Capital Financing
Potential Benefits of Capital Acquisition Funds Can Be Achieved through Simpler Means Gao ID: GAO-05-249 April 8, 2005CAFs have been discussed as a new mechanism for financing federal capital assets. As envisioned, CAFs would have two goals. First, CAFs would potentially improve decision making by reflecting the annual cost for the use of capital in program budgets. Second, they would help ameliorate at the subunit level the effect of large increases in budget authority for capital projects (i.e., spikes), without forfeiting congressional controls requiring the full cost of capital assets to be provided up-front. Through discussions with budget experts and by working with two case studies, the Departments of Agriculture and of the Interior, we are able to describe in this report (1) how CAFs would likely operate, (2) the potential benefits and difficulties of CAFs, including alternative mechanisms for obtaining the benefits, and (3) several issues to weigh when considering implementation of CAFs.
Capital acquisition funds (CAF) have been suggested as department-level funds that would use appropriated up-front borrowing authority to buy new departmental subunit assets. These subunits would then pay the CAF a mortgage payment sufficient to cover the principal and interest payment on the Treasury loan. The CAF would use those receipts only to repay Treasury and not to finance new assets. If existing capital assets were transferred to the CAF, subunits would pay an annual capital usage charge to the CAF. CAFs might achieve the goals intended, but these goals can be achieved through simpler means. Alternative mechanisms, such as asset management systems, cost accounting systems, and working capital funds may achieve the goal of allocating annual capital costs and improving decision making for capital assets. Our case study agencies generally did not indicate problems with budget authority spikes. They budget in useful segments, use accumulated no-year authority, or finance capital assets using working capital funds. Many concerns about CAFs were raised, including the long-term feasibility of making fixed annual mortgage payments and the added complexity CAFs would create. Implementation would raise a number of issues. If CAFs were applied only to new assets going forward, all programs would not reflect the full annual cost of capital for decades. Yet the difficulties of including existing capital are numerous. Even if these issues were tackled, there is little assurance that CAFs alone would create new incentives for programs to reassess their use of capital since CAF payments would not affect the deficit. Implementation issues could overwhelm the potential benefits of a CAF. More importantly, current efforts under way in agencies would reflect asset costs as part of program costs without introducing the difficulties of a CAF. As long as alternative efforts uphold the principle of up-front funding, CAFs do not seem to be worth the implementation challenges they would create. Except for OMB, agencies generally agreed with our conclusions.
GAO-05-249, Capital Financing: Potential Benefits of Capital Acquisition Funds Can Be Achieved through Simpler Means
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Report to the Chairman, Subcommittee on Government Management, Finance,
and Accountability, Committee on Government Reform, House of
Representatives:
April 2005:
Capital Financing:
Potential Benefits of Capital Acquisition Funds Can Be Achieved through
Simpler Means:
GAO-05-249:
GAO Highlights:
Highlights of GAO-05-249, a report to the Chairman, Subcommittee on
Government Management, Finance, and Accountability, Committee on
Government Reform, House of Representatives:
Why GAO Did This Study:
CAFs have been discussed as a new mechanism for financing federal
capital assets. As envisioned, CAFs would have two goals. First, CAFs
would potentially improve decision making by reflecting the annual cost
for the use of capital in program budgets. Second, they would help
ameliorate at the subunit level the effect of large increases in budget
authority for capital projects (i.e., spikes), without forfeiting
congressional controls requiring the full cost of capital assets to be
provided up front. Through discussions with budget experts and by
working with two case studies, the Departments of Agriculture and of
the Interior, we are able to describe in this report (1) how CAFs would
likely operate, (2) the potential benefits and difficulties of CAFs,
including alternative mechanisms for obtaining the benefits, and
(3) several issues to weigh when considering implementation of CAFs.
What GAO Found:
Capital acquisition funds (CAF) have been suggested as department-level
funds that would use appropriated up-front borrowing authority to buy
new departmental subunit assets. These subunits would then pay the CAF
a mortgage payment sufficient to cover the principal and interest
payment on the Treasury loan. The CAF would use those receipts only to
repay Treasury and not to finance new assets. If existing capital
assets were transferred to the CAF, subunits would pay an annual
capital usage charge to the CAF.
CAFs might achieve the goals intended, but these goals can be achieved
through simpler means. Alternative mechanisms, such as asset management
systems, cost accounting systems, and working capital funds may achieve
the goal of allocating annual capital costs and improving decision
making for capital assets. Our case study agencies generally did not
indicate problems with budget authority spikes. They budget in useful
segments, use accumulated no-year authority, or finance capital assets
using working capital funds. Many concerns about CAFs were raised,
including the long-term feasibility of making fixed annual mortgage
payments and the added complexity CAFs would create.
Implementation would raise a number of issues. If CAFs were applied
only to new assets going forward, all programs would not reflect the
full annual cost of capital for decades. Yet the difficulties of
including existing capital are numerous. Even if these issues were
tackled, there is little assurance that CAFs alone would create new
incentives for programs to reassess their use of capital since CAF
payments would not affect the deficit.
Implementation issues could overwhelm the potential benefits of a CAF.
More importantly, current efforts under way in agencies would reflect
asset costs as part of program costs without introducing the
difficulties of a CAF. As long as alternative efforts uphold the
principle of up-front funding, CAFs do not seem to be worth the
implementation challenges they would create. Except for OMB, agencies
generally agreed with our conclusions.
Up-Front Financing of Federal Capital Assets under a CAF:
[See PDF for image]
[End of figure]
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[End of section]
Contents:
Letter:
Results in Brief:
Background:
Scope and Methodology:
CAF Operations Would Create a New Financing System and New Oversight
Responsibilities:
CAF Benefits Can Be Achieved through Alternative Means Without the
Added Budget Complexity:
Several Issues to Weigh When Considering Implementation of CAFs:
Conclusion:
Agency Comments and Our Response:
Appendixes:
Appendix I: Comments from the Department of the Treasury:
Appendix II: Comments from the Department of the Interior:
Figures Figures:
Figure 1: Up-Front Financing of Federal Capital Assets before and after
Establishing CAFs: New Asset Obtained in Year 1:
Figure 2: NPS Asset Management Plan:
Figure 3: Illustration of Budget Spikes and Potential Smoothing Effects
of a CAF at ARS:
Abbreviations:
ABC: activity-based costing:
APHIS: Animal and Plant Health Inspection Service:
ARS: Agricultural Research Service:
BA: budget authority:
BLM: Bureau of Land Management:
BPA: Bonneville Power Administration:
CAF: capital acquisition fund:
CBO: Congressional Budget Office:
CPAIS: Corporate Property Automated Information System:
DOD: U.S. Department of Defense:
DOI: U.S. Department of the Interior:
FASAB: Federal Accounting Standards Advisory Board:
FBF: Federal Buildings Fund:
FMS: Financial Management Service:
FS: Forest Service:
FTS: Federal Technology Service:
GSA: General Services Administration:
INFRA: Infrastructure:
IT: information technology:
NASA: National Aeronautics and Space Administration:
NPS: National Park Service:
NRC: National Research Council:
OMB: Office of Management and Budget:
PBS: Public Buildings Service:
USDA: U.S. Department of Agriculture:
WCF: working capital fund:
Letter April 8, 2005:
The Honorable Todd Russell Platts:
Chairman:
Subcommittee on Government Management, Finance, and Accountability:
Committee on Government Reform:
House of Representatives:
Dear Mr. Chairman:
This report responds to your request that we explore the concept of
capital acquisition funds (CAF) as a possible way to reflect the annual
cost for the use of capital in program budgets while still maintaining
up-front congressional control over budgetary resources. To fully
understand how these funds would work in the federal government, we
agreed to (1) describe how CAFs might work as a financing approach for
federal agencies' capital investment, (2) examine the potential
benefits and difficulties of instituting and using CAFs, and (3)
identify any issues that Congress might consider before instituting
CAFs.
Since CAFs do not currently exist, we developed an in-depth
understanding of the CAF mechanism through a review of written CAF
proposals and interviews with budget experts at the Office of
Management and Budget (OMB) and the Congressional Budget Office (CBO).
We then presented a detailed description of CAFs to officials at the
Departments of Agriculture (USDA) and of the Interior (DOI) and some of
their agencies. We obtained their insights and opinions on the
applicability of the mechanism at their agencies and on how CAFs might
compare to their current practices for financing capital assets. We
also spoke with Department of the Treasury (Treasury) and General
Services Administration (GSA) officials and congressional staff to gain
their perspective on CAFs. Our work was conducted in Washington, D.C.,
from May 2004 through January 2005 in accordance with generally
accepted government auditing standards. We obtained comments on a draft
of this report from OMB, Treasury, GSA, DOI, and USDA. Written comments
from Treasury and DOI are reproduced in appendix I and II. We have
incorporated technical comments as appropriate throughout the report.
Results in Brief:
In recent years, various interested parties[Footnote 1] have reported
on the different ways that federal agencies can improve planning,
budgeting, and decision making for capital assets. One common
recommendation has been to consider the creation of new capital asset
financing mechanisms, CAFs. The theory behind this recommendation is
that CAFs would both help improve decision making by allocating capital
costs to subunits[Footnote 2] of departments on an annual basis and
also help alleviate, at the subunit level, the large, year-to-year
increases in budget authority (BA)[Footnote 3] (referred to in this
report as "spikes") that sometimes occur with up-front financing of
capital assets without changing the requirement for up-front funding at
the department level.
CAFs would operate at the department level and would to some extent
complicate the current process for financing federal capital assets.
Instead of providing departmental subunits with up-front appropriations
to directly purchase capital assets, Congress would appropriate up-
front borrowing authority to the departmental CAF for the full cost of
an asset.[Footnote 4] The CAF then would borrow from the Treasury's
general fund to acquire the asset. The subunit would receive the asset
and make a "mortgage payment"[Footnote 5] to the CAF. This mortgage
payment would then be forwarded to Treasury as repayment for the
borrowed funds; it would not be used to finance new assets. If existing
capital assets were transferred to the CAF, the CAF would impute an
annual capital usage charge on those assets to using agencies. The CAF
would collect these charges on existing capital and forward them to
Treasury; they could not be used for future projects. See figure 1 for
an example of the current capital financing process compared to the
process under a CAF mechanism.
Figure 1: Up-Front Financing of Federal Capital Assets before and after
Establishing CAFs: New Asset Obtained in Year 1:
[See PDF for image]
[A] This example assumes the asset is acquired at the beginning of the
fiscal year and rented for the entire year. The mortgage payment equals
approximately $644,000, assuming a $10 million loan for 30 years at a 5
percent interest rate with monthly payments.
[End of figure]
This new system for financing assets would increase management and
oversight responsibilities for Treasury, departments with CAFs, OMB,
and CBO. Treasury would have to set up CAF accounts and manage and
report on the borrowing authority and mortgage payments; it would
consider charging an administrative fee to cover the costs of these new
responsibilities. Departments would have to account for the
transactions between the CAF, Treasury, and the subunits, and perform
oversight responsibilities. OMB would have to issue guidelines to
determine the types of assets to include in the CAF and the method for
calculating a capital usage charge for existing capital. OMB and
Congress would have oversight responsibilities, which would need to be
spelled out. In addition, OMB and CBO would have to determine the
scoring of both the initial up-front borrowing authority and the
subsequent appropriations for the annual mortgage payments. Although on
a gross basis the BA would be appropriated twice, the payments are
purely intragovernmental and offset one another so no adjustments would
be needed to any appropriation subcommittee allocations[Footnote 6] for
new assets. If existing capital assets are included in a CAF, the
scoring of annual capital usage charges would have to be determined.
CAFs might improve decision making by allocating capital costs to
programs. This could be part of a broader effort to include full costs
in program budgets as a way of facilitating comparison across programs.
CAFs might also ameliorate the spikes in BA for subunits that are
sometimes said to inhibit capital acquisition. However, we found that
agencies are implementing or using alternative mechanisms to address
these challenges. For example, some agencies are developing and
beginning to use asset management systems that should allow them to
evaluate and record the condition of existing assets, estimate the
funding required to sustain capital assets over time, and prioritize
maintenance and improvements.[Footnote 7] Other agencies are using full
cost information from accounting systems to aid in budget decisions,
although more progress is needed before their cost accounting systems
can fully inform decision making, including capital planning and
budgeting.
Regarding spikes in BA, the case study subunits we spoke with generally
did not consider them to be an impediment to acquiring needed capital.
They explained that spikes are sometimes created by the changing
priorities and funding decisions of Congress rather than agency budget
requests. In other cases, agencies avoid spikes by funding capital in
useful segments or using no-year authorities.[Footnote 8] Both of these
approaches allow an agency to spread the total cost of an asset over
time by either completing a project in phases or accumulating numerous
years of funding in no-year accounts until the total amount of up-front
BA has been appropriated. In addition, agency working capital funds
(WCF)[Footnote 9] and the Federal Buildings Fund (FBF)[Footnote 10] at
GSA are being used to finance some capital assets. By using these
funds, which charge a rent payment or user fee, capital costs are
allocated to programs and spikes in BA are averted.
In addition to describing alternative methods for achieving CAF goals,
many of those we spoke with voiced concerns about CAFs. Case study
agency and Treasury officials raised questions about the long-term
feasibility of making fixed annual mortgage payments, especially in
times of constrained budgets. Some subunits and congressional
appropriations staff were concerned about shifting more control over
capital assets from the subunit to the department level. In general,
almost all agency officials, congressional staff, and budget experts
that we interviewed concluded that CAFs sounded complicated and many
questioned whether the challenges that CAFs are designed to address
were problematic enough to warrant their adoption; especially given the
additional budget complexities CAFs create.
We identified several other pertinent issues to weigh when considering
the implementation of CAFs. Perhaps the most difficult issue to tackle
would be the implementation of an annual capital usage charge on
existing capital assets. The argument in favor of these charges is that
they would allow programs to show the full annual cost of capital in
their budgets and in doing so establish a level playing field for
federal capital investment to allow for comparisons across programs.
The annual capital usage charge also might influence agency managers to
dispose of excess capital assets. If existing capital is not included,
it would be decades before all programs showed the full annual cost of
capital in their budgets, and programs purchasing new capital would
appear more expensive than those using existing capital. However, there
is no agreement on the need for such a charge or how it would be
computed.
Beyond that, although cost allocation efforts may increase the
transparency of total program costs, it is not clear that CAFs would
really create incentives for managers to make better decisions about
new or existing capital assets, especially if annual mortgage payments
and capital usage charges are automatically included in subunit
appropriations. For existing capital assets, mission responsibilities,
legal requirements for federal property sales, and financial costs
would likely constrain an agency's ability to dispose of surplus
assets. If implemented, CAFs would create a whole new set of
circumstances that would need to be addressed if an asset (which would
be owned by the CAF) is sold or transferred--how would a "sale price"
be determined between federal agencies, how would the full repayment of
CAF debts be ensured, and how would the agencies' budgets be adjusted?
Finally, even if guidelines indicate that most capital assets should be
included in the CAF, it is likely that some capital assets would
continue to be funded through currently existing mechanisms such as
WCFs, FBF, and the Federal Technology Service's (FTS) Information
Technology (IT) Fund.[Footnote 11]
In the past, we saw some merit in the broad concept behind
CAFs[Footnote 12] and agreed that CAFs should be explored as a
financing mechanism. After having done an in-depth examination of the
specifics and after discussing the perspectives of others who would be
involved in implementing CAFs, we now see that implementation
challenges are significant and that agencies have adopted other
mechanisms to address challenges CAFs were designed to address. It is
clear that in a mechanical sense CAFs could operate as intended, albeit
by increasing the complexity of capital asset financing. However, we
found there is little assurance that this increased complexity will
better achieve what is already being accomplished through the
alternative mechanisms discussed in this report. Without stronger
justification and a clear plan for handling the potential difficulties
raised in this report, CAFs would absorb the time and energy of those
involved in budgeting for capital without commensurate benefit.
We obtained comments on a draft of this report from OMB, Treasury, GSA
and our case study agencies--USDA and DOI. Treasury, GSA, USDA and DOI
generally agreed with the report. Treasury, USDA, DOI and OMB provided
technical comments, which have been incorporated as appropriate. OMB
provided oral comments and agreed with our description of the mechanics
of CAFs and concurred that spikes in BA for capital assets could be
alleviated through other means. OMB also recognized the problems with
CAFs that are highlighted in this report, including those related to
existing capital, and agreed that the complications of designing and
operating CAFs might outweigh the benefits. However, they disagreed
with our description of the goals of CAFs because they view CAFs as
part of a broader effort to have program budgets reflect full annual
costs in order to change incentives for decision makers. They do not
believe alternative mechanisms achieve that goal.
We recognize that if the sole or primary purpose of a CAF is to embed
costs in the program budgets, then the alternatives discussed in this
report do not achieve that purpose. However we believe, as highlighted
in the Report of the President's Commission to Study Capital Budgeting,
that the primary goal of CAFs is to improve decision making for
capital. Asset management and cost accounting systems, when fully
implemented, provide invaluable information that will assist decision
makers in determining how much and what types of capital are needed.
While this information may not necessarily be reflected in program
budgets, it is available to aid in budget and program decision making.
The fact that many of these systems are in relatively early stages of
development also increases our concern about CAFs. In a recent report,
we noted the belief among some agency officials, congressional
appropriations committee staff, and budget experts that improving
underlying financial and performance information should be a
prerequisite to efforts to restructure program budgets.[Footnote 13] We
argue this would also be true for CAFs, since without adequate measures
of program costs and an ability to identify capital priorities, a new
financing mechanism would do nothing to address the basic challenges of
determining how much and what types of capital are needed. Moreover, we
are not convinced that CAFs and the annual mortgage payments they would
require would change incentives for program managers or other decision
makers, especially if annual mortgage payments and capital usage
charges are automatically included in subunit appropriations. In
conclusion, we remain of the view that the operational challenges of
CAFs outweigh the benefits and that alternative mechanisms described in
this report can more simply promote improved decision making.
Background:
The federal government acquires a wide variety of capital assets for
its own use including land, structures, equipment, vehicles, and
information technology. Large sums of taxpayer funds are spent on these
assets, and their performance affects how well agencies achieve their
missions. To directly acquire an asset, agencies generally are required
to have full up-front BA for the total asset cost--usually a sizable
amount.[Footnote 14] This requirement allows Congress to recognize the
full budgetary impact of capital spending at the time a commitment is
made; however, it also means that the full cost of an asset must be
absorbed in the annual budget of an agency or program, despite the fact
that benefits may accrue over many years. This up-front funding
requirement has presented two challenges for capital planning and
budgeting at the federal level.
One challenge is how to permit "full cost" analysis and to promote more
effective capital planning and budgeting by allocating capital costs on
an annual basis to programs that use capital. Allocating capital costs
over the assets' useful lives ensures that the full annual cost of
resources a program uses is considered when evaluating the program's
effectiveness. It can make program managers more aware of on-going
capital costs, thus promoting more effective decision making for
capital. It may also contribute to equalizing comparisons across
different programs or different approaches to achieving similar goals.
A second challenge is how to address the possible bias against the
acquisition of necessary capital assets that may be created by spikes
(large, temporary, year-to-year increases in BA), which can make
capital assets seem prohibitively expensive in an era of resource
constraints. GAO has reported in the past that agencies view up-front
funding as an impediment to capital acquisition because of the
resulting spike in BA.[Footnote 15] CAFs have been suggested as a
capital asset financing approach that would benefit federal departments
and their subunits by addressing both of these challenges. CAFs would
be department-level funds that use annually appropriated authority to
borrow from the Treasury to purchase federally-owned assets[Footnote
16] needed by subunits of the department. These subunits would then pay
the CAF a mortgage payment sufficient to cover the principal and
interest payment on the Treasury loan. The CAF would use those receipts
only to repay Treasury and not to finance new assets.
The CAF concept was formally proposed in the February 1999 Report of
the President's Commission to Study Capital Budgeting[Footnote 17] as a
mechanism that would help improve the process by which annual budget
decisions are made by promoting better planning and budgeting of
capital expenditures for federally owned facilities. The report states
that by ensuring that individual programs are charged the true cost of
using capital assets, the CAF encourages managers to make more
efficient use of those assets. The Commission report also argues that
CAFs could help smooth out the spikes in BA experienced by subunits
with capital project requests. By aggregating all up-front BA for
capital requests at the department level, subunit budgets would reflect
only an annual payment for capital. Since the Commission report, CBO,
GAO, and the National Research Council (NRC) have all agreed that CAFs
should be explored as a capital financing mechanism.[Footnote 18]
CAFs were also discussed in the President's Fiscal Year 2004 Budget
issued in February 2003.[Footnote 19] The section on "Budget and
Performance Integration" briefly described the concept and reports that
draft legislation creating CAFs has been developed, discussed with
agencies, and improved. It said that CAFs would be one way to show the
uniform annual cost for the use of capital without changing the
requirement for up-front appropriations. At this time, OMB's interest
in CAFs appears to have waned. CAFs were not mentioned in the
President's Budget in either fiscal year 2005 or 2006 and the CAF
legislation described has not been introduced.
Scope and Methodology:
To address our objectives, we reviewed the available literature
describing the CAF concept. We also interviewed budget experts at OMB
and CBO to gain a more thorough understanding of how CAFs would operate
and discuss issues involved with their implementation. This permitted
us to describe a theoretical CAF with some operational detail.
Additionally, we sought the views of the many parties that would be
affected if CAFs were established. Since agency and congressional
officials were generally unaware of the CAF concept, we developed a
brief summary describing the general mechanics of a CAF and shared that
summary prior to interviews in order to generate discussion.
To get the department perspective, we chose USDA and DOI as case
studies. Both of these departments have substantial and varied capital
needs.[Footnote 20] Capital assets acquired by USDA and DOI include
land, buildings, research equipment, laboratories, quarantine
facilities, dams, bridges, parklands, roads, trails, vehicles,
aircraft, and information technology (hardware and software). In
addition, each department has multiple subunits that use capital assets
to achieve their missions--important for examining the question of
subunit spikes. We interviewed officials at the department and subunit
levels to gather their opinions and insights on the operation,
benefits, and difficulties of CAFs. Specifically within USDA we spoke
with officials in the Animal and Plant Health Inspection Service
(APHIS), the Agricultural Research Service (ARS), and the Forest
Service (FS). Within DOI, we spoke with officials in the National Park
Service (NPS) and the Bureau of Land Management (BLM). During these
discussions, agency officials also compared CAFs (as described in our
summary) with current practices used for planning, budgeting, and
acquisition of capital assets.
Since congressional approval would be necessary for the creation and
operation of CAFs, we spoke with staff on the House and Senate Budget
Committees, the House and Senate Appropriations Subcommittees on the
Interior, and the House Appropriations Subcommittee on
Agriculture[Footnote 21] to get their opinions on the proposed CAF
mechanism. We also interviewed officials at Treasury, which would be
responsible for managing the borrowing authority. In addition, we spoke
with officials at GSA to discuss how a CAF might affect the FBF, used
by some federal agencies to acquire federal office space and the FTS,
used by some federal agencies to acquire IT.
Finally, we reviewed agency documents including asset management plans,
accounting system descriptions, capitalization policies, and working
capital fund information. We also examined our prior work, financial
accounting standards, and various legal and budgetary sources
specifically related to federal property management.
We recognize that our findings on agency perspective, which are based
on interviews with five subunits within two departments, may not be
applicable to all agencies within the federal government. However, we
were struck by the consistency in department and subunit reaction to
the concept, especially when followed by comparable reactions from
congressional officials. Our work was conducted in Washington, D.C.,
from May 2004 through January 2005 in accordance with generally
accepted government auditing standards.
CAF Operations Would Create a New Financing System and New Oversight
Responsibilities:
Implementing CAFs would change the current process for financing new
federal capital projects. In addition, if all existing capital assets
of a department and its subunits were transferred to the CAF, the CAF
would impute an annual capital usage charge on those assets to using
agencies. This additional complication could be avoided if CAFs were
limited to new assets. However, this would mean it would be decades
before all programs showed the full annual cost of capital in their
budgets.
Although in many respects CAFs are accounting devices to record
financial transactions, their creation would create new management and
oversight responsibilities for many federal entities. Treasury would
have primary responsibility for administering the borrowing authority.
Both Treasury and those departments with CAFs would be required to keep
track of the many CAF transactions. The management and oversight
responsibilities of the departments would need to be clearly spelled
out in order for CAFs to operate effectively. OMB would likely have to
issue guidelines on operation specifics and OMB and the congressional
appropriations committee staff would have to review the CAFs to ensure
they were operating properly. OMB and CBO would score (estimate) the
CAFs' and subunits' BA--both the initial authority to borrow and the
subsequent appropriations used for repayment. The scoring of the annual
capital usage charges, if CAFs were applied to existing capital, has
not yet been developed.
CAFs Would Be Positioned at the Department Level and Create a More
Complex Process for Financing Capital:
Although CAFs do not currently exist, we can describe how they would
likely operate based on written proposals and our discussions with
budget experts. CAFs would be established at the department level as
separate accounts that would receive up-front authority to borrow
(provided in appropriation acts) on a project-by-project basis, for the
construction and acquisition of large capital projects for all of the
subunits within a department. For those departments with subunits split
between two appropriation subcommittees, it is likely that two CAFs
would be necessary. For example, DOI receives appropriations through
two subcommittees: the Energy and Water Development Subcommittee, which
is responsible for Bureau of Reclamation (Reclamation) programs; and
the Interior and Related Agencies Subcommittee, which is responsible
for all other Interior programs. CBO, OMB, and agency officials we
spoke with generally believed that having a CAF that crossed
subcommittee jurisdictions would create many problems, thus it would
likely be necessary for departments to have a separate CAF for each
subcommittee with which they work. Using the example above, DOI would
have one CAF for Reclamation and a second for the remaining subunits
within DOI. Alternatively, CAFs could be situated at the appropriation
subcommittee level rather than the department level, with each of the
13 subcommittees appropriating to their respective CAF for the agencies
under their jurisdiction.[Footnote 22] Some congressional officials did
not seem to think that this would be the most effective arrangement and
raised the point that increased resources might be needed at the
subcommittee level to manage CAF transactions. In addition, OMB argued
that CAFs should be located at the department level because the
department is the focus of accountability for planning and managing
programs and capital assets, as well as for budget execution and
financial reporting.
The CAF would receive appropriations for the full cost of an asset (or
useful segment of an asset) in the form of borrowing authority. Like
all BA, the borrowing authority for each CAF-financed project would
specify the purpose, amount, and duration of the authority. Unless the
asset is to be available for use in the same fiscal year, the subunit
itself would receive no appropriations. The CAF would use its authority
to borrow from the Treasury's general fund to acquire the asset for the
subunit. When the asset became usable, the subunit would begin to pay
the CAF an amount equal to a mortgage payment consisting of interest
and principle. These equal annual payments would consist of the
principal amortized over the useful life of the asset and include
interest charges at a rate determined by Treasury (based on the average
interest rate on marketable Treasury securities of comparable
maturity). The CAF would use these mortgage payments to repay Treasury
for the funds borrowed plus interest. Unlike a revolving fund, the
mortgage payments collected by the CAF would be used only to repay
Treasury and could not be used to finance new assets.
For each project funded through the CAF, the subunit's annual budget
request would need to include the annual mortgage payment in each year,
for the useful life of the asset (or until the asset was sold or
transferred). The subunit would need annual appropriations for these
payments, along with its other operating expenses. On the basis of our
discussions, we conclude that the appropriations from which the
payments are made would be discretionary as opposed to mandatory. They
would not be provided as a line item for mortgage payments to the CAF,
but would be part of the subunit's total appropriation. While the
subunit would be required to make the annual payment, there would be no
guarantee that Congress would include the additional amounts to cover
the payment in the subunit's appropriation.
At some point, the mortgage on an asset would be "paid off." However,
if annual capital usage charges on existing capital were established,
payments would continue, although the amount of the payments would
depend on the method used to calculate the charges for existing
capital. Any imputed charges collected by the CAF would be transferred
to the general fund of Treasury and not be available to finance new
assets. Later in this report we discuss in more detail the idea of
imputing a capital usage charge on existing capital.
Treasury Would Oversee Borrowing Authority Used to Acquire Capital
Assets:
Treasury is responsible for administering and managing borrowing
authority. Treasury officials explained that within the department, the
Financial Management Service (FMS) would have responsibility for
setting up the accounts to correspond with each CAF created. Before a
CAF could actually borrow from Treasury, an agreement would have to be
signed establishing the interest rate and repayment schedule. Treasury
officials recommended that OMB establish guidelines to specify the
useful life of capital assets so departments would abide by an
appropriate amortization schedule and not attempt to lower payments by
lengthening the asset's useful life. The standards issued by the
Federal Accounting Standards Advisory Board (FASAB) on how to account
for property, equipment, and internal-use software could be useful in
developing these guidelines.[Footnote 23] According to Treasury
officials, FMS would also be responsible for preparing the warrants, an
official document that establishes the amount of monies authorized to
be withdrawn from the central accounts maintained by Treasury, and
would report annually on account activity. The Bureau of Public Debt
would have the most day-to-day interaction with the CAF. It would be
responsible for transferring the borrowed funds to the department and
for receiving payments. Although Treasury officials did not think it
would be an unmanageable task, they said that tracking individual
transactions could become complicated, depending on the level of
detailed reporting required, and would certainly require additional
staff time. To cover these costs, they would want to charge an
administrative fee, as they do for trust funds.
CAFs Would Add Complications to Oversight and Scoring:
A CAF is an additional layer of administration that could complicate
program management rather than streamline it. At the department level,
the chief financial officer would likely be responsible for the
financial operation of the CAF. Department heads would need to specify
duties for those with capital asset management and oversight
responsibilities according to the unique needs of the department.
Oversight functions would include accounting for all the transactions
between the CAF and Treasury as well as between the CAF and the
subunits. In addition, the managerial relationship between the CAF and
individual subunits would have to be worked out. OMB would also likely
have new responsibilities. For example, OMB would probably have to
develop guidelines on issues such as (1) the types of assets to include
in the CAF, (2) the amortization schedule for various types of assets,
(3) the method for calculating a capital usage charge on existing
capital (along with CBO and Congress), and (4) the relationship between
a CAF and FBF.[Footnote 24] Indeed, the NRC report argued that
oversight and management of CAFs should actually reside at OMB.
Although OMB officials provided no details, they agreed that they would
have some responsibility for reviewing CAFs, as would congressional
committees.
As they do for all appropriation actions, CBO and OMB would score the
CAF and subunit BA--both the initial authority to borrow and the
subsequent appropriations used for repayment. Although the net amounts
of BA and outlays for capital acquisitions would not change, the type
of BA would. Currently, annual appropriations, which allow program
managers to incur obligations and make outlays with no additional
steps, are provided for most capital acquisitions. A CAF, however,
would be appropriated up-front borrowing authority. On a gross basis,
the BA would have to be appropriated twice, once as up-front borrowing
authority and incrementally over time through appropriations for the
annual mortgage payment. Since the annual mortgage payment is purely
intragovernmental, the subunit's BA and outlays are offset by receipts
in the CAF, so the total BA and outlays are not double-counted.
Therefore, appropriation subcommittee allocations would not need to be
adjusted if a CAF were used for new assets.
The initial borrowing authority would be equal to the asset cost and
would be scored up front in the CAF budget. When the annual mortgage
payments begin, the amount provided in the subunit's budget would equal
the mortgage payment and would be scored as discretionary BA. The
mortgage payment would then be transferred to the CAF and, as a
receipt, be considered mandatory BA. However, according to OMB, it
would be treated as a discretionary offset for scoring
purposes.[Footnote 25] The payment and receipt would completely offset
each other within the appropriation subcommittees' totals and in the BA
and outlay totals for the federal budget as a whole.
When the CAF repays Treasury using the mortgage receipts, scoring would
follow the current guidelines for debt repayment transactions. The
mortgage receipt would be considered mandatory BA and be used to repay
Treasury; however, the portion of the mortgage payment that corresponds
to the amortization of the asset cost would be deducted from the BA
(and outlay) totals. When collections are used for debt repayment, they
are unavailable for new obligations, and therefore are not BA. If they
were counted, the BA and outlay totals would be overstated over the
life of the loan. According to OMB, the remaining mandatory BA would be
obligated and outlayed for interest payments to an intragovernmental
receipt account in Treasury, but would not be scored. At this time, the
scoring of annual capital usage charges on existing capital assets has
not been determined.
CAF Benefits Can Be Achieved through Alternative Means Without the
Added Budget Complexity:
CAFs have been proposed as a way to address two challenges that arise
from the full up-front funding requirement for capital projects. The
first challenge is to facilitate program performance evaluation and
promote more effective capital planning and budgeting by allocating
capital costs on an annual basis to those programs using the capital.
By having annual cost information, managers can better plan and budget
for future asset maintenance and replacement. During our interviews, we
learned that asset management and cost accounting systems are currently
being implemented that could be used to address this problem. These
systems are designed to provide the information necessary for improved
priority setting and better decision making, although we found that
many agencies are still working to fully implement and use these
systems. The second challenge--managing periodic spikes in BA caused by
capital asset needs--if considered a problem at all, is managed by our
case study agencies through existing entities and practices, such as
the use of WCFs. Consequently, CAFs appear to offer few benefits over
and above those provided by other mechanisms being put into place or in
use. In addition, officials at the department and subunit level and key
congressional staff we spoke with have a number of concerns about
adopting CAFs as an alternative financing method. Most of those we
spoke with said CAFs sounded like a complicated mechanism to achieve
benefits that can be achieved in simpler ways and some worried that
implementation of CAFs could distract from current efforts to improve
capital decision making.
Allocating Annual Capital Costs and Improving Decision Making for
Capital Assets May Be Achieved through Existing Initiatives:
Officials we interviewed reacted to our presentation of the CAF
mechanism by describing current agency initiatives and existing
mechanisms that they believe can better achieve the ultimate goal of
improving budgeting and decision making for capital. We found that some
agencies currently make use of asset management plans to collect,
track, and analyze cost information and to assist management in budget
decisions and priority setting. Accounting systems that report full
costs are also being developed that will include the cost of capital
assets in total program costs and will provide a tool for agency
managers to make better decisions and use capital more efficiently.
Once fully implemented, these methods will provide agencies with the
ability to assign costs at the program level and link those costs to a
desired result. The information provided should lead agencies to
consider whether they will continue to need the current quantities and
types of fixed assets they own to meet future program needs.
The Departments of the Interior and Agriculture Are Implementing Asset
Management Systems to Make Informed Decisions on Capital Investment:
As we have reported in previous work, leading organizations gather and
track information that helps them identify the gap between what they
have and what they need to fulfill their goals and objectives.[Footnote
26] Routinely assessing the condition of assets and facilities allows
managers and their decision makers to evaluate the capabilities of
current assets, plan for future asset replacements, and calculate the
cost of deferred maintenance. We found that asset management systems
are being developed and implemented at some agencies as a mechanism to
aid in the identification of asset holdings and prioritization of
maintenance and improvements.
For example, we reported in 2004 that NPS, within DOI, is currently
implementing an asset management process.[Footnote 27] If it operates
as planned, the agency will, for the first time, have a reliable
inventory of its assets, a process for reporting on the condition of
those assets, and a systemwide methodology for estimating deferred
maintenance costs. The system requires each park to enter all of its
assets and information on its condition into a centralized database for
the entire park system and to conduct annual condition assessments and
regular comprehensive assessments. This new process will not be fully
implemented until fiscal year 2006 or 2007, and will require years of
sustained commitment by NPS and other stakeholders.
Figure 2: NPS Asset Management Plan:
Department officials provided us a prototype of an asset management
plan for the Grand Canyon National Park. The objective is to establish
the total cost of ownership of the Grand Canyon's asset inventory and
to provide a tool to aid managers in budget decisions, priority
setting, and communication. It focuses on four key questions about the
following:
* What inventory NPS owns in the park;
* The condition of assets;
* Current replacement values;
* What operations and resources are required to properly sustain the
asset inventory;
Information on the park's inventory is gathered from condition
assessments, operations and maintenance budgets, staff experience, and
industry standard sources.[A] This information helps clarify asset
maintenance and operations requirements, which are then compared to
agency budget data to determine if funding levels are adequate to
sustain the capital over time. In addition, managers use a facility
condition index plotted against an asset priority indexb to restore
assets in priority order and identify assets for disposal.
Source: DOI.
[A] Industry standard sources refer to the facility condition index,
which is considered to be a leading metric for assessing asset
conditions. It is calculated by dividing the total project requirements
by the replacement value of the asset.
[B] The asset priority index is a score that park leadership assigns
and is reflective of the asset's relevance to carrying out the park
mission.
[End of figure]
According to NPS documents, this approach and the information captured
in the asset management plan provides Grand Canyon National Park
managers with the knowledge and specifics to make informed capital
investment decisions and to develop sound business cases for funding
requests. The appropriators for NPS that we spoke with agreed that the
additional funding they have provided for condition assessments and
asset management has improved planning and decision making at NPS.
Department officials told us that these types of asset management plans
would eventually be completed for all capital-holding subunits within
DOI. The completion of this management system is especially important
for DOI because much of its mission is the upkeep and improvement of
its capital for use by the public.
FS, whose capital includes numerous trails, roads, and recreation
facilities, has implemented and is continuing to enhance its asset
management system referred to as Infrastructure (INFRA). INFRA has been
in production since 1998 and served as the agency's primary inventory
reporting and portfolio management tool for all owned real property
until May 2004. FS officials said that they have used INFRA to assist
management in prioritizing backlogs of maintenance and renovations.
According to these officials, INFRA allows for the transfer of FS asset
inventory data directly into USDA's asset inventory system known as the
Corporate Property Automated Information System (CPAIS). CPAIS, which
agency officials said was modeled after INFRA and further enhanced to
include leased property and GSA assignments, was implemented in May
2004 and maintains data elements necessary to track and manage owned
property, leased property, GSA assignments, and interagency agreements.
The system will provide the department and its subunits with the
capability to increase asset utilization and cost management and to
analyze and reduce maintenance expenses. The primary users of the
system are those subunits with considerable capital needs, according to
agency officials. ARS's capital is mostly high-priced laboratories,
specific scientific equipment, and research facilities, and officials
are confident that CPAIS will provide the information needed to ensure
accountability over its real property. ARS also has its own facilities
division made up of contractors and engineers that are equipped with
the experience and expertise to manage and oversee their specialized
capital projects. APHIS officials said they are in the process of doing
facility condition assessments and hope to use the information in order
to better align its mission with its strategic plan.
The need for asset management systems to aid agency officials in making
informed decisions was underscored in our report designating federal
real property as a new high-risk area in 2003. The report highlighted
the fact that in general, key decision makers lack reliable and useful
data on real property assets.[Footnote 28] In February 2004, the
President issued an Executive Order for Federal Real Property Asset
Management. The order requires designated agencies to have a real
property officer and to implement an asset management planning process.
Its purpose is to promote the efficient and economical use of America's
real property assets and to assure management accountability for
implementing federal real property management reforms.
Some Agencies Are Beginning to Use Full Cost Information to Make Budget
Decisions, Although Much Work Needs to Be Done:
We found that some agencies are currently implementing cost accounting
methods, such as activity-based costing (ABC), to help determine the
full cost of a product or service, including the annual cost of
capital, and using that information to make budgeting
decisions.[Footnote 29] For example, BLM has implemented a management
framework that integrates ABC and performance information. We have
previously reported that BLM's model fully distributes costs and can
readily identify, among other things, (1) the full costs of each of its
activities and (2) what it costs to pursue each of its strategic goals.
The system provides detailed information that facilitates external
reporting and can be used for internal purposes, such as developing
budgets and analyzing the unit costs of activities and
outputs.[Footnote 30] Integrating cost and performance information into
one system helped BLM become a finalist for the President's Quality
Award in 2002 in the "performance and budget integration" category. The
bureau was recognized for implementing a disciplined approach that
allows it to align resources, outputs, and organizational goals, and
can lead to insights to reengineer work processes as necessary. Among
the results of its ABC efforts, BLM has reported increased efficiency
and success in completing deferred maintenance and infrastructure
improvement projects. BLM was at the forefront of this cost management
effort, which began in 1997 and has now been adopted departmentwide as
part of DOI's vision of effective program management.
In another report, we described how the National Aeronautics and Space
Administration (NASA) is beginning to use accounting information to
help make decisions about capital assets.[Footnote 31] NASA's "Full
Cost" Initiative involves changes to accounting, budgeting, and
management to enhance cost-effective mission performance by providing
complete cost information for more fully informed decision making and
management. The accounting changes allow NASA to show the full cost of
related projects and supporting activities while the "full cost"
budgeting uses budget restructuring to better align resources with its
strategic plan. The accounting and budgeting portions of the initiative
support the management decision-making process by providing not only
better information, but also incentives to make decisions on the most
efficient use of resources. For example, NASA officials credited "full
cost" budgeting with helping to identify underutilized facilities, such
as service pools--the infrastructure capabilities that support multiple
programs and projects. NASA's service pools include wind tunnels,
information technology, and fabrication services. If programs do not
cover a service pool's costs, NASA officials said that it raises
questions about whether that capability is needed. NASA officials also
explained that when program managers are responsible for paying service
pool costs associated with their program, program managers have an
incentive to consider their use and whether lower cost alternatives
exist. As a result, NASA officials said "full cost" budgeting provides
officials and program managers a greater incentive to improve the
management of these institutional assets. Although accounting changes
alone are not sufficient to improve decision making and management, it
is clear from discussions with NASA officials and agency documentation
that the move to full costing is a critical piece of the initiative.
Some agencies still need to make more progress before their cost
accounting can more fully inform their decision making, including
decisions on capital planning and budgeting. In a 2003 report looking
at the financial management systems of 19 federal departments, we found
that although departments are required to produce information on the
full cost of programs and projects, some of the information is not
detailed enough to allow them to evaluate programs and activities on
their full costs and merits.[Footnote 32] For example, the Department
of Defense (DOD) does not have the systems and processes in place to
capture the required cost information from the hundreds of millions of
transactions it processes each year. Lacking complete and accurate
overall life-cycle cost information for weapons systems impairs DOD's
and congressional decision makers' ability to make fully informed
decisions about which weapons, or how many, to buy. DOD has
acknowledged that the lack of a cost accounting system is its largest
impediment to controlling and managing weapon systems costs. Our report
states that departments are experimenting with methods of accumulating
and assigning costs to obtain the managerial cost information needed to
enhance programs, improve processes, establish fees, develop budgets,
prepare financial reports, make competitive sourcing decisions, and
report on performance. As departments implement and upgrade their
financial management systems, opportunities exist for developing cost
management information as an integral part of the systems to provide
important information that is timely, reliable, and useful.
CAFs Might Smooth Budget Spikes, but Benefit May Be Minor:
The President's Commission to Study Capital Budgeting and NRC have
suggested that a CAF might help ameliorate the spikes in agency budgets
that often result from large periodic capital requests by smoothing
capital costs over time and across subunits. Our analysis of recent
trends in BA for capital acquisitions clearly shows the presence of
spikes at the subunit level. See figure 3 for an illustration of budget
spikes and potential smoothing effects of a CAF at ARS.
Figure 3: Illustration of Budget Spikes and Potential Smoothing Effects
of a CAF at ARS:
[See PDF for image]
Note: In this figure, the first 12 years of data are based on actual BA
for capital assets for fiscal years 1994 through 2005. To simulate a
long-term trend, we replicate this data for years 13 through 30. A 20-
year repayment term is used to calculate the annual mortgage payment,
which does not include an interest charge. We obtained BA data for
capital assets from OMB's MAX database as described in the Scope and
Methodology section.
[End of figure]
However, these spikes did not appear to be a major concern to the case
study subunits we spoke with nor did they consider them a barrier in
meeting capital needs. Given current practices for financing capital
assets, it seems that some program managers and Congress have found
ways to cope with spikes in the absence of CAFs. As a result, the
benefit of smoothing costs with a CAF would be minimal.
Some Spikes May Be Created by Congressional Funding Decisions:
Our prior work indicates that some agencies have complained that large
spikes in their budget hinder their ability to acquire the needed
funding to complete capital projects[Footnote 33] and reveals that some
agencies have turned to alternative financing mechanisms, such as
incremental funding, operating leases, and public-private partnerships,
that allow them to obtain assets without full, up-front BA.[Footnote
34] A few agency officials we spoke with said that because of the up-
front funding requirement, they have sometimes opted for operating
leases instead of capital leases or constructing buildings. Operating
leases are generally more expensive than construction, purchase, or
capital leases for long-term needs but do not have to be funded up
front. Nevertheless, the agencies we spoke with reported that spikes
are often created by the changing priorities of Congress and its
willingness to provide up-front funding for favored capital projects.
For example, ARS officials reported that appropriators have increased
the agency's budget in a given year to fund a new or expanded facility
that the subcommittee considered a priority. Historically, the
appropriations subcommittee for ARS (and all USDA agencies except FS)
has been active in initiating capital projects and following through
with the up-front funding necessary to build or acquire assets. From
ARS's perspective, budget spikes are not problematic because of the
perceived ease in obtaining needed funds. DOI also reported that some
of its subunits have received "waves" of funding for capital projects
largely dependent upon the priorities of Congress and the President.
Within DOI, BLM officials agreed that budget spikes were mostly a
result of congressional add-ons. On the other hand, NPS reported that
most of its capital projects are just not large enough to cause a
noticeable budget spike.
Staff from the congressional budget committee suggested that
deliberations during the appropriations process result in some
smoothing at the subcommittee level. The smoothing effects may not be
apparent to agencies when they review their individual budgets, but
they are evident from a governmentwide perspective. Historical analysis
shows that federal nondefense capital spending has remained relatively
constant over the past 30 years.[Footnote 35]
Spikes Are Being Managed by Funding Useful Segments or Using No-Year
Authority:
When spikes might be a problem, the departments and subunits we spoke
with have been able to manage them by dividing projects into useful
segments and accumulating funds with no-year authority. USDA and FS
reported that they have broken capital projects into useful segments
and requested the funding accordingly to minimize dramatic fluctuations
in capital costs. For example, USDA is currently renovating its
headquarters in Washington, D.C., and is using funds the department
receives every other year to finance the overhaul of one discrete
section of the building at a time. APHIS and BLM have also broken up
large projects by funding the survey and design phases in the first
year and requesting funds for construction in subsequent years. In
addition, ARS and APHIS have authorities that allow them to accumulate
a specified amount or percentage of unobligated funds until the amount
is sufficient to cover the full up-front costs of the desired asset.
For example, ARS is building an animal health center in Iowa, which
costs an estimated $460 million. ARS received $124 million in fiscal
year 2004 towards the project and can accumulate that money in its no-
year account until the total amount to cover the costs is collected. In
its efforts to consolidate field offices, APHIS officials told us they
were granted authority to convert $2 million in unobligated balances
into no-year money each year for 3 years. The $6 million it was able to
accumulate allowed it to fund the consolidation with up-front funding.
The bureau hopes to expand this authority to apply to other capital,
including helicopters and airplanes.
WCFs and FBF Can Be Used Both to Finance Capital Assets Without Spikes
and to Allocate Capital Costs:
WCFs, a type of revolving fund,[Footnote 36] are a mechanism that can
be used both to spread the cost of capital acquisition over time and to
incorporate capital costs into operating budgets. As reported
previously,[Footnote 37] we found that WCFs can be effective for
agencies with relatively small, ongoing capital needs because the WCFs,
through user charges, spread the cost of capital over time in order to
build reserves for acquiring new or replacement assets. Also, WCFs help
to ensure that capital costs are allocated to programs that use capital
by promoting full cost accounting. Since WCFs are designed to be self-
financing, the user charges must be sufficient to recoup the full cost
of operations and include charges, such as depreciation, to help fund
capital replacement.
Some we spoke with use WCFs to finance capital assets such as IT
initiatives and equipment. For example, USDA's WCF provided funds to
the National Finance Center, one of its activity centers, to purchase
and implement a financial system. Department officials explained that
after the system became operational, the Finance Center charged the 28
user entities a depreciation expense to recoup the costs of purchasing
the system so it could repay the WCF. In another example, the FS's WCF
purchases radio equipment, aircraft, IT, and other motor-driven
equipment. The equipment is rented out to administrative entities
within the agency, such as the National Forests and Research Experiment
Stations, and to outside agencies for a charge that recoups the costs
of operation, maintenance, and depreciation. The user charge is
adjusted to include sufficient funds to replace the equipment. Agency
officials would like to expand the WCF beyond just equipment and
establish a facilities maintenance fund. Through this fund, they would
apply a standard charge per square foot plus a replacement cost
component. The charges would be used for ongoing maintenance and
replacement and they believe would help influence line officers to
reexamine capital needs. BLM's WCF functions similar to that of the
FS's WCF. BLM's WCF purchases vehicles, then charges fees to users of
the vehicles and uses the revenue to buy replacement vehicles. In both
of these examples, the WCF is designed to accumulate the funds to
absorb the up-front costs of the capital while the user entities incur
the annual costs of using the capital.
This mechanism operates similarly to a CAF, but with more flexibility
in the funding requirements. First, since WCFs are revolving funds,
they allow agencies to purchase new capital without a specific
congressional appropriation whereas a CAF would require a new
appropriation to purchase new capital. Second, WCFs are not subject to
fiscal year limitations (they have no-year authority) while CAFs would
have project-by-project borrowing authority specified in appropriation
acts. Third, WCFs reflect annual capital costs through a depreciation
charge whereas CAFs would reflect this cost through an annual mortgage
payment of principal and interest.[Footnote 38] Hence, both would
reflect the annual cost of capital in the subunits' budgets.
To obtain federal office space, many agencies lease from and make
rental payments to GSA, which deposits those funds into the FBF.
Although leasing is recognized as being more expensive in the long run
than ownership, some agencies lease because it does not require as much
up-front funding as ownership (i.e., to avoid spikes). Although a CAF
is conceptualized to reduce the amount of up-front funding needed by
subunits when acquiring capital assets (while still requiring up-front
funding at the department level), it is not clear that having a CAF
would encourage subunits to build rather than lease office space. Two
agency officials we spoke with said that they would likely continue
leasing and one commented that if planning outright ownership, it would
be easier to deal with obtaining the traditional up-front funding than
worry about the annual mortgage payments required by a CAF. Through
their charges, both WCFs and FBF spread the cost of capital over time
and ensure that capital costs are properly allocated to the user
programs.
Agency Officials, Congressional Staff and Other Key Players Have
Numerous Concerns About CAFs:
Agency officials, congressional staff, and other key players raised
numerous concerns about CAFs. For example, department and subunit
officials are concerned that there is no guarantee or assurance that
the annual mortgage payments to be collected by the CAF will be
adequately funded in annual subunit appropriations. In addition, some
subunits and appropriators are reluctant to shift more control for
capital planning and budgeting to the department level. Congressional
staff also raised concerns about the feasibility of the congressional
mind shift that would be required to fund capital through a mechanism
such as a CAF, especially if a charge on existing capital is included,
and questioned the value that a CAF would really add to agency planning
and budget decision making that could not be obtained through other
means. CBO and GSA were also apprehensive and cautious about the
usefulness of the CAF concept when operating details were described in
full. Most budget experts and agency officials we spoke with agreed
that the complexities involved in operating a CAF would likely outweigh
the possible benefits. A few worried that CAFs might even divert
attention from the current initiatives under way to improve asset
management and full costing.
Concerns over Receipt of Annual Mortgage Payment:
Treasury, which would assume responsibility for collecting debt
repayments, was concerned that there would be no guarantee that future
appropriations would finance the mortgage payments, nor would there be
any enforcement mechanism by which Treasury could enforce repayment.
Treasury officials feared that over time other types of spending would
take priority over debt repayment. They based their concerns on the
record of some other programs that have struggled to repay debt or for
which debt has been "forgiven" or otherwise excused. For example, the
Black Lung Disability Trust Fund, which provides disability benefits
and medical services to eligible workers in the coal mining industry,
has growing debt and will never become solvent under current
conditions.[Footnote 39] Although Black Lung Disability Fund revenues
are now sufficient to cover current benefits, they do not cover either
repayment of the over $8 billion owed the Treasury or interest on that
debt. Another example is the Bonneville Power Administration (BPA),
which is a federal electric power marketing agency in the Pacific
Northwest with authority to borrow from Treasury on a permanent,
indefinite basis in amounts not exceeding $4.45 billion at any time.
BPA finances its operations with power revenues and the loans from
Treasury, and has authority to reduce its debt using "fish credits."
This crediting mechanism, authorized by Congress in 1980, allows BPA to
reduce its payments to Treasury by an amount equal to mitigation
measures[Footnote 40] funded on behalf of nonpower purposes, such as
fish mitigation efforts in the Columbia and Snake River systems. BPA
took this credit for the first time in 1995 and has taken it every year
since that time. The annual credit allowed varies, but has ranged
between about $25 million and $583 million, including the use in 2001
and 2003 of about $325 million total unused "fish credits" that had
accumulated since 1980.
Some officials at the department and subunit level also raised concerns
about the long-run feasibility of fulfilling their mortgage payments
over the entire repayment period given that the payments are made from
their annual appropriations, which they expect to become increasingly
constrained. The mortgage payments would be relatively uncontrollable
items within an agency's budget, to the detriment of other, more
controllable items, such as personnel costs. Because the mortgage costs
would not change unless the asset is sold, managers would have less
flexibility in making budgeting decisions within stagnant or possibly
declining annual budgets that occur in times of fiscal restraint. BLM
officials said this type of fixed obligation, which could consume an
increasing share of its budget, could hinder its ability to address
emergency needs that arise during the year. For example, they cited a
case in which the agency reprogrammed resources to deal with a
landslide that occurred on the Oregon coast in late 2003. BLM delayed
other projects in order to redirect funds for the removal and
stabilization of the landslide and to reopen Galice Creek Road, which
is a major artery for public access, recreation, and commercial
activity such as timbering, as well as BLM and FS administration. BLM
officials questioned whether the fixed payment to the CAF would
constrain their ability to make adjustments such as this. Many agency
officials were skeptical of the idea that they could fulfill annual
mortgage payments to a CAF without squeezing program operations and
some said they would rather deal with the up-front funding requirement
than have to worry about annual mortgage payments.
The alternative to force-fitting a mortgage payment within agencies'
annual appropriations is to adjust agency budgets with an automatic add-
on equal to agencies' mortgage payments. While this would relieve
budget pressures at the agency level, it would probably not provide
incentives or influence managers to improve capital asset management
and decision making.
Concerns About Shifting More Control over Capital Assets to the
Department Level:
Under the CAF concept, requests for capital projects would come from
the department level and the CAF would own all capital assets. This
would shift more control of capital planning and decision making from
the subunit to the department level. Some agencies and one
appropriation subcommittee staffer said they would not favor this
shift. Several agencies feel that they have the expertise and
experience to better assess their own capital needs, which are often
mission specific. For example, ARS's capital consists of mostly
scientific equipment, laboratories, and research facilities designed
for conducting agricultural research in various climates. In fact, the
agency has its own facilities division consisting of contractors and
engineers who are involved in the management and oversight of capital
projects. Similarly, APHIS's facilities are mission specific. BLM's use
of activity-based costing allows it to assign capital costs to the
program level and track those costs to desired outputs. Consequently,
the bureau has a more intimate understanding of its capital needs and
how capital contributes to carrying out its mission. One agency raised
the point that departmental management might force bureaus to share
facilities or later decide to use an asset for purposes other than
those originally intended. While some of these departmental decisions
might be beneficial, some agencies were skeptical of departmental
decision making.
Concerns over Problems Not Addressed, Additional Complexity, and
Limited Benefits:
The officials we interviewed stated that there are important problems
in capital budgeting that CAFs do not address. Before the smoothing
effects of a CAF can be realized in the out years, the department must
still receive full up-front funding to begin new capital projects or
acquire new assets. And as noted above, some agency officials stated
that the annual mortgage payments may be even more of a dilemma than
the up-front funding requirement. Since a CAF assumes up-front funding,
some agencies may still seek to use some of the alternative financing
mechanisms that they already use, such as operating leases or enhanced-
use leases, to meet capital needs without first having to secure
sufficient appropriations to cover the full cost of the asset.[Footnote
41] As currently envisioned, CAFs would probably not help improve
capital planning concerns, such as the need for improved budgeting and
management of asset life-cycle costs. According to the NRC
report,[Footnote 42] operation and maintenance costs are typically 60
to 85 percent of the total life-cycle costs of a facility while design
and construction typically account for only 5 to 10 percent of those
costs.[Footnote 43] For example, agencies must properly determine the
funds needed for increasing staff in new and expanded facilities in
order to avoid staffing shortages.
Almost everyone we spoke with agreed that CAFs sounded complicated and
many questioned whether the challenges in budgeting for capital that
CAFs were designed to address were great enough to warrant CAFs as a
solution. Congressional budget committee and appropriations
subcommittee staff agreed that CAFs might be beneficial in theory but
were probably not worth the additional budget complexity they would
create. Budget committee staff considered the proposed benefits of a
CAF to be abstract and uncertain coupled with a sizeable likelihood for
repayment problems in the out years. In addition, they saw no obvious
dilemma prompting the need for CAFs. While this capital financing
approach may be appealing in theory since it promotes strategic
planning and broadened, forward-looking perspectives, budget
practitioners cautioned the adoption of an approach involving such
layers of complexity in the absence of a clearly stated, agreed-upon
problem that the new approach is expected to address. Further, they saw
a need for agencies to complete their implementation of capital asset
management and cost accounting systems, which can help achieve some of
the same benefits that CAFs were meant to achieve. A good asset
management system including inventories and asset condition would
likely be a necessary precursor to successfully implementing CAFs. All
of these factors weaken the case for CAFs as an improved approach to
current capital financing practices.
Several Issues to Weigh When Considering Implementation of CAFs:
While in theory CAFs could be implemented at most agencies, there are
several complex issues that Congress would need to consider before
adopting such a mechanism. For example, proposals to apply CAFs to
existing capital would require the development of a formula to
calculate an annual capital usage charge, which is likely to be a
difficult and contentious undertaking. Key players including OMB, CBO,
and Congress would need to work together to develop an agreed-upon
method to estimate an appropriate capital usage charge for various
types of assets. And even if the full cost of programs, including the
cost of existing capital, was more accurately reflected in the budget
through the use of CAFs, incentives to cut capital costs may not
materialize except in times of severe budget cuts. Even then, managers'
abilities to eliminate unneeded capital assets would probably be
limited given mission responsibilities and legal requirements that
dictate the disposal of surplus federal property. To remedy this,
additional funding or agency flexibilities would be needed, as would
provisions to ensure debt repayment if CAF-financed assets were
transferred or sold. Additionally, it is likely that some capital
projects for federal office space, IT, and land would continue to be
financed outside of the CAF through mechanisms such as the FBF, WCFs,
or the GSA IT Fund.
Imputing an Annual Capital Charge on Existing Capital May Offer
Benefits but Would Be Difficult and Contentious:
There are arguments that the CAF concept be applied to existing capital
assets as well as new capital assets to ensure that the full costs of
all programs are reflected in the budget. OMB points out that if CAFs
were not applied to all capital, it would be many decades before
programs reflected full annual costs and before the cost of alternative
inputs could be compared. Developing an annual capital usage charge for
existing assets would establish a level playing field for federal
capital investment and allow for comparisons across programs. In
addition, this new charge could influence agency managers to get rid of
excess capital assets.
Accomplishing these goals would require developing a standard method of
computing an appropriate annual capital usage charge. Subunits would
pay these charges to the department's CAF using appropriated funds,
which would then be transferred to Treasury's general fund. In other
words, agencies would receive appropriations to pay for the use of
capital assets they already own and would not retain any of the funds
to maintain or replace assets. Imputing such a charge on existing
capital is likely to be difficult and very contentious given questions
about how to estimate the charge and the fact that the assets were
already funded.
Before imputing an annual capital usage charge, key players, including
OMB and Congress, would need to agree on some type of standard formula
to estimate the charge. Three possible approaches to compute annual
capital usage charges would be to (1) use historical cost for the asset
by applying a charge as though the original cost had been financed by
borrowing from Treasury, (2) use market rental rates, or (3) devise a
calculation incorporating asset replacement cost, depreciation rates,
and interest rates. There are arguments for and against each of these
options. For example, while using historical cost would make the charge
congruent with accounting data; the charge would not reflect the
current cost of using capital and so might be less meaningful for
evaluating costs. Although using market rates would theoretically be
the right measure for comparing the cost of using resources for federal
versus private purposes, the fact that many government assets fill
unique purposes means there is not a measure of market value for them.
For example, some agencies occupy historic buildings, such as the Old
Executive Office Building, for which a comparable market-based value
would be difficult to determine. The third approach might be considered
an agreeable middle ground, but applying depreciation rates poses
problems since they are largely arbitrary. Agreement on whether to
apply Treasury or market interest rates would be necessary.
Some agency officials and congressional staff suggested that any
charges on existing capital should reflect the life-cycle costs of
maintaining assets and, similar to a WCF, receipts collected should be
made available for future maintenance and renovation costs. We have
reported that repair and maintenance backlogs in federal facilities are
significant and that the challenges of addressing facility
deterioration are prevalent at major real property-holding
agencies.[Footnote 44] However, research and discussions on CAF design
indicate that CAF receipts could only go to Treasury and not for future
projects. Officials were also skeptical about how to accurately charge
for highly specialized capital. For example, ARS has more than 100
laboratories located in various regions of the country, as well as
abroad, which are designed to carry out mission responsibilities
ranging from the study of crop production to human nutrition to animal
disease control. The highly technical and diverse nature of its
objectives requires capital assets that are suitable for varied
climates, soils, and other agricultural factors, which pose unique and
difficult challenges in establishing capital usage charges that would
be viewed as acceptable by agency officials.
If key players were able to agree on the method for calculating usage
charges on existing capital assets, they would also have to examine the
budgetary effects of such charges. Budget scorekeepers--OMB, CBO, and
the budget committees--would need to develop additional scoring rules
to clarify how the usage charges would be treated in the budget. Unlike
charges on new capital, there is no corresponding debt to repay. As a
result scorekeepers would have to specify how to score the usage
charges as they are transferred from the CAF to Treasury. Although
these charges would not change agency or government outlays or the
deficit, they could require a permanent increase in agencies' total BA,
which would require Congress to consider adjustments of appropriations
subcommittee allocations.[Footnote 45] Oversight would be especially
important for these transactions since CAF collections would be greater
than needed to repay Treasury loans, creating a temptation to use
accruing balances for other purposes.
Similar questions about how to charge for and how to score capital
usage charges for existing assets would eventually pertain to new
capital funded through the CAF. Once an asset is fully "paid off"
through the CAF, it is comparable to existing capital and would
similarly incur an annual capital usage charge. Some might argue that
payments should continue in the same amounts as before, while others
may call for the calculation of a new capital usage charge for "paid
off" assets based upon the formula used for capital that existed before
the creation of CAFs. In any case, numerous decisions on capital usage
charges for existing capital would need to be made prior to
implementing CAFs.
Aside from the specifics of how to develop appropriate capital usage
charges, most agency officials and congressional staff with whom we
spoke were skeptical of the need for such a charge. Many said that the
cost of maintaining capital assets--which is reflected in agency
budgets--and depreciation expenses--which are reflected in agency
accounting systems along with asset maintenance costs--sufficiently
represent the cost of existing capital assets and help inform
managers.[Footnote 46] As discussed earlier, asset management systems
and full cost accounting approaches are also beginning to provide the
information managers need to make better decisions about the
maintenance or disposal of existing assets and the need for new
capital. Some congressional staff thought the mind shift required for
Congress to agree to impute this new charge on existing capital assets
would be even more difficult than that required for purchasing new
capital using borrowing authority.
In the countries of New Zealand, Australia, and the United Kingdom,
charges on existing capital are being used to encourage the efficient
use of assets. These charges, similar to interest charges, are
generally used to reflect the opportunity cost of capital invested. In
New Zealand, departments are appropriated a capital charge based on
their asset base at the beginning of the year; at the end of the year
they must pay the government a capital charge based on their year-end
asset base. If a department has a smaller asset base at the end of the
year than the asset base for which the appropriation was made, the
department is permitted to keep part of the appropriation made for the
capital charge. This spurred the New Zealand Department of Education to
sell a number of vacant sites that it had acquired in the 1960s but
that were no longer needed. However, officials in New Zealand's Office
of Controller and Auditor General were uncertain about the
effectiveness of having a charge for capital in changing behavior
significantly. In addition, some analysts in New Zealand expressed
concern that capital charging could drive department executives to
decisions that are rational in the short term but damaging in the long
term. For example, an audit official suggested that a department might
have an incentive to try to operate with obsolete and fully depreciated
assets in order to avoid a higher capital charge.
Cost Allocation Efforts May Have Limited Effect on Agency Decision
Making:
Although one goal of CAFs is to ensure the allocation of full costs to
programs in the budget and thereby encourage managers to make more
informed decisions about capital assets, additional incentives to
evaluate new or existing asset needs are unlikely to be created except
during times of severe budget cuts or downsizing. For new assets funded
through the CAF, the mortgage payments made out of the subunits
appropriations would be equal to those received by the CAF and thus the
payments would offset each other within the department budget and at
the appropriations subcommittee level and would not affect the deficit.
Although the information on total program costs might be made more
transparent, it is not clear that this would create stronger incentives
for more careful deliberation on future asset needs than having these
costs shown through available methods such as cost accounting systems
or the use of working capital funds.
A charge on existing assets might also have limited impact. If
appropriation subcommittee allocations were simply raised to
accommodate new capital usage charges, programs would appear more
expensive but perhaps not differentially so. As with new assets, the
capital charge on existing assets would not affect the deficit. As a
result, incentives for rationalizing existing capital would not
necessarily be created. Even during tight budget years, when mandatory
CAF payments would squeeze operating budgets and be most likely to
force trade-offs among capital assets, managers may be constrained by
mission responsibilities, legal requirements, or the cost of disposing
of assets. Consequently, agencies might have to argue for increased
funding or case-by-case exemptions, which Congress has granted in the
past.[Footnote 47]
Some agencies questioned the effectiveness of applying a charge to
influence managers' decision making given the unique locations or types
of assets required to accomplish mission goals. BLM officials said an
annual capital usage charge would have a limited impact on their
ability to dispose of capital assets because of its stewardship role
over the nation's public lands. Similarly, ARS officials justified
having locations dispersed all over the country because its research
activities are diverse and require facilities in various climates and
environments. As discussed, Congress also plays a role in determining
where ARS will conduct its research. Likewise, many of APHIS's capital
assets are mission specific, including animal quarantine stations,
sterile insect-rearing facilities, and laboratories, and typically do
not have a comparable counterpart in the commercial sector. APHIS
officials said this limits managers' abilities to sell or transfer
assets because the land often must be converted to original condition,
a costly undertaking. For some subunits we spoke with, destruction of
certain assets, which also has an up-front cost, is the only viable
option for eliminating unneeded assets. For example, NPS and FS have
many facilities located on public land. If no longer needed, some of
these facilities cannot be sold or transferred and would have to be
demolished. According to FS officials, when they determine that an
asset has exhausted its useful life and needs to be disposed of, the
agency will incur the cost for removal and recover the salvage value.
Many agencies are subject to certain legal requirements that create
disincentives for disposing of surplus property. In these cases,
agencies would need additional funding or more flexibility to modify
asset holdings if improved decision making were to be realized. For
example, under the National Environmental Policy Act, agencies may need
to assess the environmental impact of their decisions to dispose of
property. In general, agencies are responsible for environmental
cleanup of properties contaminated with hazardous substances prior to
disposal, which can involve years of study and amount to considerable
costs. Agencies that own properties with historic designations--which
is common in the federal portfolio and certainly within the inventories
of USDA and DOI--are required under the National Historic Preservation
Act to ensure that historic preservation is factored into how the
property is eventually used. The Stewart B. McKinney Homeless
Assistance Act, as amended, sets forth a requirement that consideration
be given to making surplus federal property, including buildings and
land, available for use by states, local governments, and nonprofit
agencies to assist homeless people.
If none of these restrictions apply and an agency is able to sell an
asset, most cannot retain the proceeds from the sale of unneeded
property even up to the cost of disposal. However, Congress has granted
special authorities in some cases. For example, FS officials told us it
owned a number of trails and roads on public lands that ran through the
city of Los Angeles, California. When the city expanded, it was no
longer feasible to maintain the roads and trails. As a result, the
agency was granted authority to sell the land and use the proceeds to
build a new ranger station.[Footnote 48] We have said that agencies be
allowed to retain enough of the proceeds from an asset sale to recoup
the cost of disposal, and that in some cases it may make sense to
permit agencies to retain additional proceeds for reinvestment in real
property where a need exists.[Footnote 49]
Issues Regarding Property Sales Would Further Complicate CAF
Implementation:
Provisions would also need to be established to ensure the full
repayment of CAF debts in the event that an agency sells or transfers a
capital asset before it reaches the end of its useful life (the
repayment period). Two possible options would be to (1) transfer the
outstanding debt to a new "owner" agency of the asset or (2) allow the
"seller" agency to sell the asset and use the proceeds from the sale to
repay the outstanding CAF debt. Both of these options would produce
complications and issues to resolve. For example, transferring the
asset would require all parties involved, including Treasury, to record
adjustments to their CAF accounting systems and oblige subunits to
adjust their budget requests accordingly. After the transfer, it is not
clear whether the "seller" agency's budget would be reduced by an
amount equal to the asset's mortgage payment. However, if that was
done, it would lessen or eliminate the incentive for the "seller"
agency to sell or transfer the asset. If the asset was sold instead of
transferred, an appropriate "sale price" would need to be determined as
well as the appropriate disposition of the sale proceeds. For example,
if the asset was sold for an amount that is greater than the
outstanding CAF debt, the Treasury general fund would receive full
repayment on the asset plus excess revenue. On the other hand, if an
asset was sold for an amount less than the outstanding debt, the CAF
would default on the loan unless additional receipts for debt repayment
were appropriated. Finally, some subunits may argue to refinance their
mortgage if a lower Treasury interest rate became available and lower
payments would result. Again, before CAFs are implemented, proposals on
how to handle such circumstances would need to be addressed.
Some Capital Would Likely Continue to Be Obtained through Existing
Means:
The CAF's scope of coverage would need to be addressed by any CAF
proposal. Capital assets are generally defined as land, structures,
equipment and intellectual property (such as software) that are used by
the federal government and have estimated useful lives of 2 years or
more. However, departments have some discretion in defining capital.
The Commission report suggested that OMB issue guidance on which
capital items belong in the CAF to ensure uniform implementation of the
CAF proposal. Alternatively, each department could use its current
department guidelines and definitions to determine which capital to
fund through the CAF. Whatever parameters are put in place, some
capital assets would likely continue to be funded outside the CAF
through existing mechanisms.
For example, for federal office space, the Commission and NRC reports
state that agencies would generally continue to lease space from GSA
and pay rent to FBF. FBF, a governmentwide revolving fund, is used to
acquire office buildings and the space is then rented out to federal
agencies. Most agencies are not allowed to lease their own office space
unless GSA delegates its authority to do so to that agency, which GSA
has done in the past. Under the CAF mechanism, if GSA were to delegate
this authority, the CAF would lease the office space. The NRC report
recommends that agencies should use their CAF for office space
acquisition only if it could be done more effectively and efficiently
than through GSA. GSA would negotiate the acquisition of space for
multiple agencies that seek to collocate in a single facility.
Agencies also have the option to purchase IT through FTS and its IT
Fund. For a fee, FTS provides expertise and assistance in acquiring and
managing IT products. Those agencies that chose to use this service may
argue for continuing to finance these projects outside of the CAF so
that they are not paying a fee to FTS as well as interest on the
borrowed funds. Some officials also questioned the effectiveness of
using borrowing authority to finance IT purchases when their useful
life is typically no more than 10 years and is often 5 years or less,
thus indicating that officials may argue to fund some IT projects
outside the CAF. Departments and subunits would also likely continue to
rent certain capital assets from WCFs or to use their WCFs to purchase
some capital. As discussed, WCFs rely on user charges to fund ongoing
maintenance and replacement of capital assets and the collections are
used by some departments and subunits to finance capital assets, such
as vehicles and IT.
Land, such as wilderness areas, is also likely to remain outside the
CAF. Land retains its value so concepts such as depreciation and
amortization do not apply to it. However, one subunit official stated
that using borrowing authority to buy land might be beneficial if it
meant that land could be purchased at a faster rate to obtain
environmentally sensitive land before it is damaged.
Conclusion:
There is little doubt that in the mechanical sense CAFs could work as a
new system for financing capital assets. However, the implementation
and operation of the CAF concept would be complicated. Managing the
extra layer of responsibilities for CAF administration and oversight
would require the devotion of resources within departments, subunits,
and Treasury and to a lesser extent, OMB, CBO, and Congress. Accounting
for CAF transactions would be complex and burdensome. The annual debt
repayment would be a source of concern for Treasury and agency
officials, especially as more assets were financed through the CAF and
mortgage payments became a larger percentage of agency appropriations.
Beyond the complexities inherent in financing capital assets using
borrowing authority is a list of difficult issues that would have to be
resolved before benefits could be realized. The most difficult of these
issues, applying a capital usage charge to existing capital, would also
be the most important to address if annual capital costs were to be
allocated to program budgets. If CAFs were applied only to new assets
going forward, programs would not reflect the full annual cost of
capital for decades and programs purchasing new capital would appear
more expensive than those using existing capital. Even if this and
other issues were tackled and improved information about capital costs
was provided to managers, there is little assurance that CAFs alone
would create incentives for programs to reassess their use of capital.
Even in times of severe budget constraints, it is probable that
managerial flexibility to adjust the amount of assets used by a program
would continue to be limited by agency missions, legal restrictions,
and limited funds for asset disposal. Given the execution complexities
and implementation concerns, the ensuing question seems to be whether
there are simpler methods that can be used to achieve the same benefits
as CAFs.
We believe there is strong evidence that both benefits attributed to
CAFs could be more easily obtained through existing mechanisms. Asset
management and cost accounting systems, when fully implemented, will be
important tools for promoting more effective planning and budgeting for
capital. Cost accounting systems can provide the same information on
capital costs as CAFs are intended to provide, while the information
provided by asset management systems could be even more crucial for
helping managers with limited budgets prioritize capital asset
maintenance and replacement. For existing capital, incentives to
rationalize assets might be created if agencies were allowed to retain
proceeds to recoup the cost of disposal, or in some cases, for
reinvestment in real property. While some of our case study agencies
did not view spikes as a problem, those that did felt they were
managing them well through the use of WCFs, no-year authority, and
acquiring assets through useful segments. In any case, spikes in
spending for capital assets are likely to continue as congressional and
presidential priorities change over time.
When described in detail to executive branch and congressional
officials, we learned that the CAF proposal would likely have few
proponents. Almost everyone we consulted concluded that implementation
issues would overwhelm the potential benefits of a CAF. More
importantly, current efforts under way in agencies would achieve the
same goals as a CAF without introducing the difficulties. Given this,
as long as alternative efforts uphold the principle of up-front
funding, then a CAF mechanism does not seem to be worth the complexity
and implementation challenges that it would create.
Agency Comments and Our Response:
We obtained comments on a draft of this report from OMB, Treasury, GSA
and our case study agencies--USDA and DOI. Treasury, GSA, USDA and DOI
generally agreed with the report. Treasury, USDA, DOI and OMB provided
technical comments, which have been incorporated as appropriate. OMB
agreed with our description of the mechanics of CAFs and concurred that
spikes in BA for capital assets could be alleviated through other
means. OMB also acknowledged the problems with CAFs that are
highlighted in this report, including those related to existing
capital, and agreed that the complications of designing and operating
CAFs might outweigh the benefits. However, they disagreed with our
description of the primary goal of CAFs and therefore do not believe
alternative mechanisms achieve the same goal.
OMB supports having program budgets reflect full annual budgetary costs
in order to change incentives for decision makers. In addition to
proposing to budget for accruing retirement benefit costs, OMB has
suggested budgeting for accruing hazardous waste clean-up costs and
budgeting for capital through CAFs. Budgeting for full annual budgetary
costs should facilitate decision makers' ability to compare total
resources used with results achieved across government programs. For
capital, OMB has suggested CAFs as a possible method to allocate and
embed the cost of capital assets at the program budget level. OMB
recognizes the usefulness of asset management and cost accounting
systems regardless of whether CAFs are adopted. It is OMB's opinion
that these tools do not ensure that the costs of capital are captured
in individual program budgets and therefore do not affect incentives
for decision makers in allocating resources among and within programs.
We disagree on several points.
We recognize that if the sole or primary purpose of a CAF is to embed
costs in the program budgets, then the alternatives discussed in this
report do not achieve that purpose. However we believe, as highlighted
in the Report of the President's Commission to Study Capital Budgeting,
that the primary goal of CAFs is to improve decision making for
capital. We are not convinced that CAFs and the annual mortgage
payments they would require would achieve this more effectively than
other mechanisms. We argue instead that the information provided by
asset management and cost accounting systems, when fully implemented,
could assist decision makers in efficiently allocating budgetary
resources. While this information may not necessarily be reflected in
program budgets, it is available to aid in budget and program decision
making. The fact that many of these systems are in relatively early
stages of development also increases our concern about CAFs. In a
recent report, we noted the belief among some agency officials,
congressional appropriations committee staff, and budget experts that
improving underlying financial and performance information should be a
prerequisite to efforts to restructure program budgets.[Footnote 50] We
argue this would also be true for CAFs, since without adequate measures
of program costs and an ability to identify capital priorities, a new
financing mechanism would do nothing to address the basic challenges of
determining how much and what types of capital are needed.
It is also unclear that CAFs would create new incentives as OMB argues.
As we describe in the section titled "Cost Allocation Efforts May Have
Limited Effect on Agency Decision Making," if the annual mortgage
payments offset each other within the department budget and at the
appropriations subcommittee level, the deficit would not be affected,
and it is unlikely incentives would be changed. Even during tight
budget years, when CAF payments would squeeze operating budgets,
managers may be unable to change the amount of capital assets they use
because of mission responsibilities, legal requirements, or the cost of
disposing of assets.
We also recognize the value of linking resources to results in
comparing programs; however, it is unclear that CAFs are necessary or
would even work to accomplish this. Institutionalizing CAFs could
permit program comparison, but fair evaluations would only be possible
if existing capital were included. Therefore, the difficult issue of
including existing capital would have to be addressed. Alternatively,
we believe that cost accounting systems, when well developed within and
across agencies, provide a similar opportunity for comparing programs.
In conclusion, we remain of the view that the operational challenges of
CAFs outweigh the benefits and that alternative mechanisms described in
this report can more simply accomplish the goals of CAFs.
As we agreed with your office, unless you publicly announce the
contents of this report earlier, we plan no further distribution of it
until 30 days from its issuance date. At that time we will send copies
of this report to the Director of the Office of Management and Budget,
the Administrator of the General Services Administration, the Secretary
of the Department of the Interior, the Secretary of the Department of
Agriculture, and the Secretary of the Department of the Treasury. We
will also make copies available to others upon request. This report
will also be available at no charge on the GAO Web site at [Hyperlink,
http://www.gao.gov]. If you or your staff have any questions regarding
the information in this report, please contact me at (202) 512-9142 or
Christine Bonham at (202) 512-9576. Key contributors to this report
were Jennifer A. Ashford, Leah Q. Nash, and Seema V. Dargar.
Sincerely yours,
Signed by:
Susan J. Irving:
Director, Federal Budget Analysis:
Strategic Issues:
[End of section]
Appendixes:
Appendix I: Comments from the Department of the Treasury:
DEPARTMENT OF THE TREASURY:
WASHINGTON, D.C. 20220:
MAR 2 2005:
Ms. Susan J. Irving:
Director, Federal Budget Analysis:
Strategic Issues:
U.S. Government Accountability Office:
441 G Street, N.W.
Washington, D.C. 20548:
Dear Ms. Irving:
The Department of the Treasury has received for comment a copy of the
draft report entitled Capital Financing: Potential Benefits of Capital
Acquisition Funds Can Be Achieved through Simpler Means (GAO-05-249).
Our comments are as follows:
We are in general agreement with the conclusions contained in the
report that implementing capital acquisition funds (CAF) to purchase
capital assets would be challenging and complex, not only from an
accounting and budget standpoint but also from increased management and
oversight responsibilities for Treasury and other stakeholders.
We recommend that the discussion of Bonneville Power Administration's
(BPA) "fish credits" be stricken from pp. 28-29 of the report for the
following reasons:
1. In about 1980, Congress gave BPA the statutory authority to offset
the dollar amount of the non-power portion of its statutorily required
fish recovery efforts against its total annual payment to Treasury.
These offset credits are commonly called "fish credits."
2. This statutory offset authority provides BPA with a means, outside
of the normal budget/appropriations process, to reimburse BPA
ratepayers, who pay for power produced by Federal Columbia River Power
System, for the non-power-related portion of these fish recovery costs.
The BPA ratepayers are, however, responsible for paying the power-
related portion of these costs. This is the reason why Congress gave
BPA in 1980 the statutory authority to use "fish credits." Congress did
not give BPA this statutory authority in 1994 to help BPA solve its
current financial difficulties, as is stated on pp. 28-29. This "fish
credit" statutory authority actually predates the explosion in BPA's
fish recovery costs that occurred in 1994 by about 14 years. It was
given to BPA in 1980 as a means for BPA to avoid delays in the
appropriations process.
3. From about 1980 until 1994, BPA used appropriations, and not the
statutorily authorized "fish credits," to cover the power and the non-
power-related portions of its required fish recovery costs because
these costs were not very high then. However, in 1994, BPA began using
"fish credits" on an annual basis, instead of seeking high annual
appropriations, which were needed because its fish recovery costs had
exploded due to changes to the Endangered Species Act, among other
things. In addition to the use of annual "fish credits" to reimburse
its ratepayers for the non-power-related portion of its fish costs, BPA
was also allowed, under certain OMB/Treasury prescribed conditions, to
use up to about $325 million in retroactive "fish credits" that had
"accrued" from 1980 until 1993.
Thank you for the opportunity to respond to this draft GAO report. If
you have any questions or wish to discuss these comments further,
please contact me at (202) 622-0750:
Sincerely,
Signed by:
Barry K. Hudson:
Acting Chief Financial Officer:
cc: Donald Hammond: Fiscal Assistant Secretary:
Christine Bonham:
Assistant Director, Federal Budget Analysis:
Strategic Issues:
U.S. Government Accountability Office:
GAO's Comments:
We believe that the discussion of BPA's use of "fish credits" is an
appropriate example for the section on agencies' repayment of their
borrowing from Treasury. Although these credits were provided by
Congress, their use for offsetting payments on Treasury debt has been
controversial and opposed by some members of Congress and other
interested parties. However, we have made technical changes to the
section based on Treasury's comments.
[End of section]
Appendix II: Comments from the Department of the Interior:
United States Department of the Interior:
OFFICE OF THE ASSISTANT SECRETARY POLICY, MANAGEMENT AND BUDGET:
Washington, DC 20240:
FEB 23 2005:
Ms. Susan J. Irving:
Director, Federal Budget Analysis:
Strategic Issues:
U.S. Government Accountability Office:
441 G. Street N.W.
Washington, D.C. 20548:
Dear Ms. Irving:
Re: GAO Draft Report 05-249: Capital Financing, Potential Benefits of
Capital Acquisition Funds Can Be Achieved Through Simpler Means:
Thank you for the opportunity to comment on the above referenced draft
report on Capital Financing.
The Department of the Interior agrees with the major conclusion of the
report that the benefits attributed to Capital Acquisition Funds (CAFs)
could be more easily obtained through existing mechanisms:
"Asset management and cost accounting systems, when fully implemented,
will be important tools for promoting more effective planning and
budgeting for capital. Cost accounting systems can provide the same
information on capital costs as CAFs are intended to provide, while the
information provided by asset management systems could be even more
crucial for helping managers with limited budgets prioritize capital
asset maintenance and replacement.."
We believe that Interior, through several initiatives, is already
providing more effective planning and budgeting for capital.
-Interior has implemented a Capital Planning and Investment Control
(CPIC) process that involves review of all capital asset projects
valued at $2.0 million or greater and fully considers the annual
operating costs of proposed projects. This process is evolving to shift
to life-cycle management, where the planning focus in on asset
investments rather than just project formulation and project execution.
-Interior is in the process of implementing a robust, common,
automated, off-the-shelf asset management system. Deployment began in
2002 in the National Park Service and was followed by the Bureau of
Land Management, U.S. Geological Survey, Fish and Wildlife Service, the
Bureau of Indian Affairs for its irrigation systems and safety of dams
program, and the DOI National Business Center for the Interior Main and
South buildings. The Bureau of Reclamation began using the same system
in 1995 for its water facilities. The BIA continues to use the
comprehensive facilities maintenance management system already in
place, that provides the functionality and business process features
that will provide information to manage BIA non-irrigation facilities
over their entire useful life.
-Phased implementation of the Department's Financial and Business
Management System (FBMS) has begun in three of eight Interior bureaus.
This system will provide timely financial and business information,
such as property inventories, and standardize DOI's business practices
across all bureaus. The common, automated asset management system
referenced in the paragraph above will be configured on a single
platform and be linked to FBMS.
-Interior, in response to Executive Order 13327 Federal Real Property
Asset Management issued in February 2004, has developed and submitted
to the Office of Management and Budget (OMB) its initial agency-wide
asset management plan. This plan institutionalizes a common framework
government-wide for the life cycle management of assets.
The report also states that spikes in funding can be avoided by funding
capital in useful segments and by using no-year authorities, but
probably will continue with shifts in executive and legislative branch
priorities. While Interior will not ultimately control the executive or
legislative shifts in priorities with their attendant fluctuations in
funding, it does use no-year budget accounts for construction
activities; and bureaus phase projects into useful segments when budget
targets will not permit full funding in one year.
We also note for your attention three technical changes that need to be
made. First, in the paragraph at the top of page 12, the Bureau of
Reclamation should replace the Bureau of Land Management in two places,
as the named Interior bureau under the aegis of the Energy and Water
Development Subcommittee. Second, in the first full paragraph on page
29, BLM officials believe that the report is addressing the National
Park Service because BLM has no parks.
In conclusion, we believe that the complicated CAF funding mechanisms
would probably produce little improvements in capital financing but
would require many more staff in Interior, the Department of Treasury,
OMB, and most likely in the legislative branch to administer it.
Further, the complexity and complications of an annual mortgage for
each capital asset would be difficult to explain to a field program
manager and might reduce his/her feeling of ownership and control of
the very assets the CAF concept is designed to improve.
Sincerely,
Signed by:
P. Lynn Scarlett:
Assistant Secretary Policy, Management and Budget:
[End of section]
(450331):
FOOTNOTES
[1] These interested parties include the President's Commission on
Capital Budgeting, OMB, CBO, GAO, and others referenced throughout this
report.
[2] Throughout this report we use the term "subunit" to mean any
agency, bureau, or program that falls under the jurisdiction of a
department-level entity. For example, the Agricultural Research Service
would be a subunit within USDA. We sometimes use the word agency in
place of the term subunit.
[3] Budget authority is authority provided by law to enter into
financial obligations that will result in immediate or future outlays
involving federal government funds. An appropriation act is the most
common means of providing budget authority. The basic forms of budget
authority include (1) appropriations, (2) borrowing authority, (3)
contract authority, and (4) authority to obligate and expend offsetting
receipts and collections.
[4] Authority to borrow is a type of budget authority and thus is
subject to congressional control. It refers to the statutory authority
that permits a federal agency to incur obligations and make payments to
liquidate obligations out of borrowed monies. This does not include the
Treasury's authority to borrow from the public or other sources under
31 U.S.C. 31. It can be provided in appropriations acts, authorization
acts, or in permanent law.
[5] Throughout this report we use the term "mortgage payment" to mean
an amount equal to the interest and amortization on an acquired capital
asset.
[6] In this report, subcommittee allocations refer to the distribution
by the House and Senate appropriations committees of total new BA and
outlays to the 13 appropriations subcommittees as required by the
Congressional Budget and Impoundment Control Act of 1974. This
allocation limits the total budget authority and outlays available for
all accounts under the subcommittees' jurisdiction.
[7] We describe some of the asset management systems in this report and
in GAO, Budget Issues: Agency Implementation of Capital Planning
Principles Is Mixed, GAO-04-138 (Washington, D.C.: Jan. 16, 2004).
However, it was beyond the scope of both these reports to evaluate the
effectiveness of the systems described.
[8] No-year authority refers to budget authority that remains available
for obligation for an indefinite period of time, usually until the
objectives for which the authority was made available are attained.
[9] A working capital fund is a revolving fund that operates as an
accounting entity. The assets are capitalized and all income is in the
form of offsetting collections derived from the funds' operations and
available in their entirety to finance the funds' continuing cycle of
operations without fiscal year limitation.
[10] The FBF is a governmentwide revolving fund established in 1972 and
is the principal funding mechanism for the Public Buildings Service
(PBS). Within GSA, PBS leases office space to federal customer
agencies. PBS collects rent from federal tenants, which is deposited
into the FBF. Congress exercises control over the FBF through the
appropriations process that sets annual limits on how much of the fund
can be expended for various activities. In addition, Congress may
appropriate additional amounts for the FBF.
[11] The IT fund is a full-cost recovery revolving fund that provides
federal agencies with IT products and services. FTS recovers both the
costs of products and services and the costs of their delivery through
the IT Fund. The IT Fund was authorized by the Paperwork Reduction
Reauthorization Act of 1986 as included in section 821(a)(1) of Public
Law 99-500 and 99-691; 40 U.S.C. 322.
[12] GAO, Accrual Budgeting: Experiences of Other Nations and
Implications for the United States, GAO/AIMD-00-57 (Washington, D.C.:
Feb. 18, 2000).
[13] GAO, Performance Budgeting: Efforts to Restructure Budgets to
Better Align Resources with Performance, GAO-05-117SP (Washington,
D.C.: February 2005), 15.
[14] While complying with up-front funding, agencies may choose to
structure capital purchases into a series of useful segments. A useful
segment of a capital project is a component that either (1) provides
information that allows the agency to plan the capital project, develop
the design, and assess the benefits, costs, and risks before proceeding
to full acquisition (or canceling the acquisition) or (2) results in a
useful asset for which the benefits exceed the costs even if no further
funding is appropriated.
[15] GAO, Budget Issues: Budgeting for Capital, GAO/AIMD-97-5
(Washington, D.C.: Nov. 12, 1996); Budget Issues: Alternative
Approaches to Finance Federal Capital, GAO-03-1011 (Washington, D.C.:
Aug. 21, 2003); and Capital Financing: Partnerships and Energy Savings
Performance Contracts Raise Budgeting and Monitoring Concerns, GAO-05-
55 (Washington, D.C.: Dec. 16, 2004).
[16] It would not be appropriate or useful to include in the CAF grants
to states or localities for what, in other contexts, may be deemed to
be capital expenditures, such as those for highways. The grant itself
is the program; highways and other federally assisted capital assets
are not owned by the federal government and are not being used by the
federal government in its own operations, so there are no federal
programs to which the cost of using this capital should be allocated
for budget decision making.
[17] The President's Commission to Study Capital Budgeting, Report of
the President's Commission to Study Capital Budgeting (Washington,
D.C.: February 1999).
[18] CBO, The Budgetary Treatment of Leases and Public/Private Ventures
(Washington, D.C.: February 2003); GAO/AIMD-00-57; NRC, Investments in
Federal Facilities: Asset Management Strategies for the 21ST Century
(Washington, D.C.: The National Academies Press, 2004).
[19] OMB, Analytical Perspectives, Budget of the United States
Government, Fiscal Year 2004 (Washington, D.C.: 2003), 13.
[20] We used character class data from OMB's MAX system to identify
departments with substantial capital budget authority over the last 12
years. These character classes include Construction and Rehabilitation
(1312 and 1314), Major Equipment (1322 and 1324), and Purchases and
Sales of Land and Structures (1340). Major equipment includes capital
purchases of information technology but excludes the support services
related to information technology purchases. MAX is the computer system
used to collect and process information needed to prepare the
President's Budget.
[21] We were unable to meet with staff from the Senate Appropriations
Subcommittee on Agriculture.
[22] The President's Commission to Study Capital Budgeting, Report of
the President's Commission, 33 and NRC, Investments in Federal
Facilities, 82.
[23] Statement of Federal Financial Accounting Standards, No. 6,
Accounting for Property, Plant and Equipment and No. 10, Accounting for
Internal Use Software.
[24] All of these issues are discussed in more detail in other sections
of this report.
[25] According to OMB officials, this treatment of budget authority can
be used for certain transactions.
[26] GAO, Executive Guide: Leading Practices in Capital Decision-
Making, GAO/AIMD-99-32 (Washington, D.C.: December 1998).
[27] GAO-04-138. In this report we also found that three of four case
study agencies--NPS, the Department of Veterans Affairs, and the
National Oceanic and Atmospheric Administration--lacked current asset
condition data.
[28] GAO, High-Risk Series: Federal Real Property, GAO-03-122
(Washington, D.C.: January 2003).
[29] Statement of Federal Financial Accounting Standards, No. 4,
Managerial Cost Accounting Concepts and Standards for the Federal
Government, recommends that federal entities report the full costs of
outputs in general-purpose financial reports.
[30] GAO, Bureau of Reclamation: Opportunities Exist to Improve
Managerial Cost Information and Cost Recovery, GAO-02-973 (Washington,
D.C.: Sept. 20, 2002).
[31] GAO-05-117SP.
[32] GAO, Financial Management: Sustained Efforts Needed to Achieve
FFMIA Accountability, GAO-03-1062 (Washington, D.C.: Sept. 30, 2003).
[33] GAO/AIMD-97-5.
[34] GAO, Budget Issues: Incremental Funding of Capital Assets, GAO-01-
432R (Washington, D.C.: Feb. 26, 2001) and GAO-03-1011.
[35] OMB, Historical Tables, Budget of the U.S. Government, Fiscal Year
2005 (Washington, D.C.: 2004), Table 9.3, 160-161.
[36] Revolving funds are accounts authorized to be credited with
collections that are earmarked to finance a continuing cycle of
business-type operations without fiscal year limitation.
[37] GAO-97-5.
[38] OMB noted that these two costs are not identical since CAF
mortgage payments would reflect an interest cost whereas WCFs do not
reflect an interest cost. However, besides depreciation, some WCFs are
able to charge additional amounts for future asset replacement.
[39] The debt resulted from advances originally obtained to cover
benefit payments that coal taxes, the primary source of fund revenues,
could not provide.
[40] BPA is required by law to mitigate the impacts to fish and
wildlife to the extent they are affected by the construction and
operation of the Federal Columbia River Power System.
[41] For a thorough discussion of alternative financing approaches, see
GAO-03-1011.
[42] NRC, Investments in Federal Facilities, 27.
[43] Land acquisition, programming, conceptual planning, renewal or
revitalization, and disposal account for the remaining 5 to 35 percent.
[44] GAO-03-122, 15.
[45] Although the scoring has not been determined, the subunit's
payment to the CAF for existing assets would likely require budget
authority since the payment is not for debt repayment.
[46] OMB noted that neither the budget nor accounting systems reflect
imputed interest costs and therefore do not reflect full economic
costs.
[47] For example, Congress has provided FS and BLM with specific
authorities to sell land in Los Angeles, California and near Las Vegas,
Nevada. These authorities allowed the agencies to retain the sale
proceeds and use them for new projects.
[48] In fiscal year 2002, Congress granted FS additional authorities to
sell or exchange excess buildings and other structures located on
National Forest System lands and under the jurisdiction of FS. The
agency was allowed to retain proceeds from the sales until the proceeds
were expended for maintenance and rehabilitation activities within the
FS region in which the building or structure was located. In fiscal
year 2003, Congress extended this authority allowing for some of the
sale proceeds to be used for construction of replacement facilities.
Pub. L. No. 107-63, Sec. 329, 115 STAT. 471 (Nov. 5, 2001) and Pub. L.
No. 108-7, Sec. 325, 117 STAT. 275-276 (Feb. 20, 2003).
[49] GAO-03-122, 41.
[50] GAO-05-117SP, 15.
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