    [Analytical Perspectives]
    [Special Analyses and Presentations]
    [6. Federal Investment Spending and Capital Budgeting]
    [From the U.S. Government Publishing Office, www.gpo.gov]

      ======================================================================

                       SPECIAL ANALYSES AND PRESENTATIONS

    ========================================================================

    [[Page 97]]

              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 Executive Branch 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.
      In all of the following presentations, Department of Defense
    projections for 2002 and beyond represent estimates based on historical
    program and spending levels. The most notable exceptions are the
    inclusion in these estimates of $2.6 billion for a new research and
    development initiative and $400 million for a housing initiative, both
    proposed for 2002. All other projections, beginning in 2002, are subject
    to change as a result of the Defense Strategy Review now underway.
    Further information on Department of Defense projections can be found in
    Chapter 7, ``Research and Development Funding,'' in this volume, and in
    the National Defense chapter in the main Budget volume.

                    Part I: DESCRIPTION OF FEDERAL INVESTMENT

      For more than fifty years, the Federal budget has included a chapter
    on Federal investment--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 2006.
      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

    [[Page 98]]

    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 25, ``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 $253.6 billion in 2000.
    They are estimated to increase to $270.8 billion in 2001 and, subject to
    the Defense Strategic Review mentioned in the introduction to this
    chapter, are projected to increase further to $298.5 billion in 2002.
    Major Federal investment outlays will comprise an estimated 15.2 percent
    of total Federal outlays in 2002 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 Part. Those tables
    include both budget authority and outlays.
      Physical investment.--Outlays for major public physical capital
    investment (hereafter referred to as physical investment outlays) are
    estimated to be $145.7 billion in 2002. Physical investment outlays are
    for construction and rehabilitation, the purchase of major equipment,
    and the purchase or sale of land and structures. More than three-fifths
    of these outlays are for direct physical investment by the Federal
    Government, with the remaining being grants to State and local
    governments for physical investment.
      Direct physical investment outlays by the Federal Government are
    primarily for national defense. Defense outlays for physical investment
    were $56.1 billion in 2000 and are estimated to increase to $58.1
    billion in 2001 and $62.3 billion in 2002. Almost all of these outlays,
    or an estimated $57.1 billion in 2002, are for the procurement of
    weapons and other defense equipment, and the remainder is primarily for
    construction on military bases, family housing for military personnel,
    and Department of Energy defense facilities.

      Outlays for direct physical investment for nondefense purposes are
    estimated to be $27.1 billion in 2002. These outlays include $16.3
    billion for construction and rehabilitation. This amount includes funds
    for water, power, and natural resources projects of the Corps of
    Engineers, the Bureau of Reclamation within the Department of the
    Interior, the Tennessee Valley Authority, and the power administrations
    in the Department of Energy; construction and rehabilitation of veterans
    hospitals and Postal Service facilities; facilities for space and
    science programs, and Indian Health Service hospitals and clinics.
    Outlays for the acquisition of major equipment are estimated to be $10.3
    billion in 2002. The largest amounts are for the air traffic control
    system. For the purchase or sale of land and structures, disbursements
    are estimated to exceed collections by $0.4 billion in 2002. 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 $56.3 billion in 2002. Almost two-thirds of these
    outlays, or $37.4 billion, are to assist States and localities with
    transportation infrastructure, primarily highways. Other major grants
    for physical investment fund sewage treatment plants, community
    development, and public housing.
      Conduct of research and development.--Outlays for the conduct of
    research and development are estimated

    [[Page 99]]

                                  Table 6-1.  COMPOSITION OF FEDERAL INVESTMENT OUTLAYS
                                                (In billions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                                                       Estimate
                                                                                           2000  -------------------
                                                                                         Actual     2001      2002
    ----------------------------------------------------------------------------------------------------------------
                                    Federal Investment

    Major public physical capital investment:
      Direct Federal:
        National defense..............................................................      56.1      58.1      62.3
        Nondefense....................................................................      25.4      26.6      27.1
                                                                                       -----------------------------
        Subtotal, direct major public physical capital investment.....................      81.5      84.8      89.4

    Grants to State and local governments.............................................      48.7      52.9      56.3
                                                                                       -----------------------------
    Subtotal, major public physical capital investment................................     130.2     137.7     145.7

    Conduct of research and development:
      National defense................................................................      41.0      41.6      46.8
      Nondefense......................................................................      32.9      36.8      40.4
                                                                                       -----------------------------
        Subtotal, conduct of research and development.................................      73.9      78.4      87.2
    Conduct of education and training:
      Grants to State and local governments...........................................      31.4      35.2      39.4
    Direct Federal....................................................................      18.0      19.6      26.2
                                                                                       -----------------------------
        Subtotal, conduct of education and training...................................      49.5      54.8      65.6
                                                                                       -----------------------------
    Major Federal investment outlays..................................................     253.6     270.8     298.5

                                        MEMORANDUM

    Major Federal investment outlays:
      National defense................................................................      97.1      99.7     109.2
      Nondefense......................................................................     156.4     171.1     189.3
                                                                                       -----------------------------
    Total, major Federal investment outlays...........................................     253.6     270.8     298.5

    Miscellaneous physical investments:
      Commodity inventories...........................................................        -*       0.3      -0.4
      Other physical investment (direct)..............................................       2.8       3.7       3.6
                                                                                       -----------------------------
        Total, miscellaneous physical investment......................................       2.8       4.0       3.2
                                                                                       -----------------------------
    Total, Federal investment outlays, including miscellaneous physical investment....     256.3     274.8     301.7
    ----------------------------------------------------------------------------------------------------------------

    to be $87.2 billion in 2002. 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. More than half of these outlays, an estimated $46.8 billion in
    2002, 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 $40.4 billion in 2002. 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 $65.6 billion in 2002. 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 $39.4 billion in 2002, 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 $26.2 billion in 2002. 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.

    [[Page 100]]

      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 $0.4 billion in 2002.
      Outlays for other miscellaneous physical investment are estimated to
    be $3.6 billion in 2002. 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 2006. 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.

    [[Page 101]]

                                   Table 6-2. FEDERAL INVESTMENT BUDGET AUTHORITY AND OUTLAYS: DEFENSE AND NONDEFENSE PROGRAMS
                                                                    (in millions of dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                     Estimate
                    Description                                              2000    -----------------------------------------------------------------------
                                                                            Actual       2001        2002        2003        2004        2005        2006
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                 NATIONAL DEFENSE
    Major public physical investment:
      Construction and rehabilitation.........  BA                            5,596       5,043       5,843       6,022       6,186       6,356       6,529
                                                O                             4,713       4,925       5,113       5,181       5,360       5,580       5,694
      Acquisition of major equipment..........  BA                           54,573      62,496      60,147      62,026      63,747      65,528      67,353
                                                O                            51,388      53,205      57,239      57,540      59,592      62,167      63,423
      Purchase or sale of land and structures.  BA                              -45         -20         -19         -41         -41         -42         -42
                                                O                               -45         -20         -19         -40         -41         -42         -42
                                                                         -----------------------------------------------------------------------------------
        Subtotal, major public physical         BA                           60,124      67,519      65,971      68,007      69,892      71,842      73,840
         investment.
                                                O                            56,056      58,110      62,333      62,681      64,911      67,705      69,075
                                                                         -----------------------------------------------------------------------------------
    Conduct of research and development.......  BA                           42,326      44,484      48,289      49,769      51,133      52,544      53,991
                                                O                            41,050      41,596      46,850      47,145      48,803      50,850      51,883
    Conduct of education and training           BA                               10           9           9          11          11          12          12
     (civilian).
                                                O                                 8           9          15          17          18          18          19
                                                                         -----------------------------------------------------------------------------------
      Subtotal, national defense investment...  BA                          102,460     112,012     114,269     117,787     121,036     124,398     127,843
                                                O                            97,114      99,715     109,198     109,843     113,732     118,573     120,977
                    NONDEFENSE
    Major public physical investment:
      Construction and rehabilitation:
        Highways..............................  BA                           29,451      35,786      34,666      30,859      31,718      32,581      33,516
                                                O                            24,910      27,093      29,222      30,383      31,371      32,353      33,225
        Mass transportation...................  BA                            7,108       5,979       6,453       7,163       7,358       7,557       7,770
                                                O                             5,100       5,222       5,415       5,539       6,148       6,888       7,179
        Rail transportation...................  BA                               10          54          21          21          22          22          23
                                                O                                15          55          30          26          20          22          23
        Air transportation....................  BA                            2,872       2,637       2,985       3,416       3,505       3,596       3,689
                                                O                             1,637       2,185       2,788       3,120       3,327       3,466       3,595
        Community development block grants....  BA                            4,809       5,113       4,802       4,909       5,019       5,130       5,245
                                                O                             4,955       4,940       5,044       4,979       4,913       4,944       5,042
        Other community and regional            BA                            1,552       2,246       1,732       1,762       1,797       1,831       1,865
         development.
                                                O                             1,368       1,781       1,774       1,800       1,857       1,832       1,808
        Pollution control and abatement.......  BA                            4,065       3,954       3,569       3,629       3,690       3,414       2,935
                                                O                             4,152       4,013       3,904       3,945       3,909       3,907       3,836
        Water resources.......................  BA                            3,281       3,717       3,053       3,125       3,191       3,274       3,340
                                                O                             3,634       3,692       3,455       3,373       3,394       3,442       3,333
        Housing assistance....................  BA                            6,892       7,324       6,624       6,771       6,922       7,076       7,235
                                                O                             7,169       7,904       7,989       7,804       7,587       7,590       7,634
        Energy................................  BA                            1,152       1,179       1,315       1,230       1,316       1,316       1,318
                                                O                             1,151       1,177       1,318       1,232       1,318       1,318       1,319
        Veterans hospitals and other health...  BA                            1,269       1,444       1,684       1,785       1,821       1,861       1,902
                                                O                             1,548       1,407       1,650       1,727       1,819       1,862       1,909
        Postal Service........................  BA                            1,231         825         858       1,331         983       1,114       1,048
                                                O                             1,500         935         975       1,025       1,083       1,068       1,083
        GSA real property activities..........  BA                              766       1,173       1,489       1,459       1,532       1,598       1,634
                                                O                               956       1,027       1,175       1,432       1,944       2,153       2,139
        Other programs........................  BA                            5,294       7,797       6,632       6,593       6,648       6,745       6,880
                                                O                             5,276       6,771       6,879       6,975       6,734       6,720       6,832
                                                                         -----------------------------------------------------------------------------------
          Subtotal, construction and            BA                           69,752      79,228      75,883      74,053      75,522      77,115      78,400
           rehabilitation.
                                                O                            63,371      68,202      71,618      73,360      75,424      77,565      78,957
                                                                         -----------------------------------------------------------------------------------
      Acquisition of major equipment:
        Air transportation....................  BA                            1,979       2,546       2,836       2,901       2,966       3,032       3,100
                                                O                             2,060       2,005       2,302       2,523       2,704       2,940       3,006
        Postal Service........................  BA                              676         778         493         900       1,000         675         675
                                                O                               592         735         749         821       1,204       1,021         848
        Other.................................  BA                            6,418       6,801       6,996       6,930       7,014       7,131       7,263
                                                O                             6,420       6,813       7,339       7,049       7,223       7,381       7,510
                                                                         -----------------------------------------------------------------------------------
          Subtotal, acquisition of major        BA                            9,073      10,125      10,325      10,731      10,980      10,838      11,038
           equipment.
                                                O                             9,072       9,553      10,390      10,393      11,131      11,342      11,364
                                                                         -----------------------------------------------------------------------------------
      Purchase or sale of land and structures.  BA                              663         685         246         263         576         567         574
                                                O                               781         747         377         451         838         938         985

    [[Page 102]]

      Other physical assets (grants)..........  BA                              950       1,247       1,437       1,470       1,497       1,531       1,556
                                                O                               873       1,051         962         992       1,135       1,077       1,112
                                                                         -----------------------------------------------------------------------------------
        Subtotal, major public physical         BA                           80,438      91,285      87,891      86,517      88,575      90,051      91,568
         investment.
                                                O                            74,097      79,553      83,347      85,196      88,528      90,922      92,418
                                                                         -----------------------------------------------------------------------------------
    Conduct of research and development:
      General science, space and technology...  BA                           10,513      11,666      11,676      12,653      13,396      13,885      14,333
                                                O                            10,103      10,746      11,549      12,072      13,052      13,593      14,081
      Energy..................................  BA                            1,066       1,429       1,174       1,180       1,359       1,405       1,467
                                                O                             1,265       1,401       1,195       1,264       1,307       1,383       1,419
      Transportation..........................  BA                            1,586       1,650       1,665       1,569       1,607       1,608       1,645
                                                O                             1,440       1,467       1,657       1,785       1,653       1,682       1,697
      Health..................................  BA                           17,694      20,376      22,799      26,736      27,239      27,850      28,470
                                                O                            15,220      17,738      20,470      23,310      25,983      27,051      27,713
      Natural resources and environment.......  BA                            1,944       2,055       1,995       2,041       2,084       2,130       2,179
                                                O                             1,687       1,835       1,782       1,804       1,822       1,846       1,885
      All other research and development......  BA                            3,444       3,967       3,626       3,712       3,691       3,772       3,859
                                                O                             3,182       3,592       3,743       3,784       3,711       3,719       3,798
                                                                         -----------------------------------------------------------------------------------
        Subtotal, conduct of research and       BA                           36,247      41,143      42,935      47,891      49,376      50,650      51,953
         development.
                                                O                            32,897      36,779      40,396      44,019      47,528      49,274      50,593
                                                                         -----------------------------------------------------------------------------------
    Conduct of education and training:
      Education, training, employment and
       social services:
        Elementary, secondary, and vocational   BA                           17,066      24,593      44,326      30,429      31,107      31,798      32,510
         education \1\.
                                                O                            20,524      23,276      25,601      29,603      30,384      30,954      31,608
        Higher education......................  BA                           11,859      10,954      16,715      16,832      17,422      18,054      18,701
                                                O                            10,137       9,622      15,626      16,325      16,605      17,278      17,982
        Research and general education aids...  BA                            2,280       2,720       2,240       2,287       2,338       2,388       2,439
                                                O                             2,212       2,635       2,587       2,430       2,429       2,448       2,503
        Training and employment \1\...........  BA                            2,848       5,506       7,442       5,463       5,382       5,501       5,624
                                                O                             4,758       5,815       6,798       6,170       5,545       5,474       5,534
        Social services \1\...................  BA                            6,703       9,478      11,218      10,258      10,511      10,772      11,041
                                                O                             7,616       8,237       9,422       9,831      10,105      10,357      10,611
                                                                         -----------------------------------------------------------------------------------
          Subtotal, education, training, and    BA                           40,756      53,251      81,941      65,269      66,760      68,513      70,315
           social services.
                                                O                            45,247      49,585      60,034      64,359      65,068      66,511      68,238
                                                                         -----------------------------------------------------------------------------------
      Veterans education, training, and         BA                            1,663       2,314       2,397       2,467       2,549       2,653       2,788
       rehabilitation.
                                                O                             1,694       2,293       2,400       2,476       2,559       2,680       2,807
      Health..................................  BA                            1,099       1,407       1,216       1,370       1,395       1,424       1,455
                                                O                               962       1,173       1,248       1,267       1,360       1,402       1,430
      Other education and training............  BA                            1,805       1,889       1,981       2,117       1,957       2,006       2,046
                                                O                             1,541       1,748       1,909       1,999       2,043       2,046       2,044
                                                                         -----------------------------------------------------------------------------------
        Subtotal, conduct of education and      BA                           45,323      58,861      87,535      71,223      72,661      74,596      76,604
         training.
                                                O                            49,444      54,799      65,591      70,101      71,030      72,639      74,519
                                                                         -----------------------------------------------------------------------------------
      Subtotal, nondefense investment.........  BA                          162,008     191,289     218,361     205,631     210,612     215,297     220,125
                                                O                           156,438     171,131     189,334     199,316     207,086     212,835     217,530
                                                                         ===================================================================================
    Total, Federal investment \1\.............  BA                          264,468     303,301     332,630     323,418     331,648     339,695     347,968
                                                O                           253,552     270,846     298,532     309,159     320,818     331,408     338,507
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    \1\ Budget authority for several programs in this category and in the total does not reflect program level, since budget authority is distorted by the
      use of advance appropriations in 2000, 2001 and 2002. Budget authority for 2002 is significantly overstated because of a one-time adjustment proposed
      by the Administration to reverse the misleading budget practice of using advance appropriations simply to avoid spending limitations. For additional
      information on this issue, see Chapter 13, ``Preview Report,'' in this volume.

    [[Page 103]]

                                  Table 6-3. FEDERAL INVESTMENT BUDGET AUTHORITY AND OUTLAYS: GRANT AND DIRECT FEDERAL PROGRAMS
                                                                    (in millions of dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                     Estimate
                    Description                                              2000    -----------------------------------------------------------------------
                                                                            Actual       2001        2002        2003        2004        2005        2006
    --------------------------------------------------------------------------------------------------------------------------------------------------------
       GRANTS TO STATE AND LOCAL GOVERNMENTS
    Major public physical investments:
      Construction and rehabilitation:
        Highways..............................  BA                           29,451      35,786      34,666      30,859      31,718      32,581      33,516
                                                O                            24,909      27,090      29,218      30,382      31,371      32,353      33,225
        Mass transportation...................  BA                            7,108       5,979       6,453       7,163       7,358       7,557       7,770
                                                O                             5,100       5,222       5,415       5,539       6,148       6,888       7,179
        Rail transportation...................  O                                 7           7   ..........  ..........  ..........  ..........  ..........
        Air transportation....................  BA                            2,799       2,623       2,969       3,400       3,488       3,579       3,672
                                                O                             1,578       2,173       2,764       3,103       3,311       3,448       3,577
        Pollution control and abatement.......  BA                            2,907       2,851       2,466       2,501       2,538       2,235       1,730
                                                O                             2,700       2,719       2,766       2,817       2,780       2,783       2,694
        Other natural resources and             BA                               49          52          28          29          29          30          31
         environment.
                                                O                                67          68          79          52          47          41          42
        Community development block grants....  BA                            4,809       5,113       4,722       4,827       4,935       5,045       5,158
                                                O                             4,955       4,940       5,036       4,927       4,836       4,861       4,957
        Other community and regional            BA                            1,222       1,651       1,278       1,305       1,336       1,366       1,396
         development.
                                                O                             1,077       1,347       1,367       1,378       1,349       1,336       1,315
        Housing assistance....................  BA                            6,864       7,290       6,590       6,736       6,886       7,040       7,198
                                                O                             7,160       7,875       7,955       7,772       7,554       7,556       7,598
        Other construction....................  BA                              195       1,416         294         300         306         312         319
                                                O                               200         319         671         497         390         332         339
                                                                         -----------------------------------------------------------------------------------
          Subtotal, construction and            BA                           55,404      62,761      59,466      57,120      58,594      59,745      60,790
           rehabilitation.
                                                O                            47,753      51,760      55,271      56,467      57,786      59,598      60,926
                                                                         -----------------------------------------------------------------------------------
      Other physical assets...................  BA                              997       1,333       1,493       1,528       1,555       1,591       1,617
                                                O                               902       1,143       1,023       1,039       1,186       1,130       1,166
                                                                         -----------------------------------------------------------------------------------
        Subtotal, major public physical         BA                           56,401      64,094      60,959      58,648      60,149      61,336      62,407
         capital.
                                                O                            48,655      52,903      56,294      57,506      58,972      60,728      62,092
                                                                         -----------------------------------------------------------------------------------
    Conduct of research and development:
      Agriculture.............................  BA                              263         289         264         309         284         289         295
                                                O                               231         276         257         286         276         258         263
      Other...................................  BA                              244         347         319         306         317         324         332
                                                O                               174         210         324         343         355         368         384
                                                                         -----------------------------------------------------------------------------------
        Subtotal, conduct of research and       BA                              507         636         583         615         601         613         627
         development.
                                                O                               405         486         581         629         631         626         647
                                                                         -----------------------------------------------------------------------------------
    Conduct of education and training:
      Elementary, secondary, and vocational     BA                           15,287      22,165      43,407      29,623      30,283      30,957      31,649
       education \1\.
                                                O                            19,352      21,498      23,587      28,184      29,325      29,949      30,587
      Higher education........................  BA                              321         431         362         369         428         444         454
                                                O                               176         396         409         405         414         458         483
      Research and general education aids.....  BA                              483         502         426         440         451         460         470
                                                O                               546         583         533         476         480         478         489
      Training and employment \1\.............  BA                            2,090       4,015       5,453       3,981       3,918       4,005       4,094
                                                O                             3,484       4,491       5,184       4,608       4,090       4,014       4,057
      Social services \1\.....................  BA                            6,375       9,103      10,845       9,900      10,144      10,396      10,656
                                                O                             7,359       7,678       9,074       9,467       9,731       9,972      10,218
      Agriculture.............................  BA                              434         438         420         464         446         455         465
                                                O                               442         425         466         441         457         462         470
      Other...................................  BA                              126         136         121         122         125         128         130
                                                O                                88         110         112         112         114         115         117
                                                                         -----------------------------------------------------------------------------------
        Subtotal, conduct of education and      BA                           25,116      36,790      61,034      44,899      45,795      46,845      47,918
         training.
                                                O                            31,447      35,181      39,365      43,693      44,611      45,448      46,421
                                                                         -----------------------------------------------------------------------------------
      Subtotal, grants for investment.........  BA                           82,024     101,520     122,576     104,162     106,545     108,794     110,952
                                                O                            80,507      88,570      96,240     101,828     104,214     106,802     109,160
              DIRECT FEDERAL PROGRAMS
    Major public physical investment:
      Construction and rehabilitation:
        National defense:
          Military construction and family      BA                            5,079       4,673       5,292       5,459       5,610       5,767       5,928
           housing.

    [[Page 104]]

                                                O                             4,202       4,521       4,589       4,616       4,783       4,990       5,091
          Atomic energy defense activities and  BA                              517         370         551         563         576         589         601
           other.
                                                O                               511         404         524         565         577         590         603
                                                                         -----------------------------------------------------------------------------------
            Subtotal, national defense........  BA                            5,596       5,043       5,843       6,022       6,186       6,356       6,529
                                                O                             4,713       4,925       5,113       5,181       5,360       5,580       5,694
                                                                         -----------------------------------------------------------------------------------
        International affairs.................  BA                              370         727       1,308       1,337       1,367       1,397       1,429
                                                O                               240         356         860       1,023       1,189       1,302       1,359
        General science, space, and technology  BA                            2,968       2,990       2,562       2,522       2,489       2,495       2,536
                                                O                             2,978       2,961       2,764       2,652       2,611       2,601       2,630
        Water resources projects..............  BA                            3,237       3,665       3,025       3,096       3,162       3,244       3,309
                                                O                             3,568       3,630       3,376       3,321       3,347       3,401       3,291
        Other natural resources and             BA                            1,582       1,627       1,588       1,622       1,658       1,698       1,734
         environment.
                                                O                             1,829       1,841       1,618       1,615       1,617       1,629       1,644
        Energy................................  BA                            1,152       1,179       1,315       1,230       1,316       1,316       1,318
                                                O                             1,151       1,177       1,318       1,232       1,318       1,318       1,319
        Postal Service........................  BA                            1,231         825         858       1,331         983       1,114       1,048
                                                O                             1,500         935         975       1,025       1,083       1,068       1,083
        Transportation........................  BA                              260         243         240         244         252         256         261
                                                O                               209         340         263         207         222         238         249
        Housing assistance....................  BA                               28          34          34          35          36          36          37
                                                O                                 9          29          34          32          33          34          36
        Veterans hospitals and other health     BA                            1,179       1,344       1,634       1,734       1,769       1,808       1,847
         facilities.
                                                O                             1,444       1,322       1,559       1,658       1,743       1,811       1,857
        Federal Prison System.................  BA                              441         711         700         716         732         748         765
                                                O                               477         743         542         918         898         788         806
        GSA real property activities..........  BA                              766       1,173       1,489       1,459       1,532       1,598       1,634
                                                O                               956       1,027       1,175       1,432       1,944       2,153       2,139
        Other construction....................  BA                            1,134       1,949       1,664       1,607       1,632       1,660       1,692
                                                O                             1,257       2,081       1,863       1,778       1,633       1,624       1,618
                                                                         -----------------------------------------------------------------------------------
          Subtotal, construction and            BA                           19,944      21,510      22,260      22,955      23,114      23,726      24,139
           rehabilitation.
                                                O                            20,331      21,367      21,460      22,074      22,998      23,547      23,725
                                                                         -----------------------------------------------------------------------------------
      Acquisition of major equipment:
        National defense:
          Department of Defense...............  BA                           54,454      62,418      60,030      61,906      63,625      65,403      67,225
                                                O                            51,272      53,125      57,132      57,428      59,477      62,049      63,303
          Atomic energy defense activities....  BA                              119          78         117         120         122         125         128
                                                O                               116          80         107         112         115         118         120
                                                                         -----------------------------------------------------------------------------------
            Subtotal, national defense........  BA                           54,573      62,496      60,147      62,026      63,747      65,528      67,353
                                                O                            51,388      53,205      57,239      57,540      59,592      62,167      63,423
                                                                         -----------------------------------------------------------------------------------
        General science and basic research....  BA                              391         449         422         432         441         452         462
                                                O                               318         427         409         395         402         415         423
        Space flight, research, and supporting  BA                              869         977         815         769         731         720         726
         activities.
                                                O                               871         967         763         777         743         725         724
        Energy................................  BA                              121         118         115         115         115         115         115
                                                O                               121         118         115         115         115         115         115
        Postal Service........................  BA                              676         778         493         900       1,000         675         675
                                                O                               592         735         749         821       1,204       1,021         848
        Air transportation....................  BA                            1,979       2,546       2,836       2,901       2,966       3,032       3,100
                                                O                             2,060       2,005       2,302       2,523       2,704       2,940       3,006
        Water transportation (Coast Guard)....  BA                              830         248         464         474         485         496         507
                                                O                               340         445         441         376         430         463         488
        Other transportation (railroads)......  BA                              571         520         521         533         544         557         569
                                                O                               594         554         834         533         545         557         570
        Social security.......................  O                                66          69          57          60          64          69          73
        Hospital and medical care for veterans  BA                              687         775         605         622         636         650         664
                                                O                             1,014         695         781         802         820         838         856
        Department of Justice.................  BA                              567         612         519         535         546         559         572
                                                O                               659         599         573         563         575         588         600
        Department of the Treasury............  BA                              709       1,113       1,415       1,336       1,368       1,400       1,434
                                                O                               856       1,188       1,390       1,357       1,400       1,437       1,458
        GSA general supply fund...............  BA                              626         664         656         656         656         656         656

    [[Page 105]]

                                                O                               584         664         656         656         656         656         656
        Other.................................  BA                            1,000       1,239       1,408       1,400       1,434       1,466       1,497
                                                O                               968         995       1,259       1,368       1,422       1,465       1,493
                                                                         -----------------------------------------------------------------------------------
          Subtotal, acquisition of major        BA                           63,599      72,535      70,416      72,699      74,669      76,306      78,330
           equipment.
                                                O                            60,431      62,666      67,568      67,886      70,672      73,456      74,733
                                                                         -----------------------------------------------------------------------------------
      Purchase or sale of land and structures:
        National defense......................  BA                              -45         -20         -19         -41         -41         -42         -42
                                                O                               -45         -20         -19         -40         -41         -42         -42
        International affairs.................  BA                               15          28           1   ..........  ..........  ..........  ..........
                                                O                                55          90           2           2           2           2           2
        Privatization of Elk Hills............  BA                        ..........  ..........  ..........       -323   ..........  ..........  ..........
                                                O                         ..........  ..........  ..........       -323   ..........  ..........  ..........
        Other.................................  BA                              648         657         245         586         576         567         574
                                                O                               726         657         375         772         836         936         983
                                                                         -----------------------------------------------------------------------------------
          Subtotal, purchase or sale of land    BA                              618         665         227         222         535         525         532
           and structures.
                                                O                               736         727         358         411         797         896         943
                                                                         -----------------------------------------------------------------------------------
        Subtotal, major public physical         BA                           84,161      94,710      92,903      95,876      98,318     100,557     103,001
         investment.
                                                O                            81,498      84,760      89,386      90,371      94,467      97,899      99,401
                                                                         -----------------------------------------------------------------------------------
    Conduct of research and development:
      National defense
        Defense military......................  BA                           39,567      41,391      45,144      46,554      47,847      49,185      50,555
                                                O                            38,279      38,504      43,706      43,907      45,496      47,471      48,430
        Atomic energy and other...............  BA                            2,759       3,093       3,145       3,215       3,286       3,359       3,436
                                                O                             2,771       3,092       3,144       3,238       3,307       3,379       3,453
                                                                         -----------------------------------------------------------------------------------
          Subtotal, national defense..........  BA                           42,326      44,484      48,289      49,769      51,133      52,544      53,991
                                                O                            41,050      41,596      46,850      47,145      48,803      50,850      51,883
                                                                         -----------------------------------------------------------------------------------
      International affairs...................  BA                              200         216         206         211         215         221         225
                                                O                               179         183         183         185         185         186         196
      General science, space and technology
        NASA..................................  BA                            5,513       6,232       6,320       7,178       7,820       8,183       8,505
                                                O                             5,411       5,724       6,298       6,673       7,449       7,917       8,288
        National Science Foundation...........  BA                            2,747       3,057       3,033       3,100       3,149       3,220       3,291
                                                O                             2,446       2,644       2,928       3,044       3,202       3,222       3,284
        Department of Energy..................  BA                            2,253       2,377       2,323       2,375       2,427       2,482       2,537
                                                O                             2,246       2,378       2,323       2,355       2,401       2,454       2,509
                                                                         -----------------------------------------------------------------------------------
          Subtotal, general science, space and  BA                           10,713      11,882      11,882      12,864      13,611      14,106      14,558
           technology.
                                                O                            10,282      10,929      11,732      12,257      13,237      13,779      14,277
                                                                         -----------------------------------------------------------------------------------
      Energy..................................  BA                            1,066       1,429       1,174       1,180       1,359       1,405       1,467
                                                O                             1,265       1,401       1,195       1,264       1,307       1,383       1,419
      Transportation:
        Department of Transportation..........  BA                              404         517         571         550         562         574         589
                                                O                               348         423         535         566         555         570         578
        NASA..................................  BA                              999         926         890         831         852         836         852
                                                O                               958         901         879         963         839         845         845
                                                                         -----------------------------------------------------------------------------------
          Subtotal, transportation............  BA                            2,469       2,872       2,635       2,561       2,773       2,815       2,908
                                                O                             2,571       2,725       2,609       2,793       2,701       2,798       2,842
                                                                         -----------------------------------------------------------------------------------
      Health:
        National Institutes of Health.........  BA                           16,916      19,483      21,993      25,909      26,391      26,979      27,580
                                                O                            14,568      16,941      19,619      22,488      25,155      26,203      26,846
        All other health......................  BA                              765         818         726         742         757         776         793
                                                O                               639         768         809         769         765         776         788
                                                                         -----------------------------------------------------------------------------------
          Subtotal, health....................  BA                           17,681      20,301      22,719      26,651      27,148      27,755      28,373
                                                O                            15,207      17,709      20,428      23,257      25,920      26,979      27,634
                                                                         -----------------------------------------------------------------------------------
      Agriculture.............................  BA                            1,160       1,265       1,171       1,263       1,219       1,243       1,272
                                                O                             1,063       1,189       1,210       1,287       1,283       1,287       1,309

    [[Page 106]]

      Natural resources and environment.......  BA                            1,944       2,055       1,995       2,041       2,084       2,130       2,179
                                                O                             1,687       1,835       1,782       1,804       1,822       1,846       1,885
      National Institute of Standards and       BA                              332         355         318         325         332         340         348
       Technology.
                                                O                               396         395         423         388         345         349         353
      Hospital and medical care for veterans..  BA                              642         700         719         736         753         770         788
                                                O                               658         683         717         752         767         769         786
      All other research and development......  BA                              799       1,077         913         835         855         878         900
                                                O                               628         828         914         852         822         841         860
                                                                         -----------------------------------------------------------------------------------
        Subtotal, conduct of research and       BA                           78,066      84,991      90,641      97,045      99,908     102,581     105,317
         development.
                                                O                            73,542      77,889      86,665      90,535      95,700      99,498     101,829
                                                                         -----------------------------------------------------------------------------------
    Conduct of education and training:
      Elementary, secondary, and vocational     BA                            1,779       2,428         919         806         824         841         861
       education.
                                                O                             1,172       1,778       2,014       1,419       1,059       1,005       1,021
      Higher education........................  BA                           11,538      10,523      16,353      16,463      16,994      17,610      18,247
                                                O                             9,961       9,226      15,217      15,920      16,191      16,820      17,499
      Research and general education aids.....  BA                            1,797       2,218       1,814       1,847       1,887       1,928       1,969
                                                O                             1,666       2,052       2,054       1,954       1,949       1,970       2,014
      Training and employment.................  BA                              758       1,491       1,989       1,482       1,464       1,496       1,530
                                                O                             1,274       1,324       1,614       1,562       1,455       1,460       1,477
      Health..................................  BA                            1,085       1,393       1,202       1,356       1,380       1,409       1,440
                                                O                               948       1,159       1,234       1,253       1,346       1,388       1,415
      Veterans education, training, and         BA                            1,663       2,314       2,397       2,467       2,549       2,653       2,788
       rehabilitation.
                                                O                             1,694       2,293       2,400       2,476       2,559       2,680       2,807
      General science and basic research......  BA                              640         797         938         956         854         873         892
                                                O                               513         666         787         867         897         874         861
      National defense........................  BA                                8           7           7           7           7           8           8
                                                O                                 6           7          13          13          14          14          15
      International affairs...................  BA                              305         232         243         248         254         260         265
                                                O                               306         306         275         279         250         256         261
      Other...................................  BA                              644         677         648         703         664         685         698
                                                O                               465         816         633         682         717         742         747
                                                                         -----------------------------------------------------------------------------------
        Subtotal, conduct of education and      BA                           20,217      22,080      26,510      26,335      26,877      27,763      28,698
         training.
                                                O                            18,005      19,627      26,241      26,425      26,437      27,209      28,117
                                                                         -----------------------------------------------------------------------------------
      Subtotal, direct Federal investment.....  BA                          182,444     201,781     210,054     219,256     225,103     230,901     237,016
                                                O                           173,045     182,276     202,292     207,331     216,604     224,606     229,347
                                                                         ===================================================================================
    Total, Federal investment \1\.............  BA                          264,468     303,301     332,630     323,418     331,648     339,695     347,968
                                                O                           253,552     270,846     298,532     309,159     320,818     331,408     338,507
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    \1\ Budget authority for several programs in this category and the total does not reflect program level, since budget authority is distorted by the use
      of advance appropriations in 2000, 2001 and 2002. Budget authority for 2002 is significantly overstated because of a one-time adjustment proposed by
      the Administration to reverse the misleading budget practice of using advance appropriations simply to avoid spending limitations. For additional
      information on this issue, see Chapter 13, ``Preview Report,'' in this volume.

    [[Page 107]]

         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 Executive Branch 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. The Congress has expressed its concern about
    planning for capital assets with legislation and other actions that
    complemented Executive Branch 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.
      Executive Branch concern. For many years, the Executive Branch has
    devoted particular attention to improving the process of planning,
    budgeting, and acquiring capital assets. The current guidance has been
    issued for several years, most recently as OMB Circular A-11: Part 3:
    ``Planning, Budgeting, and Acquisition

    [[Page 108]]

    of Capital Assets'' (July 2000) (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''
    (November 20, 2000), which provides principles for internal management
    and planning practices for information systems and technology; and (6)
    OMB Circular No. A-127, ``Financial Management Systems,'' which
    prescribes policies and standards for executive departments and agencies
    to follow in developing, evaluating, and reporting on financial
    management 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. This guidance encourages the Executive Branch agencies to be
    responsible for using good capital programming principles for managing
    the capital assets they use, and asks the agencies 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, this budget reissues 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.
      The Report of the President's Commission to Study Capital Budgeting
    (February 1999) 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.

    From Planning to Budgeting

      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) and also in its more recent letter
    to the Chairman of the Senate Budget Committee, entitled ``Budget
    Issues: Incremental Funding of Capital Asset Acquisitions (February 26,
    2001).'' Full funding was also endorsed in the Report of the President's
    Commission to Study Capital Budgeting (February 1999).
      The full funding principle 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.
      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.

    [[Page 109]]

    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
    Executive Branch efforts, 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.
      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.
      As a result of these 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 Administration will work with the Congress to promote full upfront
    funding for capital projects or usable segments thereof, and to improve
    capital planning and integrate capital planning with GPRA strategic
    plans.

                           Major Acquisition Proposals

      For the definition of major capital assets described above, this
    budget requests $90.7 billion of budget authority for 2002. This
    includes $65.3 billion for the Department of Defense, subject to the
    Defense Strategy Review mentioned in the introduction to this chapter,
    and $25.4 billion for other agencies. The major requests are shown in
    Table 6-4: ``Capital Asset Acquisitions,'' which distributes the funds
    according to the categories for construction and rehabilitation, major
    equipment, and purchases of land and structures.

    Construction and Rehabilitation

      This budget includes $20.8 billion of budget authority for 2002 for
    construction and rehabilitation.
      Department of Defense.--The budget projects $5.3 billion for 2002 for
    general construction on military bases and family housing. This funding
    will be used to:

                     Table 6-4.  CAPITAL ASSET ACQUISITIONS
                    (Budget authority in billions of dollars)
    ------------------------------------------------------------------------
                                                   2000     2001      2002
                                                  Actual  Estimate  Proposed
    ------------------------------------------------------------------------
                 MAJOR ACQUISITIONS
    Construction and rehabilitation:
      Defense military construction and family      5.1      4.7       5.3
       housing..................................
      Corps of Engineers........................    2.8      3.2       2.7
      National Aeronautics and Space                2.8      2.6       2.2
       Administration...........................
      General Services Administration...........    0.8      1.2       1.5
      Department of State.......................    0.4      0.7       1.3
      Department of Energy......................    0.9      0.9       1.1
      Other agencies............................    5.9      6.6       6.8
                                                 ---------------------------
       Subtotal, construction and rehabilitation   18.6     19.8      20.8

    Major equipment:
      Department of Defense.....................   54.5     62.4      60.0
      Department of Transportation..............    2.8      2.8       3.3
      Department of the Treasury................    0.7      1.1       1.4
      National Aeronautics and Space                0.9      1.0       0.8
       Administration...........................
      Department of Commerce....................    0.6      0.8       0.8
      Department of Veterans Affairs............    0.7      0.8       0.6
      Other agencies............................    2.7      2.9       2.8
                                                 ---------------------------
         Subtotal, major equipment..............   62.8     71.8      69.7
    Purchases of land and structures............    0.6      0.7       0.2
                                                 ---------------------------
         Total, major acquisitions \1\..........   82.1     92.3      90.7
    ------------------------------------------------------------------------
    \1\ This total is derived from the direct Federal major public physical
      investment budget authority on Table 6-3 ($92.9 billion for 2002).
      Table 6-4 excludes an estimate of spending for assets not owned by the
      Federal Government ($2.2 billion for 2002).

        support the fielding of new systems;
        enhance operational readiness, including deployment and
              support of military forces;
        provide housing for military personnel and their families;
              and
        correct safety deficiencies and environmental problems.
      Corps of Engineers.--This budget requests $2.7 billion for 2002 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.
      National Aeronautics and Space Administration.--The budget includes
    $2.2 billion for continued investments in construction of the Space
    Station, and for research facilities for science, aeronautics, and
    technology.
      General Services Administration (GSA).--The 2002 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 State.--The Administration requests $1.3 billion in
    budget authority to support embassy security, construction, and major
    renovations. These funds are needed to help modernize Department of
    State facilities around the world.
      Department of Energy.--This budget requests $1.1 billion for 2002 for
    construction and rehabilitation for the Department of Energy. This
    includes funds for nuclear waste disposal, scientific research, power
    marketing, and other activities.
      Other agencies.--This budget includes $6.8 billion in budget authority
    for construction and rehabilitation for

    [[Page 110]]

    other agencies in 2002. This includes amounts for the Tennessee Valley
    Authority ($1.1 billion); Department of the Interior ($1.1 billion),
    largely for the Bureau of Indian Affairs, water resources, and parks;
    the Department of Health and Human Services ($0.9 billion), largely for
    the National Institutes of Health and the Indian Health Service; and the
    Postal Service ($0.9 billion).

    Major Equipment

      This category covers capital purchases for major equipment, including
    weapons systems; information technology, such as computer hardware,
    major software, and renovations required for this equipment; and other
    types of equipment. This budget requests $69.7 billion in budget
    authority for 2002 for the purchase of major equipment. For information
    on information technology investments, see Chapter 22 in this volume,
    ``Program Performance Benefits from Major Information Technology
    Investments.''
      Department of Defense.--The budget includes $60.0 billion for
    equipment purchases primarily related to procurement for 2002 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 $3.3 billion in
    budget authority for the Department of Transportation for major
    equipment, which includes $2.8 billion to modernize the air traffic
    control system and $0.5 billion for the Coast Guard to acquire vessels
    and other equipment.
      Department of the Treasury.--The budget requests $1.4 billion in
    budget authority for major equipment. The largest amounts are $0.6
    billion to modernize information technology systems for the Internal
    Revenue Service.
      National Aeronautics and Space Administration (NASA).--The budget
    requests $0.8 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 $0.8 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 $2.8 billion for major equipment
    for other agencies for 2002. This includes amounts for the General
    Services Administration ($0.7 billion), largely for vehicles; the
    Department Justice ($0.6 billion), including funds for the Federal
    Bureau of Investigation; and the Postal Service ($0.5 billion).

    Purchase and Sale of Land and Structures

      This budget includes $0.2 billion for 2002 for the purchase and sale
    of land and structures. This includes $0.4 billion for Federal land
    acquisition by the Departments of the Interior and Agriculture for
    parks, forests, refuges, and other recreational purposes. These and
    other purchases are partially offset by sales of land and structures in
    other agencies.

         Appendix to Part II: PRINCIPLES OF BUDGETING FOR CAPITAL ASSET
                                  ACQUISITIONS

                            Introduction and Summary

      The Executive Branch 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 appor

    [[Page 111]]

    tionment 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
      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, new or continued funding will be recommend
    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.'')
      Because good information on capital planning is essential to long-term
    success, the Executive Branch 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

    [[Page 112]]

      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 2000).

                           C. Principles of Financing

    Principle 1: Full Funding

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

    Principle 2: Regular and Advance Appropriations

      Regular appropriations for the full funding of a capital project or a
    useful segment of a capital project in the budget year are preferred. If
    this results in spikes that, in the judgment of OMB, cannot be
    accommodated by the agency or the Congress, a combination of regular and
    advance appropriations that together provide full funding for a capital
    project or a useful segment should be proposed in the budget.
      Explanation: Principle 1 (Full Funding) is met as long as a
    combination of regular and advance appropriations provide budget
    authority sufficient to complete the capital project or useful segment.
    Full funding 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

    [[Page 113]]

    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 is
              attributed to one-time asset purchases;
        reduce the pressure for capital spikes to crowd out
              operating expenses; and
        improve justification and make proposals easier to evaluate,
              since capital acquisitions are generally analyzed in a
              different manner than operating expenses (e.g., capital
              acquisitions have a longer time horizon of benefits and life-
              cycle costs).

                               D. Risk Management

      Risk management should be central to the planning, budgeting, and
    acquisition process. Failure to analyze and manage the inherent risk in
    all capital asset acquisitions may contribute to cost overruns, schedule
    shortfalls, and acquisitions that fail to perform as expected. For each
    major capital project a risk analysis that includes how risks will be
    isolated, minimized, monitored, and controlled may help prevent these
    problems.
      The project cost, schedule and performance goals established through
    the planning phase of the project are the basis for approval to procure
    the asset and the basis for assessing risk. During the procurement phase
    performance-based management systems (earned value or similar system)
    must be used to provide contractor and Government management visibility
    on the achievement of, or deviation from, goals until the asset is
    accepted and operational. If goals are not being met, performance-based
    management systems allow for early identification of problems, potential
    corrective actions, and changes to the original goals needed to complete
    the project and necessary for agency portfolio analysis decisions. These
    systems also allow for Administration decisions to recommend meaningful
    modifications for increased funding to the Congress, or termination of
    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 2000).
      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

    [[Page 114]]

      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 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 2000).

    Funding
      Full funding: Full funding means that appropriations--regular
    appropriations or advance appropria

    [[Page 115]]

    tions--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:
        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

    [[Page 116]]

    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 6-5 shows the value of the net federally financed
    physical capital stock since 1960, in constant fiscal year 1996 dollars.
    The total stock grew at a 2.2 percent average annual rate from 1960 to
    2000, with periods of faster growth during the late 1960s and the 1980s.
    The stock amounted to $1,921 billion in 2000 and is estimated to
    increase slightly to $1,994 billion by 2002. In 2000, the national
    defense capital stock accounted for $635 billion, or 33 percent of the
    total, and nondefense stocks for $1,286 billion, or 67 percent of the
    total. \3\
    ---------------------------------------------------------------------------
      \3\ The historical stock estimates are reduced from those published
    last year because of an assumed faster depreciation rate for highways
    and the full incorporation of revised price indexes from the Bureau of
    Economic Analysis, as explained in the note on estimating methods at the
    end of this part. The revisions leave the year-to-year trends virtually
    unchanged.

      Real stocks of defense and nondefense capital show very different
    trends. Nondefense stocks have grown consistently since 1970, increasing
    from $455 billion in 1970 to $1,286 billion in 2000. With the
    investments proposed in the budget, nondefense stocks are estimated to
    grow to $1,370 billion in 2002. During the 1970s, the nondefense capital
    stock, grew at an average annual rate of 4.9 percent. In the 1980s,
    however, the growth rate slowed to 2.9 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, a large defense buildup began
    to increase the stock of defense capital. By 1986, the defense stock had
    exceeded its earlier Vietnam-era peak. In the last few years,
    depreciation on the increased stocks, together with a slower pace of
    defense physical capital investment allowed by the collapse of the
    Soviet Union and the closure or realignment of unneeded military bases,
    reduced the stock from its previous levels. The increased defense
    investment in this budget would slow the rate of decline markedly, with
    the stock estimated to decrease from $635 billion in 2000 to $624
    billion in 2002.
      Another trend in the Federal physical capital stocks is the shift from
    direct Federal assets to grant-financed assets. In 1960, 42 percent of
    federally financed nondefense capital was owned by the Federal
    Government, and 58 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 2000, 27 percent of the nondefense stock was owned by
    the Federal Government and 73 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

                                                                      Table 6-5.  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........................................................................      806       572        234        98       61       36      136           82           25         20         9
      1965........................................................................      892       554        338       128       78       51      209          146           30         21        12
      1970........................................................................    1,044       589        455       155       94       61      301          213           44         25        19
      1975........................................................................    1,091       521        570       176      109       67      394          261           71         39        23
      1980........................................................................    1,216       484        732       206      130       76      526          317          112         73        25
      1985........................................................................    1,422       569        853       234      143       90      619          368          135         92        24
      1990........................................................................    1,696       721        975       269      154      114      706          429          147        105        26
    Annual data:
      1995........................................................................    1,832       712      1,119       311      164      146      809          496          156        115        43
      1996........................................................................    1,845       691      1,153       319      165      154      834          511          159        116        48
      1997........................................................................    1,858       672      1,186       327      165      162      859          526          162        118        53
      1998........................................................................    1,869       657      1,212       330      165      165      882          540          165        119        59
      1999........................................................................    1,890       644      1,246       338      166      173      908          556          167        120        65
      2000........................................................................    1,921       635      1,286       350      167      183      936          574          170        121        70
      2001 est....................................................................    1,956       628      1,328       362      169      194      966          594          173        123        76
      2002 est....................................................................    1,994       624      1,370       373      170      203      997          614          176        124        82
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

    [[Page 117]]

    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 6-6 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 6-5.

                  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 6-7, the R&D capital stock financed by
    Federal outlays is estimated to be $914 billion in 2000 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 2000 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.

      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
    1980s, from an annual rate of 3.8 percent in the 1970s to a rate of 2.1
    percent in the 1980s. 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 6-8, the federally financed education stock is
    estimated at $1,030 billion in 2000 in constant 1996 dollars, rising to
    $1,157 billion in 2002. The vast majority of the Nation's education
    stock is

                                              Table 6-6.  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.......................................   22.7        4.7      18.1    7.0        2.2       4.7    2.5    2.3   15.7        2.4      13.3        12.6           0.1         0.1        0.5
      1965.......................................   32.5        6.9      25.6   10.1        3.0       7.1    3.3    3.8   22.3        3.8      18.5        15.5           2.1         0.4        0.5
      1970.......................................   32.1        9.4      22.6    6.9        3.8       3.1    2.3    0.8   25.1        5.6      19.5        11.9           5.1         0.9        1.6
      1975.......................................   32.9       11.6      21.3    9.0        4.3       4.8    3.6    1.2   23.8        7.4      16.5         7.0           4.3         4.5        0.7
      1980.......................................   46.9       14.6      32.4   11.0        4.9       6.0    3.9    2.2   36.0        9.6      26.4        12.3           7.5         6.8       -0.2
      1985.......................................   45.4       17.8      27.7   13.7        6.4       7.4    2.6    4.8   31.7       11.4      20.3        13.0           4.1         3.2       -0.1
      1990.......................................   46.3       22.3      24.0   16.2        9.2       7.0    2.4    4.5   30.1       13.1      17.1        11.9           1.7         2.1        1.4
    Annual data:
      1995.......................................   59.9       26.3      33.5   19.5       11.4       8.2    1.8    6.3   40.3       15.0      25.4        15.2           2.8         2.0        5.4
      1996.......................................   61.1       27.3      33.8   20.7       11.8       8.9    0.9    8.0   40.3       15.4      24.9        14.9           3.0         1.6        5.5
      1997.......................................   60.9       28.2      32.7   20.0       12.3       7.7   -0.1    7.8   40.9       15.9      25.0        15.2           2.9         1.5        5.3
      1998.......................................   55.5       29.0      26.5   15.5       12.6       2.9     -*    2.9   40.0       16.4      23.7        14.1           2.7         1.1        5.8
      1999.......................................   63.4       29.7      33.7   21.3       12.9       8.4    0.7    7.7   42.2       16.8      25.3        16.1           2.7         1.2        5.3
      2000.......................................   71.0       30.9      40.1   25.5       13.5      12.0    1.5   10.5   45.5       17.4      28.1        18.1           2.7         1.6        5.7
      2001 est...................................   74.0       32.1      41.9   26.2       14.2      11.9    1.5   10.4   47.9       17.9      30.0        19.5           2.8         1.6        6.1
      2002 est...................................   75.5       33.4      42.1   26.0       14.9      11.1    1.3    9.8   49.5       18.5      31.0        20.7           2.7         1.5        6.2
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
    * $50 million or less.

    [[Page 118]]

                                            Table 6-7.  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...................................         247          15          233         204          63          140         451          78          373
      1975...................................         262          19          242         249          92          157         511         112          399
      1980...................................         265          24          242         295         125          170         560         148          412
      1985...................................         304          29          276         321         165          156         626         194          432
      1990...................................         381          34          347         362         217          146         744         251          493
    Annual data:
      1995...................................         399          40          359         436         278          158         835         318          517
      1996...................................         401          41          360         448         290          158         850         332          518
      1997...................................         403          42          360         463         303          160         866         346          520
      1998...................................         403          44          360         478         316          163         882         359          523
      1999...................................         402          45          358         495         329          166         897         374          523
      2000...................................         401          46          356         512         344          169         914         389          524
      2001 est...............................         400          47          353         533         359          174         933         406          527
      2002 est...............................         403          48          355         556         377          179         959         425          534
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    \1\ Excludes outlays for physical capital for research and development, which are included in Table 6-5.

    financed by State and local governments, and by students and their
    families themselves. This federally financed portion of the stock
    represents about 3 percent of the Nation's total education stock. \4\
    Nearly three-quarters is for elementary and secondary education, while
    the remaining one quarter is for higher education.
    ---------------------------------------------------------------------------
      \4\ For estimates of the total education stock, see Table 2-4 in
    Chapter 2, ``Stewardship: Toward a Federal Balance Sheet.''

      Despite a slowdown in growth during the early 1980s, the stock grew at
    an average annual rate of 5.4 percent from 1970 to 2000, and the
    expansion of the education stock is projected to continue under this
    budget.

                           Note on Estimating Methods

      This note provides further technical detail about the estimation of
    the capital stock series presented in Tables 6-5 through 6-8.
      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,

          Table 6-8.  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.............................          67            48         19
      1965.............................          93            67         26
      1970.............................         213           167         46
      1975.............................         307           247         60
      1980.............................         434           338         96
      1985.............................         535           399        137
      1990.............................         703           519        184
    Annual data:
      1995.............................         792           574        218
      1996.............................         822           596        226
      1997.............................         856           621        235
      1998.............................         909           661        248
      1999.............................         969           708        261
      2000.............................       1,030           762        268
      2001 est.........................       1,088           813        275
      2002 est.........................       1,157           869        289
    ------------------------------------------------------------------------

    [[Page 119]]

    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 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 NIPA table explicitly links 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 presented estimates of capital stocks consistent with its
    October 1999 comprehensive revisions in ``Fixed Assets and Consumer
    Durable Goods,'' Survey of Current Business, April 2000, pp. 17-30.
    ---------------------------------------------------------------------------
      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 chained NIPA price indexes for Federal, State, and
    local consumption of durables and gross investment. The price indexes
    were updated this year consistent with revised data back to 1930 from
    BEA's October 1999 comprehensive NIPA revisions. 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 nondefense construction and rehabilitation;
    20.3 percent for nondefense equipment; 14.0 percent for defense
    equipment; 2.1 percent for defense structures; 2.0 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. The depreciation
    rate for transportation grants was increased from the 1.6 percent rate
    used last year, consistent with a revised as

    [[Page 120]]

    sumption for the service life of highways adopted by BEA in its October
    1999 revisions.
    ---------------------------------------------------------------------------
      \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 6-8 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 6-8 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.

          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 President's Commission to Study Capital Budgeting recently
    considered 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, but it did not
    recommend any kind of capital budget or target for investment in the
    sense discussed in this section. \10\ This section is intended to show
    the implications of budgeting for capital separately or changing the
    basis for measuring capital investment in the budget.
    ---------------------------------------------------------------------------
      \10\ Report of the President's Commission to Study Capital Budgeting
    (February 1999). To be specific, the Commission did not recommend
    changing the budget to alter the basis for measuring capital investment,
    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 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 6-9 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.

    [[Page 121]]

                             Table 6-9.  ALTERNATIVE DEFINITIONS OF INVESTMENT OUTLAYS, 2002
                                                (In millions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                                           Investment Outlays
                                                                                  ----------------------------------
                                                                                    All types
                                                                                    of capital   Federal    National
                                                                                       \1\       capital    capital
    ----------------------------------------------------------------------------------------------------------------
    Construction and rehabilitation:
      Grants:
        Transportation...........................................................      37,397   .........     37,397
        Natural resources and environment........................................       2,845   .........      2,845
        Community and regional development.......................................       6,403   .........      1,120
        Housing assistance.......................................................       7,955   .........  .........
        Other grants.............................................................         671   .........        571

      Direct Federal:
        National defense.........................................................       5,113       5,113  .........
        General science, space, and technology...................................       2,764       2,733      2,764
        Natural resources and environment........................................       4,994       3,915      4,591
        Energy...................................................................       1,318       1,318      1,318
        Transportation...........................................................         263         233        263
        Veterans and other health facilities.....................................       1,559       1,559      1,559
        Postal Service...........................................................         975         975        975
        GSA real property activities.............................................       1,175       1,175  .........
        Other construction.......................................................       3,299       2,893      1,277
                                                                                  ----------------------------------
          Total construction and rehabilitation..................................      76,731      19,914     54,680

    Acquisition of major equipment (direct):
      National defense...........................................................      57,239      57,239  .........
      Postal Service.............................................................         749         749        749
      Air transportation.........................................................       2,302       2,302      2,302
      Other......................................................................       7,278       6,247      4,165
                                                                                  ----------------------------------
       Total major equipment.....................................................      67,568      66,537      7,216

    Purchase or sale of land and structures......................................         358         358  .........
    Other physical assets (grants)...............................................       1,023   .........         61
                                                                                  ----------------------------------
      Total physical investment..................................................     145,680      86,809     61,957

    Research and development:
      Defense....................................................................      46,850   .........      1,206
      Nondefense.................................................................      40,396   .........     40,029
                                                                                  ----------------------------------
       Total research and development............................................      87,246   .........     41,235

    Education and training.......................................................      65,606   .........     65,203
                                                                                  ==================================
    Total investment outlays.....................................................     298,532      86,809    168,395
    ----------------------------------------------------------------------------------------------------------------
    \1\ Total outlays for ``all types of capital`` are equal to the total for ``major Federal investment outlays''
      in Table 6-1. Some capital is not classified as either Federal or national capital, and a relatively small
      part is included in both categories.

      Capital budgets and other changes in Federal budgeting have been
    suggested from time to time for the Government's investment in both
    Federal and national capital. The 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.

                          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

    [[Page 122]]

    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 2002 is
    estimated to be $86.8 billion, or 29 percent of the total Federal
    investment outlays shown in Table 6-1. Of the investment in Federal
    capital, 72 percent is for defense and 28 percent for nondefense
    purposes. (The estimates for defense investment throughout this section
    are subject to change as a result of the Defense Strategy Review
    mentioned in the introduction to this chapter.)

    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.
      Some capital budget proposals would partition the unified budget into
    a capital budget, an operating budget, and a total budget. Table 6-10
    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 larger
    surplus than the unified budget by a small amount, $7 billion, because
    capital expenditures are larger than depreciation by $7 billion. This
    reflects both the relatively small Federal investment in new capital
    assets ($87 billion) and the offsetting effect of depreciation on the
    existing stock ($80 billion). The figures in Table 6-10 and the
    subsequent tables of this section are rough estimates, intended only to
    be illustrative and to provide a basis for broad generalizations.

     Table 6-10.  CAPITAL, OPERATING, AND UNIFIED BUDGETS: FEDERAL CAPITAL,
                                    2002 \1\
                            (In billions of dollars)
    ------------------------------------------------------------------------

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

                        Operating Budget

    Receipts................................................       2,192
    Expenses:
      Depreciation..........................................          80
      Other.................................................       1,874
                                                             ---------------
        Subtotal, expenses..................................       1,954
                                                             ---------------
      Surplus or deficit (-)................................         238

                         Capital Budget

    Income: depreciation....................................          80
    Capital expenditures....................................          87
                                                             ---------------
      Surplus or deficit (-)................................          -7

                         Unified Budget

    Receipts................................................       2,192
    Outlays.................................................       1,961
                                                             ---------------
      Surplus or deficit (-)................................         231
    ------------------------------------------------------------------------
    \1\ Historical data to estimate the capital stocks and calculate
      depreciation are not readily available for Federal capital.
      Depreciation estimates were based on the assumption that outlays for
      Federal capital were a constant percentage of the larger categories in
      which such outlays were classified. They are also subject to the
      limitations explained in Part III of this chapter. Depreciation is
      measured in terms of current cost, not historical cost.

      Some proposals for a capital budget would exclude defense capital
    (other than military family housing). These exclusions--weapons systems,
    military bases, and so forth--would comprise three-fourths of the
    expenditures shown in the capital budget of Table 6-10. For 2002, this
    exclusion would make little difference to the operating budget surplus.
    If defense capital was excluded, the operating budget would have a
    surplus that was $10 billion more than the unified budget surplus
    instead of $7 billion more as shown above for the complete coverage of
    Federal capital. Capital expenditures for defense in 2002 are estimated
    to be $3 billion less than depreciation, whereas capital expenditures
    for nondefense purposes (plus military family housing) are estimated to
    be $10 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 an agency 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

    [[Page 123]]

    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, in
    which case the budget would record no expense at all in the budget year.
    ---------------------------------------------------------------------------
      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 is not
    permanent, it is 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 present 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 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

    [[Page 124]]

    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 lives. With similar
    objectives in mind, the Federal Accounting Standards Advisory Board has
    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\ Statement of Federal Financial Accounting Standards No. 6,
    Accounting for Property, Plant, and Equipment, pp. 5-14 and 34-35. (The
    Federal Accounting Standards Advisory Board was established by the
    Office of Management and Budget, Department of Treasury, and General
    Accounting Office to develop accounting standards and concepts for the
    Federal government. The American Institute of Certified Public
    Accountants has designated it as the body to establish generally
    accepted accounting principles (GAAP) for Federal government entities.)
    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 (November 1999).
    ---------------------------------------------------------------------------
      States do not currently record depreciation expense in the financial
    accounting statements for governmental funds. They record depreciation
    expense only in their proprietary (commercial-type) funds and in those
    trust funds where net income, expense, or capital maintenance is
    measured. \18\ Under new financial accounting standards, however,
    depreciation on most capital assets will be recognized as an expense in
    government-wide financial statements. This requirement will be phased in
    over the next three years and is effective for larger governments for
    fiscal years beginning after June 2001. \19\
    ---------------------------------------------------------------------------
      \18\ Governmental Accounting Standards Board (GASB), Codification of
    Governmental Accounting and Financial Reporting Standards as of June 30,
    2000, sections 1100.107 and 1400.114-1400.118.
      \19\ Governmental Accounting Standards Board, Statement No. 34, Basic
    Financial Statements--and Management's Discussion and Analysis--for
    State and Local Governments (June 1999), paragraphs 18-29 and 44-45. For
    discussion of the basis for conclusions of these new standards, 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, has traditionally been divided into separate titles of which
    some are for current expenditures and others for capital expenditures. A
    recent study of European countries found only four, however, that had a
    real difference between a current budget and a capital budget (Greece,
    Ireland, Luxembourg, and Portugal). \20\
    ---------------------------------------------------------------------------
      \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.
    ---------------------------------------------------------------------------
      In addition, four developed countries have recently begun to adopt
    accrual budgets that include the use of depreciation in place of capital
    expenditures. These four countries, however, require appropriations for
    the full cost or current cash disbursements as an additional control
    under some or all circumstances. New Zealand, the first country to shift
    to an accrual budget, 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

    [[Page 125]]

    certain capital assets such as state highways. Australia, which adopted
    an accrual budget as of its 1999-2000 budget, requires an appropriation
    for departments that do not have adequate reserves to purchase assets.
    The United Kingdom plans to budget on an accrual basis starting with its
    budget for 2001-02. In addition to the depreciation in the budget there
    would be an appropriation for cash payments for capital assets made in
    the fiscal year. Parliamentary approval would be needed for both the
    ``resource budget,'' which would include depreciation, and the cash
    requirement, which would include the cash payments made for capital
    assets. Canada plans to publish its 2001-02 budget on a full accrual
    basis, for the first time including depreciation of capital assets, but
    it distinguishes between its budget and its ``estimates.'' The budget
    sets forth the overall fiscal framework, while the ``estimates''
    comprise the detailed departmental appropriations. The estimates are on
    a modified cash basis that does not make use of depreciation.
      A country with an accrual budget may calculate its measure of fiscal
    position on other bases as well. The Australian budget has several
    measures of fiscal position. The primary fiscal measure, the fiscal
    balance, is close to a cash basis and includes the purchase of property,
    plant, and equipment rather than depreciation. \21\
    ---------------------------------------------------------------------------
      \21\GAO, Accrual Budgeting: Experiences of Other Nations and
    Implications for the United States, GAO/AIMD-00-57 (February 2000).
    ---------------------------------------------------------------------------
      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. \22\
    ---------------------------------------------------------------------------
      \22\Denmark had accrual budgets generally, not just for capital
    assets, but abandoned that practice a number of years ago. The budgets
    in Sweden, Great Britain, Germany, and France as of the middle 1980s 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.'' \23\
    ---------------------------------------------------------------------------
      \23\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.'' \24\
    ---------------------------------------------------------------------------
      \24\GAO, Budget Issues: Incorporating an Investment Component in the
    Federal Budget, GAO/AIMD-94-40 (November 1993), p. 11. GAO had made the
    same recommendation in earlier reports but with less extensive analysis.
    ---------------------------------------------------------------------------
      After further study of the role of depreciation in budgeting for
    national capital, GAO reiterated that conclusion in another study in
    1995. \25\ ``The greatest disadvantage . . . was that depreciation would
    result in a loss of budgetary control under an obligation-based
    budgeting system.'' \26\ 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 expressly 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.'' \27\
    ---------------------------------------------------------------------------
      \25\GAO, Budget Issues: The Role of Depreciation in Budgeting for
    Certain Federal Investments, GAO/AIMD-95-34 (February 1995), pp. 1 and
    19-20.
      \26\Ibid., p. 17. Also see pp. 1-2 and 16-19.
      \27\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.
        The effect of Federal taxation, borrowing, and other
              policies on private investment.

    [[Page 126]]

      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. \28\ 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.'' \29\ 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. \30\ 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. \31\
    ---------------------------------------------------------------------------
      \28\Incorporating an Investment Component in the Federal Budget, pp.
    1-2, 9-10, and 15.
      \29\Ibid., pp. 1 and 5.
      \30\Ibid., pp. 2 and 13-16.
      \31\The Role of Depreciation in Budgeting for Certain Investments, pp.
    2 and 19-20.

      Table 6-11.  UNIFIED BUDGET WITH NATIONAL INVESTMENT COMPONENT, 2002
                            (In billions of dollars)
    ------------------------------------------------------------------------

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

    Receipts.................................................      2,192
    Outlays:
      National investment....................................        168
      Other..................................................      1,792
                                                              --------------
       Subtotal, outlays.....................................      1,961
                                                              --------------
      Surplus or deficit (-).................................        231
    ------------------------------------------------------------------------

      Table 6-11 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 $168 billion in 2002.
    It includes infrastructure outlays financed by Federal grants to State
    and local governments, such as highways and sewer projects, as well as
    direct Federal purchases of infrastructure, such as electric power
    generation equipment. It also includes intangible investment for
    nondefense research and development, for basic research financed through
    defense, and for education and training. Much of this expenditure
    consists of grants and credit assistance to State and local governments,
    nonprofit organizations, or individuals. Only 12 percent of national
    investment consists of assets to be owned by the Federal Government.
    Military investment and some other ``capital assets'' as defined
    previously are excluded, because that investment does not primarily
    enhance economic growth.

    A Capital Budget for National Investment

      Table 6-12 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. \32\
    ---------------------------------------------------------------------------
      \32\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 6-12.  CAPITAL, OPERATING, AND UNIFIED BUDGETS: NATIONAL CAPITAL,
                                    2002 \1\
                            (In billions of dollars)
    ------------------------------------------------------------------------

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

                        Operating Budget

    Receipts................................................       2,156
    Expenses:
      Depreciation \2\......................................          77
      Other.................................................       1,792
                                                             ---------------
        Subtotal, expenses..................................       1,869
                                                             ---------------
      Surplus or deficit (-)................................         287

                         Capital Budget

    Income:
      Depreciation \2\......................................          77
      Earmarked tax receipts \3\............................          36
                                                             ---------------
        Subtotal, income....................................         113
    Capital expenditures....................................         168
                                                             ---------------
      Surplus or deficit (-)................................         -56

                         Unified Budget

    Receipts................................................       2,192
    Outlays.................................................       1,961
                                                             ---------------
        Surplus or deficit (-)..............................         231
    ------------------------------------------------------------------------
    \1\ For the purpose of this illustrative table only, education and
      training outlays are arbitrarily depreciated over 30 years by the
      straight-line method. This differs from the treatment of education and
      training elsewhere in this chapter and in Chapter 2. All depreciation
      estimates are subject to the limitations explained in Part III of this
      chapter. Depreciation is measured in terms of current cost, not
      historical cost.
    \2\ Excludes depreciation on capital financed by earmarked tax receipts
      allocated to the capital budget.
    \3\ Consists of tax receipts of the highway and airport and airways
      trust funds, less trust fund outlays for operating expenditures. These
      are user charges earmarked for financing capital expenditures.

      In addition to these basic limitations, the definition of investment
    is more malleable for national capital than Federal capital. Many
    programs promise long-term intangible benefits to the Nation, and
    depreciation rates are much more difficult to determine for intangible
    investment such as research and education than they are for physical
    investment such as highways and office buildings. These and other
    definitional questions are hard to resolve. The answers could
    significantly affect budget decisions, because they would determine
    whether the budget would record all or only a small part of the cost of
    a decision when policy makers were comparing the budgetary cost of a
    project with their judgment of its benefits. The process of reaching an
    answer with a capital budget would open the door to manipulation,
    because there would be an incentive to make the

    [[Page 127]]

    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. \33\
    ---------------------------------------------------------------------------
      \33\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 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. \34\
    ---------------------------------------------------------------------------
      \34\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 2001 and 2002, and for a discussion of the
    NIPA Federal sector and its relationship to the budget.
    ---------------------------------------------------------------------------
      Until a few 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. \35\ 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. \36\
    ---------------------------------------------------------------------------
      \35\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.
      \36\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.''
    ---------------------------------------------------------------------------
      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 2000 Federal
    Government current account surplus was increased $6 billion by including
    depreciation rather than gross investment, because depreciation of
    federally owned structures, equipment, and software was less than gross
    investment. The 2002 Federal current account surplus is estimated to be
    increased $14 billion. \37\ A capital budget is not needed to capture
    this effect.
    ---------------------------------------------------------------------------
      \37\See actuals and estimates for 2000-02 in Table 16-2 of chapter 16
    of this volume, ``National Income and Product Accounts.''
    ---------------------------------------------------------------------------

                      Borrowing to Finance a Capital Budget

      A further issue traditionally 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.
      As this argument has traditionally been framed, it might appear as
    though it did not apply under present circumstances. The Government now
    has a large surplus, which is mostly used to repay Federal debt held by
    the public, and a large surplus is estimated to continue throughout the
    projection period of this budget. It does not ``borrow'' in the sense of
    increasing its debt from year to year, and it is not estimated to borrow
    during the projection period. However, the argument is fundamentally
    about the proper target for Federal debt and whether that target should
    be higher if the Government has net investment. If the Government has
    deficits financed by selling debt, should it borrow more than otherwise
    because of its net investment? Or if the Government has surpluses used
    to repay debt, should it repay less than otherwise because of its net

    [[Page 128]]

    investment? This section follows the traditional way of discussing the
    issue by referring to ``borrowing to finance net investment.'' However,
    for the present analysis, ``borrowing more'' is equivalent to ``repaying
    less debt.''
      This argument about financing capital expenditures 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 6-10 and 6-12 suggest that this
    rationale would currently justify some change in borrowing (or debt
    repayment) under the two capital budgets roughly illustrated in this
    chapter, but for Federal capital the change would not be much. For
    Federal capital, Table 6-10 indicates that current cost depreciation is
    less than gross investment for Federal capital--the capital budget
    deficit is $7 billion. The rationale of borrowing to finance net
    investment would justify the Federal Government borrowing this amount
    ($7 billion) and no more to finance its investment in Federal capital.
    For national capital, Table 6-12 indicates that current cost
    depreciation (plus the excise taxes earmarked to finance capital
    expenditures for highways and airports and airways \38\) is less than
    gross investment--the capital budget deficit is $56 billion. The
    rationale of borrowing to finance net investment would justify the
    Federal Government borrowing this amount ($56 billion) and no more to
    finance its investment in national capital. \39\
    ---------------------------------------------------------------------------
      \38\The capital budget deficit would be about $22 billion larger if
    current cost depreciation were used instead of earmarked excise taxes
    for investment in highways and airports and airways.
      \39\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-
    3.
    ---------------------------------------------------------------------------
      Even with depreciation calculated in current cost, the rationale for
    borrowing to finance net investment--or, under present circumstances,
    the rationale for reducing debt repayment because of 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. A high level of net
    national saving is needed to meet the demographic and other 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. \40\
    ---------------------------------------------------------------------------
      \40\GAO considered deficit financing of investment but did not
    recommend it. See Incorporating an Investment Component in the Federal
    Budget, pp. 12-13.
    ---------------------------------------------------------------------------
      The present budget proposes to continue to run substantial surpluses,
    reducing the debt to make room for financing private 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 realized 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.

    [[Page 129]]

           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 2001 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 $130.2 billion in 2000
    and is projected to increase to $182.2 billion by 2010 on a current
    services basis. The largest components are for national defense and for
    roadways and bridges, which together accounted for more than three-
    fifths of Federal public physical capital spending in 2000.
      Table 6-13 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 $34.4
    billion in 2000, and current services outlays are estimated to increase
    to $50.6 billion by 2010. Outlays for nondefense housing and buildings
    were $13.1 billion in 2000 and are estimated to be $19.0 billion in
    2010. Physical capital outlays for other nondefense categories were
    $26.7 billion in 2000 and are projected to be $34.8 billion by 2010. For
    national defense, this spending was $56.1 billion in 2000 and is
    estimated on a current services basis to be $77.8 billion in 2010.
      Table 6-14 shows current services projections on a constant dollar
    basis, using fiscal year 1996 as the base year.

                                     Table 6-13.  CURRENT SERVICES OUTLAY PROJECTIONS FOR FEDERAL PHYSICAL CAPITAL SPENDING
                                                                    (In billions of dollars)
    --------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                 Estimate
                                                                       2000  -------------------------------------------------------------------------------
                                                                      Actual   2001    2002    2003    2004    2005    2006    2007    2008    2009    2010
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    Nondefense:
      Transportation-related categories:
         Roadways and bridges.......................................    25.0    27.1    30.0    31.7    32.9    33.9    34.8    35.7    36.5    37.3    38.1
         Airports and airway facilities.............................     3.7     4.2     5.0     5.5     5.8     6.2     6.3     6.4     6.6     6.7     6.9
         Mass transportation systems................................     5.1     5.2     4.9     4.7     4.5     4.5     4.6     4.7     4.8     4.9     5.0
         Railroads..................................................     0.6     0.7     0.6     0.6     0.6     0.6     0.7     0.7     0.7     0.7     0.7
                                                                     ---------------------------------------------------------------------------------------
           Subtotal, transportation.................................    34.4    37.2    40.5    42.5    43.8    45.2    46.4    47.5    48.5    49.6    50.6

      Housing and buildings categories:
         Federally assisted housing.................................     7.6     8.4     8.5     8.5     8.6     8.8     9.0     9.3     9.1     9.3     9.5
         Hospitals..................................................     2.2     1.7     1.7     1.8     1.8     1.9     1.9     2.0     2.0     2.1     2.2
         Public buildings \1\.......................................     3.3     4.5     4.6     5.6     6.4     6.7     6.8     6.9     7.0     7.2     7.3
                                                                     ---------------------------------------------------------------------------------------
           Subtotal, housing and buildings..........................    13.1    14.6    14.8    15.9    16.9    17.4    17.7    18.2    18.2    18.6    19.0

      Other nondefense categories:
         Wastewater treatment and related facilities................     2.9     3.2     3.2     3.4     3.5     3.6     3.7     3.8     3.9     3.9     4.0
         Water resources projects...................................     3.7     3.7     3.9     4.1     4.2     4.3     4.2     4.3     4.4     4.5     4.7
         Space and communications facilities........................     6.3     5.7     6.1     6.4     6.9     6.9     6.8     7.8     7.6     7.6     7.8
         Energy programs............................................     1.3     1.3     1.3     1.3     1.4     1.4     1.4     1.4     1.5     1.5     1.5
         Community development programs.............................     5.6     5.8     6.0     6.1     6.3     6.5     6.6     6.8     6.9     7.0     7.2
         Other nondefense...........................................     7.0     8.0     7.8     7.7     8.4     8.5     8.7     8.9     9.2     9.4     9.6
                                                                     ---------------------------------------------------------------------------------------
           Subtotal, other nondefense...............................    26.7    27.8    28.4    29.1    30.7    31.1    31.4    33.0    33.5    34.1    34.8
                                                                     ---------------------------------------------------------------------------------------
         Subtotal, nondefense.......................................    74.1    79.6    83.7    87.4    91.4    93.8    95.6    98.6   100.3   102.2   104.4
    National defense................................................    56.1    58.1    61.7    63.4    66.5    69.6    71.7    73.1    74.1    75.9    77.8
                                                                     ---------------------------------------------------------------------------------------
    Total...........................................................   130.2   137.7   145.5   150.9   157.9   163.3   167.2   171.7   174.4   178.2   182.2
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    \1\ Excludes outlays for public buildings that are included in other categories in this table.

    [[Page 130]]

                 Table 6-14.  CURRENT SERVICES OUTLAY PROJECTIONS FOR FEDERAL PHYSICAL CAPITAL SPENDING
                                         (In billions of constant 1996 dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                                             Estimate
                                                                       2000  ---------------------------------------
                                                                      Actual   2001    2002    2003    2004    2005
    ----------------------------------------------------------------------------------------------------------------
    Nondefense:
      Transportation-related categories:
         Roadways and bridges.......................................    23.3    24.6    26.4    27.1    27.3    27.4
         Airports and airway facilities.............................     3.6     3.9     4.6     4.9     5.1     5.2
         Mass transportation systems................................     4.8     4.7     4.3     4.0     3.8     3.6
         Railroads..................................................     0.6     0.6     0.6     0.6     0.6     0.6
                                                                     -----------------------------------------------
           Subtotal, transportation.................................    32.3    33.9    35.9    36.6    36.7    36.8

      Housing and buildings categories:
         Federally assisted housing.................................     7.1     7.7     7.5     7.3     7.2     7.2
         Hospitals..................................................     2.2     1.6     1.7     1.7     1.7     1.7
         Public buildings \1\.......................................     3.3     4.4     4.4     5.2     5.8     5.9
                                                                     -----------------------------------------------
           Subtotal, housing and buildings..........................    12.6    13.7    13.6    14.2    14.7    14.8

      Other nondefense categories:
         Wastewater treatment and related facilities................     2.7     2.9     2.8     2.9     2.9     2.9
         Water resources projects...................................     3.7     3.6     3.8     3.9     3.9     3.9
         Space and communications facilities........................     6.3     5.6     5.8     6.0     6.4     6.2
         Energy programs............................................     1.3     1.3     1.3     1.3     1.3     1.3
         Community development programs.............................     5.3     5.3     5.3     5.3     5.3     5.2
         Other nondefense...........................................     6.9     7.8     7.4     7.1     7.6     7.5
                                                                     -----------------------------------------------
           Subtotal, other nondefense...............................    26.1    26.5    26.4    26.4    27.3    27.0
                                                                     -----------------------------------------------
         Subtotal, nondefense.......................................    71.0    74.0    75.9    77.3    78.7    78.7
    National defense................................................    57.0    57.9    60.2    60.6    62.3    63.8
                                                                     -----------------------------------------------
    Total...........................................................   128.0   131.9   136.1   137.8   141.0  142.4
    ----------------------------------------------------------------------------------------------------------------
    \1\ Excludes outlays for public buildings that are included in other categories in this table.

                    Public Civilian Capital Needs Assessments

      The Act requires information regarding the state of major Federal
    infrastructure programs, including highways and bridges, airports and
    airway facilities, mass transit, railroads, federally assisted housing,
    hospitals, water resources projects, and space and communications
    investments. Funding levels, long-term projections, policy issues, needs
    assessments, and critiques, are required for each category.
      Capital needs assessments change little from year to year, in part due
    to the long-term nature of the facilities themselves, and in part due to
    the consistency of the analytical techniques used to develop the
    assessments and the comparatively steady but slow changes in underlying
    demographics. As a result, the practice has arisen in reports in
    previous years to refer to earlier discussions, where the relevant
    information had been carefully presented and changes had been minimal.
      The needs assessment material in reports of earlier years is
    incorporated this year largely by reference to earlier editions and by
    reference to other needs assessments. The needs analyses, their major
    components, and their critical evaluations have been fully covered in
    past Supplements, such as the 1990 Supplement to Special Analysis D.
      It should be noted that the needs assessment data referenced here have
    not been determined on the basis of cost-benefit analysis. Rather, the
    data reflect the level of investment necessary to meet a predefined
    standard (such as maintenance of existing highway conditions). The
    estimates do not address whether the benefits of each investment would
    actually be greater than its cost or whether there are more cost-
    effective alternatives to capital investment, such as initiatives to
    reduce demand or use existing assets more efficiently. Before investing
    in physical capital, it is necessary to compare the cost of each project
    with its estimated benefits, within the overall constraints on Federal
    spending.

    [[Page 131]]

                             Significant Factors Affecting Infrastructure Needs Assessments

                                                        Highways

    1. Projected annual average growth in travel to the year 2017.  2.16 percent
    2. Annual cost to maintain 1997 physical conditions on          $50.8 billion (1997 dollars)
     highways.....................................................
    3. Annual cost to maintain 1997 physical conditions on bridges  $5.8 billion (1997 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    $7.7 billion (1997 dollars)
     facilities over a period of 20 years.........................
    2. Yearly cost to replace and maintain the urban, rural, and    $3.1 billion (1997 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      $76 billion
     1972 through 2000.
    3. The population served by centralized treatment facilities:   99 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 (4.9 million*)
      A. In severely substandard units............................  0.5 million
      B. With a rent burden greater than 50 percent...............  4.6 million

    * The total is less than the sum because some renter families
     have both problems.

                                   Indian Health Service (IHS) Health Care Facilities

    1. IHS hospital occupancy rates (2000)........................  39.9 percent
    2. Average length of stay, IHS hospitals (days) (2000)........  4.0
    3. Hospital admissions (2000).................................  64,837
    4. Outpatient visits (2000)...................................  8,318,609
    5. Eligible population (2000).................................  1,511,135

                                  Department of Veterans Affairs (VA) Hospitals (2001)
    1. Medical Centers............................................  172
    2. Outpatient clinics.........................................  781
    3. Domiciliaries..............................................  43
    4. Vet centers................................................  206
    5. Nursing homes..............................................  135

                                                     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. 1999 Status of the Nation's Surface
    Transportation System: Conditions and

    [[Page 132]]

    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.
      FY 2000 Indian Health Service and Tribal Hospital Inpatient
    Statistics.
      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.