Budget Issues: Incremental Funding of Capital Asset Acquisitions 
(26-FEB-01, GAO-01-432R).					 
								 
This correspondence comments on the use of incremental funding	 
for capital projects. GAO identified civilian nondefense agency  
capital projects with estimated costs of $175.6 billion, based on
agency budget justifications and other data. Costs for		 
incrementally funded and high technology civilian projects are	 
estimated at $154.7 billion. Of this amount, $78.5 billion in	 
budget authority has been provided through fiscal year 2000,	 
leaving $76.2 billion of budget authority still required after	 
fiscal year 2000 to complete these projects, a requirement that  
constitutes a claim on discretionary spending in future years.	 
About half of the $154.7 billion is for high technology projects.
Because some capital projects have unknown funding requirements  
beyond the fiscal year 2001 request, the remaining budget	 
authority needed to complete all projects exceeds the $76.2	 
billion identified and assumes no further cost growth. This	 
budget authority relates only to civilian projects. Department of
Defense spending for capital acquisitions is generally fully	 
funded; its fiscal year 1999 capital spending totaled almost $53 
billion. If the Navy shipbuilding and conversion account were to 
be moved from full to incremental funding for a given period of  
time, this would not allow the Navy to procure more ships for a  
given amount of funding. In general, full funding ensures that	 
the full estimated costs of decisions are recognized at the time 
that the commitment is made. Incremental funding erodes future	 
fiscal flexibility for programs such as shipbuilding because	 
funding is dedicated to completing procurements begun in previous
years.								 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-01-432R					        
    ACCNO:   164533						        
    TITLE:   Budget Issues: Incremental Funding of Capital Asset      
             Acquisitions                                                     
     DATE:   02/26/2001 
  SUBJECT:   Budget authority					 
	     Budgeting						 
	     Defense budgets					 
	     Defense procurement				 
	     Federal procurement				 
	     Financial management				 
	     Future budget projections				 

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GAO-01-432R

Incremental Funding of Capital Assets

United States General Accounting Office Washington, DC 20548

February 26, 2001 The Honorable Pete V. Domenici Chairman Committee on the
Budget United States Senate

Subject: Budget Issues: Incremental Funding of Capital Asset Acquisitions
Dear Mr. Chairman: In your August 23, 2000, letter you asked us to (1)
identify the extent to which capital projects are funded incrementally; (2)
illustrate the effects of incremental funding by assessing the implications
for future DOD budgets if the Navy's shipbuilding and conversion account
were to change from full to incremental funding; (3) examine the
consequences of the past use of incremental funding, including
lease-purchases, at civilian agencies and the Department of Defense (DOD);
and (4) provide ideas that might be helpful to the Congress in promoting
more-effective budgeting for capital asset acquisitions.

On December 21, 2000, we briefed the Committee staff on the results of our
work. As agreed with your office, we later briefed the staffs of the Senate
Committee on Armed Services, Senate Committee on Appropriations, and the
House Committee on Appropriations. This letter summarizes our work and
transmits briefing slides.

To identify incrementally funded projects, we reviewed fiscal year 2001
Budget Justifications and agency documentation for 18 agencies involving
approximately 700 individual projects. We identified projects that have
received funding through fiscal year 2000 and are still in progress. To
illustrate the effects of incremental funding on the Navy's shipbuilding and
conversion account, we used the Navy's fiscal year 2002 Program Objective
Memorandum to determine the full-funding baseline and developed four
notional incremental funding scenarios. To examine the consequences of past
incremental funding, we researched prior GAO work in this area. We conducted
our review between August and December 2000 in accordance with generally
accepted government auditing standards. We obtained comments from DOD, Army
Corps of Engineers, NASA, Federal Bureau of Prisons, and the U.S. Coast
Guard on the slides relevant to each. The agency officials concurred with
the accuracy of the information contained in the slides. The Office of
Management and Budget (OMB) reviewed the entire briefing and concurred with
our position on full funding.

2 GAO-01-432R Incremental Funding of Capital Assets

Background

Capital projects can be grouped into three funding categories: full funding,
incremental funding, and high technology. Fully funded capital projects are
those for which budget authority is or appears to be provided for the full
estimated cost of a capital project or a stand-alone stage if the project is
divisible into stages. Fully funded projects also include the survey and
design of a capital project and a major upgrade or renovation that results
in a usable asset. Incrementally funded capital projects are projects for
which budget authority is or appears to be provided for only part of the
estimated cost of a capital acquisition or part of a usable asset. High
technology capital projects are incrementally funded projects for which
budget authority is or appears to be provided for only part of the estimated
cost of information technology acquisitions or projects that are highly
dependent on research and development and highly uncertain in outcome. Space
exploration equipment would be an example of such a project. Incremental
funding can be justified for high technology capital projects because such
projects are often closer in nature to research and development and funding
provided on an incremental basis can provide useful knowledge even if no
additional funding is provided. GAO has advocated full funding for capital
asset acquisitions as a way to increase recognition of implied commitments
embodied in budgetary decisions as compared to the incremental funding
approach. OMB and others in the budget community have supported and endorsed
this concept. The Navy and DOD also are proponents of the full-funding
approach.

Results in Brief

We identified civilian nondefense agency capital projects with total
estimated costs of $175.6 billion, based on agency Budget Justifications and
other agency data. Costs for incrementally funded and high technology
civilian projects are estimated to total $154.7 billion. Of this amount,
$78.5 billion in budget authority has been provided through fiscal year
2000, leaving $76.2 billion of budget authority still required after fiscal
year 2000 to complete these projects, a requirement that constitutes a claim
on discretionary spending in future years. About half of the $154.7 billion
total is for high technology projects. Because some capital projects have
unknown or “yet to be determined” funding requirements beyond
the fiscal year 2001 request, the remaining budget authority needed to
complete all projects is actually greater than the $76.2 billion identified
and assumes no further cost growth. This budget authority relates only to
civilian projects. DOD spending for capital acquisitions is generally fully
funded; its fiscal year 1999 capital spending totaled almost $53 billion.
(See slides 12 and 13.)

If the Navy shipbuilding and conversion account were to be moved from full
to incremental funding for a given period of time, this would not allow the
Navy to procure more ships for a given amount of funding. Additional ships
would require additional funding. After the initial year, incremental
funding reduces the amount of budget authority available to fund new ships
in any given fiscal year because a portion of the funding must be devoted to
completing ships partially funded in prior years. In addition, there is a
risk of cost growth associated with all capital projects-cost growth has
occurred with fully funded projects as well as incrementally funded
projects. Any cost growth on ships partially funded in prior years would
further reduce the funding available

GAO-01-432R Incremental Funding of Capital Assets 3 for new ships. In
addition, costs and commitments continue beyond the years depicted in

the briefing slides in all scenarios. (See slides 20 to 29.) There are
several other budgetary implications as well as acquisition management
issues related to incremental funding for the Navy and for agencies in
general. In general, full funding ensures that the full estimated costs of
decisions are recognized at the time that the commitment is made.
Incremental funding erodes future fiscal flexibility for programs such as
shipbuilding because funding is dedicated to completing procurements begun
in previous years. According to DOD and OMB officials, incremental funding
also limits cost visibility and accountability. These officials believe that
acquisition estimates are likely to increase because there would be an
incentive to “low ball” the estimate at the beginning.
Additionally, contractors may hedge their bets on pricing because they may
not be able to take advantage of economies of scale that can come with
longer-term and more certain commitments. (See slides 30 and 31.)

The use of incremental funding and lease-purchase arrangements in the past
has had some negative consequences. For example, a 1996 GAO report 1 cited
incremental funding as a key factor underlying Department of Energy project
cost overruns and schedule delays. Another GAO report 2 found that the use
of long-term leases for auxiliary ships in the 1970s and 1980s resulted in
higher costs per ship. (See slides 33 and 34.)

Promoting effective management of capital asset acquisitions is important.
We recognize that some incremental funding for high technology acquisitions
is justified because, while such projects are intended to result in a usable
asset, they are closer in nature to research and development activities.
However, for other capital projects, as we have previously reported, 3 full
funding is an important tool for maintaining governmentwide fiscal control.
Failure to recognize the full costs of proposed commitments when budget
decisions are made could lead to distortions in the allocation of resources.

During the course of our review, we also found that the data supporting
agency capital project requests are often incomplete and/or not clear. For
example, some project requests did not include the total estimated project
costs. For other requests, the project descriptions were vague, making it
difficult to determine future costs or whether funding provided would
produce a usable asset. Since there is value in providing executive and
legislative decision-makers the best possible information, we plan to
discuss with OMB some options for improved reporting.

We will send copies of this letter to Senator Kent Conrad, Senator Ted
Stevens, Senator Robert C. Byrd, Senator John Warner, Senator Carl Levin,
Representative Jim Nussle,

1 Department of Energy: Opportunity to Improve Management of Major System
Acquisitions (GAO/ RCED- 97- 17, Nov. 26, 1996). 2 Defense Acquisitions:
Historical Analyses of Navy Ship Leases (GAO/ NSIAD- 99- 125, June 25,

1999). 3 Accrual Budgeting: Experiences of Other Nations and Implications
for the United States

(GAO/ AIMD- 00- 57, Feb. 18, 2000) and Budget Issues: Budgeting for Federal
Capital (GAO/ AIMD97- 5, Nov. 12, 1996).

4 GAO-01-432R Incremental Funding of Capital Assets Representative John M.
Spratt, Jr., Representative C.W. Bill Young, Representative

David Obey, Representative Bob Stump, and Representative Ike Skelton in
their capacities as Chair or Ranking Member or Ranking Minority Member of
Senate or House Committees. We also will send a copy to the Honorable
Mitchell E. Daniels, Jr., Director, Office of Management and Budget. Copies
will be made available to others on request.

We appreciate the opportunity to be of assistance. If you or your staff have
any questions regarding the briefing or this letter, please contact me at
(202) 512-9573 or Christine Bonham, Assistant Director, at (202) 512-9576.
Key contributors to this review were Trina Lewis, Jennifer Eichberger, and
David Best.

Sincerely yours, Paul L. Posner Managing Director, Federal Budget Strategic
Issues

Enclosure

Enclosure 5

GAO-01-432R Incremental Funding of Capital Assets

Briefing for the Senate Budget Committee on Incremental Funding of Capital
Asset Acquisitions

December 21, 2000

Enclosure GAO-01-432R Incremental Funding of Capital Assets

6

Agenda

Background

Objectives, scope, methodology, and data limitations

Civilian capital projects funded through fiscal year 2000 and future
resources required

Department of Defense capital spending

Agency capital project examples

Navy Shipbuilding- incremental funding scenarios

Budgetary and other acquisition management issues related to incremental
funding

Consequences of past incremental funding (including lease- purchases)

More effective budgeting for capital asset acquisitions

Related GAO products

Enclosure GAO-01-432R Incremental Funding of Capital Assets

7

Background

Full Funding

GAO has advocated full funding for capital projects as a way to increase
recognition of implied commitments embodied in budgetary decisions.

OMB's capital programming guidance has endorsed this concept, and it was
supported by the President's Commission to Study Capital Budgeting.

Full funding is defined as the practice of providing budget authority for
the full costs of a capital acquisition or project at the time decisions are
made to

provide financial resources.

Full funding need not mean the entire project if the project is divisible
into stand- alone stages. For such a project full funding is providing
budget

authority sufficient to complete a stand- alone stage. A stand- alone stage
is a component of a project that either (1) provides information that allows
for

the planning, design, and assessment of costs, benefits, and risks of a
potential acquisition or (2) results in a usable asset for which the
benefits

exceed the costs even if no further funding is provided.

OMB considers the use of a combination of regular and advance appropriations
as satisfying the full- funding concept.

Navy and DOD are proponents of full funding.

Enclosure GAO-01-432R Incremental Funding of Capital Assets

8

Background

Incremental Funding

Incremental funding is the practice of providing budget authority for only a
portion of a capital acquisition or project- a portion that would not be
usable if no further

funding were provided. Incremental funding is usually funding sufficient to
cover obligations estimated to be incurred in one fiscal year. Funding to
continue the

project would need to be requested from the Congress each year unless
advance appropriations were provided.

Although OMB considers advance appropriations as consistent with full
funding, the practice could be viewed as a form of incremental funding.

Capital Investment Defined

Capital asset spending within the scope of this study is defined as spending
for defense weapons systems; other procurement, buildings, natural resource

projects; and a wide variety of other construction and equipment owned by
the federal government and used to deliver federal services. It includes not
only the

assets as initially acquired, but also major improvements, renovations, and
repairs.

Capital asset spending also includes spending for information technology and
research and development activities directly intended to result in a usable
capital

asset.

Enclosure GAO-01-432R Incremental Funding of Capital Assets

9

Background

Perspective on Magnitude of Current Capital Investment

$74.7 billion outlays in fiscal year 1999 on direct major physical capital;
represents 4.4 percent of fiscal year 1999 total direct federal outlays.

$53.9 billion outlays on defense- related capital assets.

$20.8 billion outlays on nondefense capital assets.

President's fiscal year 2001 budget estimated $75.7 billion outlays in
fiscal year 2000 and $78.5 billion outlays in fiscal year 2001 on direct
major

physical capital.

Enclosure GAO-01-432R Incremental Funding of Capital Assets

10

Objectives

Senate Budget Committee requested that GAO:

Identify incrementally funded capital projects at major capital- owning
agencies.

Assess the implications for the Navy's shipbuilding and conversion account
if its funding were changed from full to incremental and illustrate this
with

scenarios.

Examine the consequences of the past use of incremental funding, including
lease- purchase arrangements, at civilian agencies and DOD.

Provide ideas that might assist the Congress in promoting more effective
budgeting for capital assets.

Enclosure GAO-01-432R Incremental Funding of Capital Assets

11

Scope and Methodology

Using GAO's Budget Database, identified agencies with capital outlays in
fiscal year 2000. This database contains data taken from OMB's MAX

system- the computerized system used to collect and process information
needed to prepare the President's Budget.

Identified 25 entities whose capital spending covers over 80 percent of
fiscal year 2000 capital spending (excluding military procurement which was

separately addressed). Reviewed data for approximately 700 individual
projects.

Data sources: fiscal year 2001 Budget Justifications, agency capital plans,
other agency documents, and OMB, CBO, and GAO staff.

Identified agency capital projects that have received funding through fiscal
year 2000 and are still in progress (on- going). Did not identify fiscal
year 2001

appropriated amounts.

Included data such as estimated total project cost, funding provided through
fiscal year 2000, advance appropriations requested (if any), and computed

estimated costs to complete project.

Enclosure GAO-01-432R Incremental Funding of Capital Assets

12

Scope and Methodology

Grouped capital projects into three categories of funding:

Full funding: budget authority is

or appears to be provided for the full estimated cost of a capital project
or stand- alone stage, including the survey

and design phase of a project and major upgrade or renovation resulting in a
usable asset.

Incremental funding: budget authority is or appears to be provided for only
part of a capital project or part of a usable asset; requires additional
funding

to complete acquisition.

High technology: incremental budget authority is or appears to be provided
for information technology projects and capital projects that are highly

dependent on research and development and highly uncertain in outcome, such
as space exploration equipment.

Enclosure GAO-01-432R Incremental Funding of Capital Assets

13

Scope and Methodology

For Shipbuilding and Conversion account, used Navy's fiscal year 2002
Program Objective Memorandum to determine baseline. Then developed 4

scenarios: (1) baseline funded incrementally over 3 years; (2) additional
ships added to baseline and funded incrementally over 3 years; (3)
additional ships

added to baseline and funded incrementally over 5 years; and (4) selected
ship classes (Carriers and Amphibious ships) incrementally funded over 3

years.

The DOD, Army Corps of Engineers, NASA, Federal Bureau of Prisons, and Coast
Guard have each reviewed the relevant slides. The Office of

Management and Budget has reviewed the entire briefing.

Enclosure GAO-01-432R Incremental Funding of Capital Assets

14

Data Limitations and Required Judgments

Accuracy of Budget Justification and other agency data not verified.

Level of detail needed to completely judge whether funding was for a stand
alone stage was not always provided in the data source we used; classifying

spending required significant use of team judgment based on available data
and time constraints. Agencies may be able to provide additional clarifying

data if questioned in detail on each project.

Most agencies have not reviewed and agreed with judgments made.

No assurance that all of capital projects were identified in all agencies.

Data for the Environmental Protection Agency and the Department of Veterans
Affairs were not received in time to review and analyze.

In seeking to identify consequences of past use of incremental funding we
may not have identified all past uses.

Enclosure GAO-01-432R Incremental Funding of Capital Assets

15

List of Agencies/ Bureaus

Army Corps of Engineers General Services Administration Bureau of Prisons
Indian Health Services

Bureau of Reclamation Internal Revenue Service Centers for Disease Control &
Prevention NASA

Coast Guard National Institutes of Health Department of Defense National
Oceanic & Atmospheric Administration

Department of Energy National Park Service Department of Housing & Urban

Development National Science Foundation

Department of Veterans Affairs Smithsonian Institution Environmental
Protection Agency Department of State

Federal Aviation Administration Tennessee Valley Authority Food & Drug
Administration U. S. Postal Service

Federal Railroad Administration

Enclosure GAO-01-432R Incremental Funding of Capital Assets

16

Summary Tables

Enclosure GAO-01-432R Incremental Funding of Capital Assets

17

Civilian Capital Projects Funded Through Fiscal Year 2000 and Future
Resources Required

Type of Funding (Dollars in Thousands)

Total Budget Authority to Date

and Identified Future

Requirements Total Budget

Authority Provided Through Fiscal Year

2000 Remaining Budget

Authority Required After Fiscal Year

2000* Future

Requirements Requested as

Advance Appropriations

a

Incrementally Funded Civilian

$76,751,876 $31,421,676 $45,330,200 $1,621,379

High Technology- Civilian

77,930,848 47,018,861 30,911,987 14,179,954

Fully Funded- Civilian

20,915,871 13,200,243 7,715,628 b

1,437,075

Total- All Projects

$175,598,595 $91,640,780 $83,957,815 $17,238,408 c

*Some projects included have funding requirements beyond the FY 2001 request
that are unknown or yet to be determined, therefore the remaining budget
authority that will be required after FY 2000 is certainly greater than the
numbers presented here.

a Advance appropriations amounts represent amounts agencies requested in the
FY 2001 budget request. These advance

appropriations ranged from FY 2002 through 2008. Advance appropriation
totals are included in the “Remaining Budget Authority Required After
Fiscal Year 2000” totals as well.

b This amount was identified by agencies as their planned future requests
related to fully funded projects.

c Approximately $4.8 billion in advance appropriations are not included in
this total because they were requested for projects

starting in FY 2001 or later and therefore are not in the scope of this
tabulation.

Enclosure GAO-01-432R Incremental Funding of Capital Assets

18

Department of Defense Capital Spending (Fully Funded)

a Capital Outlays

Account (Dollars in Thousands)

FY 1999 FY 2000

(estimate) FY 2001

(estimate) Advance

Appropriation Request

b

Armed Forces Retirement Home (Civilian)

$6,000

Family Housing

$731,000 $898,000 $801,000

Military Construction

$3,333,000 $3,248,000 $3,640,000 $821,000 c

Operation and Maintenance

$426,000 $480,000 $333,000

Procurement

$48,288,000 $47,356,000 $50,215,000

Total

$52,778,000 $51,982,000 $54,989,000 $827,000

Source: GAO Budget Database, Capital Expenditures by Character Class;
President's Budget, Fiscal Year 2001, Analytical Perspectives.

a

Two procurement projects were determined to be exceptions to the full
funding concept: At a unit cost of $1,922.8 million

,

the last of eight LHD- 1 amphibious assault ships is being incrementally
funded. The LHD- 8 received $44.2 million in budget authority in FY1999,
$356. 2 million in FY2000, and $460 million in FY2001, leaving a balance of

$1,062.4 million. The LPD- 17 amphibious ships have been fully funded
through FY2000, but in FY2001 received $560.7 million to fund 2 ships

with a unit cost of $744. 6 million each. b

Advance appropriations amounts represent amounts DOD plans to request as
advance appropriations in FY 2002 through 2005. c

These advance appropriations are to fully fund selected military
construction and family housing projects in the DOD.

Enclosure GAO-01-432R Incremental Funding of Capital Assets

19

Some Specific Examples

Enclosure GAO-01-432R Incremental Funding of Capital Assets

20

Army Corps of Engineers Incrementally Funded Project

Project Name: Atlantic Intracoastal Waterway Bridge at Great Bridge, VA

Brief Description:

Replacement of the existing federal bridge. New bridge provides 5 lanes, 2
shoulders, and pedestrian walkways.

Funding Stream

(Budget Authority in Thousands of Dollars):

Estimated Federal Cost

Provided Through

FY 1999 Provided in

FY 2000 Requested

in FY 2001 Required

After FY2001 to Complete

Project

$24,054 5, 066 2,573 8, 492 7,923

Key Phrases (terms & phrases used to determine funding category):

Funds to initiate preconstruction engineering and design were appropriated
in FY1995. Funds to initiate construction were appropriated in FY1998.

Status as of Jan 1, 2000- 10% complete

Physical Completion Schedule- September 2002

The requested amount in Fiscal Year 2001 will be applied as follows:
Continue construction $7,592,000

Construction management $ 900,000 Total $8,492,000

Enclosure GAO-01-432R Incremental Funding of Capital Assets

21

U. S. Coast Guard Incrementally Funded Project

Project Name:

Alex Haley Conversion Project- Phase II

Brief Description :

CGC Alex Haley was recently converted to operate in the harsh Alaska/ Bering
Sea. Improvements to crew habitability, operation capability, and machinery
and personal safety are still

required. Plans include the installation of a helicopter hangar to allow
deployment of HH- 65 helicopter; installation of a machinery space fixed
fire suppression system; and installation of an onboard trash

incinerator.

Funding Stream

(Budget Authority in Thousands of Dollars): Estimated

Federal Cost Provided

Through FY 1999

Provided in FY 2000

Requested in FY 2001

Required After FY2001

to Complete Project

TBD $20,000 0 3,200 TBD

Funding Descriptions:

FY1998 Project Start- up FY1999 Completion of Phase I Vessel Conversion

FY2001 Engineering, Design & Long Lead Time Material procurement FY2002
– Phase II Production

FY2004 FY2005 Project Completion

Enclosure GAO-01-432R Incremental Funding of Capital Assets

22

National Aeronautics and Space Administration Incrementally Funded Project-
High Technology

Relativity Mission/ Gravity Probe- B

The development of the Relativity mission began in 1993

,

after many years of studying mission design alternatives and developing the
advanced technologies required for this mission to verify Einstein's theory
of

general relativity. The award of the spacecraft development contract was
made in 1994. The scheduled launch date is September 2001, using a Delta II
launch vehicle.

(Budget Authority in Thousands of Dollars)

Activity Prior to

FY1999 FY 1999 FY 2000 FY 2001 FY 2002 FY 2003 TOTAL

Development $388,200 $46,500 $37,700 $13,800 $486,200 Mission

Operations* 1,000 1, 000 1,000 3, 000

Data Analysis*

8,000 5, 200 3,100 16,300 Launch

Support 24,100 14,800 12,200 51,100

Tracking & Data

Support* TBD

Total (Excluding

Civil Service Costs)

$412,300 $61,300 $49,900 $22,800 $6,200 $4,100 $556,600

* These line items are not included in the capital spending totals found on
page 17 because they fund operation activities.

Enclosure GAO-01-432R Incremental Funding of Capital Assets

23

Federal Bureau of Prisons Use of Advance Appropriations

The prisons listed below are being fully funded in stand- alone stages by
the Bureau of Prisons. The first year appropriations will fund the site
planning/ preparation phase of the prison. The funds in year two will

provide for a design/ build contract.

(

Budget Authority in Thousands of Dollars)

Advance Appropriation Request Planned Future Prisons:

FY 2001 Request

FY 2002 FY 2003

Funding Starting in 2001 USP Western $11,930 $147,000

USP Southeast 11,931 133,000 FCI Southeast 5, 430 106,000

FCI Mid- Atlantic 1 5, 430 121,000 FCI Midwestern 5,431 131,000

SubTotals $40,152 $638,000 Funding Starting after 2001

FCI Western $6,000 $131,000 FCI South Central 5, 000 115,000

FCI Northeast 5, 000 133,000 FCI Mid- Atlantic 2 5, 000 133,000

Mid- Atlantic Secure Female 2,000 23,000 SubTotals $23,000 $535,000

TOTAL $40,152 $661,000 $535,000

Enclosure GAO-01-432R Incremental Funding of Capital Assets

24

Navy Shipbuilding

Enclosure GAO-01-432R Incremental Funding of Capital Assets

25

Navy Shipbuilding Incremental Funding Scenario Observations

For a given period of time, incremental funding does not procure more ships
for a given amount of funding. More ships will require more funding.

Incremental funding creates funding commitments in later years in order to
complete ships partially funded in prior years that at some point require
either

increased total funding or reduced funding for new ships.

Cost growth on incrementally funded ships would further increase the total
funding requirements in the following years and/ or further reduce funding
for

new ships. Cost growth currently happens under the full- funding approach.
Cost growth was not factored into the model that follows.

Costs and commitments continue beyond the years depicted in all scenarios.
While more ships are initiated in some scenarios, approval of the total
budget

authority to finish those ships is completed over a longer time frame.

Enclosure GAO-01-432R Incremental Funding of Capital Assets

26

Navy Shipbuilding Incremental Funding Scenarios

First- present a scenario run against the shipbuilding account covering FY
2001 to 2006 in which procurements are incrementally funded over rolling 3-

year periods.

Assumptions Scenario 1 (baseline) is essentially the Navy's 2002 Program
Objective Memorandum; advanced procurements are only considered for

the aircraft carrier and the DD- 21; incremental funding is evenly divided;
quantity procured is unchanged; no cost growth is included (although cost

growth regularly occurs for fully funded programs).

Second- present two scenarios in which funding initially freed up is used
for additional ship construction and examine the budgetary effect.
Incrementally

fund all previously planned procurements plus additional ships: 1. Scenario
2: Rolling 3- year period and

2. Scenario 3: Rolling 5- year period

Third- present a fourth scenario in which incremental funding is applied to
only selected ship classes (Carriers and Amphibious ships) on a rolling 3
year

period, with no additional ship purchases.

Enclosure GAO-01-432R Incremental Funding of Capital Assets

27

Navy Shipbuilding Baseline Ship Profile

Created a baseline from the Navy's 2002 Program Objective Memorandum.

Baseline Fiscal Year 2001 2002 2003 2004 2005 2006 Total

CVN 77 1

1

CVN ( X) APAP AP AP AP1

1

NSSN 11 1 1 1 1

6

DDG- 51 32 2 2 1

10

DD- 21 AP 1

1

LHD 1

1

LPD- 17 01 2 2 1

6

TADC( X) 12 2 2 1 2

10

JCC( X) 0 1

1 Quantity66 7 7 6 537

Funding (billions) $9.41 $5.58 $6.64 $7.82 $7.63 7.30 $44.38

Notes: (1) AP is advance procurement and only included for the carrier and
the DD- 21. (2) No LPD- 17s are procured in fiscal year 2001, based on
congressional action. (3) LHD- 8 is treated as fully funded in fiscal

year 2005. (4) Ship designations: CVNs are aircraft carriers, NSSNs are
submarines, DDGs and DDs are destroyers, LHD and LPDs are amphibious ships,
TADCs are auxiliary vessels, and the JCC is a command

ship.

Enclosure GAO-01-432R Incremental Funding of Capital Assets

28

Navy Shipbuilding Incremental Funding Scenario 1

Scenario 1: The baseline incrementally funded on rolling 3- year periods,
broken into prior- year commitments and new procurement. Expressed as a

percentage relative to the baseline for each fiscal year (see p. 27).

0 20 40 60 80 100 120

'01 '02 '03 '04 '05 '06 Fiscal Years

Percentage of Baseline

New Prior

Observations

: (1) Commitments of about $7.3 billion made in fiscal years 2005 and 2006
would carry over into 2007 and 2008 in order to complete ships funded in
2005 and 2006. (2) While significantly less budget authority

is needed in year 2001, this benefit declines or disappears in future years.
(3) Available discretionary funding is reduced by between 50% and 74% in
fiscal years 2002 through 2006 in order to fund the completion of ships

partially appropriated in prior years. (4) Cost growth could significantly
reduce or eliminate any “freed- up” budget authority. For
example, in fiscal year 2002 there is about $500 million in freed- up budget
authority, however,

recent press accounts indicate that the LPD ship class has had a $200
million cost growth. If that cost growth were absorbed in fiscal year 2002,
it would reduce the freed- up budget authority by 40%.

Enclosure GAO-01-432R Incremental Funding of Capital Assets

29

Navy Shipbuilding Incremental Funding Scenarios 2 and 3

Incremental funding might initially free up budget authority for other uses
such as other Navy programs, other military service programs, or civilian
programs.

However, a more likely use might be to fund additional shipbuilding programs
or to cover the cost growth of existing ship programs. Cost growth is not

modeled in this briefing.

Therefore, additional ships are added in the sequence listed below.

Additional Ships Fiscal Year 2001 2002 2003 2004 2005 2006 Total

CVN 77 CVN (X)

NSSN DDG- 51 1 2 1 2

6

DD- 21 2

2

LHD LPD- 17 1 1

2

TADC( X) 1

1

JCC( X) 1 1

2 Quantity1 2 2 2 4 213

Notes: (1) One of the two LPD- 17s removed in 2001 is added back in 2001
(the other was placed by the Navy in 2005 in the baseline). (2) Four ships
(one LPD- 17, one TADC( X) and two JCC( X)) removed by the

Navy in the 2002 Program Objective Memorandum are added back in. (3) Six
DDG- 51s identified by the Navy's November 2000 update to the 1993 Arleigh
Burke DDG- 51 Class Industrial Base Study are included.

(4) Two DD- 21s are added in fiscal year 2006 to more closely duplicate
earlier plans that projected continuous production.

Enclosure GAO-01-432R Incremental Funding of Capital Assets

30

Navy Shipbuilding Incremental Funding Scenario 2

Scenario 2: 3- year rolling funding with additional ship purchases.

Funding as a percentage of each year's original full funding (see the
baseline on p. 27).

0 20 40 60 80 100 120 140 160

'0 1 '0 2 '0 3 '0 4 '0 5 '0 6 F isca l Y ears

Percentage of B aseline N ew

P rior

Observations

: (1) Commitments of about $10. 8 billion made in 2005 and 2006 carry over
into 2007 and 2008 before total costs of the 2001 through 2006 profile are
complete. (2) More funding will be needed starting in the second year

than under the baseline case. (3) Available discretionary funding is reduced
by between 61% and 87% in fiscal years 2002 through 2006 in order to fund
the completion of ships partially appropriated in prior years. (4) Both of

these last two effects would likely be compounded if cost growth occurs.

Enclosure GAO-01-432R Incremental Funding of Capital Assets

31

Navy Shipbuilding Incremental Funding Scenario 2

Scenario 2: 3- year rolling funding with additional ship purchases.

Total cost (then- year) difference between full funding and 3- year
incremental funding with additional ship procurement.

-8 -6 -4 -2 0 2 4 $ billions

Difference Difference

-5.997 0.39 2.35 1.543 1.324 2.495 '01 '02 '03 '04 '05 '06

Observations

: (1) Commitments of about $10.8 billion made in 2005 and 2006 carry over
into 2007 and 2008 before total costs of the 2001 through 2006 profile are
complete. (2) Lower initial

budget authority of about $6 billion is more than offset by an additional $8
billion in budget authority to complete incrementally funded ships.

Enclosure GAO-01-432R Incremental Funding of Capital Assets

32

Navy Shipbuilding Incremental Funding Scenario 3

Scenario 3: 5- year rolling funding with additional ship purchases.

5- Year funding as a % of original full funding Total cost (then- year)
difference between full and

5- year incremental funding

-8 -7 -6 -5 -4 -3 -2 -1 0 1 2 3

$ billions Difference

Difference -7.354 -1.951 -1.089 0.474 1.272 1.674

'01 '02 '03 '04 '0 '06

0 20 40 60 80 100 120 140

'0 1 '0 2 '0 3 '0 4 '0 5 '0 6 F iscal Years

P ercentage of B aseline N ew

P rior

Observations

: (1) The effects identified for the 3- year incremental funding scenario
are delayed. For example, more funding is needed than originally planned
starting in fiscal year 2004 instead of 2002. (2) Commitments of $19.9
billion continue

through fiscal year 2010. Only commitments made in fiscal years 2001 and
2002 are complete by 2006. (3) Available discretionary funding is
increasingly reduced, with reductions reaching 92% in fiscal year 2006, in
order to fund the

completion of ships partially appropriated in prior years. (4) Any cost
growth would reduce or eliminate freed- up budget authority

.

Enclosure GAO-01-432R Incremental Funding of Capital Assets

33

Navy Shipbuilding Incremental Funding Scenario 4

Scenario 4: Baseline is fully funded except for Aircraft Carriers and
Amphibious ships which are incrementally funded over rolling 3- year
periods,

with no additional ship purchases.

0 20 40 60 80 100 120 140

'0 1 '0 2 '0 3 '0 4 '0 5 '0 6 '0 7 F isca l Y ears

Percentage of B aseline N ew

P rior

Observations

: (1) Commitments of $3. 5 billion made in 2006 carry on into 2008 (there is
no new incremental funding in 2007). (2) Under this approach funding is
needed above that planned in the baseline in 2002, 2003, and

2007. (3) Cost growth would exacerbate the need for additional funding.

Enclosure GAO-01-432R Incremental Funding of Capital Assets

34

DOD/ OMB: Budgetary Concerns With Incremental Funding for the Navy

Reduces the ability to make changes in the shipbuilding program because a
large percentage of funding is dedicated to completing ships begun in
previous years.

Creates commitments in following fiscal years and limits flexibility to make
rational planning decisions. While incremental funding allows more programs
to be bought in a

given year, it is a one- time benefit. From then on, current- year funding
will pay for prior year programs. This funding bow wave makes it more
difficult to initiate new programs or

adjust for unforeseen cost growth.

Limits cost visibility and accountability. Estimates may be more likely to
have cost growth since the incentive is to “low ball” the
estimate at the beginning.

Execution problems are created. Incrementally funded programs are more often
subjected to across- the- board reductions and “get by with less
funding this year” type of

reductions.

Enclosure GAO-01-432R Incremental Funding of Capital Assets

35

DOD/ OMB: Acquisition Management Concerns Related to Incremental Funding

Increased Cost*

Inhibits contractor ability to right- size its workforce and use economies
of scale due to uncertainty in funding. Potential personnel disruption
(layoffs and rehiring) cause

higher acquisition costs or a need for greater amounts of government funding
to maintain critical skills during program stretchouts.

Reduces cost consciousness because increases in cost can simply be added to
subsequent increments for the same ships, but in future budgets.

Increases financial risk to the contractors and/ or increases cost risk to
the government for cancellation costs.

Contracting Difficulties*

More difficult to specify a discreet package of work.

Hampers the opportunity to use performance- based fixed- price contracts.

Any disruption/ reduction in the planned funding stream would likely result
in shipbuilder claims and a ripple effect on follow- on options.

* Congress provided authority to enter into a contract for the LHD- 8
amphibious ship in the fiscal year 2001 defense authorization act. According
to one congressional staff member,

the provision of contract authority could have some effect on the concerns
expressed above by indicating a strong congressional commitment to the ship.

Enclosure GAO-01-432R Incremental Funding of Capital Assets

36

Consequences of Past Incremental Funding

Enclosure GAO-01-432R Incremental Funding of Capital Assets

37

Consequences of Past Incremental Funding

Cost increases and project schedule delays for Energy projects.

A GAO report cited incremental funding as one of the key factors underlying
DOE project cost overruns and

schedule delays. For many projects, particularly in the first years of
development and construction, funding received was well below requested
amounts. This caused project

schedules to slip and costs to rise, because certain contractor expenses and
administrative costs continued to accrue each month (e. g., utilities and
security costs)

regardless of the progress. For example, one project received only about 60%
of the $155 million expected during the first 3 years of a 5- year
construction cycle. Agency

officials cited the funding delay as the reason the construction schedule
was extended 3 years and the total construction costs rose from $236 to $313
million, an increase of $77

million. Similarly, another project received only 40% of its first 3 years
planned funding and another was funded at only 43%. Both of these projects
went over original cost

estimates and were years behind schedule.

Higher ship costs may have resulted from long- term leases.

The use of long- term leases for auxiliary ships in the early 1970s and
1980s resulted in higher costs per ship.

For these acquisitions, the Navy used long- term leases primarily to avoid a
large up- front obligation of procurement funds. By leasing the vessels, the
Navy believed it could

spread payments over the length of the leases and use its annual Operation
and Maintenance appropriations to fund them without incurring an up- front
obligation of the

total lease amount. While the Navy conducted the required lease versus
purchase cost analyses, guidelines for such analyses at that time were
neither detailed nor specific.

Although the methodologies and assumptions used by the Navy showed leasing
to be cheaper, a GAO review and a Joint Committee on Taxation (JCT) study
used different

methodologies and assumptions and found purchasing to be the cheaper
alternative. For example, the Navy's cost comparison for one type of vessel
concluded the government

would save $29. 3 million per ship by leasing. However, the JCT study
concluded that

Enclosure GAO-01-432R Incremental Funding of Capital Assets

38

outright purchase would be cheaper by $20.8 million per ship. The GAO study
concluded that it would cost between $11.9 million and $38 million more per
ship to lease the

vessels.

Lease- purchase arrangement to construct Reagan Building proved more costly
than direct financing from the Federal Financing Bank.

Congress authorized the Pennsylvania Avenue Development Corporation to enter
into a development agreement

with a private company to construct the Reagan Building. At the time, it was
intended that the building would be a public/ private partnership and used
for both federal office space

and commercial activities. It was envisioned that the project would be
privately financed so that construction costs would not be recorded in the
budget. GSA was authorized to

lease the building from the development company for a period not to exceed
35 years at a rate that would cover the full development cost and, at the
end of the lease, the building

would be government owned. Later, it became clear that the building was, for
all practical purposes, a government project, and most plans for nonfederal
uses were scrapped. At

that point, it was realized that private borrowing to finance the project
would be more costly than if the government financed the borrowing itself.
Direct borrowing from the

Federal Financing Bank saved millions in financing costs, including
transactional fees and expenses associated with private financing, such as
underwriters' fees.

Enclosure GAO-01-432R Incremental Funding of Capital Assets

39

More Effective Budgeting for Capital Acquisitions

Enclosure GAO-01-432R Incremental Funding of Capital Assets

40

More Effective Budgeting for Capital Acquisitions

As we have previously reported, 1

full funding for stand- alone stages is an important tool for maintaining
governmentwide fiscal control. It helps to ensure

that Congress considers the full costs of all proposed commitments and makes
trade- offs based on the full costs.

Failure to recognize full cost when budget decisions are being made could
lead to distortions in the allocation of resources. It can also force future

Congresses and administrations to choose between having an unusable asset
and continuing project funding for years, even after priorities may have

changed.

Some instances of incremental funding are justified for high technology
capital projects. Such projects, while technically capital projects because
they are

intended to result in tangible assets, are often closer in nature to R& D.
Their costs are highly uncertain, and funds already invested are not
necessarily

wasted if no additional funding is provided because knowledge is likely to
have been gained.

1

Budget Issues: Budgeting for Federal Capital (GAO/ AIMD- 97- 5, November 12,
1996).

Enclosure GAO-01-432R Incremental Funding of Capital Assets

41

More Effective Budgeting for Capital Acquisitions

Complete, comprehensive and clear information needs to be provided to the
Congress to make informed capital decisions. Budget Justifications data
would

be improved if for each project they contained: total cost estimates,
details of all prior spending, and a description of the purpose of spending
for each fiscal

year. This would assist in determining whether a project is fully funded or
requires additional funds in the future. Capital asset plans (required by
OMB

for major acquisitions) and long- term agency capital plans (encouraged by
OMB) could be useful in reviewing capital requests but are not routinely

provided to the Congress.

Innovative funding mechanisms could be used to ease “spiking”
issues that might lead to attempts for incremental funding. For example, one
approach

that could be considered is a capital acquisition fund (CAF). A department
level CAF would borrow from the Treasury, as provided in appropriation acts,

to purchase an asset needed by a department subcomponent. The subcomponent
would “rent” the asset, paying sufficient rent so the CAF can

repay loan principal and interest to the Treasury. Full funding is preserved
and

“spiking” at the sub- component level is eased. Discretionary
caps could be adjusted to reflect a concept change for appropriating
interest.

Enclosure GAO-01-432R Incremental Funding of Capital Assets

42

Related GAO Products

Defense Acquisitions: Historical Analyses of Navy Ship Leases (GAO/ NSIAD-
99- 125, June 25, 1999).

Defense Acquisition: Historical Insights Into Navy Ship Leasing (GAO/ T-
NSIAD 99- 141, April 21, 1999).

Executive Guide: Leading Practices in Capital Decision- Making (GAO/ AIMD-
99- 32, December 1998).

Budget Issues: Budgeting for Capital (GAO/ T- AIMD- 98- 99, March 6, 1998).
Department of Energy: Improving Management of Major System Acquisitions

(GAO/ T- RCED- 97- 92, March 6, 1997). Department of Energy: Opportunity to
Improve Management of Major System

Acquisitions (GAO/ RCED- 97- 17, November 26, 1996). Budget Issues:
Budgeting for Federal Capital (GAO/ AIMD- 97- 5, November 12,

1996).
*** End of document ***