Budget Issues: Budgeting for Federal Capital (Chapter Report, 11/12/96,
GAO/AIMD-97-5).

Pursuant to a congressional request, GAO reviewed how the Army Corps of
Engineers, the Coast Guard, the General Services Administration's
Interagency Fleet Management System and Public Building Service, and the
U.S. Geological Survey plan and budget for fixed assets, focusing on:
(1) these agencies' perception of how the budget process affects their
capital acquisitions; (2) whether there are funding mechanisms that
might be helpful in planning and budgeting for fixed assets; and (3) the
responses to the Office of Management and Budget's (OMB) Bulletin 94-08
on planning and budgeting for the acquisition of fixed assets.

GAO found that: (1) the up-front funding requirement for the full cost
of acquisitions allows Congress to control capital spending at the time
a commitment is made and to better understand the future economic impact
of its decisions; (2) officials at most of the agencies reviewed see
up-front funding as problematic, since it requires the full cost of an
asset to be absorbed in an agency's or program's annual budget, despite
the fact that benefits may accrue over many years; (3) when combined
with discretionary spending caps on agency and program budgets, the
up-front funding requirement can make capital acquisitions seem
prohibitively expensive; (4) a full-scale capital budget would raise
major budget control issues and may not be necessary to address
agency-identified impediments to capital spending; (5) several
strategies can reduce the impact of the full funding requirement on
agency budgets and help agencies accommodate the consistent application
of up-front funding within the existing budget structure; (6) these
strategies include budgeting for stand-alone stages of capital
acquisitions, and using a revolving fund or an investment component in a
working capital fund; (7) Congress has authorized agencies to accumulate
budget authority for capital purchases over time; (8) some agencies have
sought accounts dedicated to capital acquisitions, while others have
sought additional authority to retain proceeds from capital asset sales;
(9) some of these same problems and strategies surfaced as a result of
an OMB effort to improve agencies' planning and budgeting for fixed
assets; (10) the OMB review identified the full extent to which capital
projects were not fully funded up front and led to OMB requesting $1.4
billion in fiscal year (FY) 1997 to fully fund some of these capital
projects; and (11) new budget preparation instructions for FY 1998
require agencies to request full up-front funding for stand-alone stages
of all ongoing and new fixed-asset acquisitions.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  AIMD-97-5
     TITLE:  Budget Issues: Budgeting for Federal Capital
      DATE:  11/12/96
   SUBJECT:  Budget authority
             Tangible assets
             Cost-based budgeting
             Federal procurement policies
             Capital
             Revolving funds
             Accounting procedures
             Appropriation accounts
             Investment planning
             Budget administration
IDENTIFIER:  GSA Interagency Fleet Management System
             Information Technology Fund
             Federal Buildings Fund
             USGS Working Capital Fund
             HH-60 Helicopter
             Coast Guard Housing Improvement Fund
             OMB MAX Budget System
             
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Cover
================================================================ COVER


Report to the Chairman, Committee on Government Reform and Oversight,
House of Representatives

November 1996

BUDGET ISSUES - BUDGETING FOR
FEDERAL CAPITAL

GAO/AIMD-97-5

Budgeting for Federal Capital

(935160)


Abbreviations
=============================================================== ABBREV

  AC&I - acquisitions, construction, and improvements
  BEA - Budget Enforcement Act
  CBO - Congressional Budget Office
  CIP - capital investment plan
  DOD - Department of Defense
  DOE - Department of Energy
  FASA - Federal Acquisition Streamlining Act
  FASAB - Federal Accounting Standards Advisory Board
  FBF - Federal Buildings Fund
  FDA - Food and Drug Administration
  FFB - Federal Financing Bank
  FSS - Federal Supply Service
  FTE - full-time equivalent
  GAO - General Accounting Office
  GDP - gross domestic product
  GPRA - Government Performance and Results Act
  GSA - General Services Administration
  GSF - General Supply Fund
  HHS - Department of Health and Human Services
  IFMS - Interagency Fleet Management System
  ITMRA - Information Technology Management Reform Act
  ITS - Information Technology Service
  MINS - major item new start
  NASA - National Aeronautics and Space Administration
  NOAA - National Oceanic and Atmospheric Administration
  NWQL - National Water Quality Laboratory
  OMB - Office of Management and Budget
  PBS - Public Buildings Service
  PRIP - plant replacement and improvement program
  SIR - surveys, investigations, and research
  USGS - United States Geological Survey
  WASC - Washington Administrative Service Center
  WCF - working capital fund
  VA - Department of Veterans Affairs

Letter
=============================================================== LETTER


B-261817

November 12, 1996

The Honorable William F.  Clinger, Jr.
Chairman, Committee on
 Government Reform and Oversight
House of Representatives

Dear Mr.  Chairman: 

This report responds to your request that we review how five federal
organizations--the Army Corps of Engineers, the Coast Guard, the
Interagency Fleet Management System and Public Buildings Service of
the General Services Administration, and the U.S.  Geological
Survey--plan and budget for fixed assets.  Specifically, we examined
(1) how these organizations perceive the current budget process
affects their capital acquisitions and (2) whether there are funding
mechanisms, used or proposed by these organizations, that might be
helpful in planning and budgeting for fixed assets.  In addition, we
agreed to examine the responses to the Office of Management and
Budget's Bulletin 94-08, "Planning and Budgeting for the Acquisition
of Fixed Assets." We have included a matter for congressional
consideration and are making recommendations to the Director of the
Office of Management and Budget to continue to improve fixed-asset
planning and budgeting. 

We are sending copies of this report to the Ranking Minority Member
of your Committee, the Director of the Office of Management and
Budget, and to interested congressional committees.  We will also
make copies available to others upon request.  The major contributors
to this report are listed in appendix VII.  If you have any questions
concerning this report, please call me on (202) 512-9573. 

Sincerely yours,

Paul L.  Posner
Director, Budget Issues


EXECUTIVE SUMMARY
============================================================ Chapter 0


   PURPOSE
---------------------------------------------------------- Chapter 0:1

As federal agencies find themselves under increasing budgetary
constraints and increasing demands to improve service, the importance
of making the most effective fixed asset acquisitions grows.  Fixed
assets often require large amounts of resources up front but can
generate long-term efficiencies and savings.  Prudent capital
planning can help agencies to make the most of limited resources
while failure to make timely and effective capital acquisitions can
result in increased long-term costs. 

However, making such capital acquisitions can present challenges.  To
maintain control over expenditures, the Congress generally requires
that agencies have budget authority for the full cost of a capital
acquisition at the time the acquisition is undertaken--regardless of
when the benefits or outlays occur.  Because an agency or program
generally must absorb the entire cost of these relatively expensive
acquisitions in a single year's budget, fixed assets may seem
prohibitively expensive despite their long-term benefits.  Moreover,
when capital costs are not allocated to programs using these fixed
assets, valuable information about total annual program costs may not
be considered when budget decisions are made.  Such information can
help ensure that appropriate trade-offs are made between capital and
operating inputs. 

Some have proposed that the challenges agencies face in budgeting for
fixed assets--and other spending with long-term benefits--can be
corrected by adopting a separate capital budget.\1 Yet, others
believe that a separate capital budget would potentially lead to
greater problems by weakening longstanding budgetary controls and
reducing spending discipline. 

Representative William F.  Clinger Jr., Chairman of the House
Committee on Government Reform and Oversight, asked GAO to examine
strategies that might address concerns about a potential bias against
capital while preserving the fiscal discipline provided by the
current unified budget structure.  To identify these strategies, GAO
examined how selected federal agencies plan and budget for capital
assets (assets that agencies use in their own operations).  The five
case study organizations represented by four agencies are:  the Army
Corps of Engineers, the Coast Guard, the General Services
Administration's (GSA) Interagency Fleet Management System (IFMS) and
Public Buildings Service (PBS), and the U.S.  Geological Survey
(USGS).\2 Specifically, GAO evaluated (1) how these case studies
perceive the current budget process affects their ability to make
effective capital acquisitions; (2) whether there are funding
mechanisms, used or proposed by these organizations, that might be
helpful in planning and budgeting for capital assets within the
current budgeting framework established by various budget and
appropriations laws; and (3) the results of the Office of Management
and Budget's (OMB) Bulletin 94-08, "Planning and Budgeting for the
Acquisition of Fixed Assets". 


--------------------
\1 Although capital budgeting proposals vary, many require that
spending on assets with long-term benefits to the agency be recorded
in a separate capital budget.  The full cost of each asset would be
recorded in the operating budget over a period of years through a
depreciation charge. 

\2 A description of GAO's criteria for selecting case studies appears
in the Objectives, Scope, and Methodology section of Chapter 1.  This
report also provides limited, supplementary information on four
additional organizations--the Food and Drug Administration (FDA), the
Forest Service, the General Services Administration's Information
Technology Service (ITS), and the National Oceanic and Atmospheric
Administration (NOAA). 


   BACKGROUND
---------------------------------------------------------- Chapter 0:2

Federal spending on physical assets can be divided into two
categories:  that which provides benefits to the government's own
operations and that which provides long-term benefits to the nation
as a whole.  This report focuses on the former--those physical assets
that the federal government uses primarily to deliver federal
services--and refers to them interchangeably as "fixed assets" or
"capital assets." Federal office buildings, equipment, and
information technology are examples of these.  Like many other
physical assets, they have relatively high initial costs but are
intended to yield benefits over many years.  An earlier report
addressed budgeting for physical assets, such as infrastructure, as
well as intangible assets, such as research and development and human
capital, that have the potential to increase the long-term productive
capacity of our broader economy.\3

Federal organizations acquire capital assets in an environment of
resource constraints and budgetary controls.  Spending for most
capital assets as well as much of government's operations is
categorized by the Budget Enforcement Act of 1990 (BEA) as
discretionary, and thus subject to an annual governmentwide cap on
discretionary spending.\4 The sum of agencies' discretionary budgets
must remain within these caps, which generally have been declining
since 1991.  Additionally, for over 100 years, the Adequacy of
Appropriations Act and the Antideficiency Act have required agencies
to have budget authority (or to budget) for the full cost of most
capital assets before acquiring them (referred to as up-front
funding).  The Congress imposes other controls, such as limits on the
length of time and purpose for which funds can be used, to help
ensure that agencies effectively use funds to meet congressional
priorities. 

Spending caps, up-front funding requirements, and the way budget
authority and outlays are recorded in the budget were intended to
help the Congress control the overall level of federal spending and
recognize the full budgetary impact of commitments when they are
made.  Up-front funding requires that budget authority for the full
price of capital acquisitions be provided before the asset is
acquired, regardless of when obligations are made or benefits
actually accrue.  This ensures that the full costs of capital
projects are recognized at the time that the commitment is made to
undertake them.  In an environment of capped resources, however,
up-front funding can make capital acquisitions seem prohibitively
expensive in the budget year and, some have suggested, can create a
bias against capital in budget deliberations. 

Some budget practitioners have advocated that the federal government
adopt a capital budget to spread capital costs over the life of an
asset through depreciation.  However, GAO has noted that, unless the
full amount of budget authority is required to be available up front,
the ability to control decisions when total resources are committed
to a particular use is reduced.\5 Thus, a capital budget, in which
only annual depreciation would be appropriated, would lessen
budgetary control under the federal government's obligations-based
budgeting system. 

This report discusses how the seemingly contradictory goals of
congressional control and managerial flexibility can be reconciled
within the current unified budget structure.  The strategies
described in this report are not exhaustive of those that could be
useful to agencies.  Rather they represent a few of the ways in which
some agencies have attempted to adapt to their budget environment. 

This report does not present a final or universal solution to the
problems in budgeting for capital assets.  Indeed, there are broader
issues, generally beyond the scope of this report, that must also be
considered if the capital acquisition process is to be improved.  For
example, the selection and evaluation of capital projects must be
improved.  GAO's past work has identified a variety of federal
capital projects, including information technology as well as
large-scale construction projects, where acquisitions have yielded
poor results--costing more than anticipated, falling behind schedule,
and failing to meet mission needs.\6

Recent legislation seeks to prevent such results.  The Federal
Acquisition Streamlining Act of 1994 (FASA) requires agencies to
develop cost, schedule, and performance goals for their acquisitions
and requires OMB to report to the Congress on agencies' progress in
meeting these goals. 

Although the federal government's cash-based budget and up-front
funding requirement have long provided fiscal control, they result in
budgetary costs that differ from the measurement of full, annual
program costs that will be needed to successfully execute the
Government Performance and Results Act of 1993 (GPRA).  Under GPRA,
agencies must develop, no later than by the end of fiscal year 1997,
strategic plans that cover a period of at least 5 years and include
the agency's mission statement; identify the agency's long-term
strategic goals; and describe how the agency intends to achieve those
goals through its activities and through its human, capital,
information, and other resources.  GPRA also requires each agency to
submit to OMB, beginning for fiscal year 1999, an annual performance
plan.\7 In essence, the annual performance plan is to contain the
annual performance goals the agency will use to gauge its progress
toward accomplishing its strategic goals and identify the performance
measures the agency will use to assess its progress.  To effectively
evaluate program performance, agencies will need data on the full,
annual costs of programs, including capital usage.  Therefore, GPRA's
requirements may drive changes in the budget account structure and
other elements of the budget process that have traditionally been
geared more toward providing fiscal control than measuring full
program costs. 


--------------------
\3 In Budget Issues:  Incorporating an Investment Component in the
Federal Budget (GAO/AIMD-94-40, November 9, 1993), investment was
defined as spending that is intended to increase the long-term
productivity of the private sector.  Investment spending is comprised
of a subset of the government's total spending on physical assets, as
well as some federal spending on intangible assets such as the
conduct of research and development.  Physical assets that would
typically meet our definition of investment include highways, dams,
and the air traffic control system.  In Federal Budget:  Choosing
Public Investment Programs (GAO/AIMD-93-25, July 23, 1993), GAO
described ways to distinguish between productivity-enhancing programs
and spending programs with other goals such as stimulating or
redistributing economic activity.  This definition of investment
differs from a common definition in which investment is any spending
designed to generate long-term benefits. 

\4 These caps were established by BEA and have been proposed to be
extended to 2002. 

\5 Budget Issues:  Incorporating an Investment Component in the
Federal Budget (GAO/AIMD-94-40, November 9, 1993). 

\6 See for example Managing for Results:  Steps for Strengthening
Federal Management (GAO/T-GGD/AIMD-95-158, May 9, 1995); Space
Station:  Program Instability and Cost Growth Continue Pending
Redesign (GAO/NSIAD-93-187, May 18, 1993); and Fossil Fuels: 
Improvements Needed in DOE's Clean Coal Technology Program
(GAO/RCED-92-17, October 30, 1991). 

\7 The first annual performance plans are to be submitted in the fall
of 1997. 


   RESULTS IN BRIEF
---------------------------------------------------------- Chapter 0:3

Requiring that budget authority for the full cost of acquisitions be
provided before an acquisition is made allows the Congress to control
capital spending at the time a commitment is made and to better
understand the future economic impact of its decisions.  However,
officials of most of our case studies see up-front funding as
problematic because it requires the full cost of an asset to be
absorbed in the annual budget of an agency or program, despite the
fact that benefits may accrue over many years.  Thus, when combined
with the effect of discretionary spending caps on agency and program
budgets, the up-front funding requirement can make capital
acquisitions seem prohibitively expensive. 

Although some have recommended that the government adopt a full-scale
capital budget, this raises major budget control issues and may not
be necessary to address agency-identified impediments to capital
spending.  Several strategies are available that can reduce the
impact of the full funding requirement on agency budgets and help
agencies accommodate the consistent application of up-front funding
within the current budget structure.  Some strategies--such as
budgeting for stand-alone stages of capital acquisitions and using a
revolving fund or an investment component in a working capital
fund--may permit agencies to plan and manage their capital spending
within an environment of full up-front funding and without the loss
of budgetary control that would accompany a separate capital budget. 
In addition, revolving funds can also help to make managers
accountable for the full costs of their programs including capital
usage. 

Each of our case studies used one or more of these strategies to help
mitigate the spikes in budget requests that up-front funding can
produce.  The Coast Guard reduces the budget authority needed to
comply with up-front funding in a given year by dividing capital
acquisitions into stand-alone stages\8 that can be funded separately. 
Another strategy that the Congress has provided to accommodate
up-front funding is to authorize agencies to accumulate budget
authority for capital purchases over time.  PBS, IFMS, the Corps of
Engineers, and USGS use a revolving fund to charge users for and
accumulate the cost of asset replacement, asset improvements, and/or
new acquisitions over a period of years.  As a result, capital costs
are included in program budgets.  Similarly, the Congress recently
provided USGS with authority to establish an expanded investment
component in its working capital fund that allows managers that
comply with specified requirements to regularly set aside and save
annual appropriations for future purchases of expensive equipment. 

Our case studies have been able to use these and other tools to adapt
to other perceived impediments.  For example, revolving funds,
budgeting for stand-alone stages, and reprogramming authority help
case studies respond to changing missions and funding uncertainty. 
Some case studies use or have sought accounts dedicated to capital
acquisition to highlight their capital needs and prevent the
"crowding out" of capital spending.  Still others have sought
additional authority from the Congress, such as the retention of
proceeds from the sale of capital assets. 

The Congress is continually challenged to find an appropriate balance
between managerial flexibility and congressional control.  Each of
the strategies that our case studies use has different strengths and
weaknesses in this regard, and they may not be appropriate for all
agencies or in all circumstances.  For example, contracting out
allows agencies to use an asset without budgeting for its full cost
up-front but should only be used when contracting out is more
cost-effective than purchasing an asset.  Similarly, agencies that
retain proceeds from the sale of assets have an incentive to dispose
of uneconomical assets, but agencies and the Congress must adequately
oversee asset sales to determine whether a sale is appropriate and
how the proceeds should be used.  Revolving funds can help agencies
accumulate the resources needed to make capital acquisitions over
time but should only be established when agencies have a record of
sound financial management and when fund purchases are small and
routine enough to warrant reduced scrutiny by the Congress and OMB. 

Some of the problems and strategies identified by our review also
surfaced as a result of OMB's effort to improve agencies' planning
and budgeting for fixed assets.  OMB used the responses from Bulletin
94-08 in its first ever Director's review\9 focusing on fixed assets. 
Among other findings, the review identified the full extent to which
capital projects were not fully funded up front.  A follow-up
bulletin and Director's review helped OMB identify more instances of
such "incremental" funding.\10 They also encouraged agencies to
include full up-front funding for capital projects in their budget
requests.  As a result, OMB requested $1.4 billion in the fiscal year
1997 budget to fully fund some of these projects as an initial step
toward requesting full up-front funding for all capital projects.\11
New budget preparation instructions for fiscal year 1998 require
agencies to request full up-front funding for stand-alone stages of
all ongoing and new fixed-asset acquisitions. 


--------------------
\8 A stand-alone stage is a unit of a capital project that can be
economically or programmatically useful even if the entire project is
not completed. 

\9 The Director's review is a formal discussion with the OMB Director
of recommendations developed by OMB examiners. 

\10 Incremental funding occurs when the Congress provides funds for a
capital acquisition based on the obligations estimated to be incurred
within a fiscal year although such funds alone will not produce a
usable asset. 

\11 Only a small portion of this request was ultimately approved in
fiscal year 1997 appropriations actions. 


   PRINCIPAL FINDINGS
---------------------------------------------------------- Chapter 0:4


      THE PROPORTION OF
      GOVERNMENTWIDE SPENDING ON
      CAPITAL HAS CHANGED LITTLE
      FROM ITS 1970 LEVEL
-------------------------------------------------------- Chapter 0:4.1

Despite growing budgetary constraints, spending to acquire nondefense
physical assets (a broader category of assets that includes dams and
environmental restoration in addition to capital assets used in
agency operations) is basically unchanged from 25 years ago relative
to gross domestic product (GDP) and total federal outlays.\12 In
1995, federal spending for these assets totaled $19.5 billion.  This
represents about the same proportion of GDP (0.3 percent) and of
total federal outlays (1.3 percent) as it did in 1970.  Among our
case studies, capital spending trends varied.\13 IFMS and PBS
generally experienced increases in capital obligations relative to
total obligations between 1982 and 1995.  USGS and the Corps saw
variations in capital spending relative to other spending between
1982 and 1995 while the ratio of capital to total outlays for the
Coast Guard has steadily declined. 

Although spending trends indicate the magnitude of capital
acquisitions, trends cannot answer the question of whether there is a
bias for or against capital.  Spending increases or decreases are the
result of a combination of decisions about relative needs within and
between agencies.  Moreover, data on the magnitude of spending masks
important information about the relative effectiveness and mix of
capital assets from year to year.  Improvements in technology or the
selection of more effective capital assets could reduce the amount an
agency needs to spend on capital assets in order to achieve its
goals. 


--------------------
\12 This broader category is used because limitations of the data
sources on federal capital spending prevent analysis of trends in
spending for capital assets as defined in this report. 

\13 Due to data limitations, capital spending could not be quantified
using a single or precise measure.  Therefore, data measured in
outlays or obligations--depending on which data were available--were
used, but the term capital spending is used to refer to both for
simplicity.  Each of these data sources may also include spending for
some assets that do not meet our definition of capital assets.  As a
result, figures should be seen as illustrative only. 


      BALANCE BETWEEN MANAGERIAL
      FLEXIBILITY AND
      CONGRESSIONAL CONTROL NEEDED
      FOR EFFECTIVE CAPITAL
      ACQUISITIONS
-------------------------------------------------------- Chapter 0:4.2

Case studies used several strategies to adapt to the requirement to
fully fund capital acquisitions up front.  Each of the methods has
advantages, disadvantages, and conditions necessary to its use, but
some may be worthwhile for other agencies to consider.  The methods
demonstrate a range of balance between managerial flexibility and
congressional control.  These strategies include: 

  -- budgeting for stand-alone stages of a larger project,

  -- using a revolving fund,

  -- using an investment component within a working capital fund,

  -- sharing assets, and

  -- contracting out for capital-intensive services. 

The Coast Guard sometimes divides capital acquisitions into
stand-alone stages and requests full funding for each stage over a
period of years.  For example, when acquiring a class of ships, the
Coast Guard may divide the acquisition into a contract for a lead
ship and spare parts with options to buy a portion of the remaining
fleet in each succeeding year.  This limits the Coast Guard's annual
commitment, and thus its annual need for budget authority.  It also
ensures that the agency receives something useful from each
commitment; this differentiates budgeting for stand-alone stages from
incremental funding in which a single useful asset is funded by
appropriations made in 2 or more years. 

PBS, IFMS, and the Corps use revolving funds to accumulate over a
period of years the resources needed for up-front funding.  By
charging users for the cost to replace and maintain capital assets,
revolving funds help ensure that needed funds will be available for
capital acquisition and that program budgets reflect capital as well
as operating costs.  Such budgets can be useful in assessing cost and
performance as required by GPRA.  However, revolving funds are only
appropriate if an agency has an established record of good financial
management and controls and has developed capital plans that can be
used for oversight.  Because revolving fund purchases need not be
reviewed by the Congress or OMB, traditional revolving funds may not
be appropriate when competition for the fund's services is lacking
and when purchases are relatively large-scale, sporadic, or
heterogeneous.  Under these conditions, a greater degree of oversight
is warranted to ensure that the resources accumulated in the fund are
used where most needed governmentwide.  Revolving funds may also not
be appropriate capital financing mechanisms for all agencies due to
the incentives they create.  For example, Coast Guard officials
believe that charging capital asset users may create incentives to
underuse assets, including those for search and rescue, and that
capital costs could be difficult to assign accurately given the
agency's overlapping missions.  Certain other conditions, discussed
in chapter 3, should also be present to ensure the effective and
appropriate use of revolving funds. 

USGS' investment component in its working capital fund achieves many
of the same goals sought by revolving funds.  USGS recently received
expanded authority to contribute some annual appropriations into its
working capital fund in order to save for expensive equipment
purchases.  This authority gives USGS managers an incentive to save
some otherwise annually expiring funds for future capital needs and
may be a promising strategy for other organizations with 1-year
appropriations.  However, investment components should be accompanied
by detailed investment plans to ensure that their funds are spent as
the Congress intended. 

USGS limits the amount of budget authority needed for capital
acquisitions by sharing the purchase and use of assets with external
entities, and the Corps contracts out for capital-intensive work when
officials believe it is economically justified.  Sharing assets and
contracting out can be useful and cost-effective for the government
when agencies do not need full use of an asset or when asset needs
are short-term and non-recurring.  However, contracting out can be
misused to by-pass budget scoring rules for purchases.  When this
occurs, the long-term cost of contracting out can be higher than
directly purchasing the asset. 

Some case studies propose additional strategies to help manage
up-front funding.  These strategies include borrowing from the
Treasury using agency assets as collateral, joining private real
estate developers in equity partnerships, and guaranteeing
developers' loans.  However, some of these strategies could diminish
congressional control by creating budget authority outside of the
appropriations process.  Also, because the budget scoring of some of
these strategies is still under review, it is not clear that agencies
would in fact be better able to accommodate up-front funding. 

Like up-front funding, other features of the budget process necessary
for congressional control are perceived by agencies as impediments to
their ability to make effective capital acquisitions.  For example,
uncertainty over future funding levels is a feature of the budget
process that results from the Congress' need to be responsive to
changing national priorities.  However, some long-term capital
projects, like construction, need some degree of funding certainty to
be planned and managed effectively.  Similarly, the Congress cannot
uniformly provide agencies with flexible account features and the
ability to retain proceeds from asset sales if it is to adequately
control how taxpayers' funds are used.  However, case studies with
more flexible funding mechanisms seem to have fewer impediments in
making capital acquisitions. 

Our case studies use a variety of strategies to mitigate adverse
effects of funding and mission uncertainty on capital acquisition. 
At IFMS and the Corps, revolving fund managers set charges such that
users contribute to their assets' replacement cost over the assets'
useful lives.  As a result, these managers have some assurance that,
as long as contributions are made in accordance with usage, funds
will be available to modernize or replace the asset if needed or to
meet other asset needs that arise.  The Corps and the Coast Guard use
reprogramming authority to make limited adjustments in funding of
existing projects when there are unexpected changes in cost. 
Similarly, the Coast Guard's practice of budgeting for stand-alone
stages of larger projects gives the agency and the Congress
flexibility to change course based on how well the acquisition is
progressing and the urgency of other needs. 

Case studies compensated for account features that seem to reduce
their ability to justify capital expenditures by seeking different
features or improving budget justifications.  When a capital
expenditure is funded from an account comprised predominantly of
operating expenditures, the account's high spend-out rate\14 may
discourage capital spending.  Such an account can also obscure
capital needs that are buried within a larger amount of operating
spending.  To combat these problems, USGS tailored budget
justifications to highlight capital needs, while PBS requested a
separate appropriations account for new capital acquisitions that
would increase its asset base.  The length of availability of capital
funding was also problematic for some case studies.  Through the use
of revolving funds, investment components, and multiyear
appropriations, all case studies now have the ability to fund capital
assets with multiyear or no-year funds.  Case studies believe that
this feature helps accommodate the size and scope of capital
projects.  However, the Coast Guard has found that its multiyear
funding is of inadequate length in some instances.  Even with
adequate fund availability and other account features, case studies
find that capital spending for major renovations or repairs are more
challenging to justify than spending for new facilities. 

The Congress permits some of our case studies, such as the Corps and
IFMS, to retain the proceeds from capital asset sales for the purpose
of replacing and maintaining assets.  Other case studies, including
the Coast Guard and PBS, would like to have this authority.  Coast
Guard and PBS officials believe that the ability to keep proceeds
would provide greater incentive to dispose of less economical
properties and enable reinvestment in other needed assets.  However,
to maintain fiscal control and authority over priorities, the
Congress has granted such retention authority cautiously.  Although
PBS has not been permitted by the Congress to retain proceeds, the
Coast Guard received congressional authority to retain proceeds from
surplus real property sales and from the sale of certain aircraft in
fiscal year 1997.  Recently enacted legislation extends this
authority to Coast Guard housing. 

Although most of the strategies case studies use or propose to
improve their ability to acquire capital assets require some
trade-off between agency flexibility and congressional control, some
improvements can be made without altering this balance.  For example,
agencies and the Congress can together determine whether operating
expenditures can be cut to make resources available for capital. 
Agencies can increase the likelihood that capital acquisitions will
receive appropriate consideration by improving the planning of and
budget justifications for capital acquisitions.  By anticipating
future needs, agencies may be able to schedule projects to alleviate
resource spikes.  Agency managers can use explicit decision criteria
and quantifiable measures for assessing mission benefits, risks, and
costs to identify early--and avoid--investments in projects with low
potential to yield significant improvements in performance.\15


--------------------
\14 A spend-out or outlay rate is the ratio of outlays resulting from
new budgetary resources to the new budgetary resources in a given
fiscal year. 

\15 Information Technology Investment:  A Governmentwide Overview
(GAO/AIMD-95-208, July 31, 1995). 


      OMB'S EFFORT TO EXAMINE
      ASSET PLANNING IS STILL
      EVOLVING
-------------------------------------------------------- Chapter 0:4.3

OMB Bulletins 94-08 and 95-03 on "Planning and Budgeting for the
Acquisition of Fixed Assets" required agencies to submit 5-year
capital spending plans with accompanying justification and encouraged
them to consider the use of flexible funding mechanisms to meet needs
within the current budget rules.  OMB officials stated that Bulletin
94-08 was intended to be a first step in an ongoing effort to improve
capital decision-making.  OMB received responses from most agencies
it expected would meet the bulletin's reporting threshold although
the submissions varied in their comprehensiveness.  Nevertheless, OMB
was able to use agency responses to the Bulletin in its first ever
Director's Review on acquisition of fixed assets.  The Review covered
the use of flexible funding mechanisms, the extent to which full
up-front funding was being practiced, and the degree to which
agencies had difficulties in justifying capital needs that required
"spikes" in funding.  Full up-front funding was a particular concern
to OMB, and the review documented the extent to which it had been
neither requested by agencies nor provided by the Congress for all
capital projects.  Some projects at the Corps of Engineers, the
National Aeronautics and Space Administration (NASA), the Department
of Energy (DOE), and the Bureau of Reclamation were incrementally
funded.  A follow-up bulletin (Bulletin 95-03) and Director's review
of fixed assets helped OMB isolate incidents of incremental funding
and encouraged agencies to request full up-front funding for their
capital projects. 

OMB used the results of these bulletins to begin estimating the cost
of fully funding projects that are currently being funded
incrementally and to develop guidance on planning and analyzing fixed
asset acquisitions.  In the President's fiscal year 1997 budget, OMB
requested $1.4 billion in budget authority to fully fund some ongoing
projects at DOE and NASA that have been incrementally funded.\16 It
also reported a fiscal year 1997 cost of $23 billion to fully fund
ongoing and new capital projects at the Corps of Engineers and the
Bureau of Reclamation.  In the summer of 1996, OMB supplemented its
annual budget preparation instructions with a new Part 3 of Circular
A-11 providing guidance to agencies on planning and analyzing fixed
asset acquisitions.  Part 3 requires agencies to request full
up-front funding for stand-alone stages of all ongoing and new fixed
asset acquisitions and outlines broad principles for planning and
monitoring such acquisitions.  It also requires agencies to consider
how their fixed asset plans relate to the plans currently being
developed for performance-related initiatives, such as GPRA, and to
develop baseline cost, schedule, and performance goals for fixed
asset acquisitions.  These goals are to be the standard against which
actual work will be measured.  Variances from the goals will be
reported to the Congress as required by FASA. 

The implications of fully funding capital projects--including those
that have been incrementally funded--will be clarified for the
government as a whole when agencies submit their fiscal year 1998
budget requests to OMB.  The principal effect will be to increase
budget authority in the initial year for projects that would
otherwise be incrementally funded over a period of years.  Because
projects' cash flows would generally be unaffected by the application
of up-front funding, the government's total annual outlays should not
change for a given level of capital projects.  For the longer term,
the impact of such a shift on future years' budget authority will be
a function of whether policymakers change the number or types of
capital acquisitions in response to the up-front funding requirement. 


--------------------
\16 Only a small portion of this request was ultimately approved in
fiscal year 1997 appropriations actions. 


   RECOMMENDATIONS TO THE OFFICE
   OF MANAGEMENT AND BUDGET
---------------------------------------------------------- Chapter 0:5

GAO recommends that the Director of the Office of Management and
Budget continue OMB's top-level focus on fixed asset acquisitions to
include working with agencies and the Congress to promote flexible
budgetary mechanisms that help agencies accommodate the consistent
application of up-front funding requirements while maintaining
opportunities for appropriate congressional oversight and control. 

As OMB continues to integrate GPRA requirements into the budget
process, GAO recommends that the Director of the Office of Management
and Budget, ensure that agencies' capital plans flow from and are
based upon their strategic and annual performance plans.  In
addition, OMB should continue its efforts to ensure that cost,
schedule, and performance goals are monitored as required by FASA. 


   MATTER FOR CONGRESSIONAL
   CONSIDERATION
---------------------------------------------------------- Chapter 0:6

Although requiring that budget authority for the full cost of
acquisitions be provided before an acquisition is made allows the
Congress to control capital spending at the time a commitment is
made, it also presents challenges.  Because the entire cost for these
relatively expensive acquisitions must be absorbed in the annual
budget of an agency or program, fixed assets may seem prohibitively
expensive despite their long-term benefits. 

This report describes some strategies that a number of agencies have
used to manage this dilemma.  The Congress should consider enabling
agencies to use more flexible budgeting mechanisms that accommodate
up-front funding over the longer term while providing appropriate
oversight and control.  For agencies having proven financial
management and capital planning capabilities and relatively small and
ongoing capital needs, these techniques could include revolving funds
and investment components.  Such techniques enable agencies to
accumulate resources over a period of years in order to finance
certain capital needs, promote full costing of programs and
activities by including costs related to capital usage in program
budgets, and provide a degree of funding predictability to aid in
long-range planning.  As GPRA moves toward full implementation, these
and other tools may take on increasing importance in helping managers
and the Congress to identify program costs and to more efficiently
manage capital assets. 


   AGENCY COMMENTS
---------------------------------------------------------- Chapter 0:7

Officials from our case studies and OMB agreed with this report's
conclusions and recommendations.  They also provided technical
corrections which have been incorporated in this report where
appropriate.  In commenting on a draft of this report, OMB and GSA
officials raised issues which required clarification and elaboration
in some sections of the report.  OMB officials agreed with the
report's support for up-front funding of capital assets but expressed
concern that the use of intragovernmental revolving funds to fund
capital acquisitions in some circumstances would undermine the
up-front funding principle and reduce budgetary control.  To clarify
that revolving funds are not always appropriate for making capital
acquisitions, references were added throughout the report to indicate
their appropriateness for relatively small and ongoing capital needs. 
GSA officials expressed a desire for some discussion of proposed
changes in scoring operating leases.  Reference to previous GAO
testimony on this matter was added in chapter 3.  GSA officials also
expressed their belief that congressional control could be maintained
if the FBF retained proceeds from the disposal of PBS properties. 
The officials suggested that, because all funds deposited in the FBF
must now be appropriated before use, the Congress would have an
opportunity to determine how disposal proceeds should be used.  This
report provides observations on circumstances which affect whether
agencies should retain proceeds, such as the need to provide a
constant level of services.  It was not intended to address whether
such circumstances exist in any specific agency.  Each agency's
situation would need to be assessed individually to select the
appropriate financing mechanism and to determine how to handle
disposal proceeds.  Therefore, the report was not altered to address
this comment. 


INTRODUCTION
============================================================ Chapter 1

Budgetary constraints and increasing demands to improve service have
increased focus on the importance of federal agencies making wise and
efficient use of resources to accomplish their missions.  Some of
these decisions require balancing short-term demands to fund
day-to-day operations with needs to acquire assets that yield
benefits over the long term.  Spending for some assets may be
necessary to produce program efficiencies and cost savings over the
long-term.  Some budget observers believe, however, that a bias is
created against spending for long-term capital assets because of the
requirement that the entire cost of these relatively expensive assets
be budgeted for in an agency's or program's annual budget or
"up-front" rather than spread over the life of the assets.\1

These concerns have led some to suggest that the federal government
adopt a capital budget to spread the cost of long-lived assets across
their useful lives.  However, capital budgeting proposals have raised
concerns among budget experts about fiscal control and
accountability. 

This report responds to a request by Representative William F. 
Clinger Jr., Chairman of the Committee on Government Reform and
Oversight, to examine issues federal agencies face in planning and
budgeting for the acquisition of capital assets.  It also assesses
ways that some federal organizations have developed to address those
concerns and that could be used by other agencies within the existing
budget structure.  For the purposes of this study, the terms "capital
assets" and "fixed assets" are used interchangeably and are defined
as tangible assets that are owned by the federal government and that
are primarily used in the delivery of federal services.\2 These types
of assets are normally available in the commercial market and include
buildings, equipment, and information technology.\3 Capital asset
acquisition may take the form of rehabilitation of existing assets or
development and construction of new ones.  The primary focus of this
report is on the capital planning and budgeting experiences of five
case study organizations represented by four agencies:  the Army
Corps of Engineers, the Coast Guard, the General Services
Administration's (GSA) Interagency Fleet Management System (IFMS) and
the Public Buildings Service (PBS), and the U.S.  Geological Survey
(USGS).\4


--------------------
\1 Full funding or up-front funding is the provision of budgetary
resources to cover the total estimated cost of a program or project
at the time it is undertaken (regardless of when the orders will be
placed or contracts awarded). 

\2 In Budget Issues:  Incorporating an Investment Component in the
Federal Budget (GAO/AIMD-94-40, November 9, 1993), we defined
"investment" as spending that is intended to increase the long-term
productivity of the private sector.  Investment spending is comprised
of a subset of the government's total spending on physical assets, as
well as some federal spending on intangible assets such as the
conduct of research and development.  Physical assets that would
typically meet our definition of investment include highways, dams,
and the air traffic control system.  In Federal Budget:  Choosing
Public Investment Programs (GAO/AIMD-93-25, July 23, 1993), we
described ways to distinguish between productivity-enhancing programs
and spending programs with other goals such as stimulating or
redistributing economic activity.  This definition of investment
differs from a common definition in which investment is any spending
designed to generate long-term benefits. 

\3 Not included are most national defense spending, grants to state
and local governments, and spending for special purpose assets such
as space stations, dams, environmental restoration, and national park
lands. 

\4 A description of our criteria for selecting case studies appears
in the "Objectives, Scope, and Methodology" section of chapter 1.  We
also provide limited, supplementary information on four additional
organizations, the Food and Drug Administration (FDA), the Forest
Service, the General Services Administration's Information Technology
Service (ITS), and the National Oceanic and Atmospheric
Administration (NOAA). 


   CAPITAL DECISIONS ARE MADE IN
   AN ENVIRONMENT OF RESOURCE
   CONSTRAINTS
---------------------------------------------------------- Chapter 1:1

Budgetary constraints have long had an influence on federal
decision-making.  Since 1970, the federal government's spending has
consistently exceeded its income, resulting in pressure to restrain
spending.  Discretionary spending or the portion of the budget that
lawmakers annually control through appropriations--which is the
primary source for capital spending--has dropped from 12.2 percent of
gross domestic product (GDP) in 1970 to 7.8 percent in 1995.  In
dealing with a shrinking resource base, it is inevitable that some
agency missions may be curtailed, and some assets may not be, nor
need to be, replaced.  Thus, a decision not to fund a particular
capital asset may reflect the outcome of competition with other
capital projects and other types of expenditures as much as it does
any characteristics of the budget process.  Distinguishing between
obstacles which are rooted in overall resource constraints and those
which are an outflow of budget practices and rules is a difficult but
critical task. 

Agencies have often pointed to the poor condition of their existing
capital assets as evidence of the need for increased capital
spending.  Articles in the popular press and past GAO reports have
discussed the poor condition of various federal fixed assets,
including the Pentagon, National Park Service facilities, Forest
Service facilities, and many financial and information systems
throughout government.\5 Moreover, spending on capital is often
necessary to generate operational savings in the future.  Some
observers have been concerned that even as overall resources are
limited, resources for capital assets are constrained even more
because of the high initial cost of capital assets and what these
observers believe to be the short-term focus of the budget process. 

It is inevitable that resource constraints will prevent some
worthwhile capital projects from being undertaken.  However,
decisions about whether any particular resource need--capital or
operating--is funded reflect the priorities that are determined by
the administration and the Congress.  Ideally, those capital projects
that are funded will be ones with the highest returns or that meet
the highest priority mission needs.  Therefore, the goal of the
budget process should be to ensure neutrality vis-a-vis various types
of spending so that decisions are guided by what is economically and
programmatically justified rather than by what is recorded or
"scored" most favorably in the budget. 


--------------------
\5 See for example:  DOD Rental Payments to GSA (GAO/T-GGD-92-31,
April 8, 1992), National Park Service:  Reexamination of Employee
Housing Program Is Needed (GAO/RCED-94-284, August 30, 1994), Parks
and Recreation:  Resource Limitations Affect Condition of Forest
Service Recreation Sites (GAO/RCED-91-48, January 15, 1991),
Financial Management Issues (GAO/OCG-93-4TR, December 1992), and
Information Management and Technology Issues (GAO/OCG-93-5TR,
December 1992). 


   CAPITAL SPENDING HAS BEEN
   RELATIVELY CONSTANT OVER TIME
---------------------------------------------------------- Chapter 1:2

It is reasonable to expect that historical budget data would give
some indication as to how spending on capital has changed over time. 
However, the federal government does not aggregate data on capital
asset spending in the same way that we have defined it in this
report--spending on assets used in agency operations.  One reason for
this is that federal budget data is intended to serve multiple
purposes.  For capital spending, the data collected are used to
highlight the level of investment activity (character class data) and
to record the nature of the assets procured (object class data). 
Nevertheless, OMB's character class data, object class data, and
program and financing data each provide some rough approximation for
capital asset spending, and therefore, an approximate gauge of how
such spending has fared over time. 

OMB asks agencies to code their net outlays each year according to
various investment categories or character classes.  Investment
outlays are defined by OMB as spending that is intended primarily to
yield benefits in the future--whether to the nation as a whole or to
the government.  Investments may be in the form of direct federal
spending or grants to state and local governments, and may be for
tangible or intangible assets.  The OMB categories that we have used
to most closely match our definition are those for direct spending on
physical assets.\6 However, the character class data will include
some types of spending, such as for flood prevention and the
acquisition of park land, which are excluded from our definition but
cannot be easily segmented from the character class codes. 

OMB also requires that agencies classify their obligations\7 by
object of expenditure or object class.  Object class schedules appear
for each account in the President's budget.\8

The classifications for "Equipment" and "Land and Structures" are the
closest approximation to our definition of capital assets, although
they include some obligations which we exclude and omit others we
would include.  For example, some salaries and contractor costs that
are devoted to capital projects are not included in these object
class categories. 

Finally, agencies may also identify their obligations as "capital
investments" in the program and financing schedules that appear for
each account in the President's budget.  In these schedules, capital
investments are acquisitions of physical or financial assets that
yield benefits over several years.  The program and financing
classification capital investments is only shown when such
investments are material for a program and represent nonreimbursable
obligations.  Agencies have discretion in defining programs, and
consequently capital investments for this schedule.  Therefore, some
capital investments in the program and financing data may include
items we would not consider capital and exclude others. 

Despite the limitations of the available data, a review of historical
trends can provide some perspective on the magnitude and overall
pattern of spending for capital assets.  (See figures 1.1 through
1.3.) OMB character class data show that direct\9 federal spending
for "nondefense physical assets" in 1995 measured $19.5 billion and
was about the same proportion of GDP and of total budgetary outlays
as it was in 1970.  Direct outlays for nondefense physical assets
measured 0.26 percent of GDP in 1970, and in spite of ups and downs
over the period, it represented about the same proportion in 1995. 
Likewise, as a percent of total budgetary outlays, direct spending
for nondefense physical assets is basically unchanged from the 1970
level of 1.3 percent (although it did fluctuate over the period
between 1.0 and 1.5 percent).  Since these assets are primarily
funded from the domestic discretionary category of spending, it may
be insightful to compare trends against this portion of the budget. 
Here, too, we found that direct spending on nondefense physical
assets is about identical to the proportion it was 25 years earlier
(7.7 percent in fiscal year 1995 and 7.4 percent in fiscal year
1970). 

   Figure 1.1:  Direct Nondefense
   Physical Capital Outlays as a
   Percent of GDP

   (See figure in printed
   edition.)

   Figure 1.2:  Direct Nondefense
   Physical Capital Outlays as a
   Percent of Total Federal
   Outlays

   (See figure in printed
   edition.)

   Figure 1.3:  Direct Nondefense
   Physical Capital Outlays as a
   Percent of Domestic
   Discretionary Outlays

   (See figure in printed
   edition.)

Historical budget data for our four case studies also show that
spending on capital assets has not necessarily fared poorly relative
to operations and programs.\10 (Appendixes II through VI provide
graphical analysis of agency trends.) Each case study experienced at
least a modest increase in its overall budget in real terms between
1982 and 1995.\11 For both GSA entities, capital obligations as a
percent of total obligations have generally increased since 1982. 
For two other agencies, USGS and the Corps of Engineers, the
proportion of obligations and outlays, respectively, made for capital
assets over time has fluctuated up and down.  In contrast, the Coast
Guard has seen a steadily decreasing proportion of its outlays go
toward capital assets. 

Caution is required in interpreting the significance of these trends. 
This is not solely due to the limitations noted above.  Neither the
overall federal data nor the case study trend data provide any
indication as to whether the past levels of capital obligations or
outlays were deficient, adequate, or excessive.  Nor can the data
indicate whether there is a bias in one direction or another.  Trends
could reflect changes in priorities between capital and other
spending or changes in underlying needs for capital.  Economies of
scale in operations may suggest that in some cases operating expenses
should decline relative to capital.  In contrast, advances in
technology may enable agencies to maintain consistent levels of
operations while reducing their spending on capital assets. 


--------------------
\6 These categories are Construction and Rehabilitation (1312 and
1314), Major Equipment (1322 and 1324), and Purchases and Sales of
Land and Structures (1340).  Major Equipment includes capital
purchases of information technology but excludes the support services
related to information technology purchases. 

\7 Obligations are binding agreements--orders placed, contracts
awarded, services received, etc.--that will result in outlays
immediately or in the future. 

\8 Credit financing accounts, which are non-budgetary accounts
appearing in the President's budget, do not have object class
schedules. 

\9 Direct federal spending is spending by the federal government
itself, rather than grants to state and local governments.  This
definition differs from the use of the term "direct spending" in the
BEA.  In the BEA, direct spending means entitlement authority, the
Food Stamp Program, and budget authority provided by law other than
appropriations acts. 

\10 Although the term spending typically refers only to outlays, due
to data limitations we have used data measured in both outlays and
obligations.  For purposes of simplicity in this report we refer to
both types of data as spending. 

\11 Data limitations prevented us from analyzing capital spending by
all case study agencies prior to 1982. 


   PRIVATE SECTOR AND FEDERAL
   PRACTICES FOR BUDGETING FOR
   CAPITAL DIFFER
---------------------------------------------------------- Chapter 1:3

As agencies try to adopt more business-like practices, it is
inevitable that comparisons are made with private-sector practices in
budgeting for capital.  Some observers have noted that when it comes
to acquiring capital assets, businesses--unlike government
agencies--are able to spread the expense of capital assets by
depreciating their value in income statements over the estimated
useful life.  Budget practitioners rightly observe that because of
the cash basis of the federal budget, there is a difference between
the timing of the costs and benefits of capital assets.  While the
benefits of capital assets flow over time, federal budget rules
require that their full cost be recognized in the budget when
acquired.  This has been equated to a business charging the full cost
of capital assets to a single year's income statement.  Doing so
would distort the true profitability of the firm in that year and
make the cost of capital asset acquisitions appear artificially high. 
However, although the budget is occasionally called upon to serve the
purpose of an income statement as well, it is not designed to measure
profitability and is poorly suited for this role.  In both the public
and private sectors, budgets generally are a means through which
organizations allocate resources.\12

For many years there has been discussion of the federal government
adopting separate capital and operating budgets.  Under many such
proposals, capital assets would be financed over time by
borrowing--with depreciation charged each period to the operating
budget (which under most proposals would be required to be balanced). 
Such proposals, however, fail to recognize key differences between
budgeting and accounting.  While depreciation is appropriate for
helping companies measure profit or loss in financial statements, it
is generally not used by companies in budgeting.  They base capital
spending decisions on present value comparisons of total cash inflows
and outflows that are expected to result from alternative capital
projects.  Depreciation is not a cash flow and therefore affects a
company's capital spending decisions only to the extent that, as a
tax deduction, it affects the amount of cash outflow for income tax. 
A company's capital budget reflects the results of its spending
decisions and records the cash requirements for its selected capital
projects that are expected during each period.  In this manner, a
business' capital budget has some similarity to the federal unified
budget, which also records the cash requirements for capital projects
during each year.  If depreciation were recorded in the federal
budget in place of cash requirements for capital spending, this would
undermine Congress' ability to control expenditures because only a
small fraction of an asset's cost would be included in the year when
the decision was made to acquire it.\13


--------------------
\12 Some private-sector businesses include depreciation in their
operating budgets, but those operating budgets are totally
accrual-based and, therefore, similar to income statements.  They
are, therefore, unlike the operating budgets described in most
capital budgeting proposals for government.  Businesses use cash and
capital budgets to allocate resources. 

\13 See Budget Issues:  Incorporating an Investment Component in the
Federal Budget (GAO/AIMD-94-40, November 9, 1993) and Budget Issues: 
The Role of Depreciation in Budgeting for Certain Federal Investments
(GAO/AIMD-95-34, February 1995). 


   FEDERAL SPENDING IS GUIDED BY
   BUDGETARY CONTROLS
---------------------------------------------------------- Chapter 1:4

The Antideficiency Act, as amended, implements Congress'
constitutional oversight of the executive branch's expenditure of
funds.  The act reflects laws enacted by the Congress since 1870 to
respond to abuses of budget authority and to gain more effective
control over appropriations.  The central provision of the act (31
U.S.C.  1341(a)(1)) prevents agencies from entering into obligations
prior to an appropriation or from incurring obligations that exceed
an appropriation, absent specific statutory authority.  Thus,
agencies may not enter into contracts that obligate the government to
pay for goods or services unless there are sufficient funds available
to cover their cost in full.  Instead, agencies must budget for the
full cost of contracts up-front.  Also, the Adequacy of
Appropriations Act (40 U.S.C.11), established in 1861, prohibits
agencies from entering into a contract unless the contract is
authorized by law or there is an appropriation to cover the cost of
the contract. 

While these acts require that agencies have sufficient appropriated
funds to cover their obligations, the Budget Enforcement Act of 1990
(BEA) created new mechanisms by which to limit federal spending
overall.  BEA formalized the distinction between direct and
discretionary spending and provided separate controls for each. 
Discretionary spending is defined as budget authority provided in
annual appropriations acts, while direct or mandatory spending is
that which is provided by law other than annual appropriations acts. 
To control discretionary spending--including spending for fixed
assets--BEA established strict dollar limits or "caps" on budget
authority and outlays for each fiscal year through 1998.\14 These
caps are implemented through allocations to House and Senate
appropriations committees, who subsequently allocate these totals
among their subcommittees.  The Congressional Budget Office (CBO) and
OMB "score" or track budget authority, receipts, and outlays
estimated to result from enacted legislation.  Should a breach of the
caps occur, BEA established a process called sequestration in which
spending for most discretionary programs is reduced by a uniform
percentage. 

As a result of BEA, scorekeeping guidelines, called scoring rules,
were developed that significantly changed how certain types of
contracts were scored in the budget.  Previously, when an agency
entered into a lease-purchase contract,\15 budget authority and
outlays were scored over the period of the lease in an amount equal
to the annual payments.  The new guidelines changed this by requiring
that budget authority for lease-purchases be scored up-front and
outlays be scored over the period during which the contractor
constructs or purchases the asset.\16 After BEA, a lease-purchase,
which is tantamount to borrowing from the private sector, was no
longer treated in the budget preferentially to borrowing by the
Treasury to finance direct ownership.  This effectively eliminated
lease-purchases from consideration as a capital acquisition method
that could be used to spread the cost of purchases over a period of
years. 

The benefits to the government as a whole and the disadvantages to
individual agencies resulting from the change in lease-purchase
scoring are illustrative of the dichotomy that can exist between
agencies' and Congress's perspective on the budget process.  Changes
in the scoring of lease-purchases, while problematic from the
perspective of an individual agency because of up-front funding
requirements and budget caps, are critical to enabling the Congress
to control the total commitments made by agencies.  Likewise, some
ideas agencies propose to alleviate their perceived obstacles to
capital spending may in turn create obstacles to maintaining fiscal
control if implemented on a governmentwide basis.  In this regard,
there is a constant tension between agency and congressional
perspectives on the nature of capital acquisition problems and their
solutions. 


--------------------
\14 In 1996, the caps were proposed to be extended through fiscal
year 2002. 

\15 Lease-purchases are a type of lease in which ownership of the
asset is transferred to the government at or shortly after the end of
the lease period. 

\16 This applies to lease-purchases in which the government assumes
substantial risk of ownership.  Scorekeeping guidelines provide
criteria for determining the relative risk. 


   THE NATURE OF THIS REPORT
---------------------------------------------------------- Chapter 1:5

This report illustrates how a select group of federal organizations
plan and budget for capital assets and the experiences they have had
with the budget process.  Five case studies were selected to include
a broad range of characteristics--large and small organizations,
operations-intensive and capital-intensive organizations, and
organizations having a range of asset needs and account structures. 
While it is inappropriate to generalize about governmentwide
practices in budgeting for capital from these case studies, it is
possible to gain insight into some issues and discover potential
strategies for addressing these issues.  The information obtained
from the case studies, supplemented by a limited number of interviews
at other agencies that purchase capital assets, provides some
indication of the range of issues that may be encountered
governmentwide. 

Because agencies can differ substantially in their asset
requirements, account structure, financial management history, and
other characteristics, care must be taken in applying lessons from
one agency to another.  The chapters that follow include issues that
generally affect all federal organizations, such as the requirement
to fully fund capital acquisitions up-front, as well as issues that
may be limited to selected organizations as a result of their
particular characteristics.  Likewise, any strategy that an agency
has adopted to deal with its perceived obstacles to capital spending
has been tailored for its specific circumstances.  Some may be
adaptable to other agencies; others may not be.  The report is also
not exhaustive with respect to the problems and strategies of case
studies.  Some financing strategies, such as budgeting for
stand-alone stages of a larger capital project, may be used by case
studies other than those explicitly mentioned in this report. 
Similarly, case studies may be using other financing approaches in
addition to those cited. 

This report is not intended to represent a final or universal
solution to the problems in budgeting for capital assets.  Indeed,
other issues would also need to be addressed if the capital
acquisition process is to be improved.  For example, the selection
and evaluation of capital projects must be improved.  GAO's past work
has identified a variety of federal capital projects including
information technology as well as large-scale construction projects
where acquisitions have yielded poor results--costing more than
anticipated, falling behind schedule, and failing to meet mission
needs.\17 In addition, to effectively evaluate program performance as
called for in the Government Performance and Results Act of 1993
(GPRA), agencies will need data on the full annual cost of programs
including the cost of capital usage.\18


--------------------
\17 See for example Managing for Results:  Steps for Strengthening
Federal Management (GAO/T-GGD/AIMD-95-158, May 9, 1995), Space
Station:  Program Instability and Cost Growth Continue Pending
Redesign (GAO/NSIAD-93-187, May 18, 1993), and Fossil Fuels: 
Improvements Needed in DOE's Clean Coal Technology Program
(GAO/RCED-92-17, October 30, 1991). 

\18 Under GPRA, agencies must develop, no later than by the end of
fiscal year 1997, strategic plans that cover a period of at least 5
years and include the agency's mission statement; identify the
agency's long-term strategic goals; and describe how the agency
intends to achieve those goals through its activities and through its
human, capital, information, and other resources.  GPRA also requires
each agency to submit to OMB, beginning for fiscal year 1999, an
annual performance plan.  In essence, the annual performance plan is
to contain the annual performance goals the agency will use to gauge
its progress toward accomplishing its strategic goals and identify
the performance measures the agency will use to assess its progress. 


   OBJECTIVES, SCOPE, AND
   METHODOLOGY
---------------------------------------------------------- Chapter 1:6

The objectives of this study were to examine (1) how case study
organizations perceive the budget process and structure affects their
ability to acquire capital assets, (2) whether there are financing
mechanisms currently used or proposed by our case studies that could
be helpful in improving budgeting for capital assets within the
current unified budget structure, and (3) the results of OMB's
Bulletin 94-08 on "Planning and Budgeting for the Acquisition of
Fixed Assets."

To identify aspects of the budget process that affected case studies'
capital spending decisions and the financing mechanisms they used and
proposed, we interviewed officials from our case studies as well as
OMB and congressional staff responsible for reviewing the budgets of
these organizations.  To select our case studies, we used data from
OMB's MAX\19 system to identify federal organizations making capital
expenditures between fiscal years 1982 and 1994 and the general type
of assets they acquired.  We developed an initial short list of
organizations that provided coverage across various departmental
levels of government and asset types.  The short list consisted of
the Army Corps of Engineers, the Coast Guard, the Forest Service, the
Food and Drug Administration (FDA), the General Services
Administration (GSA),\20 the National Oceanic and Atmospheric
Administration (NOAA), and the U.S.  Geological Survey (USGS). 

We reviewed our past work and other literature to identify
organizations among the short list that had expressed difficulty in
acquiring capital assets and/or were using a financing mechanism that
helped alleviate this difficulty.  After conducting initial
interviews with officials at each of the short list organizations to
confirm the issues they face and the assets acquired, we agreed with
the requestor to select five case studies representing four agencies: 
the Army Corps of Engineers, Coast Guard, GSA (the Public Building
Service (PBS) and the Interagency Fleet Management System (IFMS)),\21
and USGS.  Our selection of case studies was based on a goal of
choosing organizations that reflected diversity in the types of
assets acquired, the volume of capital spending, the type of account
used, and the appropriations subcommittees.  Table 1.1 (see p.  33)
shows the types of assets case studies acquire and the account(s)
used to finance capital.  After conducting more extensive interviews
with officials of our case studies, we discussed the organizations'
problems and financing mechanisms with staff of the case studies'
House and/or Senate appropriations subcommittees, as well as OMB
program examiners and policy specialists. 

GAO requested comments on a draft of this report from the Secretary
of Defense, the Secretary of the Army, the Secretary of
Transportation, the Secretary of the Interior, the Acting
Administrator of GSA, and the Director of OMB.  At meetings conducted
in August and September of 1996, these officials' designees provided
their comments.  Their comments are discussed and evaluated in
chapter 6 and certain other sections of the report as appropriate. 

To examine the responses to OMB Bulletin 94-08 on "Planning and
Budgeting for the Acquisition of Fixed Assets," we reviewed
submissions OMB received from agencies.  We discussed the bulletin
with officials of each of our case studies and with OMB officials
responsible for the bulletin's development and implementation.  We
also had discussions with OMB to determine differences in the
responses to and results of OMB's second bulletin on fixed assets
(Bulletin 95-03).  To improve the currency of our discussion of OMB's
fixed asset efforts, we also reviewed OMB's A-11 guidance to agencies
on submitting their fiscal year 1998 budget requests. 

Capital spending data in appendixes I through VI and chapter 1 were
derived from OMB's MAX system.  Although we did not verify this data
at the individual budget account or organizational level, total
obligations in the object class and program and financing schedules
and total outlays in the character class schedules were reconciled by
fiscal year to published sources. 

We performed our work from June 1995 through February 1996 in
accordance with generally accepted government auditing standards. 



                               Table 1.1
                
                Examples of Assets Acquired and Accounts
                Used to Finance Capital by Case Studies

                                Examples of assets  Account(s) used to
Case study                      acquired            finance capital
------------------------------  ------------------  ------------------
Army Corps of Engineers         Equipment,          Revolving fund\a
                                facilities,
                                information
                                systems

Coast Guard                     Vessels, aircraft,  Acquisitions,
                                shore facilities,   construction, and
                                information         improvements
                                technology

GSA: Interagency Fleet          Motor vehicles      General supply
Management System                                   fund

GSA: Public Buildings Service   Office buildings,   Federal buildings
                                courthouses,        fund
                                special purpose
                                buildings

U.S. Geological Survey          Information         Surveys,
                                systems,            investigations,
                                telecommunications  and research;
                                , and scientific    working capital
                                equipment           fund
----------------------------------------------------------------------
\a Although Corps fixed assets used on multiple civil works projects
are acquired through a revolving fund, other fixed assets are
acquired through the Corps appropriations accounts, including the
Construction, General, and the Flood Control, Mississippi River and
Tributaries accounts. 


--------------------
\19 MAX is the computer system used to collect and process
information needed to prepare the budget. 

\20 We considered three separate operating entities within GSA--the
Public Building Service, the Interagency Fleet Management System, and
the Information Technology Service. 

\21 For simplicity we refer to GSA as well as its operating entities
as "agencies" throughout the report. 


AGENCY AND GOVERNMENTWIDE
PERSPECTIVES ON UP-FRONT FUNDING
DIFFER
============================================================ Chapter 2

The Adequacy of Appropriations Act and the Antideficiency Act require
that resources be available to fulfill government commitments to pay
for goods and services when the commitments are made, or up-front. 
However, officials at the organizations we contacted typically viewed
the requirement as an impediment to their meeting capital asset
needs.  Managers expressed concern that their agency or program
budgets are not able to accommodate the large, single-year increases
in budget authority needed to fully fund capital projects up front. 
As a result, managers believe that capital needs are either not met
or met through methods that are more costly in the long term. 

Despite the potential problems for individual agencies, up-front
funding is critical to safeguarding Congress' ability to control
overall federal expenditures and to assess the impact of the federal
budget on the economy.  Without up-front funding, projects may be
undertaken without adequate attention being given to their overall
costs and benefits.  Moreover, failure to fully fund projects before
they are undertaken can distort the allocation of budget resources
and obscure the impact of federal budgetary action on the private
sector.  Only a few agencies, including the Army Corps of Engineers
(one of our case studies), have been exempted from the up-front
funding requirement.  Despite these agencies' use of incremental
funding,\1 OMB has taken steps to encourage consistent application of
up-front funding across government in the future. 


--------------------
\1 Incremental funding occurs when the Congress provides funds for a
capital acquisition based on the obligations estimated to be incurred
within a fiscal year when such funds will not produce a usable asset. 


   AGENCIES VIEW UP-FRONT FUNDING
   AS AN IMPEDIMENT TO CAPITAL
   ACQUISITION
---------------------------------------------------------- Chapter 2:1

Managers in most of the organizations we contacted cited requirements
for full up-front funding as an obstacle to acquiring capital assets. 
These officials felt that when it is necessary to purchase expensive
capital assets, up-front funding requirements result in a spike in
their agency's or program's budget authority that often would not be
provided in the current budget environment.  Although an asset may be
an important component to carrying out the mission of the
organization and may bring benefits over many years, managers
believed that having to budget for the full cost in 1 year is often a
significant impediment to its acquisition.  Although general resource
constraints are not new, full up-front funding has become more
difficult because most capital spending is discretionary and, thus,
annually capped by BEA.  OMB has responded to BEA by frequently
imposing limits on agency spending and by prohibiting agency
borrowing.  Consequently, managers may find themselves faced with a
situation in which funding an expensive capital project may require
deep cuts in operations or in all other capital projects during that
year.  Faced with these trade-offs, agency managers may either delay
capital projects until an additional appropriation can be obtained
or, when possible, look for other ways of meeting their capital needs
though the long-run cost may be higher. 

Officials from virtually every organization that we contacted could
cite examples of how the up-front funding requirement affected their
ability to acquire capital.  Up-front funding appeared to be a
particularly significant issue at organizations we contacted that
acquire buildings because these assets often have a high initial
cost, provide benefits over many years, and could be financed over an
extended period of time.  Up-front funding was also a concern for
USGS in acquiring equipment because the cost of the equipment
sometimes represented a significant portion of the organization's
resources. 

PBS has often cited the up-front funding requirement as an impediment
to meeting federal agency space needs in the most cost-effective
manner.  PBS is responsible for acquiring general and special purpose
work space for federal agencies and has multiple methods available
for meeting these space needs, including operating leases, capital
leases, lease-purchases,\2 and direct purchases.  Each of these
methods for obtaining space presents a combination of advantages and
disadvantages in terms of flexibility and short- and long-term cost
to PBS.  Budget scoring rules are intended to facilitate comparisons
of the long-term cost of each method and to ensure compliance with
the full funding concept.  For each space acquisition method except
for operating leases, PBS (like other federal organizations) is
required to have budget authority for the total cost up front even
though the outlays may occur over several years.\3 PBS has generally
found that ownership is the least costly manner with which to meet
long-term federal space needs.  However, PBS officials indicated that
the up-front funding requirement coupled with caps on total
discretionary budget authority and outlays has resulted in PBS not
receiving sufficient budget authority to allow it to own the amount
of office space that its studies indicate to be optimal.  PBS has
maintained that by relying on operating leases instead, the
government incurs a higher long-term cost and consumes resources that
could be used for repairs and alterations of the existing inventory. 

Other organizations felt similar constraints on their ability to
obtain or replace facilities.  Coast Guard officials, for example,
cited a need for new employee housing.  The Coast Guard prefers to
satisfy housing needs by providing allowances to employees to rent
from the private sector.  However, in remote or resort areas of the
country where affordable rental housing is not available, the Coast
Guard constructs housing.  Coast Guard officials stated that even
though the housing fulfills a long-term need, they must budget for
the full cost in a single year, which generally limits the number of
capital projects that can be undertaken.  Officials at the Forest
Service also felt that up-front funding requirements in conjunction
with resource constraints prevented them from making investments in
buildings and facilities.  Many of the agency's facilities are in
very poor condition and in need of repair or replacement.\4 However,
Forest Service managers say they are not able to obtain the large
increases in appropriations needed to meet these one-time costs. 

FDA officials also felt that up-front funding was an obstacle to
acquiring needed facilities.  They felt that some of their facilities
were in need of repair or replacement, but that many of these cannot
be undertaken because their cost must be budgeted for up-front.  In
addition, FDA has been waiting for a number of years to obtain
funding to consolidate headquarters staff that are currently spread
out across many different locations in the Washington, DC
metropolitan area into fewer sites.  FDA officials believe that the
segmentation of their facilities increases their operating cost and
makes it harder to fully use some pieces of equipment that could be
shared if staff were consolidated into fewer facilities. 


--------------------
\2 Operating leases and capital leases differ from lease-purchases in
that the ownership of the asset is not transferred to the lessee at
the conclusion of the operating or capital lease period.  Operating
leases are distinct in that they are generally for shorter term needs
and all risks of ownership of the asset remain with the lessor. 

\3 For purchases and for lease-purchases in which the government
assumes substantial risk, the outlays must be budgeted for over the
period of construction or purchase. 

\4 See Parks and Recreation:  Resource Limitations Affect Condition
of Forest Service Recreation Sites (GAO/RCED-91-48, January 15,1991). 


   UP-FRONT FUNDING IS PARAMOUNT
   TO GOVERNMENTWIDE FISCAL
   CONTROL
---------------------------------------------------------- Chapter 2:2

Although possibly problematic for individual agencies, up-front
funding has long been recognized as an important tool for maintaining
governmentwide fiscal control.  The requirement that budget authority
be provided up-front, before the government enters into any
commitment, was established over 100 years ago in the Adequacy of
Appropriations Act and the Antideficiency Act.  These acts responded
to past problems in which agencies committed the government to
payments that exceeded the resources made available to them by
Congress. 

The importance of the principle was reinforced by the 1967 Report of
the President's Commission on Budget Concepts, which emphasized the
primary purposes of the budget as being the efficient allocation of
resources and the formulation of fiscal policy to benefit the
national economy.  The up-front funding requirement advances both. 
It is essential for efficient resource allocation decisions because
it helps ensure that the Congress considers the full cost of all
proposed commitments and makes trade-offs based on full costs.  To be
useful in the formulation of fiscal policy, the budget must be able
to highlight the impact of the federal budget on the economy.  For
this purpose, the requirement for up-front funding also serves the
Congress well.  The point at which capital spending has the largest
and most direct economic impact on the private sector occurs at the
point the commitment is made--that is, up-front--not over the
expected lifetime of a long-lived asset. 

Failure to recognize the full cost of a particular type of
expenditure when budget decisions are being made could lead to
distortions in the allocation of resources.  In other words, if
particular types of spending, such as for physical assets, were given
preferential treatment in the budget by virtue of recognizing only a
fraction of their total cost, then it is likely that relatively more
spending for those types of assets would occur.  While advocates for
purchasing some federal assets may see this as a desirable end, such
an outcome may not accurately reflect the nation's needs.  In
particular, other types of federal spending that also provide
long-term benefits but that are not physical assets (including
research and development and spending for human capital) would be
arbitrarily disadvantaged in the budget process, even if national
priorities remain unchanged. 

Furthermore, failure to fully fund capital projects at the time the
commitment is entered into can force future Congresses and
administrations to choose between having an unusable asset and
continuing projects' funding for years even after priorities may have
changed.  For example, if the Congress provides funding for only part
of a project and that part is not usable absent completion of the
entire project, then the Congress and the administration may feel
compelled to continue funding in the future to avoid wasting the
initial, partial funding that was already spent.  Thus, if capital
projects are begun without full funding, future Congresses and
administrations may, in effect, be forced to commit a greater share
of their annual resources to fulfilling past commitments and thus
have less flexibility to respond to new or changing needs as they
arise. 

Although the organizations we contacted may perceive it to be
difficult to obtain full funding in a single year for capital assets,
OMB and the Congress have at various times accommodated agencies'
needs for large increases in budget authority to fully fund their
capital projects.  However, given overall resource constraints, all
of the capital needs (and operating needs) that agencies may have or
perceive cannot be met.  Thus, an agency's failure to receive funding
for its capital request may reflect the fact that, on a
governmentwide basis, other agencies' capital projects are of higher
priority to OMB or the Congress.  It also reflects governmentwide
trade-offs that are made to continue funding operations of one agency
over increases in capital spending at other agencies. 


   A FEW AGENCIES HAVE BEEN EXEMPT
   FROM UP-FRONT FUNDING
---------------------------------------------------------- Chapter 2:3

Although up-front funding is generally required across government, it
is not applied to all agencies.  Water resource projects were
explicitly exempted from up-front funding by the Rivers and Harbors
Appropriation Act of 1922.  As a result, the Corps of Engineers
implements many of its construction projects through the use of
continuing contracts.  These contracts cover the entire project but
indicate the amount of work that is expected to be completed during
each year and the cost of that increment.  Although the Congress is
aware of the total expected cost of the project, the Corps annually
requests funding for the projects in increments--only the amount of
money necessary to complete the next year's portion of work. 

The Corps' contracts are structured so that it is not committed to
paying for any additional work on a project beyond that specified for
the budget year.  If the Congress were to discontinue funding for the
project at some point during the overall contract, the Corps would be
responsible for paying the contractor various cancellation or
decommissioning costs.  However, while the Corps is not legally
obligated to complete an incrementally funded project, terminating it
before completion can leave the Corps without anything of economic
value.  Corps officials suggest however, that because of the costs
that have already been incurred and the economic justification that
is done before beginning any project, it is unlikely that the
Congress would choose to cancel a project for fiscal reasons once it
is begun.  In fact, the officials indicated they are not aware of any
Corps projects that have been cancelled by Congress. 

The Energy and Water Development appropriations subcommittees have
been comfortable with incrementally funding the Corps and other
agencies within their jurisdiction (such as the Bureau of Reclamation
and DOE) and have not changed the practice.  Officials from OMB and
the Corps indicated that the Carter administration had proposed to
the Congress fully funding Corps construction projects, but full
funding was rejected because it would have required either a large
increase in appropriations or a significant drop in the number of
projects that could be undertaken in a given year. 

One of the traditional concerns with incremental funding is that it
risks allowing projects to be started before adequate scrutiny is
given to their total cost and benefit.  Some within OMB have
suggested that this may not be as much of a concern with the Corps,
in part because both OMB and the Congress have had confidence in the
Corps' total cost estimates because of the historical reliability of
its cost-benefit justifications.  Thus, the Congress is aware of the
costs and the benefits of a project before it is authorized.  OMB
officials also indicated that other factors contribute to ensuring
that projects are managed cost effectively.  For example, state or
local authorities that act as financial partners in Corps projects
have a strong incentive to ensure that projects are well-managed.  In
addition, project authorization levels limit the amount of additional
appropriations the Corps can obtain for cost overruns. 

OMB has acknowledged that agencies have not always requested or
received full up-front funding for capital acquisitions.  Besides the
Corps of Engineers, some capital projects at the Bureau of
Reclamation, DOE, and NASA have also been funded incrementally.  One
of the objectives of OMB's bulletins on fixed assets (Bulletins 94-08
and 95-03) was to identify the extent to which incremental funding
was being used and to encourage agencies to request full funding for
their capital projects. 

Estimates are still being refined by OMB as to what the total cost
would be to fully fund all projects currently funded incrementally. 
In the fiscal year 1997 President's budget, OMB requested $1.4
billion in budget authority to fully fund selected ongoing projects
in DOE and NASA that otherwise would have been incrementally
funded.\5 Although full funding was not requested for capital
projects at the Corps of Engineers and the Bureau of Reclamation, the
President's budget indicated that the cost of fully funding ongoing
and new projects for these two agencies would be about $23 billion in
fiscal year 1997 (which represents 11 percent of total domestic
discretionary budget authority in fiscal year 1995).  The
implications of fully funding capital projects--including those that
have been incrementally funded--will be clarified for the government
as a whole when agencies submit their fiscal year 1998 budget
requests to OMB.\6 The principal effect will be to increase budget
authority in the initial year for projects that would otherwise be
incrementally funded over a period of years.  Because projects' cash
flows would be unaffected by the application of up-front funding, the
government's total annual outlays would also not change for a given
level of capital projects.  For the longer term, the impact of such a
shift on future years' budget authority will be a function of whether
policymakers change the number or types of capital acquisitions in
response to the up-front funding requirement. 


--------------------
\5 Only a small portion of this request was ultimately approved in
fiscal year 1997 appropriations actions. 

\6 As discussed in chapter 5, OMB is requiring agencies to request
full up-front funding for stand-alone stages of all ongoing and new
fixed asset acquisitions in their fiscal year 1998 budget
submissions. 


UP-FRONT FUNDING CAN BE
ACCOMMODATED BY BALANCING
MANAGERIAL FLEXIBILITY AND
CONGRESSIONAL CONTROL
============================================================ Chapter 3

Case studies use a variety of methods for adapting to the requirement
to fully fund capital acquisitions up-front.  Some of these methods
demonstrate a balance between managerial flexibility and
congressional control.  They include: 

  -- budgeting for stand-alone stages of an acquisition,

  -- revolving funds,

  -- an investment component within a working capital fund,

  -- reducing capital needs, and

  -- operating leases. 

Several of these approaches to financing capital may be worthwhile
for other agencies to consider to help accommodate the up-front
funding requirement.  For example, one case study uses contracting
strategies that are designed to limit the government's commitment and
spread the amount of budget authority needed over a period of years. 
Under certain conditions and for certain types of capital
acquisitions, revolving funds and investment-type accounts can serve
to manage the spikes in resource needs that are created for an agency
by up-front funding.  Case studies have also pursued strategies
intended to reduce their need to own capital assets and to lower
their overall cost of operations so that capital spending may be more
easily accommodated.  Yet some case studies, unable to meet long-term
capital needs with current resources, use financing methods, such as
operating leases, that are better suited for meeting short-term needs
and that can lead to higher long-term cost.  Finally, officials of
some case studies believe that additional tools would be useful, such
as borrowing authority and partnerships with the private sector. 
While these proposed tools would enhance managerial flexibility, they
must be considered in light of their impact on congressional control. 


   BUDGETING FOR STAND-ALONE
   STAGES OF AN ACQUISITION LIMITS
   THE BUDGET AUTHORITY NEEDED
---------------------------------------------------------- Chapter 3:1

The Coast Guard requests funding for separate stand-alone stages of
large capital projects.  In contrast to incremental funding,
budgeting for stand-alone stages helps ensure that a single
appropriation will yield a functional asset while limiting the amount
of budget authority needed.  For example, the Coast Guard may
structure its vessel and other equipment contracts to acquire
portions of such projects that are economically or programmatically
useful even if the entire project is not completed as planned.  In
acquiring a class of ships, the Coast Guard may write a contract for
a lead ship and spare parts with options to buy additional ships in
future years.  By structuring its acquisitions in this way, the Coast
Guard can request full funding for each useful piece of the project
as the project progresses, rather than requesting funds for the
entire project up-front.  This strategy reduces the budget authority
needed by the Coast Guard to initiate the project and is consistent
with full funding because the Coast Guard receives a useful asset
from each funded option, though the full value of the asset may not
be realized until the entire project is completed. 

The Coast Guard's experience indicates that structuring a capital
acquisition into fully-funded, stand-alone stages has several
advantages to agencies and the Congress.  First, it allows agencies
to spread the amount of budget authority needed to complete a large
capital acquisition over multiple years.  For the agency and for the
Congress, this can enable more projects to be underway concurrently. 
A second advantage is that the Congress can exercise more frequent
oversight over the progress of the total capital project.  As each
usable portion of the total project is completed, the Congress has an
opportunity to review progress, re-evaluate needs, and decide whether
to provide funding for the next segment.  Third, budgeting for
stand-alone stages of a project gives the Congress greater funding
flexibility to respond to changing needs or national priorities.  If
changing circumstances dictate that other needs are of a higher
priority, the Congress can discontinue the project at an appropriate
juncture, shift funds to the new need, and still benefit from the
funds already spent on the stand-alone stages. 

Agency managers, of course, would prefer to receive funding for the
entire project at the outset since that would reduce uncertainty,
make project management easier, and possibly lower the cost
contractors charge.  However, it is appropriate from an overall
federal budgeting perspective for projects spanning multiple years
and requiring significant resources to be re-evaluated as they
progress, with the Congress maintaining the option to end the
project.  Decisions to terminate or slow down projects reflect
current budget priorities given available resources.  If projects
have been funded in stand-alone stages, such decisions can be made
without the concern that past spending has been wasted.  On the other
hand, even though the assets are usable, their net effectiveness may
be compromised if the succeeding parts of the project are not
completed as well. 


   REVOLVING FUNDS CAN BE
   EFFECTIVE IN SPREADING THE COST
   OF CAPITAL ACQUISITION OVER
   TIME AND INCORPORATING CAPITAL
   COSTS INTO OPERATING BUDGETS
---------------------------------------------------------- Chapter 3:2

Four case studies used revolving funds\1 to finance capital assets
and manage the spikes in resource needs that can occur with up-front
funding.  Their experiences indicate that revolving funds can be
effective for agencies with relatively small, ongoing capital needs
because the funds, through user charges, spread the cost of capital
over time in order to build reserves for acquiring new or replacement
assets.  In addition, revolving funds help to ensure that capital
costs are allocated to programs that use capital.  However, revolving
funds do not always work as intended.  For example, while revolving
funds are intended to be self-financing, PBS' revolving fund has
faced several structural constraints that have limited its ability to
satisfy customer needs with the fund's rental income.  Case studies'
experiences led us to conclude that revolving funds will be most
effective when they possess certain characteristics--sound financial
management, identifiable customers to charge, the ability to recoup
replacement cost, appropriations to fund major expansions to the
asset base, and the ability to retain proceeds from the sale of
assets when expected to maintain the same size asset base.  In
addition, to ensure opportunities for oversight and control,
revolving funds also need to have capital plans, including expected
benefits from the acquisition against which actual benefits may be
judged.  Equally important, for revolving funds that acquire
large-scale and heterogeneous assets, the Congress and OMB must be
able to annually review whether proposed acquisitions are those most
needed and whether the overall level of capital spending by the
agency is appropriate given other competing capital and operating
needs across the government. 


--------------------
\1 Revolving funds are accounts authorized to be credited with
collections that are earmarked to finance a continuing cycle of
business-type operations without fiscal year limitation.  For
intragovernmental revolving funds, collections primarily come from
other government agencies and accounts.  However, OMB officials
commented that, although the four case studies have accounts
classified in the budget as revolving funds, only the IFMS revolving
fund, which can spend its collections without annual appropriations,
meets this definition. 


      REVOLVING FUNDS WERE WIDELY
      USED BY CASE STUDIES
-------------------------------------------------------- Chapter 3:2.1

Case study organizations showed that revolving funds are neither a
new nor rare tool in budgeting for capital assets.  Case studies also
demonstrated that revolving funds can be used in a variety of
circumstances.  At some case studies, the revolving funds primarily
provide assets to external customers, while at others, the assets are
used primarily to support internal operations.  However, regardless
of the particular types of assets or the customers to whom the
services are provided, revolving funds relied on charges to users to
fund ongoing maintenance and replacement of capital assets. 

The Corps of Engineers has used a revolving fund since fiscal year
1954 to finance equipment and facilities shared by multiple Corps
civil works projects and programs.  The original cost of the
equipment is charged as a depreciation cost to the projects or
programs that use it.  In addition, user charges are set to recover
expected increases in the asset's price.  By including depreciation
and inflation in its charges to users, the revolving fund ensures
that resources are available to buy new equipment when necessary. 

The Congress established USGS' working capital fund (WCF)\2 in fiscal
year 1991 to finance replacement of the agency's mainframe computer,
telecommunications equipment, and related automated data processing
(ADP) equipment.  The WCF grew out of USGS' experience in having to
finance a telecommunications upgrade and mainframe computer from
annual appropriations.  USGS recognized that it needed a way to plan
for the augmentation or replacement of these acquisitions in the
future if it was to reduce the one-time impact on operating units. 
Through the WCF, charges to users will help fund the replacement of
these assets.\3

The IFMS uses a revolving fund to finance operations of its fleet of
vehicles.  Since 1982, IFMS charges to client agencies have enabled
it to recover depreciation, operational costs, and an inflation
increment.\4 The revolving fund accumulates reserves during the year
so that portions of the fleet can be replaced as needed; proceeds
from the sale of old vehicles are also applied toward new purchases. 
The revolving fund is intended to be self-sustaining and IFMS tries
to ensure that its user charges are competitive with those of
private-sector car rental providers. 

GSA's Information Technology Fund (ITF) was initially established in
1987 and currently funds, on a reimbursable basis, federal local and
long-distance telecommunications services and ADP technical services. 
Fees charged to client agencies recover the full cost of services
plus contributions to a capital reserve fund.  The capital reserve
fund finances replacement of ITF fixed assets--primarily PBX and
telephone switches used for local phone service.  The ITF also uses
its capital reserve fund to finance extraordinary operating expenses
related to long-distance service and to finance pilot projects. 

The Federal Buildings Fund (FBF) began operations in 1975 and is the
largest of the revolving funds at GSA.  PBS, which manages the FBF,
charges client agencies rent for buildings it provides for their use. 
Like other revolving funds, the FBF is intended to be self-financing. 
The charges to users are intended to cover all costs of operations
and replacement and a limited amount of new construction.  In
practice, the FBF has been faced with customer demands for new space
that exceed collections.  As a result, PBS has sought appropriations
to supplement the Fund's income.  PBS officials cited a number of
structural constraints placed on the FBF, such as congressional
restraints on the generation and use of FBF income that have
prevented it from operating like a true revolving fund. 
Nevertheless, they believe that the FBF has been a more effective
method of financing the maintenance and replacement of assets than
was the former process of funding through appropriations alone. 


--------------------
\2 A working capital fund is a type of intragovernmental revolving
fund. 

\3 In 1995, the Congress gave USGS permission to expand its
investment component to the WCF to fund replacement of scientific
equipment and facilities improvements.  A fuller discussion of the
USGS investment component is found later in this chapter. 

\4 Prior to 1982, IFMS had been unable to charge for inflation. 


      REVOLVING FUNDS CAN PROMOTE
      MORE COST-EFFECTIVE CAPITAL
      DECISIONS
-------------------------------------------------------- Chapter 3:2.2

In addition to the benefits they provide in smoothing spikes that can
result from up-front funding, revolving funds can also help agencies
and the Congress better monitor program costs by promoting full cost
accounting.\5 Although full funding up-front leads to recognition of
the full cost of commitments in the year made, when agencies finance
capital through appropriations, the annual capital cost incurred in
carrying out a specific program is not apparent in that program's
budget.  Revolving funds can ensure through their user charges that
the full cost of programs--including capital usage--is borne on an
annual basis by those responsible for the program rather than passed
on to future users.  At an agency level, revolving funds incorporate
traditional capital budgeting concepts and can result in charging
users for capital consumption without violating up-front funding
principles for the federal government as a whole.  As GPRA is
implemented, full costing will take on even greater importance as
managers will need to assess whether their programs are achieving
goals in a cost-effective manner.\6 When the budget does not clearly
identify all costs associated with a program, including capital
usage, agencies and the Congress cannot make fully informed
trade-offs among programs because some programs appear cheaper than
they are. 

Costs tied directly to capital usage also provide an incentive for
agency managers to use capital more efficiently.  In some cases this
may lead them to reconsider whether they need the same quantity or
type of fixed assets as previously thought.  For example, as rent
charges for work space become a greater burden for agencies (because
of stagnant or declining annual budgets), it is reasonable to expect
that more agencies will become concerned about their use of space and
the resources it diverts from other purposes.  Establishing economic
incentives for agency managers to make their own trade-offs between
capital and operations based on full costs is likely to lead to more
efficient decisions about appropriate levels of capital assets. 


--------------------
\5 Managerial Cost Accounting Concepts and Standards for the Federal
Government (Statement of Federal Financial Accounting Standards,
Number 4) recommends that federal entities report the full costs of
outputs in general purpose financial reports.  This statement notes
that such cost information can be used "by the Congress and federal
executives in making decisions about allocating federal resources,
authorizing and modifying programs, and evaluating program
performance."

\6 Under GPRA, agencies must develop, no later than by the end of
fiscal year 1997, strategic plans that cover a period of at least 5
years and include the agency's mission statement; identify the
agency's long-term strategic goals; and describe how the agency
intends to achieve those goals through its activities and through its
human, capital, information, and other resources.  GPRA also requires
each agency to submit to OMB, beginning for fiscal year 1999, an
annual performance plan.  In essence, the annual performance plan is
to contain the annual performance goals the agency will use to gauge
its progress toward accomplishing its strategic goals and identify
the performance measures the agency will use to assess its progress. 


      CONSTRAINTS ON REVOLVING
      FUNDS CAN IMPEDE
      EFFECTIVENESS
-------------------------------------------------------- Chapter 3:2.3

Officials at IFMS and PBS expressed concern over financing
constraints and/or underfunded responsibilities that could impede
their revolving funds' ability to operate efficiently.  The FBF in
particular, has traditionally faced constraints on its ability to
generate income.  The FBF has also been faced recently with
responsibilities that were not anticipated at the Fund's inception. 

The IFMS' full-cost recovery pricing system has covered the costs of
maintaining and replacing its fleet, but IFMS officials believe
additional new requirements on IFMS may make cost recovery and
remaining competitive more difficult in the future.  The Energy
Policy Act of 1992 requires that by fiscal year 1999, alternatively
fueled vehicles must comprise at least 75 percent of the total number
of new vehicles acquired by a federal fleet.  Although law requires
DOE to fund the incremental acquisition costs of alternatively fueled
vehicles over their conventionally fueled counterparts, DOE officials
indicated to IFMS that DOE had only a portion of the incremental
funding needed for fiscal year 1996.  Depending on the number of
vehicles converted, IFMS officials thought that the remaining cost in
fiscal year 1996 could be absorbed through operational efficiencies. 
However, the fund may not be able to accommodate future costs if
advances from DOE continue to decline or cease altogether. 

Although a revolving fund should fully recover its costs through user
charges if it is to be self-sustaining, this has not been the case
with the FBF.  The imbalance between the FBF's costs and its income
lies in part in the inherent structure of the Fund.  FBF rent charges
to agencies are not necessarily sufficient to cover full costs
because they are not based on the actual costs to PBS.  In some
cases, PBS' repair and maintenance costs are higher than the average
for office buildings because it must maintain some of its office
buildings as heritage assets.  Since FBF charges agencies for their
use of owned and leased space based on market appraisals made every 5
years, actual costs to maintain the space and FBF payments to the
private-sector lessor may vary from the rental income FBF collects.\7
Adding to these constraints on PBS' cost recovery have been caps on
rent.  During the 1980s, the Congress believed some PBS rental
charges were too high and imposed caps on the rents of some agencies. 
Although only three agencies currently have rent caps, PBS estimated
that the caps have caused substantial income losses over the years. 

Financing office space to satisfy customer needs may also be more
difficult because the FBF is not authorized to retain the proceeds
from the disposal of property.  When PBS property is sold, all
disposal proceeds are required by law to be deposited into a land and
water conservation fund.\8 The other revolving funds operated by our
case studies can retain disposal proceeds and have fewer restrictions
on the disposal of assets.  For the Corps of Engineers, the disposal
proceeds are only a minor source of funding, but for IFMS they
represent a substantial portion of operating income. 

Constraints on income have been exacerbated by demands to expand PBS'
asset base.  During the 1980s, demands for courthouse construction
began to rise significantly.  Although PBS responded to early
courthouse construction demands by deferring maintenance on other
assets, PBS sought and received appropriations for courthouse
construction in fiscal year 1991 to supplement the Fund's rental
collections.  The FBF has since continued to receive appropriations
for construction of courthouses, border stations, and office space. 
However, PBS estimates that the present level of appropriations funds
about half of construction costs.  The remainder of the costs are
primarily being covered by FBF rental collections, which are also
used for funding repairs and modernization of the existing assets. 


--------------------
\7 PBS officials indicated that PBS plans to change its pricing of
leases so that rents charged in the future would be based on the rent
that PBS pays to the private-sector lessor. 

\8 The same law also prevents PBS from retaining income from leases
to nonfederal entities. 


      SEVERAL FACTORS ARE
      IMPORTANT FOR EFFECTIVE
      REVOLVING FUNDS
-------------------------------------------------------- Chapter 3:2.4

Despite their benefits in smoothing out spikes in resource needs,
revolving funds are not necessarily appropriate for all agencies or
in all circumstances.  Our review of case studies' revolving funds,
as well as previous analysis of specific revolving funds,\9

has led us to draw some conclusions about the characteristics needed
for successful revolving funds.  First, agencies using a revolving
fund need to have demonstrated a sound record of financial
management.  Financing capital through a revolving fund can entail a
lesser degree of congressional control than direct appropriations. 
Not all agencies may have demonstrated a sufficient stewardship of
government resources to warrant a reduction in congressional
oversight.  Good financial management can be even more important if
revolving funds rely on charges to other agencies for income and are
not subject to competition because, under such circumstances,
revolving fund managers may have less incentive to control costs. 
Sound internal controls and oversight by management are needed to
ensure that revolving fund efficiencies are not neglected because
costs can be passed on to its users.  When external competition that
can provide an incentive for cost-consciousness is absent and when
fund acquisitions are expensive, revolving funds may need a greater
degree of congressional oversight. 

Second, for a revolving fund to be effective, the agency must be able
to identify clearly the appropriate customers to charge and the
actual capital cost that each customer incurs.  If this is not
possible, a revolving fund is probably not practical.  For example,
officials at the Coast Guard indicated that because of their
organizational structure and overlapping missions it would be
impractical for them to use a revolving fund.  They explained that
many Coast Guard assets are used by units in carrying out multiple
activities--such as defense operations and law enforcement--so that
it is potentially more difficult to assign cost to a specific mission
or activity.  They also stated that it would be inappropriate to
charge some users of capital.  Since mission responsibilities are
often tied to carrying out search and rescue, law enforcement, and
maritime environmental protection activities, fees attached to those
activities could create perverse incentives.  Coast Guard officials
want to encourage units to use the most appropriate assets for
carrying out their missions and not to be inappropriately influenced
by cost considerations in what is often an emergency situation. 

Third, to be successful in the long-term, revolving fund managers
must know their full costs and have the authority to charge fees that
recover the cost of operating and replacing assets.  Without
replacement cost pricing, the resources of the fund would eventually
be depleted by inflation.  In addition, the accounting system of the
agency must be able to track costs accurately.  All agencies do not
have adequate systems to allow them to fully allocate all costs
associated with running a particular program or activity. 

Fourth, to be self-sustaining, the revolving fund should be
adequately funded initially and should receive additional resources
when significant increases in its asset base are immediately
required.  If fees are established in order to meet a specific level
of capital need, and that level increases, then some additional
resources must be made available for the fund to remain
self-sustaining.  The additional resources could come from
operational savings that are achieved, higher fees to users, or an
external injection of funding (i.e., an appropriation).  For example,
IFMS must expand its service level to include more expensive,
alternatively fueled vehicles but is hesitant to either delay vehicle
replacements or raise rates and risk losing customers.  IFMS
officials believe that some of the cost can be funded through
operating efficiencies but that additional funds will be necessary if
the requirement cannot be modified.  Likewise, if PBS must increase
the size of its inventory to meet customer demand and past
collections have not been designed to fund expansion, then
appropriations may need to be considered.  Existing reserves may be
able to fund expansions of the asset base or service level in the
short-term, but using these reserves would ultimately deprive the
existing users from having their own assets repaired and replaced. 
Also, while providing a funding source for asset base expansion,
increasing the fees charged to current users may make them pay more
than the cost they are responsible for incurring, thus distorting the
cost shown in the users' budgets.  Conversely, if demand for the
revolving fund's capital assets declines, resources could be taken
out of the revolving fund to be used for other purposes across the
government.  This is especially the case for a revolving fund that
purchases relatively large-scale and heterogeneous assets. 

Fifth, if they are to provide a constant level of service, revolving
funds typically need to have the flexibility to retain or dispose of
assets based on their economic value and be able to reinvest the
proceeds in the fund.  If a revolving fund is to operate in a
business-like fashion, its managers must be able to determine when it
is more efficient to invest in new assets than to retain and operate
existing assets.  If revolving funds tasked with providing constant
levels of services are not able to dispose of under-performing or
unnecessary assets and retain the proceeds, capital allocation
decisions may be distorted.  For example, PBS officials cited an
experience where their financial analysis indicated that they should
sell a building and use the proceeds to acquire alternative space. 
Although they could still use the building, in the long-term it would
have been a more efficient use of resources to purchase new space. 
However, because PBS is prevented by law from keeping the sale
proceeds, PBS retained the building. 

Finally, revolving funds, like other funding mechanisms, must operate
within an environment of controls if the Congress and OMB are to
ensure that resources are well spent and that capital acquisitions
reflect the government's highest priorities.  Because revolving fund
purchases need not be reviewed by the Congress or OMB, traditional
revolving funds may not be appropriate when competition for the
fund's services is lacking and when purchases are relatively
large-scale, sporadic, or heterogeneous.  Under these conditions, a
greater degree of oversight is warranted to ensure that the resources
accumulated in the fund are used where most needed governmentwide. 
Such assets might include buildings and courthouses acquired through
the FBF.  In contrast, revolving funds that compete with
private-sector service providers and that make relatively routine
purchases of small-scale, homogeneous assets such as vehicles, may
warrant relatively high degrees of autonomy because the external
factor of competition forces revolving fund managers to control their
costs and effectively allocate resources. 


--------------------
\9 For example, see Defense Business Operations Fund:  DOD Is
Experiencing Difficulty in Managing the Fund's Cash (GAO/AIMD-96-54,
April 10, 1996). 


   AN INVESTMENT COMPONENT
   ENCOURAGES SAVING FOR CAPITAL
   NEEDS
---------------------------------------------------------- Chapter 3:3

Another mechanism being used to ameliorate agency problems with
up-front funding requirements is USGS' creation of an investment
component within its working capital fund (WCF).  The investment
component is designed to encourage USGS managers to do better
long-range planning for equipment purchases and to enable them to
accumulate over time the resources they need to fund capital
up-front.  In this sense, the WCF investment component operates much
like a savings account for a manager at any level to fund capital
acquisition.  In contrast to a more traditional revolving fund, users
of the investment component make voluntary contributions for
prospective capital purchases, rather than being charged
retrospectively for capital usage.  The investment component is a
capital financing mechanism that could be useful for other agencies
as well.  However, expanded use must be accompanied by adequate
controls on agency and governmentwide investment component spending
to ensure that funds are used as intended and to prevent increases in
the deficit. 


      USGS USES AN INVESTMENT
      ACCOUNT TO ACCOMMODATE
      UP-FRONT FUNDING
-------------------------------------------------------- Chapter 3:3.1

USGS received authority from the Congress to expand its investment
component within its WCF to assist in funding laboratory operations,
facilities improvements, and replacement of scientific equipment
beginning in fiscal year 1995.  The investment component was proposed
by USGS in response to difficulties experienced in obtaining
appropriations for increasingly costly equipment.  Over time, USGS
had found that an increasing proportion of its annual appropriation
was dedicated to fixed operating expenses, such as salaries and rent,
with little left for funding long-term capital purchases. 
Furthermore, since USGS' appropriation was entirely one-year
money--expiring at the end of the fiscal year--the agency was not
able to accumulate unobligated balances over a number of years to use
for occasional, expensive purchases. 

To use the investment component, USGS managers at any level within
the organization develop and submit an investment plan, which must be
approved by a delegated authority within the respective division or
the agency as a whole.  The investment plan specifies the asset to be
acquired, the estimated acquisition or replacement cost, the number
of years required to fund the acquisition, and the schedule of
deposits into the fund (annually, quarterly, or monthly, for
example).  After the investment plan is approved, the division
periodically obligates the planned contribution amount from its
annual appropriations and pays it to the investment component of the
WCF, where it remains available for obligation.  Once in the
investment component, the contributions can be saved until a
sufficient sum--as specified in the investment plan--has been
accumulated to purchase the planned asset. 

The USGS has imposed internal restrictions on the fund to prevent
abuse of the authority.  For example, the contributions must be made
for at least 2 years prior to the purchase and may not be used for
the construction of buildings.  Once the plan is approved,
contributions to the investment component are held for the specified
purpose without fiscal year expiration. 


      INVESTMENT COMPONENTS OFFER
      OTHER ADVANTAGES AND
      LIMITATIONS
-------------------------------------------------------- Chapter 3:3.2

Although it has little history thus far, the WCF investment component
conceptually is a unique and useful way for individual agencies to
plan for and finance capital assets.  None of the officials we talked
with at USGS, OMB, or the House of Representatives Appropriations
Committee, Subcommittee on the Interior, were aware of any other
federal organizations using a similar financing mechanism. 
Nevertheless, the investment component has several benefits and may
be a useful tool for other agencies, especially those with annually
expiring funds.  First, it encourages agencies to use long-range
planning to alleviate the effects of up-front funding capital. 
Managers must anticipate the capital needs they will have in the
future and submit a plan that indicates specifically how they expect
to fund the asset need.  An investment plan requires the agency to
justify spending in advance of receiving the appropriations that will
fund contributions.  It also gives agencies an incentive to make
their own trade-offs between operations and capital and to strive for
savings in operations.  The investment component achieves this by
permitting agencies to set aside annual resources for future capital
purchases.  While agencies may have some incentive to look for
savings in operations even without an investment component, the
mechanism provides an impetus to make cuts in operations that may not
exist otherwise. 

A third advantage of the investment component is that it facilitates
agencies funding their highest priority asset needs.  When agencies
do not have sufficient annual resources to make a particular capital
purchase, they may be inclined to devote the resources to acquiring
other--possibly less critical but less expensive--capital assets
rather than see the funds expire at the close of the fiscal year. 
And finally, the investment component would contribute toward making
program and operating budgets better reflect their cost of capital
usage.  The investment component will not be as efficient or accurate
at allocating capital costs as a revolving fund since it lacks the
direct linkage between capital use and charges.  However, because
contributions are made from the operating budget, the mechanism does
help facilitate a more systematic incorporation of capital costs into
program expenses. 

Despite the potential benefits from investment components, problems
could arise if investment accounts were widely used throughout
government without adequate controls.  For example, if several
agencies obtain investment components and each decides to make large
purchases in the same year, total outlays could rise sharply and
cause a spike in the deficit.  Therefore, OMB will need to manage all
investment components to ensure that the total investment component
outlays do not cause such spikes, even though this may result in
deviations from the schedule specified in the agency's original
investment plan. 

Furthermore, if the Congress permits agencies to use such investment
components, it is giving them relatively more control than they
currently possess over the use of their appropriation.  Investment
component control issues are similar to those of revolving funds
(discussed previously in this chapter); thus the Congress would need
to have similar confidence in the financial management abilities of
agency officials before it permits the establishment of an investment
component.  Once established, managers should prepare and be held
accountable to investment plans to ensure investment component funds
are used as intended. 

The investment component concept is premised on program managers
being able to plan for fixed asset acquisitions by accumulating funds
over a period of years and applying them toward a future capital
need.  USGS officials felt that potential congressional actions to
re-allocate these funds, such as rescissions and reductions in future
appropriations, would create significant disincentives for managers
to contribute.  Likewise, these officials felt that program managers
would be less likely to contribute if top-level management used
contributions for purposes other than those in the investment plan. 

Though a promising tool, the investment component can have
limitations to its usefulness.  Agencies already faced with tight
operating budgets may have little to contribute to such an account
without making difficult trade-offs with operations, potentially
including personnel cuts.  Although increasing numbers of agencies
have been confronted with downsizing in recent years, some
appropriations subcommittee staff still question the willingness of
agencies to voluntarily trade-off personnel for capital assets. 
Furthermore, capital assets must still be budgeted for in advance of
any savings they may generate.  Capital acquisitions that could "pay
for themselves" over time still could not be funded without the
agency first carving out funds from elsewhere to pay for them.  In an
era in which agencies are already faced with budgets that require
significant cuts in operations, it is unknown how much willingness
may exist among agency heads to exact even deeper cuts in order to
fund capital. 


   AGENCIES CAN REDUCE THEIR NEED
   TO OWN ASSETS
---------------------------------------------------------- Chapter 3:4

Another way that case studies have dealt with the up-front funding
requirement is to take actions that reduce their need to own fixed
assets.  Two of these strategies include contracting out for goods
and services and cooperative arrangements to share assets.  For
example, officials from the Corps of Engineers have indicated that
some functions for which they formerly acquired capital assets--such
as producing crushed aggregate--can now be performed by the
commercial market at less expense.  It is likely that in other
agencies as well, government managers have found that increasing
specialization among contractors enables agencies to acquire some
capital-intensive services more cheaply externally than they can be
performed in-house.  Contracting out can be useful and cost-effective
when asset needs are short-term and non-recurring.  However, agencies
still incur expenses to monitor contractor performance, and
contracting out can be misused to by-pass budget scoring rules for
purchases.  When the latter occurs, the long-term cost of contracting
out can be higher than directly purchasing the asset. 

Where practical, USGS has entered into long-term cooperative
arrangements with universities and states to share the purchase and
use of capital assets that are not needed full-time.  Under such
arrangements, USGS uses the equipment as needed without bearing the
full costs of ownership.  Although this arrangement has little fiscal
drawback, USGS officials did indicate that some federal requirements
for physical tracking of the property are harder to comply with when
the assets do not reside at USGS facilities. 


   OPERATING LEASES OFFER
   FLEXIBILITY BUT CAN BE MORE
   COSTLY
---------------------------------------------------------- Chapter 3:5

Purchasing is only one of several ways in which agencies may acquire
capital assets.  Agencies may also use various forms of leases to
meet asset needs.  The three primary types of leases are operating
leases, capital leases, and lease-purchases.\10 Each represents a
different degree of risk and financial commitment borne by the
government and budget scoring rules are designed to reflect these
differences.  Operating leases offer agencies the greatest
flexibility with the least risk and financial commitment.  For
short-term needs, operating leases can be the most cost-effective
means of acquiring capital assets.  However, because of resource
constraints and more favorable budget scoring rules, some agencies
have substituted operating leases for more cost-effective means of
meeting long-term needs.  A refinement in the definition of operating
leases may be needed in order to assure consistent application of the
up-front funding requirement and better comparisons of financing
options. 


--------------------
\10 For the purposes of scoring leases in the budget, operating
leases and capital leases differ from lease-purchases in that the
ownership of the asset is not transferred to the lessee at the
conclusion of the operating or capital lease period.  Operating
leases are distinct in that they are generally for shorter-term needs
and all risks of ownership of the asset remain with the lessor. 


      AGENCIES USE OPERATING
      LEASES BECAUSE OF LOWER
      UP-FRONT COST
-------------------------------------------------------- Chapter 3:5.1

Analyses have shown that ownership of capital assets is generally the
most cost-effective method for meeting long-term capital needs.\11
However, differences in budget scoring can sometimes affect an
agency's selection of an acquisition method.  Budget authority and
outlays for purchases and lease-purchases where the government
assumes substantially all risk, must be scored up-front, regardless
of when the actual outlays occur.  Budget authority for capital
leases is scored up-front with outlays scored over the lease period. 
These scoring conventions were adopted to recognize the full extent
of the government's commitment and to facilitate comparisons of the
long-term cost of the various financing methods.  Operating leases,
in contrast, are intended primarily to meet short-term capital needs. 
Budget authority and outlays for operating leases are scored over the
lease period in an amount equal to the annual lease payments. 
Because of these budget scoring conventions, however, a long-term
operating lease will require considerably less budget authority
during the initial years than would a capital lease or a
lease-purchase of the same duration.  This difference in up-front
cost, coupled with resource constraints, has led some agencies to use
operating leases to meet long-term needs--even though the long-term
cost of such leases is projected to be higher. 

Officials at PBS indicated that their organization has frequently
used operating leases to acquire office space when budget resources
were inadequate for purchases.  PBS officials have been faced with
customer demands for long-term office space that exceed that which
PBS can purchase given its available budget resources.  As a result,
PBS has entered into operating leases in order to meet agency demands
for space.  Although such leases could be used as an interim measure
until such time that a purchase is possible, in many cases the leases
have become a more expensive, long-term solution to agency space
needs. 

IFMS officials indicated that they have also used operating leases in
lieu of purchases when budget resources were insufficient.  IFMS'
take-over of the management of the Department of Defense's (DOD)
fleet of vehicles placed additional demands on the resources of the
IFMS.  IFMS determined that sufficient resources were not available
to fund replacement of the DOD vehicles and so turned to operating
leases as a means to acquire new, more cost-effective vehicles for
DOD until funds could be accumulated in the revolving fund for
purchases.  IFMS officials believe that vehicle purchases would have
been more cost-effective but that leases were needed to meet
immediate customer needs when budget resources were not available. 

Some case studies did not consider operating leases to be a viable
alternative to ownership because the assets they acquire tend to be
somewhat specialized.  To the extent that the commercial market for
the asset is small, it is less likely that leasing will be feasible. 
For example, Coast Guard and USGS officials said that leasing ships
and some scientific equipment, respectively, were not viable options
for meeting their capital needs.  These officials generally indicated
that purchases are the most cost-effective method of acquiring
capital assets for their organizations. 


--------------------
\11 See for example Federal Office Space:  Increased Ownership Would
Result in Significant Savings (GAO/GGD-90-11, December 22, 1989). 


      BUDGET SCORING OF LONG-TERM
      LEASES SHOULD REFLECT THEIR
      TOTAL COST
-------------------------------------------------------- Chapter 3:5.2

Operating leases can provide an important measure of flexibility to
agencies to meet short-term capital needs without incurring the cost
and long-term obligation of ownership.  For federal office buildings,
factors such as governmentwide downsizing, changing conditions in the
real estate market, and uncertainty about agency missions all make
operating leases a valuable tool for the federal government to manage
its asset requirements in the face of uncertainty.  PBS has
maintained that part of its portfolio should be in the form of leased
space in order to preserve a degree of flexibility to respond to
changing needs.  It is important that operating leases have a
budgetary treatment that allows them to be available to meet genuine
short-term needs.  However, deficiencies in the current budget
scoring rules have resulted in an over-reliance on operating leases
and need to be rectified.  Previously, we have noted that applying
the principle of up-front full recognition of the long-term costs to
all options for satisfying long-term space needs--purchases,
lease-purchases, or operating leases--is more likely to result in
selecting the most cost-effective alternative than applying the
current scoring rules.\12

Operating leases were not intended to be used as a substitute for
ownership.  When operating leases are used to meet long-term needs,
the total cost of the project decision--spread over many years as
lease payments--is understated in the first-year's budget.  When
operating leases are used to avoid up-front budget scoring, the
agency may be using a financing method that is more costly in the
long-run.  Ideally, budget scoring should be neutral in its effect on
decision-making.  However, current scoring rules are driving some
decisions to use operating leases.  For space acquisition, neutrality
would be better accomplished by recording in the budget the long-term
cost of space regardless of the type of financing.\13 If this is
done, the agency's decision-making about which financing option is
used would be driven by what makes the most sense economically and
programmatically, not by what scores most favorably in the budget. 

PBS officials have suggested that there would be less need to use
more expensive operating leases if budget authority for
lease-purchases was still scored over the term of the lease, as it
was prior to BEA.  However, the change in scoring for lease-purchases
was necessary to recognize the full commitment of the government and
to ensure compliance with the requirement of up-front funding.  The
budget now recognizes the higher cost typically associated with
lease-purchases compared to direct purchases.  Officials at OMB
stated that some operating leases currently in use for long-term
needs are really more like capital leases because the buildings have
been or will likely be leased for the bulk of the asset's life.  They
indicated that such leases ought to have budget authority scored
up-front.  Although it may be difficult for policy makers to know for
certain when a capital need will be long-term, some OMB officials
believe that a tightening of the definition of an operating lease is
warranted to ensure that the budget process leads to better economic
decisions. 


--------------------
\12 Budget Issues:  Budget Scorekeeping for Acquisition of Federal
Buildings (GAO/T-AIMD-94-189, September 20, 1994). 

\13 For additional discussion of the need for this scoring change and
the challenges in implementing it, see Budget Issues:  Budget
Scorekeeping for Acquisition of Federal Buildings (GAO/T-AIMD-94-189,
September 20, 1994). 


   CASE STUDIES SEEK ADDITIONAL
   TOOLS FOR RESPONDING TO
   UP-FRONT FUNDING
---------------------------------------------------------- Chapter 3:6

Officials at some case study organizations indicated that they would
be able to better meet their capital needs and the requirements of
up-front funding if they had additional financing tools available. 
IFMS officials, for example, believe that authority to borrow from
the Treasury against the value of the fleet would help them manage
resources more efficiently.  Similarly, PBS officials desired
authority to borrow against future rental income to finance space
acquisition.  On the other hand, legislation has been enacted that
would allow the Coast Guard to offer loan guarantees and to enter
into limited partnerships with nongovernmental entities in order to
finance construction of employee housing without bearing the full
cost up-front.\14 Officials at OMB and the appropriations
subcommittee staffs expressed concern that allowing agencies to
borrow against their assets would pose a threat to governmentwide
fiscal control by permitting agencies to create budget authority
without receiving appropriations.  These officials had mixed opinions
about the Coast Guard's loan guarantee and limited partnership
proposals and believe that further information would be needed to
evaluate their soundness.  We agree with their conclusions. 


--------------------
\14 P.L.  104-324, enacted October 19, 1996. 


      BORROWING AUTHORITY IS
      SOUGHT BY IFMS AND PBS
-------------------------------------------------------- Chapter 3:6.1

An IFMS official stated that current budget rules do not lend
themselves to the efficient financial management of business-oriented
revolving funds, and that IFMS would like to manage its revolving
fund on a "balance-sheet basis" instead.  The official stated that
limiting the revolving fund's obligations to those that can be made
with the unobligated balances of its budget authority constrains
capital spending when balance sheet analysis would suggest that the
fund possesses highly liquid resources that could be made available
to fund capital acquisition.  Managing on a balance sheet basis means
that budgetary resources would be re-defined to include the book
value of vehicles.  Allowing IFMS to manage on a balance sheet basis
would be comparable to giving it a line of credit or authority to
borrow from the Treasury.  This would enable IFMS to purchase
vehicles when expanding the fleet, rather than using more costly
operating leases.  The IFMS official indicated that, in general,
authority to borrow would enable them to hold lower cash balances and
to manage the fleet in ways that more closely parallel those of
private-sector rental car companies. 

PBS would also like to use borrowing authority to fund capital
assets.  One PBS official noted that although PBS is often compared
with private-sector real estate providers, PBS lacks the financing
tools the private sector uses to manage efficiently.  For example,
private-sector real estate companies can borrow against the value of
their long-term leases, but PBS cannot.  If PBS could borrow from the
Treasury to finance a purchase, PBS officials believe that budgetary
resources spent on operating leases could instead be used to repay
the mortgage--and at less cost to the government in the long-run. 
PBS has found that lease-purchases can be more cost-effective in the
long-term than operating leases and had used them prior to BEA to
finance asset acquisition over time.  Borrowing from the Treasury
would enable PBS to do the same but at lower cost. 

Permitting agencies to borrow against the value of their assets is,
in effect, allowing them to create budget authority, thus diminishing
congressional control and oversight.  Officials at OMB and
appropriations committee staffs felt that such a practice would
inhibit control of total federal expenditures and increase government
borrowing.  Officials also expressed concern about the consequences
if an agency were unable to repay a loan from rental collections and
was forced to sell agency assets to make repayments.  While the sale
of a vehicle raised less concern than the sale of a building,
officials felt that regardless of the asset in question, the practice
would be difficult to control.  The Congress could also be forced
into making an appropriation in order to compensate for the shortfall
in income. 

With regard to PBS specifically, OMB examiners felt that the
resources going into the FBF were adequate to meet PBS' needs--given
government downsizing and the moratorium on new office space
construction.  They indicated that if there are needs that cannot be
met with the available resources--possibly courthouse
construction--the agency should request an appropriation, and that
request should compete with other budgetary options.  If PBS' request
is not funded, it reflects the fact that OMB and the Congress have
established higher priorities elsewhere.  Borrowing authority should
not be used to circumvent the appropriations process.  While PBS,
unlike the private sector, may not borrow against the value of its
assets, it does receive financing through appropriations.  An
appropriation would be viewed as a gift in the private sector since
it does not have to be repaid nor is it required to produce returns
to investors. 


      THE COAST GUARD RECEIVED
      AUTHORITY FOR EQUITY
      PARTNERSHIPS AND LOAN
      GUARANTEES
-------------------------------------------------------- Chapter 3:6.2

Recently enacted legislations gives the Coast Guard authority to
enter into certain financial arrangements with private-sector
developers.\15 This authority, modeled after similar legislation
enacted for DOD,\16 provides a variety of tools for the Coast Guard
to draw upon.  These new tools include authority to enter into
limited partnerships and to offer loan guarantees.  Each of these
could be used as an inducement for private developers to construct
housing in remote locations.  By underwriting the cost to the
developer, Coast Guard officials believe that housing can be obtained
for considerably less than if the Coast Guard were to build it
directly. 

Under the equity partnership arrangement, the Coast Guard would pay
up to one-third of the cost rather than the full cost of
construction.\17 An early DOD's proposal implied that under this
arrangement the developer would receive no rental guarantees but
would recoup its investment through rent paid by employees and
members of the general public who use the facilities.  The government
would also be repaid its investment through rental charges.  Under
the loan guarantee program, the Coast Guard would guarantee loans
made to a developer if the proceeds are used to acquire or construct
certain Coast Guard housing.  Coast Guard officials believe that
guarantees could be necessary because of the perceived risk by
lenders that the Coast Guard will not be in an area long enough for
the developer's loan to be repaid.  Under both of these methods,
Coast Guard officials believe they also save by having private
developers provide the housing and avoiding expenses that would be
incurred complying with construction regulations for federal
projects. 

OMB analyzed the scoring implications of the original DOD proposal in
May 1995.  This analysis suggested that with equity partnerships,
only the government's equity investment would be scored up-front.  It
also suggested that only the subsidy cost of the loan guarantee
program would be scored up-front.  However, more recent discussion
with OMB officials has raised questions about whether such
arrangements resemble capital leases, and therefore whether a
different scoring would apply.  An OMB official also suggested that
because Coast Guard housing is often in more remote areas than DOD's,
the authority may be less suitable for the Coast Guard than it is for
DOD.  Where the Coast Guard is virtually the only user of the
property, the arrangement more closely parallels a capital lease than
an operating lease.  This is because there is no private-sector
market for the housing and the Coast Guard is providing financing
mechanisms that presume it will occupy the housing for more than 75
percent of its economic life.  Both of these are key features of a
capital lease.  It is clear that more detail would need to be
available about any specific agreements before a definitive
conclusion can be drawn about the appropriate scoring of these
proposals or their economic value to the government. 


--------------------
\15 P.L.  104-324, enacted October 19, 1996. 

\16 P.L.  104-106, enacted February 10, 1996. 

\17 If land or facilities are conveyed as part of the project, the
Coast Guard's total investment may not exceed 45 percent of the
project's cost. 


CERTAIN MECHANISMS ENABLED CASE
STUDIES TO DEAL WITH OTHER CAPITAL
SPENDING IMPEDIMENTS
============================================================ Chapter 4

In addition to up-front funding, case studies found other features of
the budget process and their accounts impaired their ability to
acquire capital.  Uncertainty over future missions and funding
levels, account features that affect trade-offs between operating and
capital needs, and constraints on the use of proceeds from asset
sales may be impediments from an agency's perspective.  However, the
Congress needs flexibility to ensure that the government's overall
spending decisions reflect the nation's current priorities.  Our case
studies illustrate that a variety of strategies are available to
mitigate impediments for agencies without diminishing opportunities
for congressional oversight or flexibility to change funding levels. 


   CASE STUDIES FIND VARIOUS TOOLS
   USEFUL FOR MANAGING CHANGES IN
   MISSIONS AND FUNDING LEVELS
---------------------------------------------------------- Chapter 4:1

The Congress and the administration must continually assert control
over agency planning and funding decisions to ensure that the
nation's priorities are met.  Changes in missions and funding
uncertainty are inevitable and justifiable if the Congress is to
respond to the nation's priorities.  However, such changes make
planning and conducting cost-effective capital acquisitions more
difficult for case study managers.  Our case studies used mechanisms
discussed previously, such as revolving funds and budgeting for
stand-alone stages, as well as reprogramming authority, to respond to
changes in their political and fiscal environments while preserving
Congress' ability to direct such changes and oversee agency
responses. 


      CHANGES IN MISSIONS AND
      FUNDING UNCERTAINTY CAN
      HAMPER CAPITAL PLANNING
-------------------------------------------------------- Chapter 4:1.1

The Congress cannot guarantee steady annual funding streams (beyond
that provided for stand-alone stages) if it is to be responsive to
changing priorities and resource levels, but the prospect of mission
or funding changes can increase the difficulty associated with
planning and managing multiyear or risky capital purchases.  For
example, the Corps can successfully plan cost-effective construction
projects only by assuming future funding levels.  However, if planned
funding fails to materialize, the Corps may have to deviate from
these plans, and the project may become more expensive than
estimated. 

Uncertainty over future responsibilities and funding can affect less
expensive capital acquisitions with shorter completion times too. 
For instance, USGS officials speculated that managers may not feel
comfortable committing to future WCF contributions for equipment
purchases when they cannot predict how much of their future budgets
these contributions will absorb.  USGS officials also suggested that
managers may be reluctant to contribute to the WCF if they believe
the Secretary of the Interior might use contributions to meet other
priorities. 

Funding delays or shortfalls can also affect agencies' abilities to
design effective and efficient fixed asset procurement.  Although
such delays may be warranted by the emergence of higher priorities,
the cost of the postponed project is likely to increase.  For
example, the Coast Guard structures its acquisition strategies to
assure contractors of minimum levels of production that will keep
costs low.  In their response to OMB Bulletin 94-08, Coast Guard
officials wrote that funding that is insufficient to support
acquisition strategies or rescissions can cause contractor shut-downs
and make designs obsolete, adding to projected costs.  For example,
the response says that, when acquiring the HH-60 helicopter, the
Coast Guard paid a premium of $1 million to $2 million per aircraft
because funding was not provided to purchase a number of aircraft
that would enable the contractor's production line to operate
efficiently.  FDA officials said they have been reluctant to fund
repairs and maintenance on some current work space because of the
agency's planned consolidation into fewer locations.  They also
stated that FDA will incur expensive repairs if the existing space
continues to be used. 


      SOME TOOLS BALANCE AGENCY
      FLEXIBILITY WITH
      CONGRESSIONAL CONTROL
-------------------------------------------------------- Chapter 4:1.2

As noted previously, revolving funds can provide a steady and secure
stream of funding and encourage long-term planning for capital
acquisitions while allowing opportunity for some congressional
oversight.  For example, by recovering depreciation and an inflation
increment from users over an asset's useful life, the Corps'
revolving fund helps ensure that funds will be available to replace
the asset when needed and that program budgets absorb the cost of
capital.  Consequently, managers must plan what and when acquisitions
will be made in order to maintain a self-sustaining revolving fund. 
However, the Corps' appropriations subcommittees exercise oversight
responsibilities by approving every revolving-fund, fixed-asset
acquisition of $700,000 or more and implicitly approving all
acquisitions through an annual target on revolving fund obligations
for capital assets. 

When agencies experience changes in mission or funding needs,
reprogramming\1 can be used to move funds between projects.  Because
funds are appropriated for specific purposes, the Congress wants to
know when substantial deviations from the intended use of funds are
made or when needs no longer exist.  Therefore, the Congress may
place limits on the amount of reprogramming that can be done without
its prior approval.  In certain situations, these limits may be
necessary if the Congress is to provide effective oversight. 

Reprogramming can be an effective management tool if used as intended
by the Congress.  Reprogramming authority allows funds to flow to new
priorities or can help complete projects when actual costs exceed
original estimates.  For example, the Corps revolving fund has used
reprogramming authority to accommodate fluctuations between
anticipated and actual bids of contractors on fixed asset
acquisitions.  Up to 10 percent of the funds within the Corps' fixed
asset categories can be diverted from one acquisition to another
without prior approval by the Corps' appropriations subcommittees. 
When reprogramming requires the subcommittees' approval, informal
relationships between Corps officials and congressional staff help
the Corps receive a quick response to reprogramming requests.  The
Coast Guard has also taken advantage of reprogramming authority to
respond to variances between estimated and actual costs for
construction projects.  Nevertheless, Coast Guard officials feel they
are constrained in addressing some new and changing priorities
because of limits on their reprogramming authority.  (The Coast Guard
needs its appropriations subcommittees' approval to reprogram more
than the lesser of $1 million or 15 percent of the total amount
appropriated for a project and cannot reprogram between categories of
appropriations in the Acquisition, Construction, and Improvements
account (AC&I).) Officials at Coast Guard and NOAA expressed concern
about the time involved in seeking reprogramming authority.  Some of
the time involved in reprogramming is due to obtaining approval
within the agency, and it is unclear to what extent agencies inhibit
use of reprogramming by designing cumbersome, internal procedures for
requesting the authority. 

Agencies can also attempt to manage funding uncertainty by dividing
multiyear capital projects into stand-alone stages that can be
acquired and budgeted for separately.  For example, Coast Guard
acquisitions are sometimes structured as a base-year contract for a
limited quantity of items with options to buy between a minimum and
maximum quantity in future years.  This structure permits the
contractor to produce economically while acknowledging the inherent
uncertainty of future funding levels.  This acquisition strategy does
not ensure that multiyear acquisitions will be completed as planned
but attempts to balance agency desires for certainty with the
Congress' responsibility to allocate resources in a changing
environment.  With this strategy, the Congress indicates an initial
agreement to the total purchase but still has the prerogative to fund
less than the minimum quantity. 


--------------------
\1 Reprogramming is the shifting of funds from one object or program
to another within an appropriation or fund account for purposes other
than those contemplated at the time of appropriation.  As a matter of
law, an agency is free to reprogram unobligated funds as long as the
expenditures are within the general purpose of the appropriation and
are not in violation of any other specific limitation or otherwise
prohibited.  While there are no governmentwide reprogramming
guidelines, the Congress exercises control over an agency's spending
flexibility by providing guidelines or nonstatutory instructions on
its authority to reprogram. 


   ACCOUNT FEATURES AFFECT HOW
   TRADE-OFFS BETWEEN CAPITAL AND
   OTHER EXPENDITURES ARE MADE
---------------------------------------------------------- Chapter 4:2

Various features of an account--its congressional and executive
review structures, its purpose, and the period for which its funds
are available--can affect an agency's ability to justify and make
effective capital purchases.  Each can influence how lawmakers view
the trade-offs between types of capital spending or between capital
and operations spending.  Where certain account features seemed to
discourage what case studies perceived to be prudent capital
decisions, case studies sought other features, such as longer periods
of funding availability and separate appropriations accounts for
capital.  Although certain account features may facilitate justifying
or executing fixed asset purchases, case study officials stated that
some types of asset purchases tend to be more difficult to support
regardless of an account's features.  As a result, case studies have
developed strategies unrelated to account features, such as more
comprehensive budget justifications, to better explain capital needs. 


      CONGRESSIONAL AND EXECUTIVE
      REVIEW STRUCTURES MAY AFFECT
      CONSIDERATION OF CAPITAL
      EXPENDITURES
-------------------------------------------------------- Chapter 4:2.1

Congressional committee jurisdictions and executive organizational
budget review structures have developed over time to fulfill a
variety of needs and purposes.  When these are different, a
competitive conflict could arise.  For example, FDA faces two
different sets of competitors in the budget process.  OMB includes
FDA's budget within the spending cap applied to FDA's parent agency,
the Department of Health and Human Services (HHS), even though FDA is
not funded by the same appropriations subcommittee as HHS.  As a
result, during the administration's budget formulation, FDA competes
against other HHS programs which are not reviewed by FDA's
appropriations subcommittee.  The difference in executive and
congressional review structures might result in a proposed capital
project being eliminated under one set of competitors when it might
have survived amongst another set. 


      PURPOSE OF ACCOUNT AFFECTS
      JUSTIFICATION OF CAPITAL
      EXPENDITURES
-------------------------------------------------------- Chapter 4:2.2

Some capital expenditures can be more difficult to justify when
funded from an account whose primary purpose differs from that of the
capital spending request, such as a salaries and expense account that
funds mostly operational expenditures.  Most capital spending across
the government occurs from accounts whose primary purpose is to fund
capital assets.  However, where dual-purpose accounts exist, they can
distort the cost of capital in the budget year relative to other
expenditures or affect perceptions of the capital spending's
acceptability.  Dual-purpose accounts can also result in operating
expenditures obscuring capital needs in some instances. 


         DISTORTIONS IN THE COST
         OF CAPITAL
------------------------------------------------------ Chapter 4:2.2.1

Capital projects funded in accounts comprised largely of operating
activities may seem more expensive than capital projects funded in
other types of accounts in the budget year.  This occurs because,
when scoring outlays, accounts that contain mostly salaries and
operating expenses have a first-year spend-out rate\2 closer to 100
percent when capital expenditures have historically been a relatively
small or sporadic component of the account's spending.  Conversely,
accounts that have traditionally funded mostly capital expenditures
receive a low, first-year spend-out rate that reflects the typical
multiyear pattern of construction cash flows.  For example, the Coast
Guard's Operating Expenses account has a first-year spend-out rate of
80 percent; the AC&I account has a first-year spend-out rate of 17
percent.  When outlay constraints are tight and capital is a
relatively small or nonrecurring expense, capital expenditures funded
in operating accounts may yield higher first-year outlay estimates
than capital expenditures in capital accounts and, therefore, may be
less likely to be funded. 

On the other hand, the use of predominantly capital accounts with
lower first-year spend-out rates can protect new construction when
budgetary cuts are being made.  A new $100 million construction
project makes fewer outlays in the first-year, and thus can produce
fewer outlay savings in that year, than a $100 million operating
account.  Therefore, a much larger amount of new construction budget
authority would have to be cut to achieve a given amount of outlay
savings than if operating funds were cut.  Accordingly, when outlay
savings are needed, capital accounts may have an advantage over
operating accounts. 

Spend-out rates may also potentially affect the trade-offs between
different types of capital expenditure when they are funded out of
the same accounts but outlay at different rates.  For example, PBS
funds all capital expenditures from the same account, but each type
of expenditure has a different outlay rate.  Purchases of existing
buildings have a 100 percent first-year outlay rate, repairs and
alterations have a 20 percent rate, and new construction a 3 percent
rate.  The remaining outlays for repairs, alterations, and
construction will be scored in subsequent years.  While many factors,
including future years' outlays, affect how capital is acquired,
outlay scoring would appear to make new construction considerably
more attractive than buying an existing building.  Though market
conditions may make the purchase of existing buildings more
economical than constructing new ones, the outlays of the former will
be higher in the budget year.  Likewise, repairs and alterations can
initially appear more expensive than new construction.  Extensive
budget justifications showing the most effective use of capital are
particularly important in such cases. 


--------------------
\2 A spend-out or outlay rate is the ratio of outlays resulting from
new budgetary resources to the new budgetary resources in a given
fiscal year. 


         PERCEPTIONS OF
         ACCEPTABILITY
------------------------------------------------------ Chapter 4:2.2.2

The purpose of the account may also affect perceptions of the
acceptability of capital expenditures.  A congressional staff member
explained that recent Treasury secretaries may have been reluctant to
request funding to repair the Treasury building.  The staff member
opined that because such repairs would traditionally be funded from
the Office of the Secretary's discretionary budget account, the
secretaries may have believed they would be criticized for increasing
their office budgets.  To make the purpose of the funding more
readily apparent and to achieve a lower first-year spend-out rate for
the repairs, the subcommittee created a separate account for Treasury
repairs and maintenance in Treasury's fiscal year 1996 appropriations
act.  Separate repairs and maintenance accounts were also created for
the White House and the National Archives. 


         OBSCURED CAPITAL NEEDS
------------------------------------------------------ Chapter 4:2.2.3

Placing operating and capital expenses in a single account may help
simplify oversight and can encourage agencies to take the initiative
in making trade-offs between capital and operating expenditures. 
However, such dual-purpose accounts can hinder agencies' capital
requests when operating expenses are large enough to obscure capital
needs.  For example, USGS justifies the budget for its Surveys,
Investigations, and Research account by program.  Program line items
generally represent USGS activities, such as water resources
investigations, rather than the types of items USGS would like to
fund, such as fixed assets.  USGS officials believe this budget
structure hides the increasing cost of scientific equipment by
combining these expenditures with large program operating costs. 

Although combining capital and operating expenses in one account may
hide some capital needs, agencies have other means to illuminate
them.  Budget justifications can be used to highlight capital needs
and costs of alternatives if capital is not visible in the account
structure.  To help emphasize capital needs, USGS created a separate
"digital mapping" modernization line item in its budget
justification.  In another instance, USGS explained to the Congress
that leasing a mainframe computer would cost over 20 percent more
than purchasing. 

Other case study officials feel separate capital accounts are needed
to protect or raise the visibility of capital.  The Coast Guard
stated that its dedicated capital account has helped mitigate a
crowding out of fixed asset acquisitions and has focused attention on
capital.  OMB proposed that PBS' construction and acquisitions be
placed in an account separate from the FBF to highlight the magnitude
of these needs and to prevent them from crowding out repairs and
alterations. 

However, a separate appropriations account for agency capital may
inhibit collection and knowledge of the total costs of each of an
agency's programs.  If capital appropriations are not charged back to
managers' budgets, capital may seem inexpensive and, thus, be used
inefficiently.  Segregating capital into a separate appropriation
account may also discourage trade-offs between related capital and
operating spending.  However, such trade-offs can be promoted by the
use of separate revolving funds for capital assets.  Rather than
relying on appropriations, revolving funds charge program managers
for their use of capital assets, as discussed in chapter 3. 


      LENGTH OF FUND AVAILABILITY
      AFFECTS AGENCIES' ABILITY TO
      MAKE CAPITAL ACQUISITIONS
-------------------------------------------------------- Chapter 4:2.3

Some agencies are able to justify acquisitions but may have
difficulty executing them when funds expire before projects can be
completed.  Multiyear and no-year funding help agencies accommodate
capital's longer acquisition cycle.  For example, Coast Guard and
Corps construction projects generally need multiyear appropriations
because their acquisition cycles can last several years.  No-year
funding is commonly provided through revolving funds.  Through
charges to users, revolving funds convert annual or multiyear
appropriations into no-year funding that an agency can accumulate for
large-scale acquisitions.  All of our case studies had the
opportunity to fund capital through multiyear appropriations or a
revolving fund.  However, even with multiyear funding, the period of
availability may not always be appropriate.  For example, the
Congress and the Coast Guard have had difficulty agreeing on the
period of fund availability that is long enough to complete the
agency's projects and short enough to discourage delays. 

The Congress has been fine-tuning the Coast Guard's fund availability
over the last several years.  For fiscal year 1992, the Congress
shortened the availability of shore, other equipment, and aircraft
funds from 5 to 3 years to encourage quicker completion of projects. 
The House of Representatives Committee on Appropriations,
Subcommittee on Transportation, reasoned that Coast Guard's funding
availability should be patterned after an agency that makes similar
acquisitions, DOD, especially since DOD's acquisitions are generally
more complex.  However, on some occasions in the past, Coast Guard
officials have found it difficult to obligate funding for shore
facilities within 3 years.  Because shore projects are sometimes
linked to vessel projects which have 5-year availability, vessel
design changes could delay the obligation of shore funds.  If a
vessel project were delayed too long, funding for completion of the
related shore facility could expire.  In cases where the timing of
one project affects another, it is important for the affected agency
to work with its appropriations subcommittee to ensure that funds are
available during the period needed. 

In addition, agencies with one-year appropriations cannot annually
set aside and accumulate funds needed to make expensive fixed asset
acquisitions.  Prior to creating a WCF investment component, USGS had
to fund all capital acquisitions with annually expiring
appropriations.  USGS had no ability to spread the cost of an
expensive purchase over a number of years by saving some funds each
year.  Without a significant increase in appropriations, only
relatively inexpensive purchases could be made. 

The Congress can maintain control over no- and multiyear funding
through a variety of means.  For example, the Congress encourages
timely completion of projects and exercises control over the Coast
Guard's multiyear appropriations by requiring quarterly reports of
progress on major acquisitions and by sometimes limiting funding of
projects to stand-alone stages.  Recent legislation may also help the
Congress oversee the use of no- and multiyear funding governmentwide. 
The Federal Acquisition Streamlining Act requires that executive
agency heads (1) set cost, performance, and schedule goals for major
acquisition programs, (2) monitor the programs to ensure they are
achieving, on average 90 percent of the established goals, and (3)
take corrective actions, including termination, on programs that do
not remain within the permitted tolerances.  FASA also requires OMB
to report to the Congress on agencies' progress in meeting these
cost, schedule, and performance goals. 


      AGENCIES BELIEVE SOME
      CAPITAL EXPENDITURES ARE
      INHERENTLY MORE DIFFICULT TO
      JUSTIFY
-------------------------------------------------------- Chapter 4:2.4

Regardless of any account features that affect capital--congressional
or executive review structures, purpose, or period of
availability--case study officials felt capital expenditures with
less visible benefits are inherently more difficult to justify. 
Explaining the costs and benefits of less tangible assets is
difficult, and the Congress may have more difficulty understanding
the explanation.  The Coast Guard and NOAA indicated that needs for
visible, safety-related assets are easier to articulate than needs
for information technology or research projects.  Congressional staff
generally agreed but noted that agencies sometimes poorly explain the
need for information technology.  Congressional staff acknowledged
that spending for assets with visible and tangible benefits, such as
new construction, may be favored over less visible assets, such as
major modernization or repairs.  However, some staff also perceived
agencies as being unwilling to cut personnel costs to free funds for
capital in general. 

Agency problems in justifying assets with administrative or
intangible benefits emphasize the importance of adequate budget
support for all capital asset acquisitions.  Such support should
include risk and cost-benefit analyses of alternative acquisition
methods and show scenarios of long-run spending under various
operating and capital spending levels.  Inherently risky or
intangible assets may require the agency to provide additional
documentation or presentations to their appropriations subcommittees. 


   ASSET SALES QUESTIONS PIT
   MANAGERIAL AUTONOMY AGAINST
   CONGRESSIONAL CONTROL
---------------------------------------------------------- Chapter 4:3

Agencies and the Congress tend to take different sides on the
question of whether agencies should retain proceeds from the sale of
their assets.  Officials at our case studies feel the ability to keep
proceeds can provide the incentive needed to dispose of properties
that are no longer needed or costly to maintain.  Therefore, they
would like to reinvest disposal proceeds in maintenance or
acquisition of new assets.  Some in the Congress are concerned that
agencies might use asset sales as a means of skirting the
appropriations process.  Despite these concerns, the Congress allows
some agencies, especially those with revolving funds, to retain asset
sale proceeds.  Our case studies illustrate that allowing agencies to
retain disposal proceeds may be warranted under limited
circumstances. 


      THE CONGRESS DETERMINES
      WHETHER AGENCIES CAN RETAIN
      PROCEEDS FROM ASSET SALES
-------------------------------------------------------- Chapter 4:3.1

The Congress has selectively determined which organizations or funds
can keep disposal proceeds.  Some revolving funds, such as those of
the Corps and IFMS, are permitted to retain asset sale proceeds; but
some, such as that of PBS, are not.  Where assets have been acquired
through appropriations, such as at the Coast Guard, agencies have
usually not been permitted to keep sales proceeds.  Whether they have
revolving funds or receive appropriations, our case studies cite the
inability to retain disposal proceeds as an impediment to capital
acquisition and a disincentive for asset disposal. 

PBS officials cite the inability to obtain and keep proceeds from the
sale of GSA properties as one factor that keeps the FBF from being
self-sufficient.  Any proceeds from asset sales must be deposited
into a land and water conservation fund.\3 PBS officials indicated
that this can create a disincentive to dispose of less cost-effective
properties.  The other revolving funds operated by our case studies
can retain disposal proceeds and have fewer restrictions on disposal
of assets.  Although the Corps considers disposal proceeds a minor
source of funding, IFMS relies heavily upon proceeds from the sale of
vehicles to sustain operations and keep rates competitive with the
private sector. 

Similarly, Coast Guard officials were supportive of recently enacted
legislation that allows the agency to keep proceeds from the sale of
housing and reinvest them in maintenance or new housing.  Coast Guard
officials say the agency's employees have difficulty finding
affordable, local housing to rent in remote or resort areas and,
therefore, the Coast Guard often needs to construct housing for them. 
The Coast Guard would like to be able to enhance its ability to meet
new construction and repair needs by disposing of less important or
less cost-effective properties and investing the proceeds in higher
priority areas.  Currently, the Coast Guard generally cannot dispose
of one property in order to invest in another unless specifically
provided by law.\4 When housing property has been disposed of,
proceeds have been returned to the Treasury. 

Recently enacted legislation\5 establishes a Housing Improvement Fund
for the Coast Guard.  Appropriations and proceeds from the sale or
lease of Coast Guard property or facilities would be deposited into
the fund.  The Coast Guard would be authorized to use the fund for
acquiring housing to the extent provided in appropriations acts.  If
the Coast Guard is expected to maintain a constant level of housing,
this authority appears appropriate because the Congress retains
control and oversight, and proceeds can be used to reduce future
appropriations requests. 


--------------------
\3 The same law also prevents PBS from retaining income from leases
to non-federal entities. 

\4 The Congress has occasionally allowed agencies to credit asset
sales proceeds toward their appropriations.  For example, the fiscal
year 1997 Transportation Appropriations Act permitted the Coast Guard
to retain proceeds from surplus real property sales during the year,
although it did not designate specifically how the proceeds would be
used.  This Act also authorized the Coast Guard to retain proceeds
from the sale of certain aircraft and use the proceeds to acquire new
aircraft and increase aviation capacity. 

\5 P.L.  104-324, enacted October 19, 1996. 


      CIRCUMSTANCES MAY JUSTIFY
      SOME AGENCIES RETAINING
      PROCEEDS
-------------------------------------------------------- Chapter 4:3.2

The Congress permits most agencies with revolving funds to keep
proceeds from the disposal of assets but generally does not allow
agencies that finance capital from appropriations to retain disposal
proceeds.  This dichotomy occurs because revolving funds are
established for the business-type activities of the federal
government and must retain some business-like tools if they are to be
self-sustaining.  Prohibiting a revolving fund from retaining
disposal proceeds may impede the fund's ability to cover all of its
costs and encourage fund managers to seek additional sources of
financing, such as appropriations or increased user charges.  In
contrast, agencies that acquire capital with appropriated funds do
not retain disposal proceeds under most circumstances because they
are expected to request appropriations for regular maintenance and
replacement of assets. 

Under some conditions, revolving funds may not need to retain
proceeds from the sale of assets.  If a fund no longer needs to
replace some assets, because of agency downsizing, for example, the
proceeds may be more appropriately returned to the Treasury to reduce
federal borrowing or to fund other needs instead of being spent by
the fund.  If the proceeds are relatively large, the Congress may
wish to weigh the needs of the fund with the needs of other
activities that could benefit from additional funding. 


OMB'S EFFORT TO IMPROVE PLANNING
AND BUDGETING FOR FIXED ASSETS
============================================================ Chapter 5

In July 1994, OMB began an effort to identify issues related to
planning and budgeting for fixed assets.  This effort was spurred, in
part, by National Performance Review (NPR) recommendations aimed at
improving fixed-asset planning and budgeting.\1 OMB requested
information regarding agencies' fixed-asset needs and concerns and
used that information to assess governmentwide and agency-specific
planning and budgeting practices.  Responses to OMB's request, which
varied in completeness, revealed that agencies were using a variety
of practices to plan and budget for fixed assets.  The responses also
provided OMB with insights into issues of concern, such as up-front
funding.  Up-front funding became the focus of OMB's follow-up effort
in 1995.  As a result, the President proposed, for fiscal year 1997,
full funding for several new and ongoing capital projects that
otherwise would have been incrementally funded.  For the fiscal year
1998 budget, OMB is requiring that agencies request full up-front
funding for all capital acquisitions and that agencies show how their
capital plans relate to the goals and plans of three
performance-related initiatives--GPRA, the Federal Acquisition
Streamlining Act of 1994 (FASA), and the Information Technology
Management Reform Act of 1996 (ITMRA). 


--------------------
\1 The National Performance Review, under the leadership of the Vice
President, is an executive branch management reform effort intended
to make the government "work better and cost less." Among hundreds of
NPR recommendations, generally intended to emphasize results and
enhance managerial flexibility, were several dealing with managing
fixed assets for the long term.  See From Red Tape to Results: 
Creating a Government that Works Better and Costs Less:  Improving
Financial Management -- Accompanying Report of the National
Performance Review, Office of the Vice-President, September 1993. 


   AGENCY RESTRUCTURING AND
   INCREASINGLY LIMITED RESOURCES
   PROMPTED REVIEW OF PLANNING AND
   BUDGETING FOR FIXED ASSETS
---------------------------------------------------------- Chapter 5:1

OMB issued Bulletin 94-08, "Planning and Budgeting for the
Acquisition of Fixed Assets"\2 in July 1994 as an initiative to
improve the acquisition of fixed assets.  The Bulletin emphasized the
importance of effective fixed-asset acquisitions in an era of
declining resources.  Restructuring and downsizing pressures may
tempt agencies to forego or neglect fixed-asset acquisitions; but,
certain purchases, such as information technology, may be critical in
enabling agencies to do more with less. 

OMB also acknowledged that certain aspects of the budget process may
exacerbate these tendencies.  Recognizing many of the financing
issues raised by our case studies, the Bulletin suggested that
one-year funding may not allow sufficient time to complete the
acquisition process, that one-time, large increases in appropriations
requests for asset acquisitions (lumpiness) may make capital spending
relatively less attractive, and that combining spending for capital
and operating expenses in one account may crowd out fixed-asset
purchases.  The Bulletin emphasized that agency planning and
budgeting, as well as OMB's review process, must be improved. 

As a first step toward making such improvements, the Bulletin
required agencies to prepare and justify 5-year spending plans\3 for
the acquisition of fixed assets and to conduct a review of funding
mechanisms for fixed-asset purchases.  The Bulletin stated that the
5-year plans would be used to develop the fiscal year 1996
President's budget and to discuss fixed-asset acquisitions in the
budget.  Agency review of funding mechanisms was intended to assess
the adequacy of current funding mechanisms for fixed assets and to
consider whether the full cost of fixed-asset acquisitions was being
recognized in budget requests.  Agencies were asked to consider
expanding the use of multiyear appropriations, asset acquisition
accounts (either revolving fund or appropriation accounts), and other
mechanisms that might alleviate funding difficulties. 


--------------------
\2 In this Bulletin, OMB defined fixed assets as buildings and
equipment normally available from the commercial sector that support
the delivery of federal services.  Defense procurement, military
construction, space programs, grants to state and local governments,
and other infrastructure, such as dams and air traffic control, were
excluded from the Bulletin's definition of fixed assets. 

\3 Account-level detail of fixed-asset purchases was to be provided
if $50 million or 50 percent or more of the account's budget
authority or outlays was used to acquire fixed assets.  Single
acquisitions of $20 million or more also required account-level
reporting. 


   COMPLETENESS OF BULLETIN
   RESPONSES VARIED
---------------------------------------------------------- Chapter 5:2

OMB received data from most agencies expected to respond to the
Bulletin, but the completeness of the responses varied.  OMB
officials expected 14 executive branch agencies would respond to the
Bulletin on the basis of previously reported spending on fixed
assets.  Of these 14, 4 did not respond.  Conversely, OMB received
responses from three agencies not expected to respond.  All of our
case studies responded to the Bulletin, but the content of their
submissions varied.  The Corps' and USGS' responses were limited
because neither agency had many fixed-asset purchases that met the
Bulletin's reporting threshold.  The Coast Guard and PBS used budget
justifications and other previously prepared documents to support
their 5-year plans and fulfill the Bulletin's request for a
description of the planning process.  Of the 13 agencies responding
to the Bulletin,\4 only the Department of Veterans Affairs (VA) and
the Coast Guard extensively discussed their evaluation of particular
funding mechanisms for fixed asset purchases. 


--------------------
\4 Agencies that responded to Bulletin 94-08 were:  the Departments
of Commerce, Defense, Education, Health and Human Services, the
Interior, Justice, Transportation, the Treasury, and Veterans
Affairs, the Environmental Protection Agency, the General Services
Administration, the National Archives, and the National Science
Foundation. 


   TWO AGENCIES DISCUSSED FUNDING
   MECHANISMS FOR FIXED ASSETS
---------------------------------------------------------- Chapter 5:3

VA's response stated that "significant savings to the government
could be realized if the type of acquisition was not determined prior
to preparation of the budget." Noting that economic conditions can
change in the minimum of 3 years between budget preparation and
appropriation, VA explained that the acquisition method initially
selected may not be economically viable or ideal at the time of
purchase.  To address this situation, VA managers discussed creating
a single real property acquisition account where space need and
budget authority need are identified in the budget prospectus and the
particular acquisition strategy is determined upon execution of the
purchase. 

The Coast Guard discussed its ability to mitigate crowding out of
fixed assets and its concern over the length of its fund
availability.  Funding both capital projects and the personnel needed
to implement those projects as separate appropriation categories
within a single account protects fixed-asset categories from
competing with each other or non-capital expenditures.  By
forecasting and ranking long-term capital needs, the Coast Guard's
capital investment plan allows the agency to control the frequency
with which large spikes in appropriations are needed.  Funding spikes
are also managed by dividing acquisitions into stand-alone stages or
components that can be budgeted for separately and over a period of
years.  However, the Coast Guard stated that the 1- and 3-year
availability of capital personnel and shore funding, respectively,
was inadequate to accommodate mission changes.\5


--------------------
\5 Coast Guard personnel funds appropriated in fiscal year 1997 are
available for 2 years. 


   CASE STUDIES FOUND BULLETIN'S
   REQUIREMENTS EASY TO MEET WITH
   PREVIOUSLY REPORTED DATA
---------------------------------------------------------- Chapter 5:4

Officials of case study organizations indicated that they made no
significant changes in their capital budgeting practices as a result
of the Bulletin.  These officials also did not perceive any
differences in the way OMB viewed their budget request as a result of
the Bulletin responses.  However, PBS officials felt the Bulletin was
a constructive step in acknowledging their concerns over scoring
inconsistencies and encouraging their efforts to focus on multiyear
financial planning and the type of space being acquired.  The
Bulletin also prompted PBS to begin to focus on the outlay impact of
their capital acquisitions. 

Officials from our case studies generally felt the Bulletin response
was easy to prepare because some fixed-asset data were being reported
to OMB or the Congress in other formats.  Officials from the Corps of
Engineers, the Coast Guard, and USGS stated that the 5-year spending
plans contained data that OMB or the Congress had previously seen in
other reports.  Therefore, these officials easily prepared Bulletin
responses but thought the requirements were already being met through
other submissions to OMB or Congress.  For example, USGS had already
provided detailed justification materials on its two purchases that
met the Bulletin's reporting threshold under other OMB mandates. 


   BULLETIN RESPONSES HELPED
   IDENTIFY PROBLEMS WITH PLANNING
   AND BUDGETING FOR FIXED ASSETS
   AS WELL AS MITIGATING
   STRATEGIES
---------------------------------------------------------- Chapter 5:5

An OMB official who helped develop the Bulletin acknowledged that the
comprehensiveness of Bulletin responses varied but felt that the
responses were useful in identifying issues for further
consideration.  This official speculated that the content and
completeness of agency submissions may have been affected by the
short time frame agencies had to respond and by the fact that
agencies were being asked to supply fixed-asset data for the first
time.  Concerned with balancing its need for information and the
agencies' burden in supplying the information, OMB accommodated
nonresponses through subsequent data requests by its program
examiners.  These requests and the formal Bulletin responses
supported a narrative summary and 3-year table of "Fixed Asset
Acquisitions" in the President's fiscal year 1996 budget. 

The responses also supported the first-ever OMB Director's review of
fixed assets.  Director's reviews, at which the Director of OMB
discusses and decides upon recommendations made by OMB examiners, are
held on a limited number of topics each year.  These discussions are
significant because they can shape the content and presentation of
the President's budget.  The Director's review of fixed assets
identified problems in planning and budgeting for fixed assets as
well as mitigating strategies.  The review found that some agencies
lacked an integrated planning and budgeting process for fixed assets. 
For example, some agencies did not reflect operational changes that
would occur from information technology acquisition in their
long-range plans and budgets.  Some agencies planned and budgeted for
the acquisition of assets but did not fully plan and budget for
related maintenance.  The review also found that agencies were using
a variety of account structures and strategies to justify fixed-asset
acquisitions.  Multiyear funding was widely used, especially for
construction-related projects.  Revolving funds were also widely
used, although OMB did not receive any new requests for such funds. 
Some agencies tried to overcome difficulty in justifying large
spending increases for capital by segregating all capital funding
into one account to smooth annual changes in outlays and prevent the
crowding-out of capital.  Other agencies found that such accounts
were not needed; spending increases for capital had been obtained
when justified. 

However, the primary focus of the OMB Director's review was up-front
funding.  Bulletin responses indicated that some capital spending was
not fully funded.  Specifically, capital projects of the Corps of
Engineers, NASA, DOE, and the Bureau of Reclamation were
incrementally funded.  Some congressional staff acknowledged that
such projects have traditionally been incrementally funded and
indicated satisfaction with this practice.  Until 1995, OMB
explicitly permitted water resource projects to be incrementally
funded.\6

However, OMB is concerned that inconsistent scoring of fixed assets
may unfairly bias some acquisitions and that incremental funding may
understate the cost of acquisitions. 


--------------------
\6 OMB Bulletin A-11 had exempted water resource projects from full
funding requirements.  This exemption was removed in 1995.  However,
the Rivers and Harbors Appropriation Act of 1922 permits incremental
funding of Corps water resource projects and is still in effect. 


   OMB'S SECOND-YEAR EFFORT
   RESULTS IN A PROPOSAL TO EXPAND
   THE USE OF FULL FUNDING
---------------------------------------------------------- Chapter 5:6

In June 1995, OMB replaced Bulletin 94-08 with Bulletin 95-03.  The
two bulletins were nearly identical except that Bulletin 95-03
broadened the definition of fixed assets and added two reporting
requirements.  The definition of fixed assets was expanded to conform
with the Federal Accounting Standards Advisory Board's (FASAB)
recommended definition of general property, plant, and equipment.\7
In addition to assets meeting FASAB's definition, space exploration
facilities and equipment and all DOE facilities were deemed fixed
assets for purposes of the Bulletin.  As a result, agencies were to
consider nearly all construction, major rehabilitation, and purchases
of fixed assets owned by the federal government in completing the
Bulletin's reporting requirements.\8

Bulletin 95-03 required agencies to provide information on the
progress of acquisitions of $20 million or more and requested
agencies to identify separable, stand-alone stages of fixed asset
acquisitions.  Information on acquisition progress was to be used to
assess agencies' progress in meeting the cost and schedule goals of
their acquisitions as required by the FASA.  Information on stages of
fixed-asset acquisitions was to be used for identifying those
separable, stand-alone phases of an acquisition that should be fully
funded up-front.  Bulletin 95-03 suggested what constituted
separable, stand-alone phases for buildings and information
technology, but asked agencies to identify such stages for other
assets. 

Only eight agencies formally responded to all aspects of Bulletin
95-03.\9 An OMB official attributed the low response partly to the
lack of fiscal year 1996 appropriations for many agencies at the time
submissions were due.  However, the official noted that, as in 1994,
OMB program examiners sought fixed-asset data from agencies when
discussing overall budget requests.  Therefore, OMB felt it had
sufficient data to hold another Director's review of fixed assets. 
This second-year review focused primarily on the extent to which
agencies were requesting full up-front funding for capital projects
and how to encourage such requests.  Although most agencies were
requesting full funding for capital projects, the review identified
some large capital projects that were not fully funded and prompted
OMB officials to encourage full up-front funding when discussing
budget requests with agencies. 

OMB also determined that the discretionary spending caps on budget
authority could accommodate full funding of some capital projects
that would otherwise be incrementally funded.  Full funding of these
projects requires additional budget authority in the budget year but
generally does not require additional outlays in the budget year. 
Because the sum of the President's discretionary spending proposals
was less than the discretionary spending caps, OMB was able to
request $1.4 billion in budget authority in the President's fiscal
year 1997 budget to fully fund capital projects at the DOE and
NASA.\10 In addition, OMB presented budget schedules showing the cost
to fully fund ongoing and new capital projects at the Corps of
Engineers and the Bureau of Reclamation.  Although full funding was
not requested for these agencies' capital projects, the schedules
indicated the cost of fully funding ongoing and new projects for
these agencies would be about $23 billion in fiscal year 1997, and
OMB stated that efforts would be made to fully fund all new projects
in the fiscal year 1998 budget. 


--------------------
\7 FASAB defined general property, plant, and equipment as items that
are used (1) to produce goods or services or to support the mission
of the entity and can be used for alternative purposes; (2) in
business-type activities; or (3) by entities whose costs can be
compared to other entities. 

\8 The Bulletin explicitly excluded DOD weapons systems, the Postal
Service, vacant land, and grants to state and local governments from
the definition of fixed assets. 

\9 Agencies that formally responded to all aspects of Bulletin 95-03
were:  the Departments of Health and Human Services, Justice, State,
and Transportation, the Environmental Protection Agency, GSA, NASA,
and the National Science Foundation. 

\10 OMB noted that NASA would request full funding for more projects
in fiscal year 1998 but did not provide cost estimates.  Only a small
portion of the $1.4 billion request was ultimately approved in FY97
appropriations actions. 


   OMB'S THIRD-YEAR EFFORT
   ATTEMPTS TO LINK FIXED-ASSET
   PLANNING AND BUDGETING WITH
   PERFORMANCE INITIATIVES
---------------------------------------------------------- Chapter 5:7

OMB officials felt that responses to Bulletins 94-08 and 95-03 helped
them move from information gathering to the development of guidance
regarding the implementation of full funding.  To guide agencies in
submitting their fiscal year 1998 budgets and to raise the visibility
of its fixed-asset effort among agencies, OMB replaced these
bulletins with a new Part 3 to OMB Circular A-11.\11 Like the
previous bulletins, the new Part 3 requires agencies to submit 5-year
spending plans for major fixed-asset acquisitions and encourages
agencies to consider the use of flexible funding mechanisms.  In
addition, it requires agencies to request full up-front funding for
stand-alone stages of all ongoing and new fixed-asset acquisitions
and outlines broad principles for planning and monitoring such
acquisitions.  Part 3 also attempts to streamline reporting
requirements for three performance-related initiatives--FASA, ITMRA,
and GPRA. 

OMB officials believe that FASA, ITMRA, and GPRA share the objective
of its fixed-asset reviews--to improve fixed asset planning and
budgeting.  FASA requires that executive agency heads (1) set cost,
performance, and schedule goals for major acquisition programs, (2)
monitor the programs to ensure they are achieving, on average, 90
percent of the established goals, and (3) take corrective actions,
including termination, on programs that do not remain within the
permitted tolerances.  FASA also requires OMB to report to the
Congress on agencies' progress in meeting these cost, schedule, and
performance goals.  ITMRA requires agency heads to establish goals
for improving the efficiency and effectiveness of agency operations
through effective use of information technology and to acquire
information technology systems in successive acquisitions of
interoperable increments.  Under ITMRA, when the President submits
the budget to the Congress, the OMB Director is to submit a report to
the Congress on the net program performance benefits achieved as a
result of agencies' major information systems projects and on how the
benefits of such projects relate to agencies' goals.  Under GPRA,
agencies must develop, no later than by the end of fiscal year 1997,
strategic plans that cover a period of at least 5 years and include
the agency's mission statement; identify the agency's long-term
strategic goals; and describe how the agency intends to achieve those
goals through its activities and through its human, capital,
information, and other resources.  GPRA also requires each agency to
submit to OMB, beginning for fiscal year 1999, an annual performance
plan.\12 In essence, the annual performance plan is to contain the
annual performance goals the agency will use to gauge its progress
toward accomplishing its strategic goals and identify the performance
measures the agency will use to assess its progress.  In issuing Part
3, OMB sought to centralize its information requests to fulfill FASA
and ITMRA reporting requirements and to ensure that fixed-asset
acquisition plans support the plans and goals developed for these
initiatives and GPRA. 

Because the planning requirements of GPRA are not yet effective and
have not yet been fully implemented, the new Part 3 of Circular A-11
requires agencies to describe how ongoing or proposed capital
acquisitions relate to the agency's mission and goals being defined
under GPRA.  It outlines broad principles for linking long-range
planning and budgeting for fixed assets to the strategic and annual
performance plans agencies develop for GPRA.  For example, OMB
advises agencies to develop long-range fixed-asset plans by ranking
long-term goals and considering the most efficient and effective
means of achieving those goals within budgetary constraints.  Part 3
also urges agencies to monitor whether fixed-asset acquisitions are
helping achieve their goals. 


--------------------
\11 Circular A-11 instructs agencies on submitting their budget
requests. 

\12 The first annual performance plans are to be submitted in the
fall of 1997. 


OBSERVATIONS AND CONCLUSIONS
============================================================ Chapter 6

While capital spending is important to efficient long-term government
operations, a goal of the budget process should be to assist the
Congress in allocating resources efficiently by ensuring that various
spending options can be compared impartially--not necessarily to
increase capital spending.  The requirement of full up-front funding
is an essential tool in helping the Congress make trade-offs among
various spending alternatives.  However, in an environment of
constrained budgetary resources, agencies need tools that can help
facilitate these trade-offs and that enable them to accommodate
up-front funding.  Furthermore, to successfully implement GPRA's
requirement for program performance measures, managers will also need
to know the full costs of their programs--including capital usage. 

Some have recommended that the government adopt a full-scale capital
budget, but this raises major budget control issues and may not be
necessary to address agency-identified impediments to capital
spending.  Rather, our case studies demonstrate that more modest
tools, such as revolving funds, investment components, and budgeting
for stand-alone stages, can help accommodate up-front funding without
raising the congressional or fiscal control issues of a separate
capital budget.  Though each of the strategies has limitations, when
accompanied by good financial management and appropriate
congressional oversight, they can be useful in facilitating effective
capital acquisition within the current unified budget context.  In
addition, one strategy, using a revolving fund, can be effective in
helping to make managers aware of the full cost of their programs. 


   THE BUDGET PROCESS SHOULD
   ENCOURAGE PRUDENT CAPITAL
   DECISIONS
---------------------------------------------------------- Chapter 6:1

The budget process must balance several sometimes conflicting goals
to facilitate effective trade-offs among various spending options. 
First, it is important that the budget process reveal the entire cost
of operating particular programs--including the cost of capital
assets used by the program.  Knowledge of full program costs is
especially significant as agencies and the Congress begin to
implement GPRA's requirements for performance measurement and
budgeting.  For example, if both capital and operating costs are not
attributed to programs over time, programs may appear deceptively
inexpensive.  In addition, the cost of replacing assets is borne
entirely by future agency managers and Congresses that may not have
been responsible for asset consumption.  Second, the budget process
ought to enable lawmakers to compare the full, long-term costs of
various spending alternatives.  Thus, long-term commitments, such as
purchases or lease-purchases, are scored up-front in the budget. 
Third, the Congress needs to be assured that agencies are spending
funds as directed by law and be able to control total federal
spending.  Fourth, agencies need the flexibility and incentives to
make economic decisions regarding capital acquisition and usage. 

Full up-front funding is one of the tools that has been important to
facilitating fiscal control and comparisons of the long-term costs of
spending alternatives.  An essential part of prudent capital planning
must be an adherence to full up-front funding.  When full up-front
funding is not practiced, the Congress risks committing the
government to capital acquisitions without determining whether the
project is affordable over the long-term.  Incremental funding also
compels future Congresses to fund a project in order to prevent
wasting resources previously appropriated.  As budgetary constraints
continue, incremental funding may lock the Congress into future
spending patterns and reduce flexibility to respond to new needs.  In
the budget process, fully funded projects may be disadvantaged in
competition with incrementally funded projects--even when the fully
funded projects actually cost less in the long-run. 

However, full up-front funding can impede agencies' ability to
economically acquire capital in an environment of resource
constraints.  Full up-front funding of relatively expensive capital
acquisitions can consume a large share of an agency's annual budget,
thereby forcing today's decision-makers to pay all at once for
projects with long-lived benefits.  While various capital budgeting
proposals have been advanced to address this, the proposals
themselves have raised significant concern because of their potential
diminution of fiscal accountability and control.  Consequently,
agencies need financing tools that can provide the fiscal control of
up-front funding and can enable them to make prudent capital
decisions within the current unified budget frame work. 


   AGENCIES AND THE CONGRESS MUST
   WORK TOGETHER TO FIND TOOLS
   THAT ENCOURAGE PRUDENT CAPITAL
   DECISIONS
---------------------------------------------------------- Chapter 6:2

Our case studies provide some examples of tools that can encourage
effective capital decisions.  Several use revolving funds to help
accumulate resources for capital replacement and to help incorporate
capital costs into program budgets.  This will become of increasing
importance as implementation of GPRA will require managers to know
the full annual cost of their programs and to evaluate the
performance of programs based on the full cost.  Because revolving
funds charge users for the cost of capital, managers have an
incentive to regularly assess their need for and use of assets.  By
providing managers with a predictable stream of funding, revolving
funds also encourage long-range capital planning.  Our work indicates
that revolving funds are most effective when (1) agencies have a
sound record of financial management, (2) costs can be tracked to
users, (3) replacement cost is recovered, (4) appropriations are
available to fund significant or immediate expansions of the fund's
asset base, (5) proceeds from the disposal of fund assets are
retained by the fund if the fund is expected to provide a constant
level of service, and (6) used to finance small-scale, ongoing
capital needs.  Our case studies also indicate that revolving funds
can provide varying degrees of congressional control.  IFMS has few
restrictions on the type of vehicles it can purchase; in contrast,
the Congress approves every large purchase by the Corps' and PBS'
revolving funds.  Oversight by the Congress is important to ensuring
that agency acquisitions are well-planned and justified and that the
agency's overall level of capital spending is appropriate given other
competing capital and operating needs across the government. 

An investment component within a working capital fund generates many
of the same benefits as revolving funds.  In addition, an investment
component may encourage agency managers to fund their voluntary
contributions by making tradeoffs between capital and operational
spending.  Although the investment component is a recent development
and used by only one of our case studies, it seems especially helpful
for agencies that would otherwise fund capital with annually expiring
funds.  USGS' investment component operates with few restrictions
apart from prohibitions against building construction and using funds
within 2 years of their placement in the investment component. 
However, expanding the use of an investment component to other
agencies may require other limitations.  For example, if several
agencies obtain investment components and each decides to make large
purchases in the same year, total outlays could rise sharply and
cause a spike in the deficit.  Therefore, OMB would need to manage
all investment components to ensure total investment component
outlays do not cause such spikes.  The Congress must also be aware
that an investment component may encourage agencies to build
unobligated balances and that agencies would need to be held
accountable to their investment plans. 

In addition to using revolving funds or an investment component, some
case studies budget for stand-alone stages of capital acquisitions
and use reprogramming authority.  Budgeting for stand-alone stages
makes capital acquisition affordable by limiting the budget authority
needed at one time.  It may also increase opportunities for oversight
and permit adjustment of capital funding levels when other needs
emerge.  This tool can be used when parts of an acquisition can be
useful without the whole being completed.  If used as intended,
reprogramming authority also helps agencies respond when changes in
funding or mission leave inadequate funding to complete a capital
acquisition or create new capital needs.  Congressional control is
maintained by limiting the amount of such authority. 

Multiyear and no-year funding help agencies accommodate capital's
longer acquisition cycle.  All of our case studies had the
opportunity to fund capital through multiyear appropriations or a
revolving fund.  However, agencies and the Congress must work
together to find a period of fund availability that is long enough to
complete the agency's projects and short enough to discourage delays. 
The Congress can maintain control over no- and multiyear funding
through individual agency reporting and FASA requirements. 

The strategies used by our case studies may not be all inclusive of
those available to all federal agencies but are indicative of the
kinds of tools agencies find useful.  Some of these mechanisms, such
as revolving funds and investment components, share to varying
degrees common characteristics that help agencies make effective
capital acquisitions.  For example,

  -- They enable agencies to accumulate resources without fiscal year
     limitations in order to finance capital needs. 

  -- They promote full costing of programs and activities by
     including costs related to capital usage in operating budgets. 

  -- They provide a degree of predictability to funding levels that
     aids in long-range planning. 

In addition to considering the provision of tools with these
characteristics, the Congress and OMB should continue to encourage
agencies to improve capital planning.  Three recent legislative
initiatives--GPRA, FASA, and ITMRA--seek to improve agency planning
for programs and capital acquisitions.  OMB's bulletins and guidance
on fixed-asset planning and budgeting have been valuable
contributions toward promoting agency capital planning.  Also, given
the governmentwide trend in downsizing, agencies may need to consider
alternatives to ownership of capital assets.  For example, agencies
may purchase the use of assets through service contracts with
private-sector organizations or other agencies.  In other instances,
agencies may need to explore creative ways of leveraging resources
with the private sector, such as limited partnerships and loan
guarantees, in order to meet their specific asset requirements. 

While agencies are concerned that the budget process facilitate
capital acquisitions, it should be understood that agencies must
ensure that capital projects are properly selected and well-managed. 
Flexible financing mechanisms and up-front funding can help to
improve the chances that agencies can fully fund capital projects and
will select financing methods that are most economical for the
government.  However, to ensure that funds are well used, it is
imperative that agencies have a sound process for selecting which
capital projects to fund and to manage those projects well.  We have
shown that many information technology projects undertaken by
agencies have been poorly managed and wasted federal resources.\1
Agencies could benefit from viewing capital projects--especially
information technology--as investments that require explicit decision
criteria and performance measures that assess risks, costs, and
benefits.\2 Long-range risks, costs, and benefits of various capital
spending alternatives should be presented in budget justifications to
the Congress.  None of the budget tools discussed can be a substitute
for good cost-benefit analysis and well-managed project
implementation. 


--------------------
\1 Managing for Results:  Steps for Strengthening Federal Management
(GAO/T-GGD/AIMD-95-158, May 9, 1995). 

\2 Executive Guide:  Improving Mission Performance Through Strategic
Information Management and Technology (GAO/AIMD-94-115, May 1994). 


   RECOMMENDATIONS TO THE OFFICE
   OF MANAGEMENT AND BUDGET
---------------------------------------------------------- Chapter 6:3

GAO recommends that the Director of the Office of Management and
Budget continue OMB's top-level focus on fixed-asset acquisitions to
include working with agencies and the Congress to promote flexible
budgetary mechanisms that help agencies accommodate the consistent
application of up-front funding requirements while maintaining
opportunities for appropriate congressional oversight and control. 

As OMB continues to integrate GPRA requirements into the budget
process, GAO recommends that the Director of the Office of Management
and Budget, ensure that agencies' capital plans flow from and are
based upon their strategic and annual performance plans.  In
addition, OMB should continue its efforts to ensure that cost,
schedule, and performance goals are monitored as required by FASA. 


   MATTER FOR CONGRESSIONAL
   CONSIDERATION
---------------------------------------------------------- Chapter 6:4

Although requiring that budget authority for the full cost of
acquisitions be provided before an acquisition is made allows the
Congress to control capital spending at the time a commitment is
made, it also presents challenges.  Because the entire cost for these
relatively expensive acquisitions must be absorbed in the annual
budget of an agency or program, fixed assets may seem prohibitively
expensive despite their long-term benefits. 

This report describes some strategies that a number of agencies have
used to manage this dilemma.  The Congress should consider enabling
agencies to use more flexible budgeting mechanisms that accommodate
up-front funding over the longer term while providing appropriate
oversight and control.  For agencies having proven financial
management and capital planning capabilities and relatively small and
ongoing capital needs, these techniques could include revolving funds
and investment components.  Such techniques enable agencies to
accumulate resources over a period of years in order to finance
certain capital needs, promote full costing of programs and
activities by including costs related to capital usage in program
budgets, and provide a degree of funding predictability to aid in
long-range planning.  As GPRA moves toward full implementation, these
and other tools may take on increasing importance in helping managers
and the Congress to identify program costs and to more efficiently
manage capital assets. 


   AGENCY COMMENTS AND OUR
   EVALUATION
---------------------------------------------------------- Chapter 6:5

Officials from our case studies and OMB agreed with this report's
conclusions and recommendations.  They also provided technical
corrections which have been incorporated in this report where
appropriate.  In commenting on a draft of this report, OMB and GSA
officials raised issues which required clarification and elaboration
in some sections of the report. 

OMB officials agreed with the report's support for up-front funding
of capital assets but expressed concern that the use of
intragovernmental revolving funds to fund capital acquisitions in
some circumstances would undermine the up-front funding principle and
reduce budgetary control.  OMB proposed that a revolving fund could
be used to fund relatively large, sporadic, or heterogeneous
purchases if the revolving fund borrowed from Treasury and charged
users to recover the principal and interest payments.  This would
facilitate congressional and executive review of such purchases while
allocating capital costs to users.  However, unless a relatively
constant amount of capital spending is undertaken by the fund each
year, such a revolving fund would cause a spike in budget authority
each time an asset is purchased.  Therefore, to clarify that
revolving funds are not always appropriate for making capital
acquisitions, references were added throughout the report to indicate
their appropriateness for relatively small and ongoing capital needs. 

GSA officials expressed a desire for some discussion of proposed
changes in scoring operating leases.  Reference to previous GAO
testimony on this matter was added to chapter 3.  GSA officials also
expressed their belief that congressional control could be maintained
if the FBF retained proceeds from the disposal of PBS properties. 
The officials suggested that, because all funds deposited in the FBF
must now be appropriated before use, the Congress would have an
opportunity to determine how disposal proceeds should be used.  This
report provides observations on circumstances which affect whether
agencies should retain proceeds, such as the need to provide a
constant level of services.  It was not intended to address whether
such circumstances exist in any specific agency.  Each agency's
situation would need to be assessed individually to select the
appropriate financing mechanism and to determine how to handle
disposal proceeds.  Therefore, the report was not altered to address
this comment. 


COMPARISON OF CASE STUDIES AND
OTHER ORGANIZATIONS CONTACTED
=========================================================== Appendix I

Table I.1 lists selected characteristics of our case studies as well
as four other federal organizations with which we conducted limited
interviews.\1 The table shows the range of capital spending and
capital financing mechanisms used by these organizations. 

The column immediately to the right of the organization's name gives
an indication of the magnitude of capital spending at each of these
organizations but does not permit reliable comparisons.  As further
discussed in chapter 1, data limitations prevent a common measurement
of capital spending for these organizations that is consistent with
our definition of capital.  Therefore, a measurement basis was
selected for each organization that yields an approximation of
capital spending.  Capital spending for the Coast Guard, the Corps of
Engineers, FDA, the Forest Service, and NOAA represents the outlays
those organizations made directly for construction and
rehabilitation, major equipment, and the purchase or sale of land and
structures in fiscal year 1995.\2

IFMS' and PBS' capital spending is derived from these organizations'
categorization of their fiscal year 1995 obligations as either
capital investment or operating spending.\3 Capital spending at USGS
and ITS represents the obligations made for the items of expense
designated "equipment" and "land and structures" in fiscal year
1995.\4

The table also provides examples of the types of fixed assets
acquired by these organizations and lists the accounts used to fund
most fixed-asset acquisitions.\5 The table indicates whether any of
these accounts are revolving funds and shows the appropriations
subcommittee charged with providing funds for fixed-asset
acquisitions.  The final two columns show the length of time for
which fixed-asset funding is available and the amount of funds
rescinded from accounts used to fund fixed assets during fiscal year
1995.  A rescission may reflect reductions of funds made available to
the account in fiscal year 1995 or in previous years.  We could not
readily determine whether a rescission reduced capital spending when
the affected account made capital and operating expenditures. 

The table indicates that these organizations vary in the magnitude of
and financing mechanisms used to fund capital spending.  USGS spends
relatively little on capital assets (about 6 percent of total
obligations) but also has a much smaller total budget than the other
organizations.  Conversely, about 40 percent of the Corps' $3.9
billion of outlays is spent on capital acquisitions.  Two-thirds of
the organizations in this table have a revolving fund that finances
at least some of their capital spending.  Three organizations--the
Corps, USGS, and the Forest Service--finance their fixed-asset
acquisitions through a combination of appropriations accounts and
revolving funds.  The Corps and the Forest Service fund large-scale
construction from their appropriations accounts and generally use
revolving funds to finance smaller acquisitions, such as equipment
and small-scale construction.  USGS funds both capital and operating
expenses from the same appropriations account.  Conversely, a
capital-intensive organization, such as the Coast Guard, has an
appropriations account dedicated to financing capital.  Despite
differences in the accounts used to finance capital, all
organizations had access to funds with multi- or no-year availability
for their capital acquisitions. 

The table also indicates that construction funds were rescinded from
nearly every organization with such an appropriation.  Funding was
generally not rescinded from revolving funds.  This dichotomy occurs
because long-term construction projects result in accumulations of
unobligated balances, which are the object of rescissions.  In
contrast, the revolving funds of these organizations tend to obligate
funds more quickly because their purchases are typically smaller and
have shorter acquisition cycles. 



                                                                      Table I.1
                                                       
                                                         Comparison of Case Studies and Other
                                                               Organizations Contacted

                                                                              Have a revolving                    Funding
            Fiscal year 1995                                Account(s) used   fund for fixed                      availability for
Organizati  capital spending      Examples of fixed assets  to fund fixed     asset             Appropriations    fixed-asset       Rescission in
on             (in millions)      acquired                  assets\a          acquisition?      subcommittee      purchases         fiscal year 1995
----------  ----------------  --  ------------------------  ----------------  ----------------  ----------------  ----------------  -----------------
Coast                 $290\b      Vessels, aircraft, shore  Acquisitions,     No                Transportation    Multiyear         $36.0 million
Guard                             facilities, information   construction,
                                  technology                and improvements

Corps of            $1,542\c      Equipment, facilities,    Revolving fund\d  Yes; for          Energy and Water  No-year\e         $60.0 million
Engineers                         information systems                         equipment and                                         from Construction
                                                                              facilities

USGS                   $56\f      Information systems,      Surveys,          Yes               Interior          No-year\g         $0
                                  telecommunications, and   investigations,
                                  scientific equipment      and research;
                                                            Working capital
                                                            fund

GSA -IFMS             $502\h      Motor vehicles            General supply    Yes               Treasury          No-year           $0
                                                            fund

GSA -ITS               $37\f      Telephone switches        Information       Yes               Treasury          No-year           $0
                                                            technology fund

GSA -PBS            $1,631\i      Office buildings,         Federal           Yes               Treasury          No-year           $631.0 million
                                  courthouses, special      buildings fund
                                  purpose buildings

FDA                    $17\b      Equipment, facilities     Buildings and     No                Agriculture       No-year           $0
                                                            facilities\j

Forest                  $6\k      Recreation facilities,    Construction;     Yes; for          Interior          No-year           $6.0 million from
Service                           offices, housing,         Working capital   equipment, tree                                       Construction
                                  laboratories, tree        fund              nurseries, and
                                  nurseries, aircraft                         aircraft

NOAA                   $83\l      Research laboratories,    Construction;     No                Commerce          No-year           $15.0 million
                                  weather data gathering    Operations,                                                             from
                                  equipment                 research and                                                            Construction;
                                                            facilities;                                                             $24.2 million
                                                            Fleet                                                                   from Operations
                                                            modernization,
                                                            shipbuilding,
                                                            and conversion
-----------------------------------------------------------------------------------------------------------------------------------------------------
\a Account titles are those given in the appendix to Budget of the
United States Government, Fiscal Year 1997 unless otherwise noted. 

\b Capital spending is outlays for character classes 1312, 1314,
1322, 1324, and 1340. 

\c Capital spending is outlays for character classes 1312, 1314,
1322, 1324, and 1340.  This figure includes spending for dams, flood
control, and other items that do not meet our definition of fixed
assets.  Obligations for the Corps' plant replacement and improvement
program were $91 million in fiscal year 1995. 

\d Although Corps fixed assets used on multiple civil works projects
are acquired through a revolving fund, other fixed assets are
acquired through the Corps' appropriations accounts, including the
Construction, General and Flood Control, and Mississippi River and
Tributaries accounts. 

\e Managed by Corps headquarters as single-year availability. 

\f Capital spending is the sum of obligations for object class 31.0,
"equipment," and object class 32.0, "land and structures." This
figure includes amounts listed under "Reimbursables" in the USGS
object class schedules presented in the appendix to Budget of the
United States Government, Fiscal Year 1997. 

\g The working capital fund does not have any restrictions on
availability; funds of the Surveys, Investigations, and Research
account are available for 1 year. 

\h Capital spending is obligations for "Fleet management:  purchase
of equipment" from the General Supply Fund's program and financing
schedule in the appendix to Budget of the United States Government,
Fiscal Year 1997. 

\i Capital spending is obligations for "Capital investment" from the
Federal Building Fund's program and financing schedule in the
appendix to Budget of the United States Government, Fiscal Year 1997. 

\j FDA's Buildings and facilities account is consolidated with its
Salaries and expenses and Rental payments accounts for presentation
in the Budget of the United States Government, Fiscal Year 1997. 

\k Estimated capital spending is outlays for character classes 1312,
1314, 1322, 1324, and 1340.  Forest Service spending on "other
physical assets" (character class 1352) was $2.2 billion. 

\l Capital spending is outlays for character classes 1312, 1314,
1322, 1324, and 1340 in the "Construction" and "Fleet modernization,
shipbuilding, and conversion" accounts.  Other accounts did not
record outlays for these character classes.  In comparison, NOAA's
obligations in object classes 31 and 32 total $189 million. 


--------------------
\1 See Objectives, Scope, and Methodology in chapter 1 for more
detail. 

\2 Capital spending for these organizations is the sum of outlays
reported in the OMB MAX system for character classes 1312, 1314,
1322, 1324, and 1340. 

\3 Capital spending for these organizations corresponds to the
"Capital Investment" line item in each organization's program and
financing schedule as reported in the appendix to Budget of the
United States Government, Fiscal Year 1997. 

\4 Capital spending for these organizations is the sum of obligations
for object classes 31.0 and 32.0 and includes amounts listed under
the line item "Reimbursables" within the object class schedules
reported for these organizations' accounts in the appendix to Budget
of the United States Government, Fiscal Year 1997. 

\5 The fixed assets and accounts listed are not all inclusive of the
spending in the table's second column due to the data limitations
described in chapter 1. 


THE COAST GUARD
========================================================== Appendix II

The Coast Guard is an agency of the Department of Transportation that
conducts search and rescue, aids to navigation, marine safety and
environmental protection, icebreaking, enforcement of laws and
treaties, and defense-related programs.  It is unique among our case
studies because most of its capital spending is made from a single
appropriations account dedicated to capital called Acquisitions,
Construction, and Improvements (AC&I). 


   FIXED ASSETS ACQUIRED
-------------------------------------------------------- Appendix II:1

The Coast Guard acquires a variety of fixed assets including vessels,
aircraft, information technology, and shore facilities through its
AC&I account.  The AC&I account also funds 670 Coast Guard full-time
equivalents (FTE) who support capital acquisition and construction. 
The Coast Guard had a total of about 33,000 FTEs in fiscal year 1995. 


   CAPITAL SPENDING TRENDS
-------------------------------------------------------- Appendix II:2

The Coast Guard experienced an increase in its operating outlays and
a decrease in its capital outlays in real dollars between fiscal
years 1982 and 1995.\1 (See figure II.1.) Operating outlays were $3.4
billion in fiscal year 1995, about 1.2 times the real 1982 level. 
Capital outlays generally fell throughout this period, reaching a
high of $556 million in 1983 and a low of $290 million in fiscal year
1995.  Figures II.1 and II.2 may not include spending by DOD for
capital assets used by the Coast Guard.  Such spending by DOD was
relatively common during the 1980s but has not been significant since
1991.\2

   Figure II.1:  Coast Guard
   Capital and Operating Outlays
   for Fiscal Years 1982 Through
   1995

   (See figure in printed
   edition.)

As shown in figure II.2, capital outlays as a percent of the Coast
Guard's total outlays decreased between fiscal years 1983 and 1995. 
After reaching a high of 16 percent in 1983, capital as a portion of
total outlays gradually fell to a 14-year low of 8 percent in fiscal
year 1995. 

   Figure II.2:  Coast Guard
   Capital Outlays as a Percent of
   Total Outlays for Fiscal Years
   1982 Through 1995

   (See figure in printed
   edition.)


--------------------
\1 Capital outlays as referred to in figure II.1 and figure II.2 are
not necessarily equivalent to our definition of capital.  Capital
outlays are the sum of outlays reported in OMB character classes
1312, 1314, 1322, 1324, and 1340 for the Coast Guard.  (See chapter 1
for more information on character classes and the limitations of this
data.) Coast Guard operating outlays were derived by subtracting
capital outlays from total net outlays. 

\2 In most years between 1982 and 1990, appropriations were made to
DOD for Coast Guard capital acquisitions.  The amount of these
appropriations varied, ranging from $5 million to about $400 million
annually.  However, due to data limitations, we were unable to
determine how much of these appropriations is reflected in the
character class data.  Relatively small appropriations were also made
to DOD for Coast Guard operational spending, and these, too, may not
be fully reflected in the data above. 


   SOURCES AND USES OF FUNDING
-------------------------------------------------------- Appendix II:3

An appropriation to the AC&I account currently funds the majority of
the Coast Guard's fixed-asset acquisitions.  The appropriation has
five categories:  vessels, aircraft, other equipment, shore
facilities, and personnel.\3 Personnel funds have 2-year
availability, aircraft, other equipment, and shore facilities funds
have 3-year availability, and vessels funds have 5-year availability. 
DOD was a significant source of funds for the Coast Guard's
defense-related fixed assets.  For example, DOD provided $339 million
for a Coast Guard icebreaker in fiscal year 1990.  Although AC&I
funding has not been supplemented by DOD funds for the last 4 fiscal
years, DOD funds nearly doubled the AC&I budget in fiscal years 1982,
1984, 1986, 1987, and 1990. 


--------------------
\3 The personnel category funds Coast Guard employees who support
capital acquisition and construction. 


   CAPITAL PLANNING AND BUDGETING
   PROCESS
-------------------------------------------------------- Appendix II:4

The Coast Guard uses its Strategic Planning, Long-Range Planning,
Programming, Budgeting, Execution, and Evaluation System to forecast
capital needs.  Based on the long-range strategic plans and program
objectives developed by this system, the Coast Guard annually
predicts fixed-asset requirements for the next 15 years and documents
them in its Capital Investment Plan (CIP).  The CIP helps the Coast
Guard anticipate and plan for years with spikes in fixed-asset needs
and smooth out these resource demands over a period of years.  The
CIP is also used to determine which projects to request funding for
within the annual guidance provided by OMB and the Office of the
Secretary of the Department of Transportation. 

Consistent with the principle of full funding, the Coast Guard
budgets for either an entire capital project or useable stand-alone
portions of a capital project.  For construction of shore facilities,
the Coast Guard generally requests funding to cover all projected
costs of the project.  In contrast, appropriations requests for
vessels are limited to funding needed to complete a useable portion
of the total project.  For example, if the total project is to
procure 30 vessels, the Coast Guard may write a base-year contract
for a lead ship and spare parts that includes options to purchase the
remaining vessels over a period of years.  Such a contract limits the
Coast Guard's commitment to the base-year acquisition; the Coast
Guard need not exercise any of the options.  In the first year of the
project, the Coast Guard would request funds for the base-year
contract.  In subsequent years, the Coast Guard would decide whether
to request funds to exercise a contract option. 

Once appropriations are received, the Coast Guard cannot reprogram
budget authority between the five AC&I categories or transfer budget
authority between any other Coast Guard account and AC&I.  The Coast
Guard can reprogram up to the lesser of $1 million or 15 percent of
the total amount appropriated for a project within each AC&I category
and can move AC&I personnel between projects. 


   RESPONSE TO OMB BULLETIN 94-08
-------------------------------------------------------- Appendix II:5

Coast Guard officials submitted the required 5-year plan, their CIP,
and a discussion of the agency's planning and budgeting process in
response to Bulletin 94-08.  Coast Guard officials stated that the
bulletin's requirements were easily met by consolidating information
already contained in the CIP with current estimates for the budget
year.  Coast Guard officials stated that much of the information
contained in the bulletin response was already available to the
Congress and the administration in other required reports. 


U.S.  ARMY CORPS OF ENGINEERS
========================================================= Appendix III

The Army Corps of Engineers is an agency within the Department of
Defense responsible for constructing and maintaining flood control,
navigation, and other water resource projects.  The Corps'
construction projects are funded through appropriations and the
contributions of local partners.\1 Fixed assets that are employed on
multiple construction projects are funded through a revolving fund
that charges individual projects for use of these assets.  Fixed
asset purchases are reviewed and approved annually by the Corps'
appropriations subcommittees. 


--------------------
\1 These partners are generally local or state governments or other
public entities, such as flood control districts or port authorities. 


   FIXED ASSETS ACQUIRED
------------------------------------------------------- Appendix III:1

The Corps acquires a variety of fixed assets, including boats,
buildings, bulldozers, communications equipment, computer hardware
and software, and dredges.  Corps officials said the revolving fund
has spent between $80 and $100 million annually over the last 10
years to acquire such assets for use on multiple projects.  The book
value of revolving fund assets was about $800 million at the end of
fiscal year 1994. 

However, only a portion of the Corps' total capital spending as
reported to OMB and shown in figures III.1 and III.2 is for fixed
assets as defined in this report.  The remaining capital outlays
include spending for dams, flood control, and other items that are
financed through appropriations and that do not meet our definition
of fixed assets. 


   CAPITAL SPENDING TRENDS
------------------------------------------------------- Appendix III:2

Figure III.1 illustrates that between fiscal years 1982 and 1995, the
Corps' total real outlays fluctuated between a low of $3.5 billion in
1987 and a high of $4.1 billion in 1982.\2

The Corps' capital outlays varied between a low of $1.3 billion in
fiscal year 1994 and a high of $1.9 billion in 1982 and 1990. 

   Figure III.1:  Corps Capital
   and Operating Outlays for
   Fiscal Years 1982 Through 1995

   (See figure in printed
   edition.)

As shown in Figure III.2, capital outlays constituted relatively less
of total Corps outlays during fiscal years 1994 and 1995 than in most
of the previous 12 years.  As recently as 1990, 52 percent of Corps'
outlays were spent on capital; in 1995, 39 percent of outlays were
spent on capital. 

   Figure III.2:  Corps Capital
   Outlays as a Percent of Total
   Outlays for Fiscal Years 1982
   Through 1995

   (See figure in printed
   edition.)


--------------------
\2 Capital outlays as referred to in figure III.1 and figure III.2
are not necessarily equivalent to our definition of capital.  Capital
outlays are the sum of data outlays reported in OMB character classes
1312, 1314, 1322, 1324, and 1340 for the Corps.  (See chapter 1 for
more information on character classes and the limitations of this
data.) Corps operating outlays were derived by subtracting capital
outlays from total net outlays. 


   SOURCES AND USES OF FUNDING
------------------------------------------------------- Appendix III:3

The Corps developed its Plant Replacement and Improvement Program
(PRIP) to guide the acquisition and replacement of Corps-owned fixed
assets that are shared by multiple civil works projects.  PRIP
generally relies on user charges from individual water resource
projects or other federal agencies to finance the maintenance and
replacement of these assets.  User charges are set to recover
operating costs, such as labor and fuel, and fixed costs, such as
depreciation, plant increment,\3 and insurance.  Charges are reviewed
every quarter and adjusted, if necessary, to ensure equitable cost
recovery. 

Although PRIP charges are set and collected to replace or purchase a
particular asset, collections for each asset are not segregated and
saved until that particular asset is retired.  Corps managers use
each year's resources to fund the particular asset needs of that
year.  All assets are not replaced one-for-one.  As technologies and
missions evolve over time, Corps managers adjust PRIP purchases to
match the new asset needs that arise. 

Proceeds from the disposal of PRIP assets can also be used to finance
replacement.  However, disposal typically does not produce
significant revenue because assets are often donated to other Corps
or Army units when they are no longer useful.  The Corps has
discretion to dispose of most assets, but disposal of dredges
requires congressional approval. 

Significant and immediate expansions of PRIP's asset base are
generally financed with appropriations.  According to a Corps
document, thirteen appropriations have been made to expand the
capital base during the fund's 40-year history.  The Corps last
received such an appropriation in fiscal year 1990 for the
acquisition of a mainframe computer system. 


--------------------
\3 Plant increment represents the higher future costs of replacement
due to inflation. 


   CAPITAL PLANNING AND BUDGETING
   PROCESS
------------------------------------------------------- Appendix III:4

Planning and budgeting for PRIP purchases is achieved through
preparation of a 5-year plan, a major item new start\4 (MINS)
authorization request, and a PRIP funding request. 

A 5-year plan is prepared by each of the Corps districts and lists
all fixed assets a district would like to acquire through PRIP.  At
this juncture, districts are not given a budget target.  Requested
assets are classified into the following PRIP categories:  land,
structures, aircraft, dredges, floating plant, mobile land plant,
fixed-land plant, computers, software, and tools and equipment.  The
PRIP manager at headquarters receives but does not scrutinize each
district's 5-year plan, nor are the plans forwarded to OMB or the
Congress.  The 5-year plans help the PRIP manager know what districts
need now and in the future and facilitate projections for the
President's budget.  The districts revise their 5-year plans every 6
months to reflect funding decisions or changes in needs. 

In April, 2 years before the beginning of the budget year, districts
request through their respective divisions a MINS authorization that
is supposed to correspond to the first year of the 5-year plan.  Each
district's authorization request is supported by formal
justifications and economic analyses.  Districts are not given an
authorization target; their requests are unconstrained.\5 Divisions
review, sort, and consolidate authorization requests from the
districts.  Each of the Corps' divisions submits a consolidated
request to headquarters.  Headquarters assesses whether districts
will have sufficient future resources to reimburse the revolving fund
for replacement of the requested asset and considers whether civil
works projects can share assets.  Headquarters ranks asset requests
across the divisions and determines which assets can be purchased
based on projections of PRIP income.  If an asset need represents a
large or immediate expansion of the asset base rather than
replacement of an existing asset, headquarters will determine whether
appropriations should be requested to supplement PRIP income.  After
these funding decisions are made, a Corps-wide MINS authorization
request is submitted to OMB.  After OMB approval and incorporation in
the President's Budget, the MINS authorization request is provided to
appropriations subcommittees in the form of "justification sheets."
These sheets contain a narrative description of each MINS and show
the total and annual amounts provided, requested, and needed for each
MINS.\6 The total amount of the PRIP program, including minor items,
is also presented to the Corps' appropriations subcommittees.  By
approving the entire PRIP program, these subcommittees set an annual
target on PRIP expenditures.  The Corps' appropriations subcommittee
in the House of Representatives also receives the revolving fund's
financial statements during the budget process. 

Once the PRIP budget has been approved, any reprogramming that
exceeds planned spending in the PRIP categories by more than 10
percent must be approved by the Corps' appropriations subcommittees. 
The Corps cannot transfer money to or from the fund without
congressional approval. 

Although the Congress does not restrict the period of availability of
PRIP funds, Corps headquarters manages PRIP as though availability
was single-year.  If districts do not obligate funds for authorized
purchases within a year, funds revert to Corps headquarters.  Corps
officials feel that managing PRIP as if funds were available for 1
year allows management to decide how resources can be best used and
is consistent with its subcommittees annual approval of PRIP
spending. 


--------------------
\4 A major item new start is any single PRIP purchase over $700,000. 

\5 Units are prohibited from purchasing some items by Corps
management and the Congress.  For example, the Corps currently has a
moratorium on the purchase of optical disk imaging and video
teleconferencing equipment until standard, Corps-wide specifications
are developed.  The Congress has prohibited the Corps from owning
more than four aircraft and purchasing additional dredges. 

\6 Construction of some of these assets is funded on an incremental
basis. 


   RESPONSE TO OMB BULLETIN 94-08
------------------------------------------------------- Appendix III:5

Corps officials submitted the required 5-year plan and a description
of the agency's planning and budgeting process in response to
Bulletin 94-08.  Because water resource projects were excluded from
the Bulletin's definition of fixed assets, the submission pertained
only to PRIP purchases that met the reporting threshold.\7

Corps officials were easily able to fulfill the Bulletin's reporting
requirements because the Congress and OMB already received much of
the data required by the Bulletin, although in a less organized or
comprehensive format.  Corps officials felt that OMB examiners were
already familiar with the agency's needs and budgeting practices and
did not gain new insights from the submission. 


--------------------
\7 Bulletin 95-03 expanded the definition of fixed assets to include
the Corps' water resource projects. 


THE INTERAGENCY FLEET MANAGEMENT
SYSTEM
========================================================== Appendix IV

The Interagency Fleet Management System (IFMS) is a component of
GSA's Federal Supply Service (FSS).  FSS provides common supplies and
services, such as transportation, mail, and travel management, to
federal agencies, but IFMS' vehicle and equipment purchases account
for most of the FSS' spending on capital assets.  IFMS and the FSS's
supply operations are funded through a revolving fund, the General
Supply Fund (GSF).  IFMS differs from other case studies with
revolving funds because it is more dependent on the retention of
proceeds from asset disposal. 


   FIXED ASSETS ACQUIRED
-------------------------------------------------------- Appendix IV:1

IFMS acquires and manages several types of vehicles for other federal
agencies, with sedans and light trucks constituting the majority of
the fleet.  IFMS' 700 FTEs oversee a fleet of 145,000 vehicles. 
Although federal agencies are not required to obtain vehicles through
IFMS, about 50 percent of all vehicles used by federal agencies are
supplied by IFMS.\1


--------------------
\1 This figure excludes vehicles used by the Postal Service. 


   CAPITAL SPENDING TRENDS
-------------------------------------------------------- Appendix IV:2

Although IFMS operating obligations were nearly equal to or exceeded
capital obligations in real terms during the early and mid 1980s,
figure IV.1 shows that capital obligations have consistently exceeded
operating obligations since fiscal year 1990.\2 IFMS obligations for
capital in fiscal year 1995 were $502 million, nearly five times as
high as the real 1982 level.  In contrast, IFMS obligations for
operating expenses grew relatively little over the period; operating
obligations were $256 million in fiscal year 1982 and $277 million in
fiscal year 1995. 

   Figure IV.1:  IFMS Capital and
   Operating Obligations for
   Fiscal Years 1982 Through 1995

   (See figure in printed
   edition.)

As a result, the portion of IFMS obligations dedicated to capital is
consistently higher after fiscal year 1990.  (See figure IV.2.) Since
1990, capital as a portion of total obligations has remained above 50
percent.  Fiscal year 1995 capital obligations represented a 14-year
high of 64 percent of total obligations. 

   Figure IV.2:  IFMS Capital
   Obligations as a Percent of
   Total Obligations for Fiscal
   Years 1982 Through 1995

   (See figure in printed
   edition.)


--------------------
\2 Capital obligations as referred to in figures IV.1 and IV.2 are
not necessarily equivalent to our definition of capital.  IFMS
capital obligations are those for the line item "Fleet management: 
purchase of equipment" as reported in the GSF's program and financing
schedule in the appendix to Budget of the United States Government,
Fiscal Year 1997.  (See chapter 1 for more information on the program
and financing schedule and the limitations of this data.) Operating
obligations correspond to the line item "Fleet management" as
reported in the GSF's program and financing schedule in the appendix
to Budget of the United States Government, Fiscal Year 1997. 


   SOURCES AND USES OF FUNDING
-------------------------------------------------------- Appendix IV:3

User charges and disposal proceeds are deposited into the GSF and
used to maintain and regularly replace vehicles.  Agencies are
charged for the use of IFMS vehicles under a full-cost-recovery
pricing system.  IFMS recovers depreciation, maintenance, and
inflation costs from fleet users.  According to IFMS' fiscal year
1995 capital outlay plan, user charges provided about three-quarters
of IFMS 1995 income; the remaining quarter was primarily generated
from vehicle disposal. 

IFMS has also received advances from the Department of Energy (DOE)
to acquire alternatively fueled vehicles under the Energy Policy Act
of 1992.  This act requires that by fiscal year 1999, alternatively
fueled vehicles must make up at least 75 percent of the total number
of new vehicles acquired by the federal fleet.  The law stipulates
that DOE is to fund the incremental cost of acquiring alternatively
fueled rather than conventionally fueled vehicles. 

The GSF is intended to be a self-sustaining revolving fund and is not
designed to generate any significant profit.  Any operating profits
that exceed identified capital requirements of the fund in a given
fiscal year are not available to the GSF and are returned to the
Treasury.\3


--------------------
\3 Virtually all identified capital requirements relate to fleet
operations. 


   CAPITAL PLANNING AND BUDGETING
   PROCESS
-------------------------------------------------------- Appendix IV:4

Beginning in January of the preceding fiscal year, local IFMS fleet
managers consult with customers to forecast fleet needs for the
upcoming fiscal year.  The budget and accounting staff of the IFMS
and FSS also forecast needs by querying an automated system of
vehicle usage history.  IFMS management and FSS budget and accounting
staff compare their forecasts and negotiate a capital outlay plan,
which is part of the FSS Financial Plan.  The capital outlay plan
displays monthly projections of the fleet's capital income and
outlays for the current and upcoming fiscal year.  The outlay plan's
income components are:  prior-year funding authority,\4 advances from
other agencies for designated procurements, depreciation, inflation,
vehicle disposal, and recovery for vehicles destroyed in accidents. 
Outlays for vehicle acquisition are offset against these income
components to derive capital availability.\5 The FSS Financial Plan
must be approved by the GSA Comptroller and the GSA Chief Financial
Officer prior to the beginning of each fiscal year. 

Although the IFMS and the supply component operate independently
within the GSF, one component can borrow from the other if cash
shortfalls occur.  For example, IFMS has borrowed from the supply
component of GSF to accommodate spikes in payments to vendors. 
Purchases and payments are concentrated in a few months of the year
to obtain favorable prices and accommodate manufacturer's production
schedules, but IFMS customers are billed bimonthly.  When IFMS has
not accumulated enough income to make payment for the purchases, IFMS
has borrowed from the supply component of GSF and repaid in
subsequent months as fleet income was collected. 


--------------------
\4 Prior-year funding authority is budget authority from previous
years that has not been obligated. 

\5 Operating and overhead costs (including maintenance) are not shown
on the capital income plan.  These costs appear on the fund's income
and expense statements. 


   RESPONSE TO OMB BULLETIN 94-08
-------------------------------------------------------- Appendix IV:5

IFMS officials submitted the required 5-year plan and explanation of
its planning and budgeting process in response to OMB Bulletin 94-08. 
They were easily able to provide the requested information, except
for data beyond the budget year, from the FSS Capital Outlay Plan. 
IFMS officials do not regularly prepare out-year estimates due to the
volatility and uncertainty of the vehicle market and future needs,
and do not believe that the out-year projections submitted for the
Bulletin are reliable. 


THE PUBLIC BUILDINGS SERVICE
=========================================================== Appendix V

The Public Buildings Service (PBS) is the component of the General
Services Administration (GSA) responsible for providing and
maintaining work space for federal agencies.  Since 1975, PBS
activities have been financed through a revolving fund, the Federal
Buildings Fund (FBF).  Unlike the other revolving funds in this
study, the FBF cannot retain proceeds from the disposal of assets. 
The Congress has also placed restraints on the generation and use of
FBF income.  Therefore, FBF does not fully function as a
business-type revolving fund. 


   FIXED ASSETS ACQUIRED
--------------------------------------------------------- Appendix V:1

PBS owns and leases general- and special-purpose work space such as
office buildings, courthouses, and laboratories.  In 1994, PBS
employed approximately 9,000 FTEs to manage 1,776 government-owned
buildings and leased space in 6,421 buildings.  Through PBS, GSA
manages more office property than any other civilian agency.\1 In
1994, PBS leased about half of the office space it provided. 


--------------------
\1 Although some agencies have authority to obtain their own work
space, GSA is the mandatory supplier of office space for most federal
agencies. 


   CAPITAL SPENDING TRENDS
--------------------------------------------------------- Appendix V:2

As shown in figure V.1, FBF total annual obligations in real dollars
were significantly higher during fiscal years 1991 through 1995 than
during fiscal years 1982 through 1990; capital obligations have
contributed to this growth.\2 Although both capital and operating
obligations increased steadily in real terms during the 1980s,
capital obligations have nearly doubled since 1990 to $1.6 billion in
fiscal year 1995.  Operating obligations were $3.1 billion in fiscal
year 1990 and $4.1 billion in fiscal year 1995. 

   Figure V.1:  PBS Capital and
   Operating Obligations for
   Fiscal Years 1982 Through 1995

   (See figure in printed
   edition.)

Capital obligations have increasingly represented more of the FBF's
total obligations since the early 1990s.  (See figure V.2.) During
fiscal years 1982 through 1995, capital obligations as a percent of
total obligations generally increased gradually from 14 percent in
1982 to 28 percent in 1995 with one exception.  In fiscal year 1991,
capital obligations rose to 38 percent of total obligations largely
because the FBF received a $1.4 billion appropriation for courthouse
construction. 

   Figure V.2:  PBS Capital
   Obligations as a Percent of
   Total Obligations for Fiscal
   Years 1982 Through 1995

   (See figure in printed
   edition.)

Figure V.3 shows the composition of FBF obligations for the FBF's
largest operating component, rental of space, and two large capital
items, construction and repairs and alterations.\3 While obligations
for rent increased steadily between fiscal years 1982 and 1995,
obligations for construction have fluctuated significantly.  As noted
above, FBF received a significant appropriation for courthouse
construction in fiscal year 1991, and demands for courthouse
construction continue. 

   Figure V.3:  PBS Obligations
   for Construction, Repairs and
   Alterations, and Rental of
   Space from Fiscal Years 1982
   Through 1995

   (See figure in printed
   edition.)


--------------------
\2 Capital obligations as referred to in figures V.1 and V.2 are not
necessarily equivalent to our definition of capital.  PBS capital
obligations are obligations for "Capital investment" as reported in
the FBF's program and financing schedule in the appendix to Budget of
the United States Government, Fiscal Year 1997.  (See chapter 1 for
more information on the program and financing schedule and the
limitations of this data.) PBS operating obligations are total gross
obligations less capital obligations. 

\3 Construction represents the sum of the program and financing
schedule line items, "Construction and acquisition of facilities,"
"Design and construction services," and "Construction of lease
purchase facilities." Repairs and alterations and rental of space are
discrete line items in the program and financing schedule. 


   SOURCES AND USES OF FUNDING
--------------------------------------------------------- Appendix V:3

The FBF receives funding from three sources:  agency rent charges,
appropriations, and borrowing authority.  Most agencies are charged
rent for the use of PBS owned or leased space based on periodic
appraisals of the market value of the space, not on PBS' actual cost
to rent or own the space.  Although FBF was designed to collect
enough rental income to pay lessors, maintain owned work space, and
sustain a limited amount of new construction, a recent and large
demand for courthouse construction has exceeded the resources
available to the fund from user fees.  Therefore, expansion of PBS'
inventory has had to be partially funded through appropriations. 
Appropriations funded about half of PBS' construction projects in
fiscal year 1995. 

Unlike some other revolving funds, the FBF cannot retain proceeds
from disposal of PBS assets.  Although PBS has authority to dispose
of surplus property, by law all proceeds must be deposited into a
land and water conservation fund.\4 Disposal proceeds are not large
due to the relatively low volume of disposal and laws that require
GSA to give nonprofit groups first choice of surplus properties. 

FBF funds are used to repair and maintain work space, to purchase or
construct work space, to make payments to lessors, and to repay loans
from the Federal Financing Bank (FFB).\5 Repair and maintenance
funding levels are driven by PBS policies and overall funding levels. 
PBS policy gives basic repairs, such as elevator maintenance, first
priority for funding.  Minor repairs, such as replacing an elevator
motor, receive second priority.  Major modernization, such as
elevator replacement, receives third priority.  Although PBS has
established a goal of making minor repairs worth 2 percent of
inventory replacement value and major modernization on 5 percent of
property square footage each year, PBS does not necessarily achieve
these rates.  Overall funding levels, urgency, and rates of return
determine which repairs and maintenance projects will be undertaken. 
Similarly, new work space is constructed or purchased when less
costly than leasing and where funding is available.  However, PBS
officials said that recent funding levels have limited construction
projects primarily to courthouses, border stations, and work space
that cannot be leased commercially. 


--------------------
\4 The same law also prevents PBS from retaining income from leases
to non-federal entities. 

\5 The Congress authorized GSA to borrow from FFB to construct office
space during the 1970s. 


   CAPITAL PLANNING AND BUDGETING
   PROCESS
--------------------------------------------------------- Appendix V:4

PBS uses a community planning process to determine long-range needs
for the acquisition and maintenance of space.  PBS' regions identify
long-range space needs for 44 major communities\6 every 2 years and
for minor communities\7 as needed.  The community plans are developed
through dialogue between PBS clients, regions, and headquarters and
are reviewed by GSA's portfolio management group.  Once the plans are
finalized, the Planning Advisory Committee of GSA officials reviews
all of the planned projects for the budget year.  Based on income
projections and space needs, the committee recommends a budget-year
program to the PBS Commissioner and Deputy Commissioner.  After
approval from the PBS Commissioner and Deputy Commissioner, the plan
is sent to the GSA Administrator for approval.  Once approved,
national headquarters staff of each client agency are asked to review
the plan for any omissions or needed changes. 

The community planning process forms the basis for the long-range
plans PBS provides to OMB.  Prior to fiscal year 1996, PBS used its
community plans to periodically prepare 5-year plans for OMB.  For
fiscal years 1996 and 1997, PBS' response to OMB Bulletins 94-08 and
95-03 effectively replaced the previous 5-year plans.  However, these
responses have much less detail than PBS' previous capital plans. 
For example, the OMB Bulletin requires identification of specific
capital projects in the current and budget year only, although PBS
formerly had been identifying projects in all 5 years. 

The Congress annually appropriates all FBF funding, including the
income received from client agencies.  To decide how FBF income will
be used, FBF's authorizing and appropriations subcommittees review
prospectuses for each construction or acquisition project in excess
of $1.81 million or any lease alteration project with an estimated
cost of at least $0.905 million.  A prospectus justifies the method
of acquisition and provides detailed cost estimates.  The GSA
Administrator can annually increase the prospectus thresholds based
on the Department of Commerce's Construction Index.  After the FBF
budget is enacted, PBS must seek congressional approval from its
appropriations subcommittees to reprogram 10 percent or more of funds
allocated for specific FBF activities.  Any transfers between the FBF
and other accounts require congressional approval. 

The Congress has controlled FBF income by limiting the rental
payments of some client agencies.  During the 1980s, the Congress
believed some PBS rental charges were too high and began to impose
caps on the rents of some agencies.  Although only three agencies
currently have rent caps, PBS estimates substantial income loss over
the years from these caps. 


--------------------
\6 PBS defines major communities as those having at least 1 million
square feet of PBS space. 

\7 Minor communities are those having less than 1 million square feet
of PBS space. 


   RESPONSE TO OMB BULLETIN 94-08
--------------------------------------------------------- Appendix V:5

PBS submitted the required 5-year plan and an explanation of PBS'
goals, new proposals, and planning processes in response to Bulletin
94-08.  The 5-year plan projected outlays for the acquisition of
general purpose office buildings, courthouses, border stations, and
laboratories.  Financial plans outlining PBS' proposals to reduce the
proportion of leased property and to repair existing government-owned
space accompanied the 5-year plan. 

Having produced 5-year capital plans in the past, PBS officials
stated that most of the information for the Bulletin was readily
assembled.  Although PBS 5-year plans produced prior to Bulletin
94-08 contained more detail about specific projects than was
requested by the Bulletin, the response contained PBS' first attempt
to project outlays over the 5-year period.  PBS officials felt that
the Bulletin encouraged their efforts to focus on multiyear financial
planning and the type of space being acquired.  PBS officials also
believed the Bulletin could help address scoring issues that have
concerned them. 


THE U.S.  GEOLOGICAL SURVEY
========================================================== Appendix VI

The U.S.  Geological Survey (USGS) is a bureau of the Department of
the Interior that conducts research and provides basic scientific
information regarding natural resources and hazards.  Until fiscal
year 1995, scientific equipment purchases were funded solely from
USGS' annual appropriations account, Surveys, Investigations, and
Research (SIR).  In fiscal year 1995, the Congress expanded USGS'
Working Capital Fund (WCF) account to include an "investment
component" to partially fund laboratory operations, facilities
improvements, and equipment replacement.  Agency managers can make
contributions from annual SIR appropriations to this "investment
component" for a future purchase of scientific equipment.  The
investment component is unique among the financing mechanisms of our
case studies because it allows managers to voluntarily save for
fixed-asset purchases. 


   FIXED ASSETS ACQUIRED
-------------------------------------------------------- Appendix VI:1

USGS acquires telecommunications equipment, information systems, and
research and scientific equipment.  In fiscal year 1995, USGS
obligated a total of $51 million from the SIR and WCF accounts for
the acquisition of equipment.  Some USGS equipment is shared with
states and universities to offset USGS' costs. 


   CAPITAL SPENDING TRENDS
-------------------------------------------------------- Appendix VI:2

As shown in figure VI.1, USGS' operating obligations were
significantly greater than capital obligations in real dollars from
fiscal year 1982 through fiscal year 1995.\1 Although operating
obligations varied little since 1983, capital obligations doubled
from fiscal years 1990 through 1991 to $64 million and fell to $56
million in 1995. 

   Figure VI.1:  USGS Capital and
   Operating Obligations for
   Fiscal Years 1982 Through 1995

   (See figure in printed
   edition.)

Between 1982 and 1995, USGS spent about 7 percent or less of its
total obligations on capital.  (See figure VI.2.) Capital obligations
as a percent of total obligations fluctuated during this time between
a low of 3.7 percent in fiscal year 1986 and a high of nearly 7.3
percent in 1992. 

   Figure VI.2:  USGS Capital
   Obligations as a Percent of
   Total Obligations for Fiscal
   Years 1982 Through 1995

   (See figure in printed
   edition.)


--------------------
\1 Capital obligations as referred to in figures VI.1 and VI.2 are
not necessarily equivalent to our definition of capital.  Capital
obligations are the sum of USGS' obligations for object class 31.0,
"equipment," and object class 32.0, "land and structures" as reported
in the appendix to Budget of the United States Government, Fiscal
Year 1997.  (See chapter 1 for more information on object class and
the limitations of this data.) Operating obligations are total gross
obligations less capital obligations. 


   SOURCES AND USES OF FUNDING
-------------------------------------------------------- Appendix VI:3

USGS primarily funds capital acquisitions from two accounts: 
Surveys, Investigations, and Research (SIR) and the Working Capital
Fund (WCF). 


         SIR
---------------------------------------------------- Appendix VI:3.0.1

About two-thirds of SIR funding is appropriated; the remaining third
comes from fees charged to federal agencies and states.  SIR funding
is used to carry out such programs and activities as:  national
mapping, geography, and surveys; geologic and mineral resource
surveys and mapping; water resources investigations; general
administration; and facilities.  Some equipment purchases are made
from this account, but approximately 80 percent of SIR funds are
currently consumed by salaries and rent.  USGS can reprogram the
lesser of $500,000 or 10 percent of a line item within the SIR
account. 


         WCF
---------------------------------------------------- Appendix VI:3.0.2

The WCF has two primary component types:  fee-for-service and
investment.  The fee-for-service component includes the National
Water Quality Laboratory (NWQL) and the Washington Administrative
Service Center (WASC).  NWQL and WASC users are assessed a fee to
fund the operations of these organizations and eventual replacement
of their assets.  The investment component of the WCF includes a
mainframe computer, telecommunications, equipment, and facilities. 
The mainframe computer and telecommunications are funded through fee
assessments, but equipment and facilities are funded through planned,
voluntary contributions from the SIR account.\2


--------------------
\2 Throughout this report, we use the term "investment component" to
refer only to those elements of the WCF that are funded through
planned, voluntary contributions. 


   CAPITAL PLANNING AND BUDGETING
   PROCESS
-------------------------------------------------------- Appendix VI:4

Each division within USGS has its own process for developing a budget
and a financial and operating plan.  The investment plan is intended
to be the link between division budgets and the WCF investment
component. 

Fixed assets can be funded directly through SIR, or the investment
component of WCF, or a combination of both.\3 USGS units may choose
to fund equipment through WCF contributions if the item is very
expensive or is not immediately needed.  If a unit decides to
purchase an asset through WCF, an investment plan is prepared that
specifies the goods or services to be acquired, the estimated
acquisition or replacement cost, the number of years required to fund
the acquisition, and the schedule of deposits into the fund
(annually, semiannually, quarterly, or monthly).  Units are not
required to fund the full acquisition cost of the asset through WCF
contributions; units can fund any portion of the cost directly
through SIR. 

USGS has placed restrictions on the use of the investment component
to reflect congressional intentions regarding use of the WCF.  For
example, all investment plans must be approved by the delegated
authority within the respective division or the bureau. 
Contributions must be made for at least 2 years with purchase
occurring in the third year or thereafter, and WCF contributions may
not be used for the construction of buildings. 


--------------------
\3 Because the investment component is relatively new and voluntary
and because operating budgets may be strained, it is uncertain how
often managers will use this component. 


   RESPONSE TO OMB BULLETIN 94-08
-------------------------------------------------------- Appendix VI:5

USGS did not submit a 5-year plan in response to the Bulletin but did
describe its WCF.  A 5-year plan was not submitted because USGS'
individual equipment purchases were not large enough to meet the
Bulletin's reporting threshold.  USGS noted that two of its largest,
fixed-asset purchases had been previously and extensively reviewed by
OMB. 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================= Appendix VII


   ACCOUNTING AND INFORMATION
   MANAGEMENT DIVISION,
   WASHINGTON, D.C. 
------------------------------------------------------- Appendix VII:1

Christine E.  Bonham, Assistant Director
C.  Bernard Myers, Evaluator-in-Charge
Laura E.  Hamilton, Evaluator


   OFFICE OF THE GENERAL COUNSEL
------------------------------------------------------- Appendix VII:2

Chuck Roney, Assistant General Counsel
Edda Emmanuelli-Perez, Senior Attorney

*** End of document. ***