[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)
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Estimate
2000 -------------------
Actual 2001 2002
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Federal Investment
Major public physical capital investment:
Direct Federal:
National defense.............................................................. 56.1 58.1 62.3
Nondefense.................................................................... 25.4 26.6 27.1
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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
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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
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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
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Subtotal, conduct of education and training................................... 49.5 54.8 65.6
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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
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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
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Total, miscellaneous physical investment...................................... 2.8 4.0 3.2
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Total, Federal investment outlays, including miscellaneous physical investment.... 256.3 274.8 301.7
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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)
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Estimate
Description 2000 -----------------------------------------------------------------------
Actual 2001 2002 2003 2004 2005 2006
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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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
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\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.
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Table 6-3. FEDERAL INVESTMENT BUDGET AUTHORITY AND OUTLAYS: GRANT AND DIRECT FEDERAL PROGRAMS
(in millions of dollars)
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Estimate
Description 2000 -----------------------------------------------------------------------
Actual 2001 2002 2003 2004 2005 2006
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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
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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
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Subtotal, conduct of research and BA 507 636 583 615 601 613 627
development.
O 405 486 581 629 631 626 647
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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
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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.
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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
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Natural resources and environment....... BA 1,944 2,055 1,995 2,041 2,084 2,130 2,179
O 1,687 1,835 1,782 1,804 1,822 1,846 1,885
National Institute of Standards and BA 332 355 318 325 332 340 348
Technology.
O 396 395 423 388 345 349 353
Hospital and medical care for veterans.. BA 642 700 719 736 753 770 788
O 658 683 717 752 767 769 786
All other research and development...... BA 799 1,077 913 835 855 878 900
O 628 828 914 852 822 841 860
-----------------------------------------------------------------------------------
Subtotal, conduct of research and BA 78,066 84,991 90,641 97,045 99,908 102,581 105,317
development.
O 73,542 77,889 86,665 90,535 95,700 99,498 101,829
-----------------------------------------------------------------------------------
Conduct of education and training:
Elementary, secondary, and vocational BA 1,779 2,428 919 806 824 841 861
education.
O 1,172 1,778 2,014 1,419 1,059 1,005 1,021
Higher education........................ BA 11,538 10,523 16,353 16,463 16,994 17,610 18,247
O 9,961 9,226 15,217 15,920 16,191 16,820 17,499
Research and general education aids..... BA 1,797 2,218 1,814 1,847 1,887 1,928 1,969
O 1,666 2,052 2,054 1,954 1,949 1,970 2,014
Training and employment................. BA 758 1,491 1,989 1,482 1,464 1,496 1,530
O 1,274 1,324 1,614 1,562 1,455 1,460 1,477
Health.................................. BA 1,085 1,393 1,202 1,356 1,380 1,409 1,440
O 948 1,159 1,234 1,253 1,346 1,388 1,415
Veterans education, training, and BA 1,663 2,314 2,397 2,467 2,549 2,653 2,788
rehabilitation.
O 1,694 2,293 2,400 2,476 2,559 2,680 2,807
General science and basic research...... BA 640 797 938 956 854 873 892
O 513 666 787 867 897 874 861
National defense........................ BA 8 7 7 7 7 8 8
O 6 7 13 13 14 14 15
International affairs................... BA 305 232 243 248 254 260 265
O 306 306 275 279 250 256 261
Other................................... BA 644 677 648 703 664 685 698
O 465 816 633 682 717 742 747
-----------------------------------------------------------------------------------
Subtotal, conduct of education and BA 20,217 22,080 26,510 26,335 26,877 27,763 28,698
training.
O 18,005 19,627 26,241 26,425 26,437 27,209 28,117
-----------------------------------------------------------------------------------
Subtotal, direct Federal investment..... BA 182,444 201,781 210,054 219,256 225,103 230,901 237,016
O 173,045 182,276 202,292 207,331 216,604 224,606 229,347
===================================================================================
Total, Federal investment \1\............. BA 264,468 303,301 332,630 323,418 331,648 339,695 347,968
O 253,552 270,846 298,532 309,159 320,818 331,408 338,507
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Budget authority for several programs in this category and the total does not reflect program level, since budget authority is distorted by the use
of advance appropriations in 2000, 2001 and 2002. Budget authority for 2002 is significantly overstated because of a one-time adjustment proposed by
the Administration to reverse the misleading budget practice of using advance appropriations simply to avoid spending limitations. For additional
information on this issue, see Chapter 13, ``Preview Report,'' in this volume.
[[Page 107]]
Part II: PLANNING, BUDGETING, AND ACQUISITION OF CAPITAL ASSETS
The previous section discussed Federal investment broadly defined. The
focus of this section is much narrower--the review of planning and
budgeting during the past year and the resultant budget proposals for
capital assets owned by the Federal Government and used to deliver
Federal services. Capital assets consist of Federal buildings,
information technology, and other facilities and major equipment,
including weapons systems, federally owned infrastructure, and space
satellites. \1\ With proposed major agency restructuring, organizational
streamlining, and other reforms, good planning may suggest reduced
spending for some assets, such as office buildings, and increased
spending for others, such as information technology, to increase the
productivity of a smaller workforce.
---------------------------------------------------------------------------
\1\ This is almost the same as the definition in Part I of this
chapter for spending for direct Federal construction and rehabilitation,
major equipment, and purchase of land, except that capital assets
excludes grants to private groups for these purposes (e.g., grants to
universities for research equipment and grants to AMTRAK). A more
complete definition can be found in the glossary to the ``Principles of
Budgeting for Capital Asset Acquisitions,'' which is at the end of this
Part.
---------------------------------------------------------------------------
In recent years the Executive Branch and the Congress have reviewed
the Federal Government's performance in planning, budgeting, risk
management, and the acquisition of capital assets. The reviews indicate
that the performance is uneven across the Government; the problems have
many causes, and as a result, there is no single solution. However, in
meeting the objective of improving the Government's performance, it is
essential that the caliber of Government planning and budgeting for
capital assets be improved.
Improving Planning, Budgeting, and Acquisition of Capital Assets
Risk Management
Recent Executive Branch reviews have found a recurring theme in many
capital asset acquisitions--that risk management should become more
central to the planning, budgeting, and acquisition process. Failure to
analyze and manage the inherent risk in all capital asset acquisitions
may have contributed to cost overruns, schedule shortfalls, and
acquisitions that fail to perform as expected. Failure to adopt capital
asset requirements that are within the capabilities of the market and
budget limitations may also have contributed to these problems. For each
major project a risk analysis that includes how risks will be isolated,
minimized, monitored, and controlled may help prevent these problems.
The proposals in this budget, together with recent legislation enacted
by Congress, are designed to help the Government manage better its
portfolio of capital assets.
Long-Term Planning and Analysis
Planning and managing capital assets, especially better management of
risk, has historically been a low priority for some agencies. Attention
focuses on coming-year appropriations, and justifications are often
limited to lists of desired projects. The increased use of long-range
planning linked to performance goals required by the Government
Performance and Results Act would provide a better basis for
justifications. It would increase foresight and improve the odds for
cost-effective investments.
A need for better risk management, integrated life-cycle planning, and
operation of capital assets at many agencies was evident in the
Executive Branch reviews. Research equipment was acquired with
inadequate funding for its operation. New medical facilities sometimes
were built without funds for maintenance and operation. New information
technology sometimes was acquired without planning for associated
changes in agency operations.
Congressional concern. The Congress has expressed its concern about
planning for capital assets with legislation and other actions that
complemented Executive Branch efforts to ensure better performance:
The Government Performance and Results Act of 1993 (GPRA) is
designed to help ensure that program objectives are more
clearly defined and resources are focused on meeting these
objectives.
The Federal Acquisition Streamlining Act of 1994 (FASA),
Title V, requires agencies to improve the management of large
acquisitions. Title V requires agencies to institute a
performance-based planning, budgeting, and management approach
to the acquisition of capital assets. As a result of improved
planning efforts, agencies are required to establish cost,
schedule, and performance goals that have a high probability
of successful achievement. For projects that are not achieving
90 percent of original goals, agencies are required to discuss
corrective actions taken or planned to bring the project
within goals. If they cannot be brought within goals, agencies
should identify how and why the goals should be revised,
whether the project is still cost beneficial and justified for
continued funding, or whether the project should be canceled.
The Clinger-Cohen Act of 1996 is designed to ensure that
information technology acquisitions support agency missions
developed pursuant to GPRA. The Clinger-Cohen Act also
requires a performance-based planning, budgeting, and
management approach to the acquisition of capital assets.
The General Accounting Office published a study, Budget
Issues: Budgeting for Federal Capital (November 1996), written
in response to a congressional request, which recommended that
the Office of Management and Budget (OMB) continue its focus
on capital assets.
Executive Branch concern. For many years, the Executive Branch has
devoted particular attention to improving the process of planning,
budgeting, and acquiring capital assets. The current guidance has been
issued for several years, most recently as OMB Circular A-11: Part 3:
``Planning, Budgeting, and Acquisition
[[Page 108]]
of Capital Assets'' (July 2000) (hereafter referred to as Part 3). Part
3 identified other OMB guidance on this issue. \2\
---------------------------------------------------------------------------
\2\ Other guidance published by OMB with participation by other
agencies includes: (1) OMB Circular No. A-109, ``Major System
Acquisitions,'' which establishes policies for planning major systems
that are generally applicable to capital asset acquisitions. (2) OMB
Circular No. A-94, ``Guidelines and Discount Rates for Benefit-Cost
Analysis of Federal Programs,'' which provides guidance on benefit-cost,
cost-effectiveness, and lease-purchase analysis to be used by agencies
in evaluating Federal activities including capital asset acquisition. It
includes guidelines on the discount rate to use in evaluating future
benefits and costs, the measurement of benefits and costs, the treatment
of uncertainty, and other issues. This guidance must be followed in all
analyses in support of legislative and budget programs. (3) Executive
Order No. 12893, ``Principles for Federal Infrastructure Investments,''
which provides principles for the systematic economic analysis of
infrastructure investments and their management. (4) OMB Bulletin No.
94-16, Guidance on Executive Order No. 12893, ``Principles for Federal
Infrastructure Investments,'' which provides guidance for implementing
this order and appends the order itself. (5) the revision of OMB
Circular A-130, ``Management of Federal Information Resources''
(November 20, 2000), which provides principles for internal management
and planning practices for information systems and technology; and (6)
OMB Circular No. A-127, ``Financial Management Systems,'' which
prescribes policies and standards for executive departments and agencies
to follow in developing, evaluating, and reporting on financial
management systems.
---------------------------------------------------------------------------
Part 3 requests agencies to approach planning for capital assets in
the context of strategic plans to carry out their missions, and to
consider alternative methods of meeting their goals. Systematic analysis
of the full life-cycle expected costs and benefits is required, along
with risk analysis and assessment of alternative means of acquiring
assets. This guidance encourages the Executive Branch agencies to be
responsible for using good capital programming principles for managing
the capital assets they use, and asks the agencies to work throughout
the coming year to improve agency practices in risk management,
planning, budgeting, acquisition, and operation of these assets.
In support of this, in July 1997 OMB issued a Capital Programming
Guide, a Supplement to Part 3. This Guide was developed by an
interagency task force with representation from 14 executive agencies
and the General Accounting Office. The Guide's purpose is to provide
professionals in the Federal Government a basic reference on capital
assets management principles to assist them in planning, budgeting,
acquiring, and managing the asset once in use. The Guide emphasizes risk
management and the importance of analyzing capital assets as a
portfolio. In addition, this budget reissues the ``Principles of
Budgeting for Capital Asset Acquisitions,'' which appear at the end of
this Part. These principles offer guidelines to agencies to help carry
out better planning, analysis, risk management, and budgeting for
capital asset acquisitions.
The Report of the President's Commission to Study Capital Budgeting
(February 1999) proposed a series of recommendations to improve each
part of the budget process; setting priorities, making current budget
decisions, reporting on these decisions, and subsequently evaluating
them. The Commission's broadest and most fundamental conclusion was that
insufficient attention is paid to the long-run consequences of all
budget decisions. The report included two recommendations to facilitate
the setting of priorities among all programs, not just those involving
capital expenditures. The first recommended integration of the planning
under the Government Performance and Results Act (GPRA) with budgeting
in the form of annually revised five-year plans, and greater emphasis by
decision-makers in the Executive Branch and Congress on the longer-run
implications of current year decisions. The second recommended an
ongoing effort within the Federal government to analyze the benefits and
costs of all major government programs as a guide to future policies.
The report also recommended evaluating the benefits and costs of major
investment projects undertaken in the past.
From Planning to Budgeting
Full funding of capital assets.--Good budgeting requires that
appropriations for the full costs of asset acquisition be provided up
front to help ensure that all costs and benefits are fully taken into
account when decisions are made about providing resources. Full funding
was endorsed by the General Accounting Office in its report, Budgeting
for Federal Capital (November 1996) and also in its more recent letter
to the Chairman of the Senate Budget Committee, entitled ``Budget
Issues: Incremental Funding of Capital Asset Acquisitions (February 26,
2001).'' Full funding was also endorsed in the Report of the President's
Commission to Study Capital Budgeting (February 1999).
The full funding principle is followed for most Department of Defense
procurement and construction programs and for General Services
Administration buildings. In other areas, however, too often it is not.
When it is not followed and capital assets are funded in increments,
without certainty if or when future funding will be available, it can
and occasionally does result in poor risk management, weak planning,
acquisition of assets not fully justified, higher acquisition costs,
cancellation of major projects, the loss of sunk costs, and inadequate
funding to maintain and operate the assets. Full funding is also an
important element in managing large acquisitions effectively and holding
management responsible for achieving goals.
Other budgeting issues.--Other budgeting decisions can also aid in
acquiring capital assets. Availability of funds for one year often may
not be enough time to complete the acquisition process. Most agencies
request that funds be available for more than one year to complete
acquisitions efficiently, and Part 3 encourages this. As noted, many
agencies aggregate asset acquisition in budget accounts to avoid
lumpiness. In some cases, these are revolving funds that ``rent'' the
assets to the agency's programs.
To promote better program performance, agencies are also being
encouraged by OMB to examine their budget account structures to align
them better with program outputs and outcomes and to charge the
appropriate account with significant costs used to achieve these
results. The asset acquisition rental accounts, mentioned above, would
contribute to this. Budgeting this way would provide information and
incentives for better resource allocation among programs and a continual
search for better ways to deliver services. It would also provide
incentives for efficient capital asset acquisition and management.
[[Page 109]]
Acquisition of Capital Assets
Improved planning, budgeting, and acquisition strategies are necessary
to increase the ability of agencies to acquire capital assets within, or
close to, the original estimates of cost, schedule, and performance used
to justify project budgets and to maintain budget discipline. The
Executive Branch efforts, along with enactment of FASA (Title V) and the
Clinger-Cohen Act, require agencies to institute a performance-based
planning, budgeting, and management approach to the acquisition of
capital assets.
Part 3 incorporates OMB memorandum 97-02, ``Funding Information
Systems Investments'' (October 25, 1996), which was issued to establish
clear and concise decision criteria regarding investments in major
information technology investments. These policy documents establish the
general presumption that OMB will recommend new or continued funding
only for those major investments in assets that comply with good capital
programming principles.
At the Appendix to this Part are the ``Principles of Budgeting for
Capital Asset Acquisitions,'' which incorporate the above criteria and
expand coverage to all capital investments.
As a result of these initiatives, capital asset acquisitions are to
have baseline cost, schedule, and performance goals for future tracking
purposes or they are to be either reevaluated and changed or canceled if
no longer cost beneficial.
Outlook
The Administration will work with the Congress to promote full upfront
funding for capital projects or usable segments thereof, and to improve
capital planning and integrate capital planning with GPRA strategic
plans.
Major Acquisition Proposals
For the definition of major capital assets described above, this
budget requests $90.7 billion of budget authority for 2002. This
includes $65.3 billion for the Department of Defense, subject to the
Defense Strategy Review mentioned in the introduction to this chapter,
and $25.4 billion for other agencies. The major requests are shown in
Table 6-4: ``Capital Asset Acquisitions,'' which distributes the funds
according to the categories for construction and rehabilitation, major
equipment, and purchases of land and structures.
Construction and Rehabilitation
This budget includes $20.8 billion of budget authority for 2002 for
construction and rehabilitation.
Department of Defense.--The budget projects $5.3 billion for 2002 for
general construction on military bases and family housing. This funding
will be used to:
Table 6-4. CAPITAL ASSET ACQUISITIONS
(Budget authority in billions of dollars)
------------------------------------------------------------------------
2000 2001 2002
Actual Estimate Proposed
------------------------------------------------------------------------
MAJOR ACQUISITIONS
Construction and rehabilitation:
Defense military construction and family 5.1 4.7 5.3
housing..................................
Corps of Engineers........................ 2.8 3.2 2.7
National Aeronautics and Space 2.8 2.6 2.2
Administration...........................
General Services Administration........... 0.8 1.2 1.5
Department of State....................... 0.4 0.7 1.3
Department of Energy...................... 0.9 0.9 1.1
Other agencies............................ 5.9 6.6 6.8
---------------------------
Subtotal, construction and rehabilitation 18.6 19.8 20.8
Major equipment:
Department of Defense..................... 54.5 62.4 60.0
Department of Transportation.............. 2.8 2.8 3.3
Department of the Treasury................ 0.7 1.1 1.4
National Aeronautics and Space 0.9 1.0 0.8
Administration...........................
Department of Commerce.................... 0.6 0.8 0.8
Department of Veterans Affairs............ 0.7 0.8 0.6
Other agencies............................ 2.7 2.9 2.8
---------------------------
Subtotal, major equipment.............. 62.8 71.8 69.7
Purchases of land and structures............ 0.6 0.7 0.2
---------------------------
Total, major acquisitions \1\.......... 82.1 92.3 90.7
------------------------------------------------------------------------
\1\ This total is derived from the direct Federal major public physical
investment budget authority on Table 6-3 ($92.9 billion for 2002).
Table 6-4 excludes an estimate of spending for assets not owned by the
Federal Government ($2.2 billion for 2002).
support the fielding of new systems;
enhance operational readiness, including deployment and
support of military forces;
provide housing for military personnel and their families;
and
correct safety deficiencies and environmental problems.
Corps of Engineers.--This budget requests $2.7 billion for 2002 for
construction and rehabilitation for the Corps of Engineers. These funds
finance construction, rehabilitation, and related activity for water
resources development projects that provide navigation, flood control,
environmental restoration, and other benefits.
National Aeronautics and Space Administration.--The budget includes
$2.2 billion for continued investments in construction of the Space
Station, and for research facilities for science, aeronautics, and
technology.
General Services Administration (GSA).--The 2002 budget includes $1.5
billion in budget authority for GSA for the construction or major
renovation of buildings. These funds will allow for new construction and
the acquisition of courthouses, border stations, and general purpose
office space in locations where long-term needs show that ownership is
preferable to leasing.
Department of State.--The Administration requests $1.3 billion in
budget authority to support embassy security, construction, and major
renovations. These funds are needed to help modernize Department of
State facilities around the world.
Department of Energy.--This budget requests $1.1 billion for 2002 for
construction and rehabilitation for the Department of Energy. This
includes funds for nuclear waste disposal, scientific research, power
marketing, and other activities.
Other agencies.--This budget includes $6.8 billion in budget authority
for construction and rehabilitation for
[[Page 110]]
other agencies in 2002. This includes amounts for the Tennessee Valley
Authority ($1.1 billion); Department of the Interior ($1.1 billion),
largely for the Bureau of Indian Affairs, water resources, and parks;
the Department of Health and Human Services ($0.9 billion), largely for
the National Institutes of Health and the Indian Health Service; and the
Postal Service ($0.9 billion).
Major Equipment
This category covers capital purchases for major equipment, including
weapons systems; information technology, such as computer hardware,
major software, and renovations required for this equipment; and other
types of equipment. This budget requests $69.7 billion in budget
authority for 2002 for the purchase of major equipment. For information
on information technology investments, see Chapter 22 in this volume,
``Program Performance Benefits from Major Information Technology
Investments.''
Department of Defense.--The budget includes $60.0 billion for
equipment purchases primarily related to procurement for 2002 of weapons
systems, related support equipment, and purchase of other capital goods.
This includes tactical fighter aircraft, airlift aircraft, naval
vessels, tanks, helicopters, missiles, and vehicles.
Department of Transportation.--The budget requests $3.3 billion in
budget authority for the Department of Transportation for major
equipment, which includes $2.8 billion to modernize the air traffic
control system and $0.5 billion for the Coast Guard to acquire vessels
and other equipment.
Department of the Treasury.--The budget requests $1.4 billion in
budget authority for major equipment. The largest amounts are $0.6
billion to modernize information technology systems for the Internal
Revenue Service.
National Aeronautics and Space Administration (NASA).--The budget
requests $0.8 billion in budget authority to procure major equipment for
programs in human space flight, science, aeronautics, and technology.
Most of the equipment is to be acquired for Space Shuttle upgrades, such
as orbiter improvements, Space Shuttle main engines, solid rocket
booster improvements, and launch site equipment.
Department of Commerce.--The budget requests $0.8 billion for the
Department of Commerce, largely for the continued acquisition of more
sophisticated and advanced weather satellites and related technology.
Department of Veterans Affairs.--This budget requests $0.6 billion for
medical equipment for health care facilities. These funds will be used
to continue to provide quality health care services for veterans.
Other agencies.--This budget requests $2.8 billion for major equipment
for other agencies for 2002. This includes amounts for the General
Services Administration ($0.7 billion), largely for vehicles; the
Department Justice ($0.6 billion), including funds for the Federal
Bureau of Investigation; and the Postal Service ($0.5 billion).
Purchase and Sale of Land and Structures
This budget includes $0.2 billion for 2002 for the purchase and sale
of land and structures. This includes $0.4 billion for Federal land
acquisition by the Departments of the Interior and Agriculture for
parks, forests, refuges, and other recreational purposes. These and
other purchases are partially offset by sales of land and structures in
other agencies.
Appendix to Part II: PRINCIPLES OF BUDGETING FOR CAPITAL ASSET
ACQUISITIONS
Introduction and Summary
The Executive Branch plans to use the following principles in
budgeting for capital asset acquisitions. These principles address
planning, costs and benefits, financing, and risk management
requirements that should be satisfied before a proposal for the
acquisition of capital assets can be included in the Administration's
budget. A Glossary describes key terms. A Capital Programming Guide has
been published that provides detailed information on planning and
acquisition of capital assets.
The principles are organized in the following four sections:
A. Planning. This section focuses on the need to ensure that capital
assets support core/priority missions of the agency; the assets have
demonstrated a projected return on investment that is clearly equal to
or better than alternative uses of available public resources; the risk
associated with the assets is understood and managed at all stages; and
the acquisition is implemented in phased, successive segments, unless it
can be demonstrated there are significant economies of scale at
acceptable risk from funding more than one segment or there are multiple
units that need to be acquired at the same time.
B. Costs and Benefits. This section emphasizes that the asset should
be justified primarily by benefit-cost analysis, including life-cycle
costs; that all costs are understood in advance; and that cost,
schedule, and performance goals are identified that can be measured
using an earned value management system or similar system.
C. Principles of Financing. This section stresses that useful segments
are to be fully funded with regular or advance appropriations; that as a
general rule, planning segments should be financed separately from
procurement of the asset; and that agencies are encouraged to aggregate
assets in capital acquisition accounts and take other steps to
accommodate lumpiness or ``spikes'' in funding for justified
acquisitions.
D. Risk Management. This section is to help ensure that risk is
analyzed and managed carefully in the acquisition of the asset.
Strategies can include separate accounts for capital asset acquisitions,
the use of appor
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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
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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
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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\
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\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.
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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).
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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.