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


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                   SPECIAL ANALYSES AND PRESENTATIONS

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          6.  FEDERAL INVESTMENT SPENDING AND CAPITAL BUDGETING

  Investment spending is spending that yields long-term benefits. Its 
purpose may be to improve the efficiency of internal Federal agency 
operations or to increase the Nation's overall stock of capital for 
economic growth. The spending can be direct Federal spending or grants 
to State and local governments. It can be for physical capital, which 
yields a stream of services over a period of years, or for research and 
development or education and training, which are intangible but also 
increase income in the future or provide other long-term benefits.
  Most presentations in the Federal budget combine investment spending 
with spending for current use. This chapter focuses solely on Federal 
and federally financed investment. These investments are discussed in 
the following sections:
    a description of the size and composition of Federal 
          investment spending;
    a discussion of capital assets used to provide Federal 
          services, and efforts to improve planning and budgeting for 
          these assets. An Appendix to Part II presents the ``Principles 
          of Budgeting for Capital Asset Acquisitions,'' which are being 
          used to guide the analysis of 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

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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

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                              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.

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  Outlays for commodity inventories are for the purchase or sale of 
agricultural products pursuant to farm price support programs and the 
purchase and sale of other commodities such as oil and gas. Sales are 
estimated to exceed purchases by $0.4 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.

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                               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

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  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.


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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

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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

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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

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  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

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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


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  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.