[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
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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.
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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
---------------------------------------------------------------------------------
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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
---------------------------------------------------------------------------------
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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
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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
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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
------------------------------------------------------------------------