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

    [[Page 55]]

                             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 56]]

    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 $430.4 billion in 2006.
    They are estimated to increase to $434.9 billion in 2007 and are
    projected to decline to $430.1 billion in 2008. Major Federal investment
    outlays will comprise an estimated 15 percent of total Federal outlays
    in 2008 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 $221.1 billion in 2008. Physical investment outlays are
    for construction and rehabilitation, the purchase of major equipment,
    and the purchase or sale of land and structures. Approximately two-
    thirds 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 $117.6 billion in 2008. Almost all of these outlays,
    or an estimated $107.8 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
                                                                                           2006  -------------------
                                                                                         Actual     2007      2008
    ----------------------------------------------------------------------------------------------------------------
    Major public physical capital investment:
      Direct Federal:
        National defense..............................................................      97.3     113.3     117.6
        Nondefense....................................................................      29.0      32.5      31.6
                                                                                       -----------------------------
          Subtotal, direct major public physical capital investment...................     126.3     145.8     149.2

      Grants to State and local governments...........................................      64.1      69.2      71.8
                                                                                       -----------------------------
        Subtotal, major public physical capital investment............................     190.4     215.0     221.1

    Conduct of research and development:
      National defense................................................................      73.0      75.5      72.9
      Nondefense......................................................................      49.8      52.7      54.1
                                                                                       -----------------------------
        Subtotal, conduct of research and development.................................     122.8     128.1     127.0

    Conduct of education and training:
      Grants to State and local governments...........................................      56.2      57.3      53.6
      Direct Federal..................................................................      61.0      34.5      28.5
                                                                                       -----------------------------
        Subtotal, conduct of education and training...................................     117.2      91.8      82.1
                                                                                       -----------------------------
          Total, major Federal investment outlays.....................................     430.4     434.9     430.1

                                        MEMORANDUM

    Major Federal investment outlays:
      National defense................................................................     170.3     188.7     190.6
      Nondefense......................................................................     260.1     246.2     239.5
                                                                                       -----------------------------
        Total, major Federal investment outlays.......................................     430.4     434.9     430.1

    Miscellaneous physical investment:
      Commodity inventories...........................................................      -1.0      -0.2       0.2
      Other physical investment (direct)..............................................       3.1       3.2       3.4
                                                                                       -----------------------------
        Total, miscellaneous physical investment......................................       2.1       3.0       3.6
                                                                                       -----------------------------
    Total, Federal investment outlays, including miscellaneous physical investment....     432.5     437.9     433.7
    ----------------------------------------------------------------------------------------------------------------

      Outlays for direct physical investment for nondefense purposes are
    estimated to be $31.6 billion in 2008. These outlays include $18.3
    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; construction for the administration of justice programs
    (largely in the Department of Homeland Security), construction of office
    buildings by the General Services Administration, and construction for
    embassy security. Outlays for the acquisition of major equipment are
    estimated to be $13.4 billion in 2008. The largest amounts are for the
    air traffic control system; law enforcement activities, largely in the
    Department of Homeland Security and the Federal Bureau of Investigation;
    and information systems in the Department of Veterans Affairs.
      Grants to State and local governments for physical investment are
    estimated to be $71.8 billion in 2008. More than two-thirds of these
    outlays, or $51.6 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 $127.0 billion in 2008.
    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 $72.9 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 $54.1 billion in 2008. 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 $82.1 billion in 2008. 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 $53.6 billion in 2008, 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 $28.5
    billion in 2008. Programs in this category are primarily aid for higher
    education through student financial assistance, loan subsidies, the

    [[Page 57]]

    veterans GI bill, and health training programs. The decline in spending
    from 2006 to 2007 reflects a significant decrease in estimates of
    Federal subsidies due to reduced student loan consolidation activity.
      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 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.
    Purchases are estimated to exceed sales by $0.2 billion in 2008.
      Outlays for other miscellaneous physical investment are estimated to
    be $3.4 billion in 2008. 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 58]]

              Table 6-2. FEDERAL INVESTMENT BUDGET AUTHORITY AND OUTLAYS: GRANT AND DIRECT FEDERAL PROGRAMS
                                                (In millions of dollars)
    ----------------------------------------------------------------------------------------------------------------
                                                Budget Authority                             Outlays
                                   ---------------------------------------------------------------------------------
              Description               2006         2007          2008          2006         2007          2008
                                      Actual      Estimate      Estimate       Actual      Estimate      Estimate
    ----------------------------------------------------------------------------------------------------------------
       GRANTS TO STATE AND LOCAL
              GOVERNMENTS

    Major public physical
     investments:
      Construction and
       rehabilitation:
        Transportation:
          Highways................      36,357        37,555   39,943            33,975        34,914        37,621
          Mass transportation.....       9,768         8,738    9,273             8,430        10,048        10,276
          Air transportation......       3,070         4,267    2,750             3,841         3,821         3,711
                                   ---------------------------------------------------------------------------------
            Subtotal,                   49,195        50,560   51,966            46,246        48,783        51,608
             transportation.......
                                   ---------------------------------------------------------------------------------
        Other construction and
         rehabilitation:
          Pollution control and          1,878         1,961    1,748             1,740         1,685         1,546
           abatement..............
          Community and regional        22,054         5,173    3,535             6,310         9,147         9,231
           development............
          Housing assistance......       6,169         6,127    5,525             7,750         7,566         7,563
          Other construction......         579           311      289               553           533           379
                                   ---------------------------------------------------------------------------------
            Subtotal, other             30,680        13,572   11,097            16,353        18,931        18,719
             construction and
             rehabilitation.......
                                   ---------------------------------------------------------------------------------
          Subtotal, construction        79,875        64,132   63,063            62,599        67,714        70,327
           and rehabilitation.....
                                   ---------------------------------------------------------------------------------
      Other physical assets.......       1,423         1,372    1,299             1,515         1,494         1,507
                                   ---------------------------------------------------------------------------------
        Subtotal, major public          81,298        65,504   64,362            64,114        69,208        71,834
         physical capital.........
                                   ---------------------------------------------------------------------------------
    Conduct of research and
     development:
      Agriculture.................         266           275      229               270           284           276
      Other.......................         169           165      164               171           130           130
                                   ---------------------------------------------------------------------------------
        Subtotal, conduct of               435           440      393               441           414           406
         research and development.
                                   ---------------------------------------------------------------------------------
    Conduct of education and
     training:
      Elementary, secondary, and        38,295        36,230   36,936            37,984        38,258        35,467
       vocational education.......
      Higher education............         501           500      337               540           582           510
      Research and general                 764           784      694               727           813           710
       education aids.............
      Training and employment.....       4,965         5,157    4,803             4,801         4,749         4,543
      Social services.............      10,109        10,239    9,567            10,015        10,255         9,873
      Agriculture.................         456           456      436               423           443           496
      Other.......................       1,700         2,216    1,997             1,682         2,189         1,979
                                   ---------------------------------------------------------------------------------
        Subtotal, conduct of            56,790        55,582   54,770            56,172        57,289        53,578
         education and training...
                                   ---------------------------------------------------------------------------------
      Subtotal, grants for             138,523       121,526   119,525          120,727       126,911       125,818
       investment.................
                                   =================================================================================
        DIRECT FEDERAL PROGRAMS

    Major public physical
     investment:
      Construction and
       rehabilitation:
        National defense:
          Military construction          9,500         9,407   11,527             6,439         8,870         9,426
           and family housing.....
          Atomic energy defense            668           628      489               654           577           504
           activities and other...
                                   ---------------------------------------------------------------------------------
            Subtotal, national          10,168        10,035   12,016             7,093         9,447         9,930
             defense..............
                                   ---------------------------------------------------------------------------------
        Nondefense:
          International affairs...       1,357           924    1,492             1,585         1,542         1,228
          General science, space,        2,114         1,941    2,285             2,183         2,879         3,261
           and technology.........
          Water resources projects       4,815         2,823    2,746             3,161         4,289         3,000
          Other natural resources        1,144           860      884               982           990           956
           and environment........
          Energy..................       1,387         1,245    1,275             1,354         1,215         1,352
          Postal Service..........         950         1,288    1,214               737           793         1,122
          Transportation..........         130           136       64                91           218           123
          Veterans hospitals and         2,867         1,343    2,006             1,946         1,844         1,937
           other health facilities
          Administration of                821         1,658    1,518               467         1,397         1,799
           justice................
          GSA real property              1,911           949    1,420             1,484         1,476         1,839
           activities.............

    [[Page 59]]

          Other construction......       1,938         1,776    1,342             1,991         1,966         1,680
                                   ---------------------------------------------------------------------------------
            Subtotal, nondefense..      19,434        14,943   16,246            15,981        18,609        18,297
                                   ---------------------------------------------------------------------------------
          Subtotal, construction        29,602        24,978   28,262            23,074        28,056        28,227
           and rehabilitation.....
                                   ---------------------------------------------------------------------------------
      Acquisition of major
       equipment:
        National defense:
          Department of Defense...     105,370       126,244   137,220           89,796       103,508       107,398
          Atomic energy defense            510           490      383               444           344           354
           activities.............
                                   ---------------------------------------------------------------------------------
            Subtotal, national         105,880       126,734   137,603           90,240       103,852       107,752
             defense..............
                                   ---------------------------------------------------------------------------------
        Nondefense:
          General science and              604           637      926               578           608           890
           basic research.........
          Space flight, research,          360           290      492               291           543           405
           and supporting
           activities.............
          Postal Service..........       1,339         1,782    1,442             1,430         1,017         1,294
          Air transportation......       3,310         3,333      860             2,615         2,737         1,817
          Water transportation           1,340         1,264      892               882         1,094         1,115
           (Coast Guard)..........
          Other transportation           1,293         1,114      900             1,257         1,188           900
           (railroads)............
          Hospital and medical           1,132           236      770               784           633           604
           care for veterans......
          Law enforcement                1,802         1,902    2,054             1,448         1,891         1,939
           activities.............
          Department of the                237           251      331               261           214           278
           Treasury (fiscal
           operations)............
          Department of Commerce           944           935      890             1,000           875           900
           (NOAA).................
          GSA general services             763           816      833               719           824           865
           funds..................
          Other...................       2,038         1,767    2,544             1,473         1,952         2,425
                                   ---------------------------------------------------------------------------------
            Subtotal, nondefense..      15,162        14,327   12,934            12,738        13,576        13,432
                                   ---------------------------------------------------------------------------------
          Subtotal, acquisition of     121,042       141,061   150,537          102,978       117,428       121,184
           major equipment........
                                   ---------------------------------------------------------------------------------
      Purchase or sale of land and
       structures:
        National defense..........         -65           -39      -37               -65           -39           -37
        Natural resources and               97           115     -323               145           129          -301
         environment..............
        General government........         168           164      156               162           164           156
        Other.....................          42           160       25                18            25             2
                                   ---------------------------------------------------------------------------------
          Subtotal, purchase or            242           400     -179               260           279          -180
           sale of land and
           structures.............
                                   ---------------------------------------------------------------------------------
        Subtotal, major public         150,886       166,439   178,620          126,312       145,763       149,231
         physical investment......
                                   ---------------------------------------------------------------------------------
    Conduct of research and
     development:
      National defense:
        Defense military..........      73,559        77,821   78,243            69,323        71,755        69,856
        Atomic energy and other...       3,917         3,608    3,645             3,720         3,726         3,079
                                   ---------------------------------------------------------------------------------
          Subtotal, national            77,476        81,429   81,888            73,043        75,481        72,935
           defense................
                                   ---------------------------------------------------------------------------------
      Nondefense:
        International affairs.....         255           255      255               258           258           258
        General science, space,
         and technology:
          NASA....................       8,227         9,131    9,330             6,807         8,438         9,445
          National Science               3,806         3,780    4,373             3,707         3,943         3,894
           Foundation.............
          Department of Energy....       2,914         2,943    3,394             2,966         3,013         3,192
                                   ---------------------------------------------------------------------------------
            Subtotal, general           15,202        16,109   17,352            13,738        15,652        16,789
             science, space, and
             technology...........
                                   ---------------------------------------------------------------------------------
        Energy....................       1,219         1,364    1,409             1,156         1,241         1,409
        Transportation:
          Department of                    792           729      788               563           576           499
           Transportation.........
          NASA....................         893           589      730               722           736           669
          Other...................          17            17       18                20            13            13
                                   ---------------------------------------------------------------------------------
            Subtotal,                    2,921         2,699    2,945             2,461         2,566         2,590
             transportation.......
                                   ---------------------------------------------------------------------------------
        Health:
          National Institutes of        27,524        27,641   27,956            26,695        26,974        27,580
           Health.................

    [[Page 60]]

          All other health........         694           676      671               653           659           670
                                   ---------------------------------------------------------------------------------
            Subtotal, health......      28,218        28,317   28,627            27,348        27,633        28,250
                                   ---------------------------------------------------------------------------------
        Agriculture...............       1,588         1,485    1,397             1,509         1,511         1,458
        Natural resources and            2,106         1,922    1,947             1,513         1,613         1,674
         environment..............
        National Institute of              366           319      398               398           378           409
         Standards and Technology.
        Hospital and medical care          824           818      822               799           809           799
         for veterans.............
        All other research and           1,919         1,547    1,728             1,545         2,084         1,701
         development..............
                                   ---------------------------------------------------------------------------------
          Subtotal, nondefense....      53,144        53,216   55,216            49,311        52,246        53,670
                                   ---------------------------------------------------------------------------------
        Subtotal, conduct of           130,620       134,645   137,104          122,354       127,727       126,605
         research and development.
                                   ---------------------------------------------------------------------------------
    Conduct of education and
     training:
      Elementary, secondary, and         1,355         1,326    1,080             1,656         1,634         1,343
       vocational education.......
      Higher education............      57,017        24,128   20,691            50,716        23,441        17,841
      Research and general               1,993         1,933    2,173             1,902         2,050         2,057
       education aids.............
      Training and employment.....         359           359      364               469           549           534
      Health......................       1,353         1,351      994             1,334         1,311         1,222
      Veterans education,                3,338         2,842    3,332             2,980         3,321         3,316
       training, and
       rehabilitation.............
      General science and basic            889           886      945               902           909           992
       research...................
      National defense............  ...........  ............  ............           5   ............  ............
      International affairs.......         485           474      515               448           462           499
      Other.......................         655           555      611               595           826           672
                                   ---------------------------------------------------------------------------------
        Subtotal, conduct of            67,444        33,854   30,705            61,007        34,503        28,476
         education and training...
                                   ---------------------------------------------------------------------------------
      Subtotal, direct Federal         348,950       334,938   346,429          309,673       307,993       304,312
       investment.................
                                   =================================================================================
    Total, Federal investment.....     487,473       456,464   465,954          430,400       434,904       430,130
    ----------------------------------------------------------------------------------------------------------------

                   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 fifth year of using the PART, the Administration has
    assessed nearly 1,000 programs, approximately 96 percent 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 244 programs:
        Programs for capital assets are essentially those identified
              in the PART system as ``capital assets and service
              acquisition'' (92 programs);

    [[Page 61]]

        Programs for research and development are essentially those
              identified in the PART system as ``research and development''
              (121 programs); and
        Programs for education and training (31 programs) are
              primarily programs in the Department of Education (e.g.,
              Federal Pell Grants) that are not grants to State and local
              governments. This category also includes programs in other
              agencies, such as the Montgomery GI Bill in the Department of
              Veterans Affairs, the Health Professions program in the
              Department of Health and Human Services, and the Job Corps
              program in the Department of Labor.
      Information on these and other programs assessed by PART is at
    www.ExpectMore.gov.
      Summary of ratings. Table 6-3 shows that the average rating for the
    244 investment programs that have been rated by PART was ``Moderately
    Effective''. Of these programs:
        57 were rated Effective;
        83 were rated Moderately Effective;
        55 were rated Adequate;
        8 were rated Ineffective; and
        41 were rated ``Results Not Demonstrated''.

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

    Purpose.................................................        84%             92%          80%             88%
    Planning................................................        80%             83%          74%             81%
    Management..............................................        83%             87%          72%             84%
    Results/Accountability..................................        56%             60%          35%             55%
    Weighted Average \1\....................................        69%             74%          55%             70%
    Average Rating..........................................   Adequate      Moderately     Adequate      Moderately
                                                                              effective                    effective

                                                            Number of Programs

                           Ratings \2\
    Effective...............................................         20              35            2              57
    Moderately effective....................................         31              49            3              83
    Adequate................................................         20              21           14              55
    Ineffective.............................................          2               3            3               8
    Results not demonstrated................................         19              13            9              41
                                                             -------------------------------------------------------
    Total number of investment programs rated...............         92             121           31             244
    ----------------------------------------------------------------------------------------------------------------
    \1\ Weighted as follows: Purpose (20 percent), Planning (10 percent), Management (20 percent), Results/
      Accountability (50 percent).
    \2\ The rating of Effective indicates a score of 85 percent or more; Moderately Effective, 70-84 percent;
      Adequate, 50-69 percent; and Ineffective, 49 percent or less.

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

    Capital Assets

      Department of Defense. Air Force Acquisition Systems. ($31.8 billion
    in 2006). Rating: Moderately Effective. This program acquires the
    equipment and other materiel needed by the Air Force to enable it to
    fulfill its mission of defeating enemy forces and protecting American
    troops.
      The Air Force acquisition system delivers equipment that generally
    meets its required performance goals and fulfills the warfighters'
    needs. The acquisition system does not include control mechanisms to
    effectively limit factors which contribute to cost and schedule
    overruns. While the acquisition system already includes a limited number
    of specific performance measures, additional measures would help to
    better determine how well the acquisition system is performing.
      Department of Defense. Marine Corps/Expeditionary Warfare. ($14.0
    billion in 2006). Rating: Moderately Effective. Expeditionary warfare is
    the temporary use of Marine Corps force in foreign countries. The
    expeditionary warfare program consists of specific investment

    [[Page 62]]

    programs for aviation assets, amphibious ships, weapons systems,
    equipment, vehicles, ammunition, and research and development.
      The Department of Defense (DoD) has articulated a limited number of
    long-term performance measures for the expeditionary warfare program in
    response to an earlier assessment. DoD has identified goals related to
    Joint and Coalition Proficiency, Operational Reach, Force Projection,
    Sustainability, and Operational and Organizational Adaptability for the
    expeditionary warfare capability.
      Department of Defense. Navy Shipbuilding ($13.4 billion in 2006).
    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 281 ships in the fleet.
      The Navy has specific cost, schedule, and performance goals for each
    shipbuilding program. The Navy conducts periodic reviews of programs at
    major 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.
      Department of Defense (DoD). Air Combat Program ($13.4 billion in
    2006). 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 management of the overall air combat program is currently based
    on the extensive system of regulations governing how individual
    acquisition programs are managed. Through these regulations DoD tracks
    the progress of individual programs and can hold managers accountable
    for their programs. 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.
      Department of Defense. Future Combat Systems/Modularity Land Warfare
    ($9.7 billion in 2006). 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.
      Tennessee Valley Authority. Tennessee Valley Authority Power ($9.3
    billion in 2006). Rating: Moderately Effective. The Tennessee Valley
    Authority (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. The Tennessee Valley Authority committed to a debt
    reduction plan that will reduce its total debt $3 billion - $5 billion
    over a ten to twelve year period. TVA has since increased that debt
    reduction total to $7.8 billion by 2016.
      Department of Energy. Environmental Management ($7.9 billion in 2006).
    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. For example, the program is renegotiating cleanup contracts
    to include performance incentives. The program is also reorganizing
    operations to focus on risk reduction. The program needs to develop
    annual cost and schedule performance measures. The Department of Energy
    Inspector General and the Government Accountability Office have
    identified better performance measures as critical to assessing program
    achievements.
      Department of Defense. Missile Defense ($7.7 billion in 2006). 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.

    Education

      Department of Education. Federal Pell Grants ($17.3 billion in 2006).
    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

    [[Page 63]]

    long-term performance goals and new measures will help track other key
    program goals.
      Department of Education. Federal Family Education Loan Program ($17.3
    billion (subsidy cost) in 2006). 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 the
    program had meaningful performance measures and outcome data, it also
    found that it 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 reduces 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 R&D 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 R&D or
    education can be carried out by Federal or State government
    laboratories, universities and other nonprofit organizations, local
    governments, or private industry. R&D covers a wide range of activities,
    from the investigation of subatomic particles to the exploration of
    outer space; it can be ``basic'' research without particular
    applications in mind, or it can have a highly specific practical use.
    Similarly, education includes a wide variety of programs, assisting
    people of all ages beginning with pre-school education and extending
    through graduate studies and adult education. Like physical assets, the
    capital stocks of R&D and education provide services over a number of
    years and depreciate as they become outdated.
      For this analysis, physical and R&D capital stocks are estimated using
    the perpetual inventory method. Each year's Federal outlays are treated
    as gross investment, adding to the capital stock; depreciation reduces
    the capital stock. Gross investment less depreciation is net investment.
    The estimates of the capital stock are equal to the sum of net
    investment in the current and prior years. A limitation of the perpetual
    inventory method is that the original investment spending may not
    accurately measure the current value of the asset created, even after
    adjusting for inflation, because the value of existing capital changes
    over time due to changing market conditions. However, alternative
    methods for measuring asset value, such as direct surveys of current
    market worth or indirect estimation based on an expected rate of return,
    are especially difficult to apply to assets that do not have a private
    market, such as highways or weapons systems.
      In contrast to physical and R&D stocks, the estimate of the education
    stock is based on the replacement cost method. Data on the total years
    of education of the U.S. population are combined with data on the
    current cost of education and the Federal share of education spending to
    yield the cost of replacing the Federal share of the Nation's stock of
    education.
      It should be stressed that these estimates are rough approximations,
    and provide a basis only for making broad generalizations. Errors may
    arise from uncertainty about the useful lives and depreciation rates of
    different types of assets, incomplete data for historical outlays, and
    imprecision in the deflators used to express costs in constant dollars.
    The methods used to estimate capital stocks are discussed further in the
    technical note at the end of Chapter 13, ``Stewardship,'' in this
    volume. Additional detail about these methods appeared in a
    methodological note in Chapter 7, ``Federal Investment Spending and
    Capital Budgeting,'' in the Analytical Perspectives volume of the 2004
    Budget.

                          The Stock of Physical Capital

      This section presents data on stocks of physical capital assets and
    estimates of the depreciation of these assets.
      Trends. Table 6-4 shows the value of the net federally financed
    physical capital stock since 1960, in constant fiscal year 2000 dollars.
    The total stock grew at a 2.2 percent average annual rate from 1960 to
    2006, with periods of faster growth during the late 1960s and the 1980s.
    The stock amounted to $2,315 billion in 2006 and is estimated to
    increase to $2,454 billion by 2008. In 2006, the national defense
    capital stock accounted for $700 billion, or 30 percent of the total,
    and nondefense stocks for $1,615 billion, or 70 percent of the total.

    [[Page 64]]

                                                                      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........................................................................    2,198       662      1,536       391      168      223    1,146          714          196        136       100
      2005........................................................................    2,256       680      1,576       400      168      232    1,176          736          198        137       105
      2006........................................................................    2,315       700      1,615       410      169      240    1,205          758          200        138       109
      2007 estimate...............................................................    2,387       729      1,658       421      171      250    1,236          781          203        139       114
      2008 estimate...............................................................    2,454       756      1,697       431      172      259    1,267          804          207        139       117
    ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

      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 $1,615 billion in 2006. With the
    investments proposed in the budget, nondefense stocks are estimated to
    grow to $1,697 billion in 2008. 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 $756 billion in 2008.
      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 2006, 25 percent of the
    nondefense stock was owned by the Federal Government and 75 percent by
    State and local governments.
      The growth in the stock of physical capital financed by grants has
    come in several areas. The growth in the stock for transportation is
    largely grants for highways, including the Interstate Highway System.
    The growth in community and regional development stocks occurred largely
    following the enactment of the community development block grant in the
    early 1970s. The value of this capital stock has grown only slowly in
    the past few years. The growth in the natural resources area occurred
    primarily because of construction grants for sewage treatment
    facilities. The value of this federally financed stock has increased
    about 40 percent since the mid-1980s.

                  The Stock of Research and Development Capital

      This section presents data on the stock of research and development
    (R&D) 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 $1,142 billion in 2006 in constant
    2000 dollars. Roughly half is the stock of basic research knowledge; the
    remainder is the stock of applied research and development.

    [[Page 65]]

      The nondefense stock accounted for about three-fifths of the total
    federally financed R&D stock in 2006. 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 $468 billion in 2008.
      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          255         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         542         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...................................         431          54          376         639         449          190       1,070         504          566
      2005...................................         442          56          386         665         471          194       1,107         527          580
      2006...................................         452          57          395         690         493          197       1,142         549          593
      2007 estimate..........................         462          58          404         716         513          203       1,178         572          606
      2008 estimate..........................         468          59          409         742         535          207       1,210         594          616
    --------------------------------------------------------------------------------------------------------------------------------------------------------
    \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 $1,451 billion in 2006 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 13-5 in
    Chapter 13, ``Stewardship.''

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

    [[Page 66]]

      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 2006. The expansion of the education stock is projected to continue
    under this budget, with the stock rising to $1,557 billion in 2008.

          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.............................         234           184         50
      1975.............................         349           282         67
      1980.............................         482           379        103
      1985.............................         577           434        143
      1990.............................         736           549        188
      1995.............................         880           643        237

    Annual data:
      2000.............................       1,133           825        308
      2001.............................       1,184           859        325
      2002.............................       1,227           890        336
      2003.............................       1,267           924        343
      2004.............................       1,328           961        367
      2005.............................       1,383         1,013        370
      2006.............................       1,451         1,057        394
      2007 estimate....................       1,505         1,099        406
      2008 estimate....................       1,557         1,141        415
    ------------------------------------------------------------------------