[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
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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
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Subtotal, conduct of education and training................................. 47.4 53.4 56.6
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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
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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
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Total, miscellaneous physical investment...................................... 2.5 3.1 3.8
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Total, Federal investment outlays, including miscellaneous physical investment.... 242.7 257.4 271.0
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* 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)
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Estimate
Description 1999 -----------------------------------------------------------------------
Actual 2000 2001 2002 2003 2004 2005
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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
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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
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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
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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
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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
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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
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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
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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
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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
--------------------------------------------------------------------------------------------------------------------------------------------------------
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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
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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:
[[Page 166]]
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
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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.
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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
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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.