FAA Budget Policies and Practices
Gao ID: GAO-04-841R July 2, 2004In recent years, Congress has raised concerns about cost growth in the Federal Aviation Administration's (FAA) operating budget. Appropriators noted several expenses in FAA's fiscal year 2004 facilities and equipment (F&E) account budget submission that appeared to be ongoing operating expenses. The House and Senate appropriations subcommittee reports on FAA's fiscal year 2004 budget submission highlighted 17 such budget items and recommended that the expenses for these items either be transferred to the operations budget or not receive funding. As a result of these concerns, the Conference Report accompanying the fiscal year 2004 Omnibus Appropriations Act directed us to conduct an audit of FAA's policies and practices for determining whether an expense should be budgeted in its operating accounts or in the capital account. Specifically, this report addresses the following questions: (1) What are FAA's policies for determining whether an expense--including personnel compensation, benefits, travel, and related expenses--belongs in its capital (F&E) or Operations accounts? (2) How did FAA implement its policies for determining whether 17 specific budget line items identified by appropriators belong in its F&E or Operations accounts, including personnel compensation, benefits, travel, and related expenses? (3) How do FAA's budget policies compare with those of other civilian agencies with large acquisition budgets, such as the National Aeronautics and Space Administration (NASA) and the Department of Defense (DOD)?
In summary, FAA Order 2500.8A contains the agency's policies for assigning budget expenditures to the F&E, Operations, and Research, Engineering, and Development (RE&D) accounts. In reviewing this order, we found that it is outdated and unclear and that the linkages between FAA's policies and the assignment of budget line items to the F&E and Operations accounts are very general. In addition, the order is not structured by organizational objectives (performance goals), as is part of FAA's fiscal year 2004 budget estimate for F&E. This structural difference makes it difficult to compare the F&E portion of the budget submission with FAA's policies. Additionally, the order lacks the level of detail needed for both FAA officials and appropriators to easily distinguish between F&E (capital) and Operations expenditures. The order also does not reflect FAA's current process for acquiring goods and services (acquisition management), which influences whether an expenditure for a project is categorized as an F&E or an Operations expense. According to our analysis, while FAA's policies for categorizing expenses are very broad and give the agency wide latitude, FAA followed the policies outlined in its 1993 order for the majority of the 17 budget line items identified by the appropriators in FAA's fiscal year 2004 budget submission. FAA concurred with the appropriators that 5 of these budget line items should have been categorized as Operations expenses and said that it would restructure the items in its next budget submission; however, the agency maintained that the remaining 12 items were appropriately categorized as F&E expenses and cited specific agency policies to support the items' placement there. Although FAA's policies for assigning budget line items to the F&E and Operations accounts are very general, our analysis generally supported FAA's categorizations. FAA's budget policies cannot readily be compared with those of NASA and DOD. While the policies of all three agencies use similar budgetary language, the policies cannot be compared in detail because the agencies use different budgetary approaches. Each agency independently developed its own budget format in response to the current administration's direction that federal agencies develop performance-based budgets.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Jayetta Hecker Team: Government Accountability Office: Physical Infrastructure Phone: (202) 512-8984GAO-04-841R, FAA Budget Policies and Practices
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Washington, DC 20548:
United States General Accounting Office:
July 2, 2004:
The Honorable Richard C. Shelby:
Chairman:
The Honorable Patty Murray:
Ranking Minority Member:
Subcommittee on Transportation/Treasury and General Government:
Committee on Appropriations:
United States Senate:
The Honorable Ernest J. Istook:
Chairman:
The Honorable John W. Olver:
Ranking Minority Member:
Subcommittee on Transportation and Treasury, and Independent Agencies:
Committee on Appropriations:
House of Representatives:
Subject: FAA Budget Policies and Practices:
In recent years, Congress has raised concerns about cost growth in the
Federal Aviation Administration's (FAA) operating budget.
Appropriators noted several expenses in FAA's fiscal year 2004
facilities and equipment (F&E) account--the account used by FAA for
much of its capital purchases--budget submission that appeared to be
ongoing operating expenses. The House and Senate appropriations
subcommittee reports on FAA's fiscal year 2004 budget submission
highlighted 17 such budget items and recommended that the expenses for
these items either be transferred to the operations budget or not
receive funding. As a result of these concerns, Congress directed us to
conduct an audit of FAA's policies and practices for determining
whether an expense should be budgeted in its operating accounts or in
the capital account.
Specifically, this report addresses the following questions: (1) What
are FAA's policies for determining whether an expense--including
personnel compensation, benefits, travel, and related expenses--
belongs in its capital (F&E) or Operations accounts? (2) How did FAA
implement its policies for determining whether 17 specific budget line
items identified by appropriators belong in its F&E or Operations
accounts, including personnel compensation, benefits, travel, and
related expenses? (3) How do FAA's budget policies compare with those
of other civilian agencies with large acquisition budgets, such as the
National Aeronautics and Space Administration (NASA) and the Department
of Defense (DOD)?
To identify FAA's policies for deciding whether an expense belongs in
its capital[Footnote 1] (F&E) or operations accounts, we reviewed FAA
Order 2500.8A, [Footnote 2] which contains the agency's policies for
making these decisions. We also interviewed FAA officials responsible
for preparing FAA's budget submission. To determine how FAA implemented
its policies for the 17 budget line items at issue for the
appropriators, we compared FAA's policies for assigning budget line
items to the F&E and Operations accounts with FAA's implementation of
those policies in its fiscal year 2004 budget submission. We also
interviewed the FAA officials responsible for preparing each of the 17
budget line items and reviewed the supplemental documentation they
provided to explain FAA's placement of the 17 line items in the F&E
account. To compare FAA's policies for categorizing budget line items
with those of NASA and DOD, we obtained comparable policy documents
from NASA and DOD and met with officials of both agencies responsible
for preparing budget submissions to clarify their agencies' policies
and obtain the information needed to draw accurate comparisons. We then
compared the three agencies' policies. We also compared FAA's, NASA's,
and DOD's processes for preparing budget estimates and their
communication with appropriations committee staff. Our review did not
assess any FAA budget line items other than the 17 identified above,
nor did it address cost growth issues, the purpose of or funding for
any of the 17 budget line items or their subcomponents, the accuracy of
FAA's budget estimates, or NASA's and DOD's approach to developing
performance-based budgets. We determined that the budget data we
reviewed were sufficiently reliable for our purposes. We performed our
work from February through June 2004 in accordance with generally
accepted government auditing standards. This report summarizes the
information we provided to your staff on May 14, 2004. The briefing
slides, which provide more details about our analysis, are attached as
enclosure I.
Background:
For fiscal year 2004, FAA submitted budget requests for four
appropriations accounts: F&E; Operations; Research, Engineering, and
Development (RE&D); and the Airport Improvement Program (AIP). FAA's
budget authority for fiscal year 2004 was $13.9 billion. In preparing
this budget submission, FAA officials used FAA Order 2500.8A (Apr. 9,
1993), which defines three of the appropriations accounts, including
the F&E (capital) account, and identifies the costs that are to be
budgeted in each. House and Senate appropriations committee staff
approved the order before it was implemented.
Summary:
In summary, we found the following:
FAA Order 2500.8A contains the agency's policies for assigning budget
expenditures to the F&E, Operations, and RE&D accounts. In reviewing
this order, we found that it is outdated and unclear and that the
linkages between FAA's policies and the assignment of budget line items
to the F&E and Operations accounts are very general. For example, it
was not always possible to use this order to distinguish between F&E
programs that allow FAA to modernize or add new capabilities and
maintenance programs (Operations) that allow FAA to maintain current
capabilities (e.g., when a system designed to modernize the national
airspace system is deployed at specific locations and the cost for
operating systems at these locations is "handed off," or moved, to the
Operations account). In addition, the order is not structured by
organizational objectives (performance goals), as is part of FAA's
fiscal year 2004 budget estimate for F&E. This structural difference
makes it difficult to compare the F&E portion of the budget submission
with FAA's policies. Additionally, the order lacks the level of detail
needed for both FAA officials and appropriators to easily distinguish
between F&E (capital) and Operations expenditures. The order also does
not reflect FAA's current process for acquiring goods and services
(acquisition management), which influences whether an expenditure for a
project is categorized as an F&E or an Operations expense. Because FAA
contended that some of its problems with modernizing the air traffic
control system were caused by federal acquisition regulations, Congress
exempted FAA in November 1995 from most federal procurement laws and
regulations and directed FAA to develop a new acquisition management
system. FAA Order 2500.8A includes an outdated appendix on the agency's
process for acquiring major systems, which reflects the process FAA
used before implementing its new acquisition management system in 1996.
According to our analysis, while FAA's policies for categorizing
expenses are very broad and give the agency wide latitude, FAA followed
the policies outlined in its 1993 order for the majority of the 17
budget line items identified by the appropriators in FAA's fiscal year
2004 budget submission. FAA concurred with the appropriators that 5 of
these budget line items should have been categorized as Operations
expenses and said that it would restructure the items in its next
budget submission; however, the agency maintained that the remaining 12
items were appropriately categorized as F&E expenses and cited specific
agency policies to support the items' placement there. Although FAA's
policies for assigning budget line items to the F&E and Operations
accounts are very general, our analysis generally supported FAA's
categorizations.
For four of the five budget line items that FAA concurred with
appropriators should have been categorized as Operations expenses and
would be restructured in its next budget submission, we found that
their placement in the F&E account in the 2004 budget submission was
generally consistent with the budget policies set forth in Order
2500.8A. However, we found that FAA's policies were particularly
unclear for 1 of these items and determined that this item could be
budgeted out of either the F&E or the Operations account.
FAA's placement of the remaining 12 budget line items in the F&E
account appears to be consistent with Order 2500.8A. FAA's budget
submission alone did not adequately explain why these line items, which
were relatively new requests for funding, should be categorized as F&E
rather than Operations expenses. However, after examining additional
FAA documents and receiving explanations from agency officials, we
found that the placement of these items in the F&E budget account
follows FAA's policies. FAA has not requested funding for (has "zeroed
out") these 12 budget line items in its fiscal year 2005 budget
estimates, pending clarification from appropriations committee staff.
FAA's budget policies cannot readily be compared with those of NASA and
DOD. While the policies of all three agencies use similar budgetary
language, the policies cannot be compared in detail because the
agencies use different budgetary approaches. Each agency independently
developed its own budget format in response to the current
administration's direction that federal agencies develop performance-
based budgets. NASA adopted a new budget format and revised its budget
policies accordingly. While NASA officials noted value in this approach
for management purposes, we have found that for some decision-making,
it could be useful for federal agencies to make meaningful distinctions
between capital investments and operating expenses in their budgets.
However, under some approaches to performance-based budgeting, this
distinction may be lost.
Before fiscal year 2003, FAA's F&E budget justification was generally
aligned with FAA Order 2500.8A and included activities such as
"Procurement and Modernization of Air Traffic Control Facilities and
Equipment." In fiscal year 2003, FAA revised its F&E budget
justification largely to reflect organizational objectives
(performance goals) such as "Improve Efficiency of the Air Traffic
Control System." However, FAA did not revise its budget policies to
link them to the new objectives. This makes it difficult to determine
whether the placement of items in the F&E account is consistent with
the budget policies. FAA officials did not discuss this revision with
appropriations committee staff before or during their move toward a
performance-based budget; however, according to a senior Department of
Transportation official, the department has conducted outreach with
appropriations staff to gain their acceptance of the principles of
performance-based budgeting.
NASA submitted a budget request for three appropriations accounts:
Science Aeronautics and Exploration, Space Flight Capabilities, and
Inspector General, and NASA's budget authority for fiscal year 2004 was
$15.4 billion. NASA relies on a "full-cost"[Footnote 3] budgeting
methodology to identify costs associated with programs and developed
its first "full-cost" budget for fiscal year 2004. "Full-cost"
budgeting led to changes in both NASA's budget policies and
presentation of capital costs in its budget justification. This
approach does not identify capital costs as a separate or distinct
category of costs to be reported within a program area in the budget.
NASA rolls up all of its capital costs with other costs to illustrate
to appropriators how much it intends to spend in its program areas.
NASA integrates its strategic plan and performance information into its
budget justifications to illustrate how much it intends to spend to
achieve its objectives. Before transitioning to "full-cost" budgeting,
NASA met with appropriations committee staff to discuss how "full-cost"
budgeting would change its budget justifications. As a result of these
discussions, a senior NASA official told us that the agency continues
to provide certain kinds of information that appropriations committee
staff said they did not want to lose in the transition to "full-cost"
budgeting.
DOD has many appropriations accounts, and its budget authority for
fiscal year 2004 was $441.4 billion. Each service has accounts for
personnel; operations and maintenance; research, development, test, and
evaluation (RDT&E); procurement; military construction, and family
housing; and base realignments and closures (BRAC). Certain
appropriations accounts report only investments[Footnote 4] ("capital
expenses"), and others report a mix of both operating and capital
investment costs. For example, the procurement and military
construction appropriations accounts are used solely for investments
("capital" expenses). The RDT&E and BRAC appropriations accounts are
used both for investments ("capital" expenses) and operating expenses.
DOD also uses a unit cost dollar threshold of $250,000 to define
operating and capital investment costs. Costs up to $250,000 are
operating expenses, and costs equal to or greater than a unit cost of
$250,000 are investment ("capital") expenses. DOD's effort to link
performance with budget resources is ongoing, and DOD is implementing a
framework for establishing department-level performance goals and
measures and tracking results. DOD has also linked some resources with
metrics for tracking results in broad program areas (e.g., air combat,
airlift, and basic research) in the fiscal year 2004 budget and plans
to expand such linkages over the next few budget cycles. DOD's approach
has not affected either its investment ("capital") budget policies or
its presentation of investment costs or operating expenses in its
budget justification.
Conclusions:
The budget policies reflected in FAA's 1993 order have not kept pace
with FAA's recent move to a performance-based budget for its F&E
account and do not reflect the agency's current (1996) acquisition
management system. As a result, the F&E portion of FAA's budget
submission is hard to follow because its performance-based format does
not track with the agency's budget policies, some of which are
ambiguous. Without any communication from FAA officials to explain the
changes they have made as part of their move toward performance-based
budgeting, committee appropriations staff have had difficulty (1)
distinguishing clearly between F&E and Operations expenses, (2)
determining when a program in a budget line item is intended to
modernize an existing capability or maintain it, and (3) tracking
budget line items when they are moved from the F&E to the Operations
account (e.g., when a system designed to modernize the national
airspace system is deployed at specific locations and the cost for
operating systems at these locations is "handed off," or moved, to the
Operations account). Communicating with appropriations committee
staff, as NASA officials did when they shifted to performance-based
budgeting, would allow FAA officials to clarify their actions,
determine the types of information the committees need to make funding
decisions, and help ensure that this information is not lost in the
transition to this new budget format.
Recommendations:
We recommend that the Secretary of Transportation direct the FAA
Administrator to take the following three actions to clarify FAA's
rationale for allocating budget expenditures between its F&E and
Operations budget accounts:
Update FAA Order 2500.8A in consultation with appropriations committee
staff.
* Clearly distinguish in the revised order between maintenance programs
(Operations) that allow FAA to maintain current capabilities and F&E
programs that allow FAA to modernize or add new capabilities.
* Revise FAA's budget practices to make it easier for appropriators to
track funding when the agency moves funds for individual budget line
items from one budget account to another.
Agency Comments:
We provided a draft of this report to the Department of Transportation
(DOT), FAA, NASA, and DOD for their review and comment. DOT, FAA, and
DOD provided oral comments, stating that they had no comments on the
report. NASA provided technical comments, which can be found in
Enclosure III.
NASA had three comments. First, NASA stated that while the GAO report
accurately states that, "NASA relies on a 'full-cost' budgeting
methodology to identify costs associated with programs and developed
its first 'full-cost' budget for fiscal year 2004," the statement that
"'Full-cost' budgeting led to changes in both NASA's capital budget
policies and presentation of capital costs," is potentially misleading
and should be changed. NASA has not had a distinct set of separate
capital budgeting procedures, therefore, the word 'capital" should be
removed when referring to NASA's budget policies. At one time, NASA did
have a separate 'mission support' appropriation that covered such
institutional infrastructure items as civil service personnel salaries,
construction of facilities, and research operation support. However,
the mission support appropriation still included a mix of institutional
resources, some of which supported development efforts and are included
presently in the full cost of development programs." As requested, we
deleted the term "capital" in reference to NASA's budgeting policies in
the final report and placed a note on the corresponding briefing slide
in Enclosure I. For the second comment regarding NASA's use of
performance-based ("full-cost") budgeting, we acknowledge that NASA has
found value in using this approach for management purposes; however, it
is GAO's position that it could be useful for federal agencies to make
meaningful distinctions between capital investments and operating
expenses in their budgets because under some approaches to performance
budgeting, this distinction may be lost. We incorporated NASA's
position into our letter and placed a note on the corresponding
briefing slide in Enclosure I. Finally, we added a note to the
appropriate briefing slide in Enclosure I to reflect NASA's third
comment that it reviewed its "full-cost" practices and its overall
budget formulation process in 2003.
We are sending copies of this report to the House Committee on
Appropriations, Subcommittee on Transportation, Treasury, and
Independent Agencies; the Senate Committee on Appropriations,
Subcommittee on Transportation/Treasury and General Government; the
Secretary of Transportation; and the FAA Administrator. We will also
make copies available to others upon request. In addition, the report
will be available at no charge on GAO's Web site at http://www.gao.gov.
If you or your staff have any questions about this report, please call
me at heckerj@gao.gov or at (202) 512-2834. Individuals making key
contributions to this report are listed in enclosure IV.
Sincerely yours,
Signed by:
JayEtta Z. Hecker:
Director, Physical Infrastructure Team:
Enclosures - 4:
Enclosure I: FAA Budget Policies and Practices:
[See PDF for image]
[End of slide presentation]
[End of section]
Enclosure II:
Briefing Appendix II: FAA Budget Mandate Matrix:
[See PDF for image]
Note: Items # 1-6 are from the House of Representatives 108-243:
Departments of Transportation and Treasury and Independent Agencies
Appropriations Bill, 2004 Items #7 - 18[Footnote 5] are from the Senate
108-146: Transportation, Treasury and General Government
Appropriations Bill, 2004 [FAA contact: Carol Burrus, Manager, Capital
Division, ABU-300 (202) 267-9025]
[End of table]
[End of section]
Enclosure III: Comments from the National Aeronautics and Space
Administration:
National Aeronautics and Space Administration:
Office of the Administrator
Washington, DC 20546-0001:
June 24, 2004:
Ms. JayEtta Hecker
Director:
Physical Infrastructure Issues:
United States General Accounting Office:
Washington, DC 20548:
Dear Ms. Hecker:
Thank you for the opportunity to comment on the draft General
Accounting Office (GAO) report entitled, Federal Aviation
Administration (FAA) Budget Policies and Practices (Report Number GAO-
04-841R). While the focus of the GAO report is on FAA, there is still
some information in the report regarding NASA that could be misleading,
and I request that it be clarified. The details of those clarifications
are provided in the enclosure.
Questions may be forwarded to Dr. Richard Beck, Director, Resources
Management Division, Office of the Chief Financial Officer, at (202)
358-2240.
Cordially,
Signed by:
Frederick D. Gregory:
Deputy Administrator:
Enclosure:
cc: ADI/Mr. Jennings:
G/Mr. Pastorek:
L/Mr. Forsgren:
O/Mr. Sutton:
O/Mr. Roberts:
NASA comments on draft report entitled "FAA Budget Policies and
Practices" (GAO Code 540091, Report Number GAO-04-841R):
While the GAO report accurately states that, "NASA relies on a 'full-
cost' budgeting methodology to identify costs associated with programs
and developed its first 'full-cost' budget for fiscal year 2004," the
statement that, "'Full-cost' budgeting led to changes in both NASA's
capital budget policies and presentation of capital costs," is
potentially misleading and should be changed. NASA has not had a
distinct set of separate capital budgeting procedures, therefore, the
word "capital" should be removed when referring to NASA's budget
policies. At one time, NASA did have a separate "mission support"
appropriation that covered such institutional infrastructure items as
civil service personnel salaries, construction of facilities, and
research operation support. However, the mission support appropriation
still included a mix of institutional resources, some of which
supported development efforts and are included presently in the full
cost of development programs. Therefore, references to NASA having
previous separate capital budgeting procedures should be deleted from
page 4 in the draft and page 31 in enclosure 1.
In adopting its full-cost budgeting practices, NASA focuses on trying
to ensure that the appropriate levels of institutional infrastructure
relate directly to the need of each program activity. In this manner,
the institutional infrastructure can be planned in direct context of
the needs of each program that contributes to achieving the Agency's
strategic plan objectives. Budgeting for NASA programs through separate
capital and operating accounts would not be compatible with the conduct
of NASA's type of program activities and could lead to possible
disconnects and/or suboptimized planning for a program when its funds
are separated across two appropriation accounts that are treated almost
as two distinct entities. Since there are particular benefits to
budgeting in this manner for NASA, it would be appreciated if the GAO
report recognized the potential value of this full-cost approach in
NASA's case instead of implying that NASA's budgeting is simply
different and could possibly be benefited by having separate capital
and operations appropriations accounts on page 4 and page 27 in
enclosure 1.
I would also ask that the reference to NASA's budget policies being 5
years old, on page 25 in enclosure 1, be updated to include the review
that we had in 2003 of the Agency's full-cost practices and its overall
budget formulation process in 2003.
Enclosure:
[End of section]
GAO Contacts and Staff Acknowledgements:
GAO Contacts: JayEtta Z. Hecker (202) 512-2834:
Beverly Norwood (202) 512-2834:
Acknowledgments: In addition to the individuals named above, Christine
Bonham, Donna Byers, Carol Campbell, Carlos Diz, Elizabeth Eisenstadt,
Tom Gordon, David Hooper, Laura Durland, Edda Emmanuelli-Perez,
Samantha Goodman, Thomas Hopp, Jerry Herley, Eric Mader, Maren McAvoy,
and John Warren made key contributions to this report.
(544090):
FOOTNOTES
[1] While there are accounting definitions for capital expenses, these
definitions are used for entirely different purposes than the
definitions of capital expenses used by federal agencies in preparing
their annual budgets. Specifically, federal accounting standards
promulgated by the Federal Accounting Standards Advisory Board define
property, plant, and equipment and establish their accounting,
including capitalization. For budgeting purposes, capital assets are
defined in OMB Circular A-11 and may differ from accounting. For
example, capital assets as defined in A-11 may or may not be
capitalized (recorded in an entity's balance sheet) under federal
accounting standards.
[2] Federal Aviation Administration, Funding Criteria for Operations,
Facilities and Equipment (F&E), and Research, Engineering and
Development (R,E&D) Accounts, 2500.8A (April 9, 1993).
[3] NASA's "full-cost" definition does not include costs that the
federal government does not currently include in the budget, such as
accruing retiree health benefits.
[4] DOD's capital costs are referred to as investments and are roughly
comparable to FAA's F&E expenses.
[5] "Controlling FAA's Operating Costs" (#6) was originally pulled from
the committee report but is not within the scope of this review.
However, we did not want to complicate the numbering system by
withdrawing it.
