[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

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

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