Budget Issues: Budgeting for Capital (Testimony, 03/06/98,
GAO/T-AIMD-98-99).
GAO discussed ways the federal government should budget for capital,
focusing on: (1) problems with the current process; (2) traditional
capital budgeting proposals; (3) an alternative investment framework;
(4) budgeting for federally owned capital assets; and (4) improving the
way federal agencies plan for and manage federal capital acquisitions.
GAO noted that: (1) the current unified budget does not highlight
different types of spending; budget data are not presented in a way that
promotes decisions to be made between spending intended to have future
benefits versus spending for current consumption and improving the
current quality of life; (2) since the current budget does not provide
this type of focus on the composition of spending, it is difficult to
focus on the impact various types of spending would have on the
long-term potential output of the economy; (3) some have proposed that
the challenges agencies face in budgeting for capital acquisitions can
be corrected by adopting a capital budget that separates revenues and
outlays for long-lived physical assets from the rest of the budget; (4)
many proposals for capital budgeting include an associated depreciation
component for capital assets which is charged to the annual operating
budget; (5) in addition, these proposals commonly envision special
budgetary treatment for capital by requiring balanced operating budgets
while allowing deficit financing of capital; (6) capital budgeting of
this nature presents several unique problems at the federal level; (7)
meaningful budget reforms can be considered to improve decision-making
on investments, but they need to be tailored to the unique roles and
environment of the federal government; (8) establishing an investment
component within the existing budget constraints is one promising way to
encourage Congress and the executive branch to make explicit decisions
about how much spending overall should be devoted to investment; (9)
programs proposed or defended as investments should be evaluated against
the criterion of improving long-term economic capacity; (10) as federal
agencies find themselves under increasing budgetary constraints and
increasing demands to improve service, the importance of making the most
effective capital asset acquisitions grows; (11) agencies and Congress
must work together to find tools that encourage prudent capital
decisions; (12) regardless of the budget approach ultimately chosen for
federal capital, it is essential that agencies take the time to properly
plan for and manage their capital acquisitions; and (13) GAO identified
five general principles that are important to the capital
decision-making process.
--------------------------- Indexing Terms -----------------------------
REPORTNUM: T-AIMD-98-99
TITLE: Budget Issues: Budgeting for Capital
DATE: 03/06/98
SUBJECT: Congressional/executive relations
Balanced budgets
Budgeting
Fiscal policies
Capital
Investment planning
Economic growth
Unified budgets
Budget outlays
Budget administration
******************************************************************
** This file contains an ASCII representation of the text of a **
** GAO report. Delineations within the text indicating chapter **
** titles, headings, and bullets are preserved. Major **
** divisions and subdivisions of the text, such as Chapters, **
** Sections, and Appendixes, are identified by double and **
** single lines. The numbers on the right end of these lines **
** indicate the position of each of the subsections in the **
** document outline. These numbers do NOT correspond with the **
** page numbers of the printed product. **
** **
** No attempt has been made to display graphic images, although **
** figure captions are reproduced. Tables are included, but **
** may not resemble those in the printed version. **
** **
** Please see the PDF (Portable Document Format) file, when **
** available, for a complete electronic file of the printed **
** document's contents. **
** **
** A printed copy of this report may be obtained from the GAO **
** Document Distribution Center. For further details, please **
** send an e-mail message to: **
** **
** **
** **
** with the message 'info' in the body. **
******************************************************************
Cover
================================================================ COVER
Before the President's Commission to Study Capital Budgeting
For Release on Delivery
Expected at
9 a.m.
Friday,
March 6, 1998
BUDGET ISSUES - BUDGETING FOR
CAPITAL
Statement of Paul L. Posner
Director, Budget Issues
Accounting and Information Management Division
GAO/T-AIMD-98-99
GAO/AIMD-98-99T
(935263)
Abbreviations
=============================================================== ABBREV
BEA - Budget Enforcement Act of 1990
DOE - Department of Energy
FAA - Federal Aviation Administration
OMB - Office of Management and Budget
============================================================ Chapter 0
Members of the Commission:
I appreciate the opportunity to appear before you to discuss our work
on budgeting for capital.
In discussing this issue, it is useful to recognize two different
ways to look at the federal government: it is both an operating
entity and, at least partially, the custodian of the economic health
of the nation. As an operating entity, the government makes
expenditures on federal services to increase internal efficiency and
maximize the use of scarce resources. This includes spending for
physical assets that provide long-term benefits to the government's
own operations, such as federal office buildings and hospitals, land,
major equipment, and information technology. We refer to these types
of physical assets as federal capital.
In its role as partial custodian for the nation's economy, the
government invests in activities such as education, research and
development, and infrastructure, which are intended to increase the
private sector's long-term productivity and growth. While providing
long-term benefits to the nation as a whole, much of this spending
does not result in assets owned by the federal government. For the
most part, the federal government provides its support for these
activities through federal subsidies to other levels of government or
the private sector. We refer to this latter type of spending as
investment.\1 In considering the way the federal government should
budget for capital, it is important to consider the underlying
purposes of capital spending and these dual roles of the federal
government.
Frequently, the debate on capital budgeting centers around proposals
that do not fully recognize these differences, applying a
one-size-fits-all treatment to spending with vastly different
characteristics and federal roles. As I will discuss, the challenges
faced in budgeting for a federally owned asset are different than for
most of our investments where the federal role is to subsidize
spending on assets, human capital, and research and development
undertaken by other sectors of the economy. The debate on capital
budgeting at the federal level often starts with certain concepts and
models extended from state, local, and private budgeting that are not
appropriate due to fundamental differences in the role of the federal
government. When state and private entities make investments, they
typically own the resulting assets, while this is frequently not the
case for the federal government. This makes it difficult to fully
apply traditional capital budgeting approaches, such as depreciation
and bond financing.
Moreover, federal fiscal policy, broadly conceived, plays a key role
in managing both the short-term economy as well as promoting the
savings needed for long-term growth. The most direct way for the
federal government to increase national saving is to achieve and
sustain a balanced budget or surplus.\2 Any changes in the budgetary
treatment of investment need to take into consideration the broader
federal responsibility. While well-chosen investments may also
contribute to long-term growth, such programs financed through
deficits would undermine their own goal by reducing savings available
to fund private investment. Reforms in how the federal government
budgets for capital and investment should be considered, but any
capital budgeting allocation process should be studied within the
overall constraints of a fiscal policy based on unified budget
principles.
In our work, we have been mindful of the need to focus on investment
and federal capital, but within the overall constraints established
in the budget. We have sought to recognize both within a responsible
fiscal framework.
My testimony will address five points:
-- problems with the current process,
-- traditional capital budgeting proposals,
-- an alternative investment framework,
-- budgeting for federally owned capital assets, and
-- improving the way federal agencies plan for and manage federal
capital acquisitions.
--------------------
\1 Reductions in tax liabilities that result from preferential
provisions in the tax code, such as exemptions and exclusions from
taxation, deductions, credits, and deferrals, are intended to
encourage certain behaviors, to adjust for differences in
individuals' ability to pay taxes, or to compensate for other parts
of the tax system. Some may be designed to encourage investment.
Such "tax expenditures" are reflected in the mandatory portion of the
budget and are not included in this testimony, which addresses
discretionary spending on capital and investment.
\2 Budget Issues: Long-Term Fiscal Outlook (GAO/T-AIMD/OCE-98-83,
February 25, 1998) and Budget Issues: Analysis of Long-Term Fiscal
Outlook (GAO/AIMD/OCE-98-19, October 22, 1997).
PROBLEMS WITH THE CURRENT
PROCESS
---------------------------------------------------------- Chapter 0:1
As a nation we have made greater strides in articulating a budget
control framework to achieve our overall fiscal policy goals than in
designing a framework for addressing the composition of spending.
The unified budget provides information on the federal government's
overall fiscal policy--the aggregate size of the government and its
borrowing requirements. However, the current budget does not
highlight different types of spending; budget data are not presented
in a way that promotes decisions to be made between spending intended
to have future benefits versus spending for current consumption and
improving the current quality of life. Since the current budget does
not provide this type of focus on the composition of spending, it is
difficult to focus on the impact various types of spending would have
on the long-term potential output of the economy.
Alternative budget presentations that accompany the President's
budgets provide some supplemental information to congressional
decisionmakers, but they are assembled after executive budget
decisions have been made. These presentations have had little effect
on the level of investment undertaken by the government. The
congressional budget and appropriations process allocates spending by
broad mission area and by agency. These were not established to
distinguish between investment and consumption spending. In the
budget process there is no explicit consideration of investment
versus consumption; a dollar is a dollar is a dollar.
The share of total federal budget outlays devoted to investment,
defined by GAO as including research and development, human capital,
and infrastructure that has a direct bearing on long-term economic
growth, gradually declined about 2 percentage points from a high of
just over 10 percent in 1981. Investment outlays for fiscal years
1997 to 2002 are projected to continue this downward trend. This is
in part a function of the fact that most investment spending is in
the part of the budget considered "discretionary"--a part that has
decreased.
TRADITIONAL CAPITAL BUDGETING
PROPOSALS
---------------------------------------------------------- Chapter 0:2
Some have proposed that the challenges agencies face in budgeting for
capital acquisitions can be corrected by adopting a capital budget
that separates revenues and outlays for long-lived physical assets
from the rest of the budget. Many proposals for capital budgeting
include an associated depreciation component for capital assets that
is charged to the annual operating budget. In addition, these
proposals commonly envision special budgetary treatment for capital
by requiring balanced operating budgets while allowing deficit
financing of capital.
Capital budgeting of this nature presents several unique problems at
the federal level. First, the federal government does not own many
of the investments it makes that are intended to promote long-term
private sector economic growth. Accounting standards developed by
the Federal Accounting Standards Advisory Board\3 are consistent with
this thinking--assets not owned by the government are not reported on
the government's balance sheet.
Second, appropriating only annual depreciation means the budget in
any given year would reflect only a fraction of the total cost of an
investment. This would undermine budgetary control of expenditures
by not recognizing the full cost of an asset at the time a decision
is made to acquire it. Currently, the law requires agencies to have
budget authority before they can obligate or spend funds on any item.
If the full amount of budget authority need not be available up
front, the ability to control decisions when total resources are
committed to a particular use is reduced. In addition, reporting
only depreciation in the budget for an asset would make it look very
inexpensive relative to other spending. It might also advantage
physical capital amenable to depreciation over human capital and
research and development. This would create a tremendous incentive
to classify as many activities as possible as capital.
Even if the fund control issues could be resolved, determining an
appropriate depreciation amount would present problems. Investments
in human capital would be particularly difficult to depreciate
because of the complexities associated with measuring the future
value and useful life of human capital. Thus, including depreciation
in the budget could result in spending decisions being based on data
that are not easily explained or supported.
It is also important to remember that neither states nor private
enterprises budget for depreciation. States do not record annual
depreciation in either their capital or operating budgets because
depreciation has no effect on the flow of current financial
resources. Private businesses use depreciation primarily for two
purposes: (1) to match revenues with expenses in a given period for
the purposes of reporting profit or loss in financial statements and
(2) for tax purposes. Neither of these purposes are applicable to
federal budgeting, except for federal business-type activities that
consider revenues and expenses in setting user fees.
Some have proposed to deficit-finance capital and investment on the
ground that such spending creates economic growth. Deficit financing
of capital, however, would also create problems for the integrity of
the budget process. If capital assets can be deficit-financed while
other types of activities cannot, there would be a significant
incentive to categorize as many activities as possible as capital.
In addition, the productivity-enhancing benefits of investments may
be offset if these investments are financed by deficits that reduce
national saving and so displace private investment for long-term
growth. Deficit financing implies that public investment has a
higher rate of return than the private investment it would displace,
which is an arguable presumption.
--------------------
\3 The Federal Accounting Standards Advisory Board was created by the
Office of Management and Budget, the Department of the Treasury, and
GAO to consider and recommend accounting principles for the federal
government.
IMPLEMENTING AN INVESTMENT
FOCUS IN THE BUDGET
---------------------------------------------------------- Chapter 0:3
The problems discussed with these two approaches do not mean that
reform in budgeting for capital is not feasible. Meaningful budget
reforms can be considered to improve decision-making on investments,
but they need to be tailored to the unique roles and environment of
the federal government. In prior work,\4 we have proposed an
alternative approach for dealing with federal spending intended to
promote the private sector's long-term economic growth. Establishing
an investment component within the existing budget constraints is one
promising way to encourage the Congress and the executive branch to
make explicit decisions about how much spending overall should be
devoted to investment. By recognizing the different impact of
various types of federal spending, an investment focus within the
budget would provide a valuable supplement to the unified budget's
concentration on macroeconomic issues. It would direct attention to
the consequences of choices within the budget under existing caps.
It would prompt a healthy debate about the overall level of public
investment--a level that is now not determined explicitly by
policymakers but is simply the result of numerous individual
decisions. The unique budgeting problems raised by this approach are
how to define investment and how to incorporate and enforce this
framework within the current budget process.
Turning first to the definitional question, if an investment
component within the budget is to be implemented in a meaningful
fashion, it will be important to decide what activities qualify for
inclusion. There are many possible definitions, but the definition
used for budgetary purposes should depend on the purpose that an
investment component is expected to serve. Many analysts have
suggested that investment is that which increases long-term private
sector economic growth. The federal government promotes long-term
economic growth in two ways--through its broad fiscal policy and
through public investment. Accordingly, we have suggested that
investment spending be defined as federal spending, either direct or
through grants, that is specifically intended to enhance the private
sector's long-term productivity. We recognize, however, that the
Congress may choose to define this category in other ways that may
highlight other spending that has long-term benefits.
Our definition of investment spending includes spending on (1) some
intangible activities, such as research and development, (2) human
capital designed to increase worker productivity, particularly
education and training, and (3) infrastructure--physical
capital--that is viewed as having a direct bearing on long-term
economic growth, such as highways, water projects, and air traffic
control systems. As noted above, although much of this is federally
funded, it is not federally owned. Spending for many federally owned
physical assets, such as for federal land, for office buildings, and
for defense weapons systems, would not be included because such
spending does not directly enhance long-term private sector
productivity.
The current budget process embodies a system of controls set up by
the Budget Enforcement Act of 1990 (BEA), which established a set of
caps on discretionary spending as part of the process. Most
investment spending is within this category of spending. If a target
for aggregate investment spending were established within the overall
discretionary caps, the budget structure and process would prompt
explicit consideration of the level of support for investment within
overall fiscal constraints. An investment component would direct
attention to the trade-offs between investment and noninvestment
activities without undermining fiscal policies and established fiscal
policy paths.
This approach has the advantage of focusing budget decisionmakers on
the overall level of investment supported in the budget without
losing sight of the unified budget's impact on the economy. It also
has the advantage of building on the current congressional budget
process as the framework for making decisions. And it does not raise
the budget control problems posed by the more traditional capital
budgeting proposals that use depreciation and deficit financing.
Although the investment component would be subject to budget
controls, the existence of a separate component could create an
incentive to categorize many proposals as investment. Any
distinction in a system of restraint creates such incentives. If,
however, the Congress and the President want a separate component to
work, difficult definitional issues can be resolved. Defining
mandatory programs for BEA was not easy in 1990, but the Congress and
the executive branch did reach agreement. Also, as part of the 1997
Balanced Budget Act, the President and the Congress were able to
reach agreement on certain categories of spending, such as education,
to receive favorable budget treatment.
--------------------
\4 Budget Trends: Federal Investment Outlays, Fiscal Years 1981-2002
(GAO/AIMD-97-88, May 21, 1997), Budget Structure: Providing an
Investment Focus in the Federal Budget (GAO/T-AIMD-95-178, June 29,
1995), and Budget Issues: Incorporating an Investment Component in
the Federal Budget (GAO/AIMD-94-40, November 9, 1993).
CHOOSING INVESTMENTS
---------------------------------------------------------- Chapter 0:4
Each type of capital we are discussing raises its own unique
decision-making challenges. For investment, the definitional
question discussed earlier will have to be addressed. Moreover, if
the federal government is to focus on the allocation of spending
between consumption and investment in order to improve long-term
economic growth, then it is important that federal investments be
wisely selected. Programs proposed or defended as investments should
be evaluated against the criterion of improving long-term economic
capacity. Such judgments are difficult, but they are not impossible.
In 1993, we developed a series of questions related to a program's
economic returns, design, and performance measures that may help
decisionmakers assess the relative worth of competing investments.\5
First, is the program designed to produce long-term economic growth?
Second, is it worth implementing, including whether there is really a
need for federal government intervention? Third, is it
well-designed, including some assurance that federal funds supplement
and do not supplant nonfederal funds? And fourth, how should the
program be evaluated after implementation?
Ideally, policymakers should have access to measures of relative
rates of return from federal investment programs in allocating
resources among programs. However, such data are scarce and further
research is needed to develop additional and better information on
the economic effect of various types of investment proposals.
Potential economic returns may determine whether to embark on a plan
for increased federal investment. In seeking the "best" federal
investment, however, decisionmakers should consider not only
estimated returns, but also whether the federal government is the
right entity to address that need. Alternative approaches to meeting
the perceived public need should be considered before addressing the
problem with federal outlays.
Program design is important to the ability of a program to contribute
to private sector output and economic growth. Decisionmakers should
consider design issues to promote effective program delivery,
including (1) coordination with other federal programs and those of
state and local governments and (2) targeting of funds to achieve the
highest possible benefit. Coordination with state and local
governments is particularly important when federal investments are
implemented through those governments. Policymakers need to be aware
of the possibility that the states and localities could use federal
investment funds to supplant their own spending. We have reported on
this issue\6 and found that studies have suggested that even the
prospect of additional federal grant funds can prompt states and
localities to reduce their planned spending, which could trigger a
decline in total overall public spending for the funded activity.
Thus, even if a program is properly classified as an investment, its
economic impact can be thwarted when federal funds are used to
replace nonfederal funding.
It is important that all public investment programs include, at the
time of their implementation, provisions for evaluating program
outcomes. Policymakers should use outcome data to ensure that
ongoing investment programs continue to be worthwhile and well
designed under changing circumstances. Also, to improve the federal
government's ability to invest wisely in the future, it is important
to learn from public investments that have already been made.
--------------------
\5 Federal Budget: Choosing Public Investment Programs
(GAO/AIMD-93-25, July 23, 1993).
\6 GAO/AIMD-93-25, July 23, 1993.
BUDGETING FOR FEDERALLY OWNED
CAPITAL ASSETS
---------------------------------------------------------- Chapter 0:5
As federal agencies find themselves under increasing budgetary
constraints and increasing demands to improve service, the importance
of making the most effective capital asset acquisitions grows. Since
spending by the federal government to support its own operations
would not qualify for the investment component, a different approach
is required. Here, the unique capital budgeting problem is the
funding of assets that provide benefits over the long term but that
must be paid for in one up-front sum. Capital assets often require
large amounts of resources up-front and some may generate long-term
efficiencies and savings.
Like investment spending, spending for most federal capital assets is
provided in annual appropriations acts and therefore is categorized
by BEA as discretionary spending. The total of all agencies'
discretionary appropriations must remain within BEA's discretionary
caps, which generally have been declining since 1991. Thus, federal
capital spending, like all discretionary spending, is being squeezed.
In fiscal year 1997, the federal government spent $72.2 billion (4.5
percent of total outlays) on direct major physical capital
investment. Of this, the largest portion, $52.4 billion, was spent
on defense-related capital assets, while $19.7 billion was spent for
nondefense capital. The President's budget estimates for spending
for direct physical capital investments decrease to $64.1 billion in
fiscal year 1998, and then rebound slightly to $68.8 billion in
fiscal year 1999. Of these amounts, $15.4 billion and $18.5 billion
are for nondefense capital in fiscal years 1998 and 1999,
respectively.
For more than 100 years, the Adequacy of Appropriations Act and the
Antideficiency Act have required agencies to have budget authority
for any government obligation, including capital acquisitions. This
is referred to as up-front funding. The requirement of full up-front
funding is an essential tool in helping the Congress make trade-offs
among various spending alternatives. Up-front funding helps ensure
that decisionmakers are fully accountable for the budgetary and
programmatic consequences of their decisions. This also ensures that
the full costs of capital projects are recognized at the time the
Congress and the President make the commitment to undertake them.
Agencies have not always requested or received full up-front funding
for capital acquisitions, however, which has occasionally resulted in
higher acquisition costs, cancellation of major projects, and
inadequate funding to maintain and operate the assets. For example,
our work has identified the lack of full up-front funding as one of
the key factors in the high rate of cost overruns, schedule
slippages, and terminations in the Department of Energy's (DOE) major
acquisitions.\7 The Office of Management and Budget's (OMB) long-term
goal is to include full funding for all new capital projects, or at
least economically and programmatically viable segments of new
projects.
However, adherence to the up-front funding requirement also extracts
a price, at least from an individual agency's viewpoint. The
requirement that the full cost of a project must be absorbed in the
annual budget of the agency or program combined with the effect of
the tight BEA discretionary spending caps can make capital
acquisitions seem prohibitively expensive. This has led some to
suggest that the result is a bias against capital in budget
deliberations.
Although up-front funding within the budget caps presents a
challenge, a number of agencies have found ways to meet that
challenge. Our work at selected federal agencies has demonstrated
that more modest tools than adopting a full-scale capital budget can
help accommodate up-front funding without raising the congressional
or fiscal control issues of a separate capital budget. When
accompanied by good financial management and appropriate
congressional oversight, these tools can be useful in facilitating
effective capital acquisition within the current unified budget
context.
--------------------
\7 Department of Energy: Opportunity to Improve Management of Major
System Acquisitions (GAO/RCED-97-17, November 26, 1996).
STRATEGIES USED BY SOME
AGENCIES TO REDUCE THE
IMPACT OF THE UP-FRONT
FUNDING REQUIREMENT
-------------------------------------------------------- Chapter 0:5.1
In a 1996 report,\8 we identified some strategies that have been
successfully used by some agencies to accommodate spending on federal
capital while preserving the fiscal discipline provided by the
current budget controls. To identify these strategies, we examined
how selected federal agencies plan and budget for capital assets. I
must emphasize that agencies must obtain authority from the Congress
to undertake some of these strategies and that some, such as the
revolving funds and "savings accounts" discussed as follows, work
best in agencies having proven financial management and capital
planning capabilities.
-- Budgeting for stand-alone stages of larger projects - 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. For example, the Coast Guard may
structure its contract for a class of new ships to acquire a
lead ship with options for additional ships. The lead ship
would be useful even if the entire class of ships is not
completed as planned. Budgeting for stand-alone stages means
that when a decision has been made to undertake a specific
capital project, funding sufficient to complete a useful segment
of the project is provided in advance. This helps ensure that a
single appropriation will yield a functional asset while
limiting the amount of budget authority needed.
-- Using a revolving fund - Agencies 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 can help ensure that
needed funds will be available for capital acquisitions and that
program budgets reflect capital as well as operating costs. The
concept of depreciation is useful for revolving funds when
determining the fees to be charged to users.
-- Establishing a "savings account" - A "savings account" achieves
many of the same goals sought by revolving funds; however, users
make voluntary contributions according to an established
schedule for prospective capital purchases, rather than being
charged retrospectively for capital usage. The "savings
account" is designed to encourage managers to do better
long-range planning for capital purchases and to enable them to
accumulate over time the resources needed to fund capital
acquisitions up-front.
-- Contracting out and asset sharing - Some agency functions for
which capital assets are acquired can be performed by the
commercial market at less expense, thus reducing the amount of
funding that an agency needs to have up front. Asset sharing
involves sharing the purchase and use of capital assets with
external entities. Sharing assets through contracting out can
be especially useful and cost-effective when asset needs are
short-term or episodic and nonrecurring.
Agencies and the Congress must work together to find tools that
encourage prudent capital decisions. Federal agencies should be
encouraged to develop flexible budgetary mechanisms that help them
accommodate the consistent application of up-front funding
requirements while maintaining opportunities for appropriate
congressional oversight and control.
--------------------
\8 Budget Issues: Budgeting for Federal Capital (GAO/AIMD-97-5,
November 12, 1996).
IMPROVING FEDERAL AGENCY
CAPITAL DECISION-MAKING
PRACTICES
---------------------------------------------------------- Chapter 0:6
Regardless of the budget approach ultimately chosen for federal
capital, it is essential that agencies take the time to properly plan
for and manage their capital acquisitions. 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. GAO, the Congress, and OMB have
identified the need to improve federal decision-making regarding
capital. Our past work has identified a variety of federal capital
projects where acquisitions have yielded poor results--costing more
than anticipated, falling behind schedule, and failing to meet
mission needs and goals.
For example, we have monitored the Federal Aviation Administration's
(FAA) acquisitions of major systems since FAA began its program to
modernize the nation's air traffic control system in the early 1980s.
This modernization program has experienced substantial cost overruns,
lengthy schedule delays, and performance shortfalls. Our work
pointed to technical difficulties and weaknesses in FAA's management
of the acquisition process as primary causes for FAA's recurring
cost, schedule, and performance problems. Identified weaknesses
included a failure to analyze mission needs, limited analyses of
alternative approaches for achieving those needs, and poor cost
estimates.\9 As I mentioned earlier, we have also identified
incremental funding as one of the causes of cost overruns, schedule
slippages, and terminations in DOE's major acquisitions.
A number of laws enacted in this decade are propelling agencies
toward improving their capital decision-making practices, including
the Federal Acquisition Streamlining Act, the Clinger-Cohen Act, and
the Government Performance and Results Act. To help agencies
integrate and implement these various requirements, OMB recently
developed a Capital Programming Guide--a supplement to OMB Circular
A-11--which provides guidance to federal agencies on planning,
budgeting, acquisition, and management of capital assets. We
participated in the development of the guide and conducted extensive
research to identify practices in capital decision-making used by
outstanding state and local governments and private sector
organizations. One federal agency, the U.S. Coast Guard, was also
used as a case study.
We will soon be reporting on the results of our research and I would
like to provide you a preview of our results today. We identified
five general principles that are important to the capital
decision-making process as a whole, which I will summarize for you.
1. Integrate Organizational Goals Into the Capital Decision-making
Process
Leading organizations begin their capital decision-making process by
defining their overall mission in comprehensive terms and by
articulating results-oriented goals and objectives. These
organizations consider a range of possible ways to achieve desired
goals and objectives--examining both capital and noncapital
alternatives. For example, the U.S. Coast Guard now begins its
process by conducting a comprehensive needs assessment through what
it calls its mission analysis process.
2. Evaluate and Select Capital Assets Using an Investment Approach
An investment approach builds on an organization's assessment of
where it should invest its capital for the greatest benefit over the
long term. Leading organizations use various decision-making
practices and techniques to make comparisons and trade-offs between
competing projects as well as to assess the strategic fit of the
investment with the organization's overall goals. Leading
organizations also develop long-term capital plans that allow them to
establish priorities for project implementation over the long term
and assist with developing current and future budgets.
3. Balance Budget Control and Managerial Flexibility When Funding
Capital Projects
Officials at leading organizations agree that good budgeting requires
that full costs be considered when making decisions to provide
resources. At the federal level, this calls for a balance between
congressional budgetary control and agency flexibility in financing
capital acquisitions. As I discussed earlier, some strategies
currently exist that allow agencies a certain amount of flexibility
in funding capital projects without the loss of budgetary control on
the part of the Congress. At the state level, one state we studied
is funding the construction of a college campus in stand-alone
stages--completing and occupying one building at a time.
4. Use Project Management Techniques to Optimize Project Success
Leading organizations apply a variety of project management
techniques to optimize project success and enhance the likelihood of
meeting project-specific as well as organizationwide goals. These
techniques include developing a project management team with the
right people and the right skills, monitoring project performance,
and establishing incentives to meet project goals.
5. Evaluate Results and Incorporate Lessons Learned Into the
Decision-making Process
Leading organizations have a common trait--a desire to assess and
improve their performance. Some of the organizations in our study
have implemented systematic procedures for evaluating project
results, while others have taken a broader approach and reevaluated
their capital decision-making processes as a whole.
--------------------
\9 Aviation Acquisition: A Comprehensive Strategy Is Needed for
Cultural Change at FAA (GAO/RCED-96-159, August 22, 1996).
CONCLUSION
---------------------------------------------------------- Chapter 0:7
In order to promote an efficient public sector and a healthy and
growing economy, the federal government should make explicit and well
thought-out decisions on national investments that will foster
long-term economic growth as well as on spending for federal capital
that provides long-term benefits to the government's own operations.
The creation of an investment component within the federal budget
could help the Congress and the President make more informed
decisions regarding an appropriate mix of spending while retaining
the strengths and discipline fostered by a unified budget and the
current congressional budget process.
While federal 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. In an environment of
constrained budgetary resources, agencies need, and some have
developed, strategies and tools that can help facilitate these
trade-offs and that enable them to accommodate up-front funding.
Agencies have demonstrated that more modest tools than a full-scale
capital budget can be developed to accommodate up-front funding
within the current unified budget.
It is essential for federal agencies to improve their capital
decision-making practices to ensure that the purchase of new assets
and infrastructure will have the highest and most efficient returns
to the government and that existing assets will be adequately
repaired and maintained. Federal agencies could draw lessons from
the strategies and practices used by leading federal, state, local,
and private sector entities and more widely apply these practices to
the federal decision-making process.
-------------------------------------------------------- Chapter 0:7.1
This concludes my prepared statement. I would be happy to answer any
questions that you may have at this time and look forward to working
with you as the Commission completes its work.
*** End of document. ***