    [Analytical Perspectives]
    [Crosscutting Programs]
    [6. Federal Investment]
    [From the U.S. Government Printing Office, www.gpo.gov]

    [[Page 73]]

                             6.  FEDERAL INVESTMENT

      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.
      In this chapter, investment is discussed in the following sections:
        a description of the size and composition of Federal
              investment spending;
        a discussion of the performance of selected Federal
              investment programs; and
        a presentation of trends in the stock of federally financed
              physical capital, research and development, and education.

                   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. In recent years the
    discussion of the composition of investment has displayed estimates of
    budget authority as well as outlays.
      The classification of spending between investment and current outlays
    is a matter of judgment. The budget has historically employed a
    relatively broad classification, encompassing 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 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 include 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.
    Table 6-2 at the end of this section allows 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 acqui

    [[Page 74]]

    sition 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, spending for physical
    investment and research and development related to education and
    training is 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 or education
    and training. For more information about the treatment of Federal credit
    programs, refer to Chapter 7, ``Credit and Insurance'', in this volume.
      This section presents spending for gross investment, without adjusting
    for depreciation.

                    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 $368.5 billion in 2004.
    They are estimated to increase to $396.5 billion in 2005 and are
    projected to decline slightly to $395.1 billion in 2006. Major Federal
    investment outlays will comprise an estimated 15 percent of total
    Federal outlays in 2006 and 3.1 percent of the Nation's gross domestic
    product (GDP). Greater detail on Federal investment is available in
    Table 6-2 at the end of this section. That table includes 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 $183.5 billion in 2006. 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 remainder 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
    are estimated to be $88.9 billion 2006. Almost all of these outlays, or
    an estimated $81.3 billion, are for the procurement of weapons and other
    defense equipment, and the remainder is primarily for construction on
    military bases, family housing for military personnel, and Department of
    Energy defense facilities.

                                  Table 6-1.  COMPOSITION OF FEDERAL INVESTMENT OUTLAYS
                                                (In billions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                                                                       Estimate
                                                                                           2004  -------------------
                                                                                         Actual     2005      2006
    ----------------------------------------------------------------------------------------------------------------
                                    FEDERAL INVESTMENT

    Major public physical capital investment:
      Direct Federal:
        National defense..............................................................      83.6      87.5      88.9
        Nondefense....................................................................      27.4      31.7      30.2
                                                                                       -----------------------------
          Subtotal, direct major public physical capital investment...................     111.0     119.1     119.1

      Grants to State and local governments...........................................      59.4      61.9      64.4
                                                                                       -----------------------------
        Subtotal, major public physical capital investment............................     170.4     181.1     183.5

    Conduct of research and development:
      National defense................................................................      65.3      71.4      73.5
      Nondefense......................................................................      48.0      51.1      51.4
                                                                                       -----------------------------
        Subtotal, conduct of research and development.................................     113.4     122.4     124.9

    Conduct of education and training:
      Grants to State and local governments...........................................      47.9      51.8      52.3
      Direct Federal..................................................................      36.8      41.1      34.3
                                                                                       -----------------------------
        Subtotal, conduct of education and training...................................      84.7      92.9      86.7
                                                                                       -----------------------------

          Total, major Federal investment outlays.....................................     368.5     396.5     395.1

                                        MEMORANDUM

    Major Federal investment outlays:
      National defense................................................................     149.0     158.8     162.4
      Nondefense......................................................................     219.5     237.6     232.7
                                                                                       -----------------------------
        Total, major Federal investment outlays.......................................     368.5     396.5     395.1

    Miscellaneous physical investment:
      Commodity inventories...........................................................      -1.4       0.2      -1.0
      Other physical investment (direct)..............................................       2.8       3.3       3.0
                                                                                       -----------------------------
        Total, miscellaneous physical investment......................................       1.4       3.5       2.0
                                                                                       -----------------------------
    Total, Federal investment outlays, including miscellaneous physical investment....     369.8     399.9     397.1
    ----------------------------------------------------------------------------------------------------------------

      Outlays for direct physical investment for nondefense purposes are
    estimated to be $30.2 billion in 2006. These outlays include $16.2
    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, and the Tennessee Valley Authority; construction and
    rehabilitation of veterans hospitals and Indian Health Service hospitals
    and clinics; facilities for space and science programs; Postal Service
    facilities; and construction for embassy security. Outlays for the
    acquisition of major equipment are estimated to be $13.7 billion in
    2006. The largest amounts are for the air traffic control system.
      Grants to State and local governments for physical investment are
    estimated to be $64.4 billion in 2006. More than two-thirds of these
    outlays, or $45.9 billion, are to assist States and localities with
    transportation infrastructure, primarily highways. Other major grants
    for physical investment fund sewage treatment plants, community and
    regional development, and public housing.
      Conduct of research and development. Outlays for the conduct of
    research and development are estimated to be $124.9 billion in 2006.
    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 $73.5 billion, 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 $51.4 billion in 2006. These are largely for the
    National Aeronautics and Space Administration, the National Science
    Foundation, the National Institutes of Health, and research for nuclear
    and non-nuclear energy programs.
      A more complete and detailed discussion of research and development
    funding appears in Chapter 5, ``Research and Development'' in this
    volume.
      Conduct of education and training. Outlays for the conduct of
    education and training are estimated to be $86.7 billion in 2006. 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 $52.3 billion in 2006, three-fifths of
    the total. They include education programs for the disadvantaged and
    individuals with disabilities, other education programs, training
    programs in the Department of Labor, and Head Start. Direct Federal
    education and training outlays are estimated to be $34.3 billion in
    2006. 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

    [[Page 75]]

    the categories for physical investment and the conduct of research and
    development.

    Miscellaneous Physical Investment Outlays

      In addition to the categories of major Federal investment, several
    miscellaneous categories of investment outlays are shown at the bottom
    of Table 6-1. These items, all for physical investment, are generally
    unrelated to improving Government operations or enhancing economic
    activity.
      Outlays for commodity inventories are primarily for the purchase or
    sale of agricultural products pursuant to farm price support programs.
    Sales are estimated to exceed purchases by $1.0 billion in 2006.
      Outlays for other miscellaneous physical investment are estimated to
    be $3.0 billion in 2006. This category includes primarily conservation
    programs. These are entirely direct Federal outlays.

    Detailed Table on Investment Spending

      The following table provides data on budget authority as well as
    outlays for major Federal investment divided according to grants to
    State and local governments and direct Federal spending. Miscellaneous
    investment is not included because it is generally unrelated to
    improving Government operations or enhancing economic activity.

    [[Page 76]]

              Table 6-2. FEDERAL INVESTMENT BUDGET AUTHORITY AND OUTLAYS: GRANT AND DIRECT FEDERAL PROGRAMS
                                                (in millions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                Budget Authority                             Outlays
                                   ---------------------------------------------------------------------------------
              Description               2004         2005          2006          2004         2005          2006
                                      Actual      Estimate      Estimate       Actual      Estimate      Estimate
    ----------------------------------------------------------------------------------------------------------------
       GRANTS TO STATE AND LOCAL
              GOVERNMENTS

    Major public physical
     investments:
      Construction and
       rehabilitation:
        Transportation:
          Highways................      34,231        34,078   33,573            30,188        32,014        34,360
          Mass transportation.....       7,813         8,450    8,517             7,567         8,183         8,284
          Air transportation......       3,649         3,697    2,531             2,958         3,042         3,264
                                   ---------------------------------------------------------------------------------
            Subtotal,                   45,693        46,225   44,621            40,713        43,239        45,908
             transportation.......
                                   ---------------------------------------------------------------------------------
        Other construction and
         rehabilitation:
          Pollution control and          2,445         2,190    1,938             2,066         1,961         1,886
           abatement..............
          Community and regional         6,207         6,063    4,276             6,761         6,783         6,766
           development............
          Housing assistance......       6,843         6,508    5,846             7,659         7,877         7,924
          Other construction......         393           434      204               613           444           329
                                   ---------------------------------------------------------------------------------
            Subtotal, other             15,888        15,195   12,264            17,099        17,065        16,905
             construction and
             rehabilitation.......
                                   ---------------------------------------------------------------------------------
          Subtotal, construction        61,581        61,420   56,885            57,812        60,304        62,813
           and rehabilitation.....
                                   ---------------------------------------------------------------------------------
      Other physical assets.......       1,772         1,585    1,279             1,599         1,619         1,542
                                   ---------------------------------------------------------------------------------
        Subtotal, major public          63,353        63,005   58,164            59,411        61,923        64,355
         physical capital.........
                                   ---------------------------------------------------------------------------------
    Conduct of research and
     development:
      Agriculture.................         267           270      148               269           275           218
      Other.......................         414           389      353               327           343           454
                                   ---------------------------------------------------------------------------------
        Subtotal, conduct of               681           659      501               596           618           672
         research and development.
                                   ---------------------------------------------------------------------------------
    Conduct of education and
     training:
      Elementary, secondary, and        36,609        37,175   37,191            32,194        36,298        36,840
       vocational education.......
      Higher education............         510           506       33               499           615           515
      Research and general                 728           801      738               714           822           822
       education aids.............
      Training and employment.....       3,476         3,509    4,232             4,064         3,378         3,655
      Social services.............       9,936        10,120    9,541             9,746        10,002         9,795
      Agriculture.................         444           451      437               424           426           410
      Other.......................         260           281      249               234           261           272
                                   ---------------------------------------------------------------------------------
        Subtotal, conduct of            51,963        52,843   52,421            47,875        51,802        52,309
         education and training...
                                   ---------------------------------------------------------------------------------
      Subtotal, grants for             115,997       116,507   111,086          107,882       114,343       117,336
       investment.................
                                   =================================================================================
        DIRECT FEDERAL PROGRAMS

    Major public physical
     investment:
      Construction and
       rehabilitation:
        National defense:
          Military construction          6,666         7,154    7,365             6,368         6,291         6,937
           and family housing.....
          Atomic energy defense            811           527      639               754           564           632
           activities and other...
                                   ---------------------------------------------------------------------------------
            Subtotal, national           7,477         7,681    8,004             7,122         6,855         7,569
             defense..............
                                   ---------------------------------------------------------------------------------
        Nondefense:
          International affairs...       1,464         1,471    1,591             1,319         1,403         1,477
          General science, space,        1,706         2,034    2,214             1,485         1,860         2,332
           and technology.........
          Water resources projects       3,061         3,249    2,753             2,812         3,083         2,978
          Other natural resources        1,117         1,025      888               972         1,087           996
           and environment........
          Energy..................       1,537         1,492    1,475             1,534         1,493         1,443
          Postal Service..........         638         1,065      847               456           491           702
          Transportation..........          51           194      101                55           152           190
          Veterans hospitals and         1,288         1,912    1,531             1,748         2,633         2,792
           other health facilities
          Federal Prison System...         161            25     -289               282           128           199
          GSA real property              1,747         1,616    1,670             1,329         1,518         1,729
           activities.............
          Other construction......       2,672         2,576    1,178             2,140         2,971         1,358
                                   ---------------------------------------------------------------------------------

    [[Page 77]]

            Subtotal, nondefense..      15,442        16,659   13,959            14,132        16,819        16,196
                                   ---------------------------------------------------------------------------------
          Subtotal, construction        22,919        24,340   21,963            21,254        23,674        23,765
           and rehabilitation.....
                                   ---------------------------------------------------------------------------------
      Acquisition of major
       equipment:
        National defense:
          Department of Defense...      83,072        78,345   78,043            76,232        80,255        80,870
          Atomic energy defense            385           381      473               296           387           470
           activities.............
                                   ---------------------------------------------------------------------------------
            Subtotal, national          83,457        78,726   78,516            76,528        80,642        81,340
             defense..............
                                   ---------------------------------------------------------------------------------
        Nondefense:
          General science and              603           588      676               569           612           621
           basic research.........
          Space flight, research,          542           710      650               475           751           563
           and supporting
           activities.............
          Postal Service..........         598         1,389      672               452           914           972
          Air transportation......       3,367         3,183    3,254             3,527         3,624         3,312
          Water transportation             919           941    1,209               671           851           920
           (Coast Guard)..........
          Other transportation           1,218         1,207      360             1,282         1,259           360
           (railroads)............
          Hospital and medical             920           725    1,096             1,734         1,367         2,067
           care for veterans......
          Law enforcement                1,851         1,794    1,880             1,348         1,962         1,740
           activities.............
          Department of the                506           319      304               481           455           387
           Treasury (fiscal
           operations)............
          Department of Commerce           719           865      913               638           762           927
           (NOAA).................
          GSA general services             750           768      906               672           807           906
           funds..................
          Other...................         721           804      788               854           911           882
                                   ---------------------------------------------------------------------------------
            Subtotal, nondefense..      12,714        13,293   12,708            12,703        14,275        13,657
                                   ---------------------------------------------------------------------------------
          Subtotal, acquisition of      96,171        92,019   91,224            89,231        94,917        94,997
           major equipment........
                                   ---------------------------------------------------------------------------------
      Purchase or sale of land and
       structures:
        National defense..........         -40           -38      -27               -40           -38           -27
        Natural resources and              251           187      164               302           328           200
         environment..............
        General government........         170           161      168               222           224           205
        Other.....................          56            59      -13                37            36           -13
                                   ---------------------------------------------------------------------------------
          Subtotal, purchase or            437           369      292               521           550           365
           sale of land and
           structures.............
                                   ---------------------------------------------------------------------------------
        Subtotal, major public         119,527       116,728   113,479          111,006       119,141       119,127
         physical investment......
                                   ---------------------------------------------------------------------------------
    Conduct of research and
     development:
      National defense:
        Defense military..........      65,410        70,267   70,789            61,510        67,016        69,549
        Atomic energy and other...       3,723         3,910    3,814             3,835         4,353         3,990
                                   ---------------------------------------------------------------------------------
          Subtotal, national            69,133        74,177   74,603            65,345        71,369        73,539
           defense................
                                   ---------------------------------------------------------------------------------
      Nondefense:
        International affairs.....         264           255      255               254           258           258
        General science, space,
         and technology:
          NASA....................       7,853         7,686   10,835             8,037         7,970         6,987
          National Science               3,790         3,711    3,756             3,439         3,754         3,724
           Foundation.............
          Department of Energy....       2,736         2,787    2,682             2,701         2,706         2,655
                                   ---------------------------------------------------------------------------------
            Subtotal, general           14,643        14,439   17,528            14,431        14,688        13,624
             science, space, and
             technology...........
                                   ---------------------------------------------------------------------------------
        Energy....................       1,373         1,225    1,352             1,387         1,463         1,498
        Transportation:
          Department of                    479           564      620               431           558           672
           Transportation.........
          NASA....................       1,056           906      852               551           871           838
          Other...................          12            16   ............          17            16             7
                                   ---------------------------------------------------------------------------------
            Subtotal,                    2,920         2,711    2,824             2,386         2,908         3,015
             transportation.......
                                   ---------------------------------------------------------------------------------
        Health:
          National Institutes of        26,900        27,503   27,821            24,498        26,388        27,384
           Health.................
          All other health........         685           681      649               760           585           602
                                   ---------------------------------------------------------------------------------

    [[Page 78]]

            Subtotal, health......      27,585        28,184   28,470            25,258        26,973        27,986
                                   ---------------------------------------------------------------------------------
        Agriculture...............       1,468         1,601    1,346             1,425         1,460         1,330
        Natural resources and            2,084         2,033    1,971             1,574         1,494         1,589
         environment..............
        National Institute of              397           416      342               493           406           472
         Standards and Technology.
        Hospital and medical care          866           784      786               850           792           777
         for veterans.............
        All other research and           1,425         1,666    1,811             1,021         1,739         1,938
         development..............
                                   ---------------------------------------------------------------------------------
          Subtotal, nondefense....      51,388        51,834   55,078            47,438        50,460        50,731
                                   ---------------------------------------------------------------------------------
        Subtotal, conduct of           120,521       126,011   129,681          112,783       121,829       124,270
         research and development.
                                   ---------------------------------------------------------------------------------
    Conduct of education and
     training:
      Elementary, secondary, and         1,530         1,593    1,273             1,691         1,904         1,627
       vocational education.......
      Higher education............      25,233        29,487   27,283            25,201        28,892        22,461
      Research and general               1,890         1,888    1,910             1,883         1,997         1,949
       education aids.............
      Training and employment.....       1,576         1,629    1,616             1,552         1,571         1,646
      Health......................       1,557         1,567    1,178             1,858         1,504         1,404
      Veterans education,                2,556         2,772    3,245             2,707         3,084         3,240
       training, and
       rehabilitation.............
      General science and basic            941           948      871               878           969           948
       research...................
      National defense............           9             8   ............          11             8   ............
      International affairs.......         355           384      458               441           377           418
      Other.......................         631           675      543               558           835           653
                                   ---------------------------------------------------------------------------------
        Subtotal, conduct of            36,278        40,951   38,377            36,780        41,141        34,346
         education and training...
                                   ---------------------------------------------------------------------------------
      Subtotal, direct Federal         276,326       283,690   281,537          260,569       282,111       277,743
       investment.................
                                   =================================================================================
    Total, Federal investment.....     392,323       400,197   392,623          368,451       396,454       395,079
    ----------------------------------------------------------------------------------------------------------------

                   PART II:  PERFORMANCE OF FEDERAL INVESTMENT

      Introduction. In recent years there has been increased emphasis on
    improving the performance of Government programs. This emphasis began
    with the Performance and Results Act of 1993, which requires agencies to
    prepare strategic plans and annual performance plans, and then report on
    their actual performance annually.
      This Administration set out to ensure that agencies worked to improve
    their performance, not just report on it. Beginning in the 2004 Budget,
    the Administration began to assess every Federal program by a method
    known as the Program Assessment Rating Tool, or PART. The Administration
    set a target of assessing all Federal programs over five years. With
    this budget, the third year of using the PART, the Administration has
    assessed over 600 programs, about three-fifths of the Federal Budget.
      The PART system assesses each program in four components (purpose,
    planning, management, and results/accountability) and gives a score for
    each of the components. The scores for each component are then
    weighted--results/accountability carries the greatest weight--and the
    program is given an overall score. A program is rated effective if it
    receives an overall score of 85 percent or more, moderately effective if
    the score is 70 to 84 percent, adequate if the score is 50 to 69
    percent, and inadequate if the score is 49 percent or lower. The program
    receives a rating ``Results Not Demonstrated'' if it does not have a
    good long-term and annual performance measure or does not have data to
    report on its measures. Chapter 2 of this volume discusses the PART
    concepts in more detail.
      This section summarizes the results of the PART for direct investment
    programs, defined to include capital assets, research and development,
    and education and training. Because an entire program is assessed, not
    just the investment portion of the program, the assessments for some
    programs may cover more than just the investment spending. PART
    assessments of programs that are grants to State and local governments
    are not summarized in this chapter but are summarized in Chapter 8,
    ``Aid to State and Local Governments'', in this volume.
      This section summarizes 166 programs:
        Programs for capital assets are those identified in the PART
              system as ``capital assets and service acquisition'' (60
              programs);
        Programs for research and development are essentially those
              identified in the PART system as ``research and development''
              (84 programs); and

    [[Page 79]]

        Programs for education and training (22 programs) are
              primarily programs in the Department of Education that are not
              grants to State and local governments (e.g., Federal Pell
              grants to individuals). This category also includes programs
              in other agencies, such as the Montgomery GI Bill in the
              Department of Veterans Affairs, the Health Professions program
              in the Department of Health and Human Services, and the Job
              Corps program in the Department of Labor.
      Information on these and other programs assessed by PART is on the CD
    ROM that accompanies this volume.
      Summary of ratings. Table 6-3 shows that the average weighted score
    for the 166 investment programs that have been rated by PART was 67
    percent, which is a rating of ``adequate''. These programs had total
    spending of $184.6 billion in 2004. Of these programs:
        37 were rated effective ($35.8 billion);
        48 were rated moderately effective ($57.7 billion);
        28 were rated adequate ($50.6 billion);
        7 were rated ineffective ($7.4 billion); and
        46 were rated ``results not demonstrated'' ($33.2 billion);

                  Table 6-3.  SUMMARY OF PART RATINGS AND SCORES FOR DIRECT FEDERAL INVESTMENT PROGRAMS
                             (excludes grants to State and local governments for investment)
    ----------------------------------------------------------------------------------------------------------------
                                                                                Type of Investment
                                                             -------------------------------------------------------
                            Criteria                                                      Education
                                                               Physical   Research and       and      All investment
                                                               capital     development     training      programs
    ----------------------------------------------------------------------------------------------------------------
                                                            Average Scores

    Purpose.................................................        81%             92%          79%             86%
    Planning................................................        75%             80%          75%             78%
    Management..............................................        81%             86%          66%             82%
    Results/Accountability..................................        48%             59%          37%             52%
    Weighted Average \1\....................................        64%             73%          55%             67%
    Average Rating..........................................   Adequate      Moderately     Adequate        Adequate
                                                                              effective

                                                            Number of Programs

                           Ratings \2\
    Effective...............................................         10              25            2              37
    Moderately effective....................................         15              31            2              48
    Adequate................................................         11               9            8              28
    Ineffective.............................................          2               2            3               7
    Results not demonstrated................................         22              17            7              46
                                                             -------------------------------------------------------
      Total number of investment programs rated.............         60              84           22             166

                                                            In millions of dollars (2004)

    Effective...............................................     $3,595         $31,782         $401          35,778
    Moderately effective....................................     41,781          14,179        1,736          57,696
    Adequate................................................     27,600             945       22,025          50,570
    Ineffective.............................................      6,389              78          886           7,353
    Results not demonstrated................................     25,492           3,407        4,337          33,236
                                                             -------------------------------------------------------
    All investment programs that were rated in PART.........   $104,857         $50,391      $29,385        $184,633
    ----------------------------------------------------------------------------------------------------------------
    \1\ Weighted as follows: Purpose (20%), Planning (10%), Management (20%), Results/Accountability (50%).
    \2\ The rating of effective indicates a score of 85 percent or more; moderately effective, 70-84 percent;
      adequate, 50-69 percent; and ineffective, 49 percent or less.

      Assessments of individual programs. The ratings of the ten physical
    capital and education and training investment programs with the largest
    funding are summarized here. Information on research and development is
    in Chapter 5, ``Research and Development'' in this volume.

    Capital Assets

      Department of Defense (DOD). Air Combat Program ($13.9 billion in
    2004). Rating: Moderately Effective. This program consists of a number
    of individual aircraft and helicopter research, development and
    procurement programs that, taken together, comprise DOD's invest

    [[Page 80]]

    ment in air combat capabilities. The PART analysis showed that the
    program purpose is clear owing to the unique military requirement for
    these systems.
      Department of Defense. Shipbuilding ($12.0 billion in 2004). Rating:
    Adequate. This program buys new ships and overhauls older ships for the
    Navy. The assessment shows that the program has a clear purpose, and the
    Navy has specific cost, schedule, and performance goals for each
    shipbuilding program. The program has experienced cost increases and
    schedule slips on some ship construction programs.
      Department of Defense. Missile Defense ($8.6 billion in 2004). Rating:
    Moderately Effective. This program consists of various systems and
    capabilities developed by the Missile Defense Agency (MDA) and military
    services. This program acquires and operates active defenses against
    short, medium, and long-range missiles in a global, multi-layered
    defensive system.
      The assessment found that: a) the Department of Defense has
    aggressively worked to fund operations and support costs fully, and has
    been successful in coordinating service and MDA budget responsibilities;
    b) the Department continues to fund only two years deployment costs per
    each ``block'' of missile defense deployments, even if significant
    portions of those deployments require four to five years of funding to
    fully implement. This policy continues to put at risk the completion of
    approved missile defense deployments; and c) MDA did not meet its
    testing goals in 2004 for the Ground Based Mid-Course Defense system,
    the main element of its first operational deployment.
      Tennessee Valley Authority. TVA Power ($7.7 billion in 2004). Rating:
    Moderately Effective. TVA is the fifth largest electric utility in the
    country, generating power at 48 coal-fired, hydropower, nuclear, and
    other power plants that it operates to meet the electricity needs of 8.3
    million people (3 percent of the U. S. market). The PART assessment gave
    TVA mixed reviews. TVA does an excellent job generating power at its
    existing power plants. A decade ago TVA's nuclear power plants posed
    serious technical and safety problems but it has overcome these problems
    and today its nuclear power plants set industry standards.
      However, TVA has a high level of debt compared to many of its
    competitors in the electricity industry. It also lacks a strategic plan,
    which makes it hard to assess TVA's plans to spend funds on additional
    power plants and transmission lines.
      Department of Energy. Environmental Management ($7.1 billion in 2004).
    Rating: Adequate. This program protects human health and the environment
    by cleaning up waste and contamination resulting from more than 50 years
    of nuclear weapons production and energy research at 114 Department of
    Energy sites in the United States and its territories. Program managers
    will continue to work with Federal and State regulators to resolve
    outstanding issues with revised cleanup plans. The program has
    established annual cost and schedule performance measures.
      General Services Administration. GSA's Regional IT Solutions Program
    ($5.4 billion in 2004). Rating: Results Not Demonstrated. This program
    provides expert technical, acquisition, and information technology
    products and services to Federal clients. This assessment found that the
    program is useful to Federal agencies that do not have in-house
    expertise to acquire IT products or services. The assessment also found
    that the program does not have long-term outcome goals that relate to
    other Government agencies or the private sector.
      Department of Defense. Airlift Program ($5.1 billion in 2004). Rating:
    Moderately Effective. This program consists of a number of individual
    Air Force tactical and strategic airlift aircraft research, development
    and procurement programs that, taken together, comprise DOD's investment
    in airlift capabilities. The analysis showed that this is a coherent
    program with a clear and basic long-term goal, namely to be able to move
    military forces and their equipment from the U.S. to anywhere in the
    world whenever required. DOD must aggressively examine possible trade-
    offs within the program that could lower the cost of meeting the airlift
    requirement without sacrificing military readiness or combat
    capabilities.
      Department of Housing and Urban Development. Project-Based Rental
    Assistance ($4.8 billion in 2004). Rating: Ineffective. This program
    provides funding to landlords who rent a certain number of affordable
    apartments to low-income families or individuals. Assistance is tied
    directly to the properties; tenants can generally not move without
    losing their assistance. The program receives low performance scores in
    part because there is confusion over program objectives, the program
    lacks strong financial accountability, and it produces poor results
    relative to alternative forms of housing assistance.

    Education

      Department of Education. Federal Pell Grants ($12.0 billion in 2004).
    Rating: Adequate. This program provides grant aid to nearly five million
    needy students to help them pay for an undergraduate education. The
    assessment found that the program helps ensure that low-income students
    can afford a college education. However, the Department of Education has
    only been minimally successful in achieving its long-term and annual
    performance goals for its main student aid programs. In addition, Pell
    grants, like other student aid, are prone to abuse, where students who
    under-report family income receive more aid than they should. The
    Department estimates that net overawards in the Pell program total more
    than $350 million annually.
      Department of Education. Federal Family Education Loan Program ($9.6
    billion in 2004). Rating: Adequate. Under the Federal Family Education
    Loan (FFEL) Program, the Department encourages private lenders to make
    loans to undergraduate and graduate students by guaranteeing such loans
    in the case of default and providing lenders with financial subsidies
    that ensure

    [[Page 81]]

    a minimum rate of return on all loans made. Overall, the assessment
    concluded that both this program and the William D. Ford Direct Student
    Loan program fulfill their purpose of ensuring that low- and middle-
    income students can afford the costs of postsecondary education. The
    program also has meaningful performance measures and outcome data on
    these measures. However, the Department has been minimally successful in
    achieving its long-term and annual performance goals for its main
    student aid programs.

                  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 this 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 and development adds to
    an ``intangible'' asset, the Nation's stock of knowledge. Spending for
    education adds to the stock of human capital by providing skills that
    help make people more productive. Although financed by the Federal
    Government, the research and development or education can be carried out
    by Federal or State government laboratories, universities and other
    nonprofit organizations, local governments, 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. 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.
    The estimates of the capital stock are equal to the sum of net
    investment in the current and prior years. A limitation of the perpetual
    inventory method is that the original investment spending may not
    accurately measure the current value of the asset created, even after
    adjusting for inflation, because the value of existing capital changes
    over time due to changing market conditions. 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
    current 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.
      It should be stressed that these estimates are rough approximations,
    and provide a basis only for making broad generalizations. Errors may
    arise from uncertainty about the useful lives and depreciation rates of
    different types of assets, incomplete data for historical outlays, and
    imprecision in the deflators used to express costs in constant dollars.
    The methods used to estimate capital stocks are discussed further in the
    technical note at the end of Chapter 13, ``Stewardship,'' in this
    volume. Additional detail about these methods appeared in a
    methodological note in Chapter 7, ``Federal Investment Spending and
    Capital Budgeting,'' in the Analytical Perspectives volume of the 2004
    Budget.

                          The Stock of Physical Capital

      This section presents data on stocks of physical capital assets and
    estimates of the depreciation of these assets.
      Trends. Table 6-4 shows the value of the net federally financed
    physical capital stock since 1960, in constant fiscal year 2000 dollars.
    The total stock grew at a 2.2 percent average annual rate from 1960 to
    2004, with periods of faster growth during the late 1960s and the 1980s.
    The stock amounted to $2,197 billion in 2004 and is estimated to
    increase to $2,315 billion by 2006. In 2004, the national defense
    capital stock accounted for $661 billion, or 30 percent of the total,
    and nondefense stocks for $1,536 billion, or 70 percent of the total.

    [[Page 82]]

                                                                      Table 6-4.  NET STOCK OF FEDERALLY FINANCED PHYSICAL CAPITAL
                                                                                      (In billions of 2000 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........................................................................      849       608        242        95       59       36      146           89           27         21        10
      1965........................................................................      937       589        348       123       74       49      225          158           32         22        13
      1970........................................................................    1,101       630        470       146       88       58      324          230           47         26        21
      1975........................................................................    1,137       545        592       166      102       64      426          282           76         42        25
      1980........................................................................    1,258       494        763       195      123       72      568          342          121         79        27
      1985........................................................................    1,462       572        890       222      136       86      668          397          146        100        26
      1990........................................................................    1,740       722      1,018       256      147      109      762          462          158        113        28
      1995........................................................................    1,882       714      1,168       297      157      141      871          534          168        123        46
    Annual data:
      2000........................................................................    1,979       635      1,345       337      160      178    1,007          618          183        131        75
      2001........................................................................    2,023       631      1,391       351      163      188    1,040          640          186        132        81
      2002........................................................................    2,078       636      1,442       366      165      201    1,076          666          189        134        87
      2003........................................................................    2,138       646      1,492       380      166      213    1,112          690          193        135        94
      2004........................................................................    2,197       661      1,536       390      168      223    1,146          714          196        136       100
      2005 estimate...............................................................    2,259       677      1,582       403      169      234    1,179          738          199        137       105
      2006 estimate...............................................................    2,315       690      1,625       413      170      244    1,211          762          201        138       110
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

      Real stocks of defense and nondefense capital show very different
    trends. Nondefense stocks have grown consistently since 1970, increasing
    from $470 billion in 1970 to $1,536 billion in 2004. With the
    investments proposed in the budget, nondefense stocks are estimated to
    grow to $1,625 billion in 2006. During the 1970s, the nondefense capital
    stock grew at an average annual rate of 5.0 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
    investment in 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
    1987, the defense stock exceeded its earlier Vietnam-era peak. In the
    early 1990s, however, depreciation on the increased stocks and a slower
    pace of defense physical capital investment began to reduce the stock
    from its previous levels. The increased defense investment in the last
    few years has reversed this decline, increasing the stock from an
    estimated $661 billion in 2004 to $690 billion in 2006.
      Another trend in the Federal physical capital stocks is the shift from
    direct Federal assets to grant-financed assets. In 1960, 39 percent of
    federally financed nondefense capital was owned by the Federal
    Government, and 61 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 slower growth in direct
    Federal investment for water resources, for example, shifted the
    composition of the stock substantially. In 2004, 25 percent of the
    nondefense stock was owned by the Federal Government and 75 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
    following the enactment of the community development block grant in the
    early 1970s. The value of this capital stock has grown only slowly in
    the past few years. The growth in the natural resources area occurred
    primarily because of construction grants for sewage treatment
    facilities. The value of this federally financed stock has increased
    about 35 percent since the mid-1980s.

                  The Stock of Research and Development Capital

      This section presents data on the stock of research and development
    capital, taking into account adjustments for its depreciation.
      Trends. As shown in Table 6-5, the R&D capital stock financed by
    Federal outlays is estimated to be $1,099 billion in 2004 in constant
    2000 dollars. Roughly half is the stock of basic research knowledge; the
    remainder is the stock of applied research and development.
      The nondefense stock accounted for about three-fifths of the total
    federally financed R&D stock in 2004. Although investment in defense R&D
    has exceeded that of nondefense R&D in nearly 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

    [[Page 83]]

    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. Increased defense R&D spending from 1980 through 1990
    led to a more rapid growth of the R&D stock. Subsequently, real defense
    R&D outlays tapered off, depreciation grew, and, as a result, the real
    net defense R&D stock stabilized at around $420 billion. Renewed
    spending for defense R&D in recent years has begun to increase the
    stock, and it is projected to increase to $531 billion in 2006.
      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.

                                            Table 6-5.  NET STOCK OF FEDERALLY FINANCED RESEARCH AND DEVELOPMENT \1\
                                                                  (In billions of 2000 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...................................         261          16          245         215          67          148         475          82          393
      1975...................................         276          21          256         262          97          165         538         118          421
      1980...................................         279          25          255         311         131          179         590         156          434
      1985...................................         321          30          291         339         174          165         659         204          455
      1990...................................         403          36          367         382         229          154         785         265          520
      1995...................................         423          43          380         461         294          167         884         336          547
    Annual data:
      2000...................................         423          48          375         543         368          175         966         416          549
      2001...................................         421          50          371         563         386          177         984         436          548
      2002...................................         435          52          383         579         405          175       1,014         457          557
      2003...................................         454          54          401         598         424          174       1,052         478          575
      2004...................................         479          55          424         620         446          174       1,099         501          598
      2005 estimate..........................         506          56          449         643         468          175       1,149         524          624
      2006 estimate..........................         531          57          473         665         489          176       1,196         547          649
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    \1\ Excludes stock of physical capital for research and development, which is included in Table 6-4.

                         The Stock of Education Capital

      This section presents estimates of the stock of education capital
    financed by the Federal Government.
      As shown in Table 6-6, the federally financed education stock is
    estimated at $1,309 billion in 2004 in constant 2000 dollars. The vast
    majority of the Nation's education stock is financed by State and local
    governments, and by students and their families themselves. This
    federally financed portion of the stock represents about 3 percent of
    the Nation's total education stock. \1\ Nearly three-quarters is for
    elementary and secondary education, while the remaining one quarter is
    for higher education.
    ---------------------------------------------------------------------------
      \1\ For estimates of the total education stock, see table 13-4 in
    Chapter 13, ``Stewardship.''
    ---------------------------------------------------------------------------
      The federally financed education stock has grown steadily in the last
    few decades, with an average annual growth rate of 5.3 percent from 1970
    to 2004. The expansion of the education stock is projected to continue
    under this budget, with the stock rising to $1,428 billion in 2006.

    [[Page 84]]

          Table 6-6.  NET STOCK OF FEDERALLY FINANCED EDUCATION CAPITAL
                          (In billions of 2000 dollars)
    ------------------------------------------------------------------------
                                                      Elementary
                                            Total         and        Higher
                Fiscal Year               Education    Secondary   Education
                                            Stock      Education
    ------------------------------------------------------------------------

    Five year intervals:
      1960.............................          70            51         20
      1965.............................          98            71         27
      1970.............................         225           176         49
      1975.............................         324           260         64
      1980.............................         458           356        102
      1985.............................         565           421        144
      1990.............................         745           550        195
      1995.............................         853           619        234
    Annual data:
      2000.............................       1,120           819        302
      2001.............................       1,169           844        325
      2002.............................       1,210           873        336
      2003.............................       1,263           915        348
      2004.............................       1,309           953        355
      2005 estimate....................       1,364           997        368
      2006 estimate....................       1,428         1,049        379
    ------------------------------------------------------------------------