[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

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