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

    [[Page 53]]

                             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 54]]

    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 $392.3 billion in 2005.
    They are estimated to increase to $425.0 billion in 2006 and are
    projected to decline to $415.5 billion in 2007. Major Federal investment
    outlays will comprise an estimated 15 percent of total Federal outlays
    in 2007 and 3.0 percent of the Nation's gross domestic product. 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 $199.3 billion in 2007. 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 $99.2 billion in 2007. Almost all of these outlays,
    or an estimated $90.2 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
                                                                                           2005  -------------------
                                                                                         Actual     2006      2007
    ----------------------------------------------------------------------------------------------------------------
    Major public physical capital investment:
      Direct Federal:
        National defense..............................................................      89.5      97.3      99.2
        Nondefense....................................................................      27.3      30.2      30.3
                                                                                       -----------------------------
          Subtotal, direct major public physical capital investment...................     116.8     127.5     129.5

      Grants to State and local governments...........................................      60.8      65.9      69.9
                                                                                       -----------------------------
        Subtotal, major public physical capital investment............................     177.7     193.4     199.3

    Conduct of research and development:
      National defense................................................................      70.6      75.6      76.8
      Nondefense......................................................................      49.2      51.8      53.9
                                                                                       -----------------------------
        Subtotal, conduct of research and development.................................     119.8     127.4     130.7

    Conduct of education and training:
      Grants to State and local governments...........................................      51.6      53.7      52.6
      Direct Federal..................................................................      43.2      50.5      32.9
                                                                                       -----------------------------
        Subtotal, conduct of education and training...................................      94.7     104.2      85.5
                                                                                       -----------------------------
          Total, major Federal investment outlays.....................................     392.3     425.0     415.5

                                        MEMORANDUM

    Major Federal investment outlays:
      National defense................................................................     160.1     172.9     176.0
      Nondefense......................................................................     232.1     252.1     239.5
                                                                                       -----------------------------
        Total, major Federal investment outlays.......................................     392.3     425.0     415.5

    Miscellaneous physical investment:
      Commodity inventories...........................................................      -0.7      -0.8      -0.2
      Other physical investment (direct)..............................................       2.8       3.2       3.3
                                                                                       -----------------------------
        Total, miscellaneous physical investment......................................       2.1       2.4       3.1
                                                                                       -----------------------------
    Total, Federal investment outlays, including miscellaneous physical investment....     394.4     427.4     418.6
    ----------------------------------------------------------------------------------------------------------------

      Outlays for direct physical investment for nondefense purposes are
    estimated to be $30.3 billion in 2007. These outlays include $17.3
    billion for construction and rehabilitation. This amount includes funds
    for water, power, and natural resources projects of the Corps of
    Engineers, the Bureau of Reclamation within the Department of the
    Interior, 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 $12.6 billion in
    2007. The largest amounts are for the air traffic control system.
      Grants to State and local governments for physical investment are
    estimated to be $69.9 billion in 2007. More than two-thirds of these
    outlays, or $50.7 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 $130.7 billion in 2007.
    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 $76.8 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 $53.9 billion in 2007. 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 $85.5 billion in 2007. 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 $52.6 billion in 2007, more than
    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 $32.9
    billion in 2007. Programs in this category are primarily aid for higher
    education through student financial assistance, loan subsidies, the
    veterans GI bill, and health training programs. The decline from 2006 to
    2007 results in part from upward reestimates of $11.4 billion in 2006 in
    loan subsidies for loans made in earlier years.
      This category does not include outlays for education and training of
    Federal civilian and military employees. Outlays for education and
    training that are for physical investment and for research and
    development are in

    [[Page 55]]

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

    Miscellaneous Physical Investment

      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 $0.2 billion in 2007.
      Outlays for other miscellaneous physical investment are estimated to
    be $3.3 billion in 2007. 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 56]]

              Table 6-2. FEDERAL INVESTMENT BUDGET AUTHORITY AND OUTLAYS: GRANT AND DIRECT FEDERAL PROGRAMS
                                                (in millions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                Budget Authority                             Outlays
                                   ---------------------------------------------------------------------------------
              Description               2005         2006          2007          2005         2006          2007
                                      Actual      Estimate      Estimate       Actual      Estimate      Estimate
    ----------------------------------------------------------------------------------------------------------------
       GRANTS TO STATE AND LOCAL
              GOVERNMENTS
    Major public physical
     investments:
      Construction and
       rehabilitation:
        Transportation:
          Highways................      38,184        37,806   41,370            31,433        33,868        38,027
          Mass transportation.....       8,039         8,482    8,729             7,826         8,338         8,932
          Air transportation......       3,696         3,070    2,725             3,530         3,800         3,705
                                   ---------------------------------------------------------------------------------
            Subtotal,                   49,919        49,358   52,824            42,789        46,006        50,664
             transportation.......
                                   ---------------------------------------------------------------------------------
        Other construction and
         rehabilitation:
          Pollution control and          2,233         1,880    1,759             2,021         1,755         1,706
           abatement..............
          Community and regional         6,115        16,779    3,624             6,399         8,251         8,157
           development............
          Housing assistance......       6,505         6,203    5,593             7,687         7,776         7,435
          Other construction......         496           491      291               458           621           416
                                   ---------------------------------------------------------------------------------
            Subtotal, other             15,349        25,353   11,267            16,565        18,403        17,714
             construction and
             rehabilitation.......
                                   ---------------------------------------------------------------------------------
          Subtotal, construction        65,268        74,711   64,091            59,354        64,409        68,378
           and rehabilitation.....
                                   ---------------------------------------------------------------------------------
      Other physical assets.......       1,567         1,422    1,369             1,494         1,502         1,504
                                   ---------------------------------------------------------------------------------
        Subtotal, major public          66,835        76,133   65,460            60,848        65,911        69,882
         physical capital.........
                                   ---------------------------------------------------------------------------------
    Conduct of research and
     development:
      Agriculture.................         273           277      245               274           268           270
      Other.......................         223           226      203               212           194           178
                                   ---------------------------------------------------------------------------------
        Subtotal, conduct of               496           503      448               486           462           448
         research and development.
                                   ---------------------------------------------------------------------------------
    Conduct of education and
     training:
      Elementary, secondary, and        37,169        37,814   36,381            36,393        38,164        37,689
       vocational education.......
      Higher education............         506           701       35               522           809           505
      Research and general                 800           763      691               753           832           694
       education aids.............
      Training and employment.....       3,509         3,125    3,770             3,378         3,077         3,180
      Social services.............      10,145        10,115    9,574             9,861        10,134         9,845
      Agriculture.................         451           456      436               441           452           437
      Other.......................         249           242      245               226           234           229
                                   ---------------------------------------------------------------------------------
        Subtotal, conduct of            52,829        53,216   51,132            51,574        53,702        52,579
         education and training...
                                   ---------------------------------------------------------------------------------
      Subtotal, grants for             120,160       129,852   117,040          112,908       120,075       122,909
       investment.................
                                   =================================================================================
        DIRECT FEDERAL PROGRAMS
    Major public physical
     investment:
      Construction and
       rehabilitation:
        National defense:
          Military construction          8,190         9,172    8,537             6,150         7,431         8,309
           and family housing.....
          Atomic energy defense            527           634      676               663           585           690
           activities and other...
                                   ---------------------------------------------------------------------------------
            Subtotal, national           8,717         9,806    9,213             6,813         8,016         8,999
             defense..............
                                   ---------------------------------------------------------------------------------
        Nondefense:
          International affairs...       1,922         1,330    1,450             1,436         1,276         1,343
          General science, space,        1,946         2,066    2,089             1,799         2,161         2,897
           and technology.........
          Water resources projects       3,318         4,316    2,692             2,749         4,040         3,402
          Other natural resources          969           974      810               988         1,021           935
           and environment........
          Energy..................       1,309         1,468    1,281             1,307         1,435         1,296
          Postal Service..........         708         1,118    1,698               678           677         1,103
          Transportation..........         122           130      112                93           194           160
          Veterans hospitals and         2,133         2,371    1,655             1,618         1,851         1,941
           other health facilities
          Federal Prison System...          25            49     -116               260           117           123
          GSA real property              1,627         1,676    1,556             1,407         1,689         1,882
           activities.............
          Other construction......       2,617         2,541    1,989             2,538         2,551         2,207
                                   ---------------------------------------------------------------------------------
            Subtotal, nondefense..      16,696        18,039   15,216            14,873        17,012        17,289
                                   ---------------------------------------------------------------------------------

    [[Page 57]]

          Subtotal, construction        25,413        27,845   24,429            21,686        25,028        26,288
           and rehabilitation.....
                                   ---------------------------------------------------------------------------------
      Acquisition of major
       equipment:
        National defense:
          Department of Defense...      96,695        86,185   84,328            82,298        88,802        89,769
          Atomic energy defense            381           473      473               388           470           456
           activities.............
                                   ---------------------------------------------------------------------------------
            Subtotal, national          97,076        86,658   84,801            82,686        89,272        90,225
             defense..............
                                   ---------------------------------------------------------------------------------
        Nondefense:
          General science and              597           583      768               604           591           709
           basic research.........
          Space flight, research,        1,179           360      426               956           272           405
           and supporting
           activities.............
          Postal Service..........         881         1,124      762               552           740           851
          Air transportation......       3,183         3,181    2,862             2,644         2,728         2,591
          Water transportation             990         1,147    1,124               816           991         1,144
           (Coast Guard)..........
          Other transportation           1,207         1,293      900             1,221         1,330           900
           (railroads)............
          Hospital and medical           1,091           886    1,009               776         1,022           130
           care for veterans......
          Law enforcement                1,717         1,798    1,948             1,684         1,628         1,846
           activities.............
          Department of the                259           237      216               296           228           227
           Treasury (fiscal
           operations)............
          Department of Commerce           896           923      962               908           773           952
           (NOAA).................
          GSA general services             826           906      906               791           784           792
           funds..................
          Other...................         837         2,035    2,071               785         1,775         2,078
                                   ---------------------------------------------------------------------------------
            Subtotal, nondefense..      13,663        14,473   13,954            12,033        12,862        12,625
                                   ---------------------------------------------------------------------------------
          Subtotal, acquisition of     110,739       101,131   98,755            94,719       102,134       102,850
           major equipment........
                                   ---------------------------------------------------------------------------------
      Purchase or sale of land and
       structures:
        National defense..........         -25           -28      -28               -25           -28           -28
        Natural resources and              152           134       80               232           164           123
         environment..............
        General government........         161           168      164               158           168           164
        Other.....................          76            53       85                53            31            63
                                   ---------------------------------------------------------------------------------
          Subtotal, purchase or            364           327      301               418           335           322
           sale of land and
           structures.............
                                   ---------------------------------------------------------------------------------
        Subtotal, major public         136,516       129,303   123,485          116,823       127,497       129,460
         physical investment......
                                   ---------------------------------------------------------------------------------
    Conduct of research and
     development:
      National defense:
        Defense military..........      69,608        71,860   74,213            66,467        71,572        72,871
        Atomic energy and other...       3,942         3,780    3,787             4,179         4,052         3,967
                                   ---------------------------------------------------------------------------------
          Subtotal, national            73,550        75,640   78,000            70,646        75,624        76,838
           defense................
                                   ---------------------------------------------------------------------------------
      Nondefense:
        International affairs.....         255           255      255               258           258           258
        General science, space,
         and technology:
          NASA....................       6,883         8,309    9,378             6,880         7,143         8,807
          National Science               3,759         3,797    4,066             3,638         3,823         3,833
           Foundation.............
          Department of Energy....       2,832         2,890    3,246             2,809         2,900         3,246
                                   ---------------------------------------------------------------------------------
            Subtotal, general           13,729        15,251   16,945            13,585        14,124        16,144
             science, space, and
             technology...........
                                   ---------------------------------------------------------------------------------
        Energy....................       1,162         1,301    1,438             1,272         1,478         1,337
        Transportation:
          Department of                    507           657      509               444           706           628
           Transportation.........
          NASA....................         954           929      721               834           812           802
          Other...................          17            17       13                10            12            16
                                   ---------------------------------------------------------------------------------
            Subtotal,                    2,640         2,904    2,681             2,560         3,008         2,783
             transportation.......
                                   ---------------------------------------------------------------------------------
        Health:
          National Institutes of        27,445        27,683   27,712            26,039        26,634        27,499
           Health.................
          All other health........         691           710      691               707           705           686
                                   ---------------------------------------------------------------------------------
            Subtotal, health......      28,136        28,393   28,403            26,746        27,339        28,185
                                   ---------------------------------------------------------------------------------

    [[Page 58]]

        Agriculture...............       1,533         1,577    1,353             1,484         1,494         1,311
        Natural resources and            2,104         2,089    1,972             1,854         2,069         1,898
         environment..............
        National Institute of              394           354      361               418           368           421
         Standards and Technology.
        Hospital and medical care          742           765      765               714           738           744
         for veterans.............
        All other research and           1,625         1,950    1,903             1,353         2,177         1,932
         development..............
                                   ---------------------------------------------------------------------------------
          Subtotal, nondefense....      50,903        53,283   54,383            48,714        51,317        53,418
                                   ---------------------------------------------------------------------------------
        Subtotal, conduct of           124,453       128,923   132,383          119,360       126,941       130,256
         research and development.
                                   ---------------------------------------------------------------------------------
    Conduct of education and
     training:
      Elementary, secondary, and         1,605         1,314    1,153             1,706         1,851         1,389
       vocational education.......
      Higher education............      31,756        45,512   22,359            31,482        39,332        21,477
      Research and general               1,880         1,900    1,962             1,954         1,988         1,942
       education aids.............
      Training and employment.....       1,626           328    1,366             1,652           458         1,346
      Health......................       1,555         1,365    1,030             1,465         1,401         1,253
      Veterans education,                2,833         3,339    3,292             2,970         3,292         3,443
       training, and
       rehabilitation.............
      General science and basic            904           898      920               919           936           924
       research...................
      National defense............           8   ............  ............           9   ............  ............
      International affairs.......         406           455      503               423           421           475
      Other.......................         616           644      569               584           830           649
                                   ---------------------------------------------------------------------------------
        Subtotal, conduct of            43,189        55,755   33,154            43,164        50,509        32,898
         education and training...
                                   ---------------------------------------------------------------------------------
      Subtotal, direct Federal         304,158       313,981   289,022          279,347       304,947       292,614
       investment.................
                                   =================================================================================
    Total, Federal investment.....     424,318       443,833   406,062          392,255       425,022       415,523
    ----------------------------------------------------------------------------------------------------------------

                   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 Government 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 fourth year of using the PART, the Administration has
    assessed almost 800 programs, about four-fifths of the Federal budget.
      The PART 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 may receive
    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 209 programs:
        Programs for capital assets are essentially those identified
              in the PART system as ``capital assets and service
              acquisition'' (79 programs);
        Programs for research and development are essentially those
              identified in the PART system as ``research and development''
              (102 programs); and
        Programs for education and training (28 programs) are
              primarily programs in the Department of Education that are not
              grants to State and local governments (e.g., Federal Pell
              Grants). This cat

    [[Page 59]]

              egory 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 at
    www.ExpectMore.gov.
       Summary of ratings. Table 6-3 shows that the average rating for the
    209 investment programs that have been rated by PART was ``Adequate''.
    These programs had total spending of $227.5 billion in 2005. Of these
    programs:
        47 were rated effective ($45.0 billion);
        67 were rated moderately effective ($69.0 billion);
        46 were rated adequate ($72.4 billion);
        9 were rated ineffective ($6.7 billion); and
        40 were rated ``results not demonstrated'' ($34.3 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
    ----------------------------------------------------------------------------------------------------------------
                                                            Type of Investment

    Purpose.................................................        83%             92%          79%             87%
    Planning................................................        79%             83%          73%             80%
    Management..............................................        82%             87%          67%             83%
    Results/Accountability..................................        55%             60%          34%             55%
    Average Rating \1\......................................   Adequate      Moderately     Adequate        Adequate
                                                                              effective

                                                            Number of Programs

                           Ratings \1\
    Effective...............................................         16              29            2              47
    Moderately Effective....................................         24              41            2              67
    Adequate................................................         18              17           11              46
    Ineffective.............................................          2               3            4               9
    Results Not Demonstrated................................         19              12            9              40
                                                             -------------------------------------------------------
      Total number of investment programs rated.............         79             102           28             209

                                                            In millions of dollars (2005)

    Effective...............................................     $4,658         $39,839         $479          44,976
    Moderately Effective....................................     50,825          16,516        1,707          69,048
    Adequate................................................     45,064           1,737       25,602          72,403
    Ineffective.............................................      5,323             166        1,249           6,738
    Results Not Demonstrated................................     27,237           2,149        4,930          34,316
                                                             -------------------------------------------------------
    All investment programs that were rated in PART.........   $133,107         $60,407      $33,967        $227,481
    ----------------------------------------------------------------------------------------------------------------
    \1\ Ratings are determined by weighting the section scores a follows: Purpose (20 percent), Planning (10
      percent), Management (20 percent), Results/Accountability (50 percent). The resulting weighted average is
      translated into a rating: Effective indicates a score of 85 percent or more; Moderately Effective, 70-84
      percent; Adequate, 50-69 percent; and Ineffective, 49 percent or less. Regardless of the weighted average, a
      rating of Results Not Demonstrated may be given if the program does not have performance goals or has not
      collected data on its performance goals.

       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. Navy Shipbuilding ($13.4 billion in 2005).
    Rating: Adequate.
      This program buys new ships and overhauls existing ships. New ships
    are built at six privately-owned shipyards. Overhauls of existing ships
    are performed at both privately-owned and publicly-owned shipyards. The
    Navy currently has 280 ships in the fleet. The Navy conducts periodic
    reviews of programs at major

    [[Page 60]]

    milestones of development and uses a structured reporting regime to help
    monitor the status of ship cost, schedule, and performance.
      The Navy has experienced cost increases and schedule slips on some
    ship construction programs, although overall performance is adequate.
    For example, the first Virginia Class submarine was only 89 percent
    complete in 2003 when the target was 92 percent. In addition, the cost
    of the first Virginia class submarine increased by 24 percent in 2002.
       Department of Defense (DoD). Air Combat Program ($13.4 billion in
    2005). Rating: Moderately Effective. The purpose of this program is to
    enable DoD to successfully wage war in the air by developing and
    producing a variety of tactical fighter and strike aircraft. DoD's
    individual programs within the overall air combat program are delivering
    aircraft at targeted rates, but in several cases, such as the F/A-22, at
    greater cost than projected.
      DoD is moving towards an assessment of the overall capabilities
    provided by its programs, rather than its traditional assessment of
    individual acquisition programs. However, until the air combat program
    is managed as a single program (consisting of several systems) with
    clear long-term goals, it will be difficult to perform such a
    ``capabilities based'' assessment.
       Department of Defense. Marine Corps/Expeditionary Warfare. ($11.9
    billion in 2005). Rating: Results Not Demonstrated. Expeditionary
    warfare is the temporary use of Marine Corps force in foreign countries.
    The expeditionary warfare program consists of specific investment
    programs for aviation assets, amphibious ships, weapons systems,
    equipment, vehicles, ammunition, and research and development.
      The Department of Defense has not set long-term performance measures
    to guide program management and budgeting for expeditionary warfare. It
    does not have program measures that assess the most important aspects of
    expeditionary warfare and its strategic goals.
       Department of Defense. Missile Defense ($8.8 billion in 2005).
    Rating: Adequate. The mission of the Missile Defense Agency (MDA) is to
    defend the United States, deployed forces, and allies from ballistic
    missile attack. MDA is researching, developing and fielding a global,
    integrated and multi-layered Ballistic Missile Defense System (BMDS),
    comprising multiple sensors, interceptors and battle management
    capabilities.
      MDA's strategic planning, resource allocation and management oversight
    activities are properly aligned to accomplish stated mission objectives.
    MDA budget requests and human resource management activities are
    explicitly tied to appropriate performance goals. MDA leaders regularly
    review and evaluate a wide array of performance data to inform and guide
    their decisionmaking.
       Tennessee Valley Authority. Tennessee Valley Authority Power ($7.8
    billion in 2005). Rating: Moderately Effective. TVA is the Nation's
    largest public power company. Through 158 locally owned distributors,
    TVA provides power to nearly 8.5 million residents of the Tennessee
    Valley. Some of TVA's former performance measures such as cents/KWH are
    no longer tracked. It is unclear how some of the new efficiency measures
    tracked by TVA relate to program performance. In its strategic plan, the
    Tennessee Valley Authority committed to a debt reduction plan that will
    reduce its total debt by $3-$5 billion over a ten-year to twelve-year
    period. TVA has since increased that debt reduction total to $7.8
    billion by 2016.
       Department of Defense. Future Combat Systems/Modularity Land Warfare
    ($7.4 billion in 2005). Rating: Moderately Effective. The Army's
    complementary transformation initiatives, Modularity and the Future
    Combat Systems, are designed to provide regional combatant commanders
    and soldiers with a lighter, faster, more survivable and rapidly
    deployable force with which to fight and win the United States' current
    and future land conflicts.
      Although the Future Combat Systems program is currently on schedule
    and on cost, the program's long schedule, significant cost, and
    technological complexity put Future Combat Systems at substantial risk
    of cost and schedule overruns as the program moves from research and
    development to acquisition.
       Department of Energy. Environmental Management ($7.3 billion in
    2005). Rating: Adequate. This program protects human health and the
    environment by cleaning up millions of gallons of radioactive waste,
    thousands of tons of spent nuclear fuel and special nuclear material,
    along with huge quantities of contaminated soil and water.
      Managers are implementing reforms that are improving program
    performance, which will significantly reduce environmental, safety, and
    health risks. For example, at the Hanford (State of Washington) site,
    the program continues to expedite retrieval of radioactive waste from
    leak-prone, single-shell tanks and transfer the waste to double-shell
    tanks for safer storage until treated and disposed. The program recently
    completed the physical cleanup of the Rocky Flats (Colorado) site more
    than a year ahead of schedule and below estimated costs. Most of the
    site will transfer to the Department of the Interior to manage as a
    national wildlife refuge after the Environmental Protection Agency, with
    concurrence by the Colorado Department of Public Health and Environment,
    certifies that the cleanup meets human health standards.
       General Services Administration. National Information Technology
    Solutions ($6.3 billion in 2005). Rating: Results Not Demonstrated. This
    program provides expert technical, acquisition, and information
    technology products and services to Federal clients. GSA is reviewing
    the organization of both the National and Regional IT Solutions programs
    for possible consolidation.
      The assessment found that the program is useful to Federal agencies
    that do not have in-house expertise to acquire information technology
    (IT) products or services. However, the program must better demonstrate
    the value it provides to customer agencies. The program must develop
    long-term outcome goals and efficiency

    [[Page 61]]

    measures which are comparable to other Federal agencies or the private
    sector. While the program does have annual goals, it must develop annual
    goals which measure the savings and quality improvement that agencies
    achieve through use of this program.

    Education

       Department of Education. Federal Pell Grants ($12.4 billion in 2005).
    Rating: Adequate. This program helps ensure access to postsecondary
    education for undergraduate students by providing need-based grants
    that, in combination with other sources of student aid, help meet
    education costs. The program also promotes lifelong learning by
    encouraging low-income adults to return to school.
      The program has meaningful performance measures and outcome data on
    these measures such as the degree to which Pell Grants are targeted to
    low-income students. New measures such as enrollment and graduation
    rates among low-income and minority students have also been added. The
    program has met its current long-term performance goals and new measures
    will help track other key program goals.
       Department of Education. Federal Family Education Loan Program ($11.1
    billion (subsidy cost) in 2005). Rating: Adequate. This program provides
    default insurance and interest subsidies to encourage private lenders to
    make postsecondary education loans to undergraduate and graduate
    students. The program also provides interest subsidies for eligible low-
    income students to cover interest accrued while in school.
      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 two programs combined provide over $70
    billion a year in new loans to students. While the PART found that these
    programs had meaningful performance measures and outcome data, it also
    found that both programs could be more cost efficient.

                  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.

    [[Page 62]]

                          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
    2005, with periods of faster growth during the late 1960s and the 1980s.
    The stock amounted to $2,257 billion in 2005 and is estimated to
    increase to $2,381 billion by 2007. In 2005, the national defense
    capital stock accounted for $680 billion, or 30 percent of the total,
    and nondefense stocks for $1,577 billion, or 70 percent of the total.

                                                                      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........................................................................    2,199       662      1,536       391      168      223    1,146          714          196        136       100
      2005........................................................................    2,257       680      1,577       400      168      231    1,178          737          198        138       105
      2006 estimate...............................................................    2,321       700      1,621       410      170      240    1,211          761          202        138       110
      2007 estimate...............................................................    2,381       717      1,664       420      171      249    1,244          786          205        139       114
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

      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 $1,577 billion in 2005. With the
    investments proposed in the budget, nondefense stocks are estimated to
    grow to $1,664 billion in 2007. 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 a low of
    $631 billion in 2001 to $717 billion in 2007.
      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 2005, 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

    [[Page 63]]

    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 40 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 $1,106 billion in 2005 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 2005. 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 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 $462 billion in 2007.
      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...................................         420          52          368         587         406          181       1,007         458          549
      2003...................................         423          53          370         613         428          186       1,036         481          555
      2004...................................         430          54          375         640         450          190       1,070         505          565
      2005...................................         439          56          383         666         473          194       1,106         529          577
      2006 estimate..........................         451          57          394         692         495          197       1,143         553          591
      2007 estimate..........................         462          59          403         718         518          201       1,180         577          603
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    \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 $1,394 billion in 2005 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 remainder is for higher
    education.
    ---------------------------------------------------------------------------
      \1\ For estimates of the total education stock, see table 13-4 in
    Chapter 13, ``Stewardship.''

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

    [[Page 64]]

      The federally financed education stock has grown steadily in the last
    few decades, with an average annual growth rate of 5.2 percent from 1970
    to 2005. The expansion of the education stock is projected to continue
    under this budget, with the stock rising to $1,519 billion in 2007.

          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.............................          71            51         20
      1965.............................         102            74         28
      1970.............................         233           184         50
      1975.............................         347           282         65
      1980.............................         479           379        101
      1985.............................         575           434        141
      1990.............................         730           544        186
      1995.............................         874           639        235

    Annual data:
      2000.............................       1,136           825        311
      2001.............................       1,186           859        327
      2002.............................       1,228           891        338
      2003.............................       1,277           932        346
      2004.............................       1,341           968        373
      2005.............................       1,394         1,001        393
      2006 estimate....................       1,462         1,045        417
      2007 estimate....................       1,519         1,086        433
    ------------------------------------------------------------------------