
operating budget with depreciation have sometimes claimed that this is 
the common practice outside the Federal Government. However, while the 
practice of others may differ from the Federal budget and the terms 
``capital budget'' and ``capital budgeting'' are often used, these terms 
do not normally mean that capital asset acquisitions are decided on the 
basis of annual depreciation cost. The use of these terms in 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.\15\ This supports the 
business's goal of deciding upon and controlling the use of its 
resources.
---------------------------------------------------------------------------
  \15\ 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.\16\
---------------------------------------------------------------------------
  \16\ 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. This Statement was 
recommended by the Federal Accounting Standards Advisory Board. 
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, cash on hand, 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 State taxes, which may 
be substantial, State operating budgets do not record any amount. No 
State operating budget is charged for depreciation.\17\
---------------------------------------------------------------------------
  \17\ 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 currently record 
depreciation expense only in their proprietary (commercial-type) funds 
and in those trust funds where net income, expense, or capital

[[Page 175]]

maintenance is measured.\18\ Under new financial accounting standards, 
however, depreciation on most capital assets will be recognized as an 
expense in government-wide financial statements. This will become 
effective for fiscal periods beginning during 2001-03, depending on the 
size of the government.\19\
---------------------------------------------------------------------------
  \18\ Governmental Accounting Standards Board (GASB), Codification of 
Governmental Accounting and Financial Reporting Standards as of June 30, 
1999, sections 1100.107 and 1400.114-1400.118.
  \19\ Governmental Accounting Standard Board, Statement No. 34, Basic 
Financial Statements--and Management's Discussion and Analysis--for 
State and Local Governments (October 1999), paragraphs 18-29 and 44-45. 
For discussion, see paragraphs 330-43.
---------------------------------------------------------------------------
  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. Rating agencies place significant weight on the 
amount of debt outstanding compared to the economic output generated by 
the State. 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 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); \20\ 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.\21\ 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 or before the government can acquire certain capital assets such 
as state highways.\22\
---------------------------------------------------------------------------
  \20\ M. Peter van der Hoek, ``Fund Accounting and Capital Budgeting: 
European Experience,'' Public Budgeting and Financial Management, vol. 8 
(Spring 1996), pp. 39-40.
  \21\ 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.''
  \22\ 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.
---------------------------------------------------------------------------
  More recently, Australia has adopted an accrual budget as of its 1999-
2000 fiscal year, although appropriations are required for departments 
with inadequate funds to replace capital assets. The budget has several 
measures of fiscal position: the operating balance is fully accrual; 
while the fiscal balance, the primary fiscal measure, is closer to a 
cash basis and includes the purchase of property, plant, and equipment 
rather than depreciation. The United Kingdom has adopted a rule that it 
will borrow only for net investment (after depreciation), averaged over 
the economic cycle. It plans to budget on an accrual basis, including 
the depreciation of capital assets, beginning with its budget for 2001-
02; an appropriation would be required for cash payments for capital 
assets made in the fiscal year, but this would not be included in the 
``resource budget.'' On the other hand, some countries--including 
Sweden, Denmark, Finland, and the Netherlands--formerly had separate 
capital budgets but abandoned them a number of years ago.\23\
---------------------------------------------------------------------------
  \23\ The budgets in Sweden, Great Britain, Germany, and France are 
described in GAO, Budget Issues: Budgeting Practices in West Germany, 
France, Sweden, and Great Britain, GAO/AFMD-87-8FS (November 1986). 
Sweden had separate capital and operating budgets from 1937 to 1981, 
together with a total consolidated budget from 1956 onwards. The reasons 
for abandoning the capital budget are discussed briefly in the GAO 
report and more extensively by a government commission established to 
recommend changes in the Swedish budget system. One reason was that 
borrowing was no longer based on the distinction between current and 
capital budgets. See Sweden, Ministry of Finance, Proposal for a Reform 
of the Swedish Budget System: A Summary of the Report of the Budget 
Commission Published by the Ministry of Finance (Stockholm, 1974), 
chapter 10.
---------------------------------------------------------------------------
  Many developing countries operate a dual budget system comprising a 
regular or recurrent budget and a capital or development budget. The 
World Bank staff has concluded that:
            ``The dual budget may well be the single most important 
          culprit in the failure to link planning, policy and budgeting, 
          and poor budgetary outcomes. The dual budget is misconceived 
          because it is based on a false premise that capital 
          expenditure by government is more productive than current 
          expenditure. Separating development and recurrent budgets 
          usually leads to the development budget having a lower hurdle 
          for entry. The result is that everyone seeks to redefine their 
          expenditure as capital so it can be included in the 
          development budget. Budget realities are left to the recurrent 
          budget to deal with, and there is no pretension that 
          expenditure proposals relate to policy priorities.'' \24\
---------------------------------------------------------------------------
  \24\ The World Bank, Public Expenditure Management Handbook 
(Washington, D.C.: The World Bank, 1998), Box 3.11, page 53.
---------------------------------------------------------------------------

                                                             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.'' \25\
---------------------------------------------------------------------------
  \25\ 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 con

[[Page 176]]

clusion in another study in 1995.\26\ ``The greatest disadvantage . . . 
was that depreciation would result in a loss of budgetary control under 
an obligation-based budgeting system.'' \27\ 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.'' \28\
---------------------------------------------------------------------------
  \26\ GAO, Budget Issues: The Role of Depreciation in Budgeting for 
Certain Federal Investments, GAO/AIMD-95-34 (February 1995), pp. 1 and 
19-20.
  \27\ Ibid., p. 17. Also see pp. 1-2 and 16-19.
  \28\ 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.\29\ 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.'' \30\ 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.\31\ Such a target for investment in 
national capital would focus attention on policies for growth, encourage 
a conscious decision about the overall level of growth-enhancing 
investment, and make it easier to set spending priorities in terms of 
policy goals for aggregate formation of national capital. GAO reiterated 
its recommendation in another report in 1995.\32\
---------------------------------------------------------------------------
  \29\ Incorporating an Investment Component in the Federal Budget, pp. 
1-2, 9-10, and 15.
  \30\ Ibid., pp. 1 and 5.
  \31\ Ibid., pp. 2 and 13-16.
  \32\ The Role of Depreciation in Budgeting for Certain Investments, 
pp. 2 and 19-20. 

  Table 6-12.  UNIFIED BUDGET WITH NATIONAL INVESTMENT COMPONENT, 2001
                        (In billions of dollars)
------------------------------------------------------------------------

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

Receipts.................................................      2,019
Outlays:
  National investment....................................        150
  Other..................................................      1,685
                                                          --------------
   Subtotal, outlays.....................................      1,835
                                                          --------------
  Surplus or deficit (-) \1\.............................        184
------------------------------------------------------------------------
\1\ The surplus allocation for debt reduction is part of the President's
  overall budgetary framework to extend the solvency of Social Security
  and Medicare, and is shown in Table S-1 in Part 6 of the 2001 Budget.

  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 $150 billion in 2001. 
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 10 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.\33\
---------------------------------------------------------------------------
  \33\ 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,
                                2001 \1\
                        (In billions of dollars)
------------------------------------------------------------------------

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

                    Operating Budget

Receipts................................................       1,981
Expenses:
  Depreciation \2\......................................          74
  Other.................................................       1,685
                                                         ---------------
    Subtotal, expenses..................................       1,758
                                                         ---------------
  Surplus or deficit (-)................................         222

                     Capital Budget

Income:
  Depreciation \2\......................................          74
  Earmarked tax receipts \3\............................          38
                                                         ---------------
    Subtotal, income....................................         112
Capital expenditures....................................         150
                                                         ---------------
  Surplus or deficit (-)................................         -38

                     Unified Budget

Receipts................................................       2,019
Outlays.................................................       1,835
                                                         ---------------
    Surplus or deficit (-) \4\..........................         184
------------------------------------------------------------------------
\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.
\4\ The surplus allocation for debt reduction is part of the President's
  overall budgetary framework to extend the solvency of Social Security
  and Medicare, and is shown in Table S-1 in Part 6 of the 2001 Budget.

  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

[[Page 177]]

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.\34\
---------------------------------------------------------------------------
  \34\ These problems are also pointed out in GAO, Incorporating an 
Investment Component in the Federal Budget, pp. 11-12. They are 
discussed more extensively with respect to highway grants, research and 
development, and human capital in GAO, The Role of Depreciation in 
Budgeting for Certain Federal Investments, pp. 11-14. GAO found no 
government that budgets for the depreciation of infrastructure (whether 
or not owned by that government), human capital, or research and 
development (except that New Zealand budgets for the depreciation of 
research and development if it results in a product that is intended to 
be used or marketed).
---------------------------------------------------------------------------

       A Capital Budget and the Analysis of Saving and Investment

  Data from the Federal budget may be classified in many different ways, 
including analyses of the Government's direct effects on saving and 
investment. As Parts I and III of this chapter have shown, the unified 
budget provides data that can be used to calculate Federal investment 
outlays and federally financed capital stocks. However, the budget 
totals themselves do not make this distinction. In particular, the 
budget surplus or deficit does not measure the Government's contribution 
to the nation's net saving (i.e., saving net of 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 (NIPA) according to one definition 
of investment. The NIPA Federal sector measures the impact of Federal 
current receipts, current expenditures, and the current surplus or 
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.\35\
---------------------------------------------------------------------------
  \35\ 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 2000 and 2001, and for a discussion of the 
NIPA Federal sector and its relationship to the budget.
---------------------------------------------------------------------------
  Until four 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.\36\ The revised NIPA 
Federal Government account is a current account or an operating account 
for the Federal Government and accordingly shows current receipts and 
current expenditures. It excludes expenditures for structures, 
equipment, and software owned by the Federal Government; it includes 
depreciation on the federally owned stock of structures, equipment, and 
software as a proxy for the services of capital assets consumed in 
production and thus as part of the Federal Government's current 
expenditures. It applies this treatment to a comprehensive definition of 
federally owned structures, equipment, and software, both defense and 
nondefense, similar to the definition of ``capital assets'' in this 
chapter.\37\
---------------------------------------------------------------------------
  \36\ 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 vary. For example, the SNA does 
not include the purchase of military equipment as investment.
  \37\ The treatment of investment (except for the recent recognition of 
software) in the 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, equipment, and software remain a part of gross 
domestic product (GDP) as a separate component. The NIPA State and local 
government account is defined in the same way and includes depreciation 
on structures, equipment, and software 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.''

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

[[Page 178]]

  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 1999 Federal 
Government current account surplus was increased $2 billion by including 
depreciation rather than gross investment, because depreciation of 
federally owned structures, equipment, and software was less than gross 
investment. The 2001 Federal current account surplus is estimated to be 
increased $16 billion. \38\ A capital budget is not needed to capture 
this effect.
---------------------------------------------------------------------------
  \38\ See actuals and estimates for 1990-2001 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 a great deal of 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 $4 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 ($4 billion). For national 
capital, Table 6-13 indicates that current cost depreciation (plus the 
excise taxes earmarked to finance capital expenditures for highways and 
airports and airways \39\) is less than gross investment but not by a 
great deal--the capital budget deficit is $38 billion. The rationale of 
borrowing to finance net investment would justify the Federal Government 
borrowing this amount ($38 billion) and no more to finance its 
investment in national capital.\40\
---------------------------------------------------------------------------
  \39\ The capital budget deficit would be about $27 billion larger if 
current cost depreciation were used instead of earmarked excise taxes 
for investment in highways and airports and airways.
  \40\ 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.\41\
---------------------------------------------------------------------------
  \41\ 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 seven 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

[[Page 179]]

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.

                                     

            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 2000 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 $118.6 billion in 1999 
and is projected to increase to $154.4 billion by 2009 on a current 
services basis. The largest components are for national defense and for 
roadways and bridges, which together accounted for almost two-thirds of 
Federal public physical capital spending in 1999.
  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 $31.0 
billion in 1999, and current services outlays are estimated to increase 
to $45.3 billion by 2009. Outlays for nondefense housing and buildings 
were $11.3 billion in 1999 and are estimated to be $15.6 billion in 
2009. Physical capital outlays for other nondefense categories were 
$22.4 billion in 1999 and are projected to be $27.8 billion by 2009. For 
national defense, this spending was $53.9 billion in 1999 and is 
estimated on a current services basis to be $65.7 billion in 2009.
  Table 6-15 shows current services projections on a constant dollar 
basis, using fiscal year 1996 as the base year.

                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 180]]



                                 Table 6-14.  CURRENT SERVICES OUTLAY PROJECTIONS FOR FEDERAL PHYSICAL CAPITAL SPENDING
                                                                (In billions of dollars)
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                             Estimate
                                                                   1999  -------------------------------------------------------------------------------
                                                                  Actual   2000    2001    2002    2003    2004    2005    2006    2007    2008    2009
--------------------------------------------------------------------------------------------------------------------------------------------------------
Nondefense:
  Transportation-related categories:
    Roadways and bridges........................................    22.8    25.5    27.2    28.1    28.7    29.2    29.8    30.5    31.1    31.7    32.3
     Airports and airway facilities.............................     3.9     3.8     3.8     4.1     4.1     4.3     4.4     4.5     4.6     4.6     4.8
     Mass transportation systems................................     4.0     4.3     4.5     5.2     5.7     6.4     6.8     7.0     7.2     7.4     7.5
     Railroads..................................................     0.3     0.7     0.6     0.6     0.6     0.6     0.7     0.7     0.7     0.7     0.7
                                                                 ---------------------------------------------------------------------------------------
      Subtotal, transportation..................................    31.0    34.3    36.1    38.0    39.2    40.6    41.6    42.6    43.6    44.5    45.3
  Housing and buildings categories:
     Federally assisted housing.................................     7.0     7.6     8.0     7.7     8.0     8.7     8.9     9.2     9.1     9.0     9.1
     Hospitals..................................................     1.3     1.4     1.9     1.9     1.9     1.9     2.0     2.0     2.1     2.1     2.2
     Public buildings \1\.......................................     3.0     3.5     3.6     3.6     3.8     3.8     3.9     4.0     4.1     4.2     4.3
                                                                 ---------------------------------------------------------------------------------------
      Subtotal, housing and buildings...........................    11.3    12.5    13.5    13.2    13.7    14.5    14.8    15.2    15.2    15.3    15.6
  Other nondefense categories:
     Wastewater treatment and related facilities................     2.5     2.9     3.1     3.4     3.6     3.8     3.9     3.9     4.0     4.0     4.1
     Water resources projects...................................     2.8     3.8     3.4     3.3     3.5     3.6     3.7     3.8     3.8     3.9     4.0
     Space and communications facilities........................     3.6     3.2     3.1     3.6     3.6     3.9     3.6     3.9     4.0     3.9     3.9
     Energy programs............................................     1.1     1.1     1.0     1.0     1.1     1.0     0.9     0.8     0.8     0.8     0.8
     Community development programs.............................     5.4     5.6     5.6     5.8     5.9     6.0     6.0     6.1     6.2     6.3     6.4
     Other nondefense...........................................     7.1     7.7     7.3     6.9     7.1     7.6     7.8     8.0     8.2     8.4     8.6
                                                                 ---------------------------------------------------------------------------------------
      Subtotal, other nondefense................................    22.4    24.1    23.5    24.0    24.8    25.9    25.9    26.5    27.0    27.3    27.8
                                                                 ---------------------------------------------------------------------------------------
    Subtotal, nondefense........................................    64.8    71.0    73.1    75.2    77.6    80.9    82.3    84.3    85.8    87.1    88.7
National defense................................................    53.9    53.3    56.1    57.7    60.2    61.8    63.3    61.9    63.1    64.4    65.7
                                                                 ---------------------------------------------------------------------------------------
Total...........................................................   118.6   124.3   129.2   132.9   137.8   142.8   145.6   146.2   148.9   151.4   154.4
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Excludes outlays for public buildings that are included in other categories in this table.


             Table 6-15.  CURRENT SERVICES OUTLAY PROJECTIONS FOR FEDERAL PHYSICAL CAPITAL SPENDING
                                     (In billions of constant 1996 dollars)
----------------------------------------------------------------------------------------------------------------
                                                                                         Estimate
                                                                   1999  ---------------------------------------
                                                                  Actual   2000    2001    2002    2003    2004
----------------------------------------------------------------------------------------------------------------
Nondefense:
  Transportation-related categories:
    Roadways and bridges........................................    21.8    23.7    24.7    24.9    24.7    24.6
     Airports and airway facilities.............................     3.8     3.6     3.6     3.7     3.7     3.8
     Mass transportation systems................................     3.9     4.0     4.1     4.6     4.9     5.4
     Railroads..................................................     0.3     0.7     0.6     0.6     0.6     0.6
                                                                 -----------------------------------------------
      Subtotal, transportation..................................    29.8    32.1    33.0    33.8    34.0    34.3
  Housing and buildings categories:
     Federally assisted housing.................................     6.8     7.1     7.2     6.8     6.9     7.3
     Hospitals..................................................     1.3     1.4     1.8     1.8     1.8     1.8
     Public buildings \1\.......................................     3.1     3.5     3.6     3.5     3.6     3.5
                                                                 -----------------------------------------------
      Subtotal, housing and buildings...........................    11.1    12.0    12.6    12.1    12.3    12.6
  Other nondefense categories:
     Wastewater treatment and related facilities................     2.4     2.7     2.8     3.0     3.1     3.2
     Water resources projects...................................     2.8     3.8     3.4     3.2     3.3     3.3
     Space and communications facilities........................     3.7     3.2     3.0     3.4     3.4     3.6
     Energy programs............................................     1.1     1.1     1.0     0.9     1.0     0.9
     Community development programs.............................     5.2     5.2     5.1     5.1     5.1     5.1
     Other nondefense...........................................     7.1     7.5     7.0     6.5     6.6     6.9
                                                                 -----------------------------------------------
      Subtotal, other nondefense................................    22.2    23.4    22.3    22.2    22.5    23.0
                                                                 -----------------------------------------------
  Subtotal, nondefense..........................................    63.1    67.5    67.9    68.2    68.7    69.9
National defense................................................    54.6    53.2    54.9    55.4    56.6    57.0
                                                                 -----------------------------------------------
Total...........................................................   117.7   120.8   122.8   123.5   125.3   126.9
----------------------------------------------------------------------------------------------------------------
\1\ Excludes outlays for public buildings that are included in other categories in this table.


[[Page 181]]


                         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          $33.4 billion (1995 dollars)
 performance on highways eligible for Federal-aid.............
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  528
 with scheduled passenger traffic.............................
2. Air traffic control towers.................................  451
3. Airport development eligible under airport improvement       $29.7 billion ($9.4 billion for capacity) (1992
 program for period 1993-1997.................................   dollars)

                                           Mass Transportation Systems

1. Yearly cost to maintain condition and performance of rail    $6.1 billion (1995 dollars)
 facilities over a period of 20 years.........................
2. Yearly cost to replace and maintain the urban, rural, and    $3.6 billion (1995 dollars)
 special services bus fleet and facilities....................

                                              Wastewater Treatment

1. Total remaining needs of sewage treatment facilities.......  $128 billion (1996 dollars)
2. Total Federal expenditures under the Clean Water Act of      $74 billion
 1972 through 2000.
3. The population served by centralized treatment facilities:   98 percent
 percentage that benefits from at least secondary sewage
 treatment systems............................................
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 (1999)........................  48.0 percent
2. Average length of stay, IHS hospitals (days) (1999)........  3.9
3. Hospital admissions (1999).................................  49,753
4. Outpatient visits (1998)...................................  4,407,000
5. Eligible population (2000).................................  1,511,135

                              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.

 Surface Transportation

  Department of Transportation. 1997 Status of the Nation's Surface 
Transportation System: Conditions and

[[Page 182]]

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--1998. 1998.
  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.
