[Analytical Perspectives, Budget of the United States Government,
   Fiscal Year 1998][Page 99-141]


[[Page 99]]

========================================================================

                   SPECIAL ANALYSES AND PRESENTATIONS

========================================================================

[[Page 101]]

 
          6.  FEDERAL INVESTMENT SPENDING AND CAPITAL BUDGETING

  Investment spending is spending that yields long-term benefits. Its 
purpose may be to improve the efficiency of internal Federal agency 
operations or to increase the Nation's overall stock of capital for 
economic growth. The spending can be direct Federal spending or grants 
to State and local governments. It can be for physical capital, which 
yields a stream of services over a period of years, or for research and 
development or education and training, which are intangible but also 
increase income in the future or provide other long-term benefits.
  Most presentations in the Federal budget combine investment spending 
with spending for current use. This chapter focuses solely on Federal 
and federally financed investment. These investments are discussed in 
the following sections:
<bullet>    description of the size and composition of Federal 
          investment spending;
<bullet>    a discussion of capital assets used to provide Federal 
          services and efforts to improve planning and budgeting for 
          these assets. An Appendix to Part II presents the ``Principles 
          of Budgeting for Capital Asset Acquisitions,'' which are being 
          used to guide the analysis of agency requests for spending for 
          capital assets. These principles include a proposed new Budget 
          Enforcement Act scorekeeping rule to enforce full funding of 
          capital projects;
<bullet>    a presentation of trends in the stock of federally financed 
          physical capital, research and development, and education;
<bullet>    alternative capital budget and capital expenditure 
          presentations; and
<bullet>    projections of Federal physical capital outlays and recent 
          assessments of public civilian capital needs, as required by 
          the Federal Capital Investment Program Information Act of 
          1984.

                Part I: DESCRIPTION OF FEDERAL INVESTMENT

  For more than forty years, a chapter in the budget has shown Federal 
investment outlays--defined as those outlays that yield long-term 
benefits--separately from outlays for current use. This year, for the 
third consecutive year, the discussion of the composition of investment 
includes estimates of budget authority as well as outlays. For the first 
time, these estimates extend four years beyond the budget year to 2002.
  The classification of spending into investment and current outlays is 
a matter of judgment. The budget has historically employed a relatively 
broad classification, including physical investment, research, 
development, education, and training. But presentations for particular 
purposes could adopt different definitions of investment:
<bullet>    To suit the purposes of a traditional balance sheet, 
          investment might include only those physical assets owned by 
          the Federal Government, excluding capital financed through 
          grants and intangible assets such as research, education, and 
          training.
<bullet>    Focusing on the role of investment in improving national 
          productivity and enhancing economic growth would exclude items 
          such as national defense assets, the benefits of which are 
          enhanced national security rather than economic growth.
<bullet>    Concern with the efficiency of Federal operations would lead 
          to a focus solely on investments to reduce costs or improve 
          the effectiveness of internal Federal agency operations, such 
          as computer systems.
<bullet>    A ``social investment'' perspective might broaden the 
          coverage of investment beyond what is included in this chapter 
          to encompass programs such as childhood immunization, maternal 
          health, certain nutrition programs, and substance abuse 
          treatment, which are designed in part to prevent more costly 
          health problems in future years.
  The relatively broad definition of investment used in this section 
provides consistency over time: historical figures on investment outlays 
back to 1940 can be found in the separate Historical Tables volume. The 
detailed tables at the end of this section allow disaggregation of the 
data to focus on those investment outlays that best suit a particular 
purpose.
  In addition to this basic issue of definition, there are two technical 
problems in the classification of investment data, involving the 
treatment of grants to State and local governments and the 
classification of spending that could be shown in more than one 
category.
  First, for some grants to State and local governments it is the 
recipient jurisdiction, not the Federal Government, that ultimately 
determines whether the money is used to finance investment or current 
purposes. This analysis classifies all of the outlays in the category 
where the recipient jurisdictions are expected to spend most of the 
money. Hence, the community development block grant is classified as 
physical investment, although some may be spent for current purposes. 
General purpose fiscal assistance is classified as current spending, 
although some may be spent by recipient jurisdictions on physical 
investment.
  Second, some spending could be classified in more than one category of 
investment. For example, grants 

[[Page 102]]

for construction of research facilities 
finance the acquisition of physical assets, but they also contribute to 
research and development. To avoid double counting, the outlays are 
classified in the category that is most commonly recognized as 
investment. Consequently outlays for the conduct of research and 
development do not include outlays for research facilities, because 
these outlays are included in the category for physical investment. 
Similarly, physical investment and research and development related to 
education and training are included in the categories of physical assets 
and the conduct of research and development.
  When direct loans and loan guarantees are used to fund investment, the 
subsidy value is included as investment. The subsidies are classified 
according to their program purpose, such as construction, education and 
training, or non-investment outlays. For more information about the 
treatment of Federal credit programs,, refer to Chapter 8, 
``Underwriting Federal Credit and Insurance.''
  This section presents spending for gross investment, without adjusting 
for depreciation. A subsequent section discusses depreciation and shows 
investment and capital stocks both gross and net of depreciation.

                Composition of Federal Investment Outlays

                                                Major Federal Investment

  The composition of major Federal investment outlays is summarized in 
Table 6-1. They include major public physical investment, the conduct of 
research and development, and the conduct of education and training. 
Defense and nondefense investment outlays were $227.9 billion in 1996. 
Because of reductions in defense spending they are estimated to decline 
to $225.7 billion in 1997 and to $218.7 billion in 1998. Major Federal 
investment will comprise an estimated 13.0 percent of total Federal 
outlays in 1998 and 2.7 percent of the Nation's gross domestic product 
(GDP). Greater detail on Federal investment is available in tables 6-2 
and 6-3 at the end of this section. Those tables include both budget 
authority and outlays.
  Physical investment.--Outlays for major public physical capital 
investment (hereafter referred to as physical investment outlays) are 
estimated to be $102.8 billion in 1998. Physical investment outlays are 
for construction and rehabilitation, the purchase of major equipment, 
and the purchase or sale of land and structures. Slightly more than 
three-fifths of these outlays are for direct physical investment by the 
Federal Government, with the remaining being grants to State and local 
governments for physical investment.
  Direct physical investment outlays by the Federal Government are 
primarily for national defense. Defense outlays for physical investment 
were $55.0 billion in 1996 and are estimated to decline to $47.8 billion 
in 1998. Almost all of these outlays, or $43.2 billion, are for the 
procurement of weapons and other military equipment, and the remainder 
is primarily for construction of military bases, family housing for 
military personnel, and Department of Energy defense facilities.

          Table 6-1.  COMPOSITION OF FEDERAL INVESTMENT OUTLAYS         
                        (In billions of dollars)                        
------------------------------------------------------------------------
                                                           Estimate     
                                               1996  -------------------
                                             actual     1997      1998  
------------------------------------------------------------------------
     Major Federal Investment Outlays                                   
                                                                        
Major public physical capital investment:                               
   Direct Federal:                                                      
    National defense......................      55.0      50.6      47.8
    Nondefense............................      20.6      21.2      15.1
                                           -----------------------------
      Subtotal, direct major public                                     
       physical capital investment........      75.5      71.8      62.9
                                                                        
  Grants to State and local governments...      40.4      41.1      39.9
                                           -----------------------------
      Subtotal, major public physical                                   
       capital investment.................     115.9     113.0     102.8
                                                                        
Conduct of research and development:                                    
  National defense........................      39.4      38.9      37.4
  Nondefense..............................      29.0      31.4      32.8
                                           -----------------------------
    Subtotal, conduct of research and                                   
     development..........................      68.4      70.3      70.2
                                                                        
Conduct of education and training:                                      
  Grants to State and local governments...      24.7      26.1      27.1
  Direct Federal..........................      18.9      16.3      18.5
                                           -----------------------------
    Subtotal, conduct of education and                                  
     training.............................      43.6      42.5      45.6
                                           -----------------------------
Total, major Federal investment outlays...     227.9     225.7     218.7
                                                                        
                MEMORANDUM                                              
                                                                        
Major Federal investment outlays:                                       
  National defense........................      94.4      89.6      85.3
  Nondefense..............................     133.4     136.1     133.4
                                           -----------------------------
    Total, major Federal investment                                     
     outlays..............................     227.9     225.7     218.7
                                                                        
Miscellaneous physical investments:                                     
  Commodity inventories...................      -1.0      -0.7      -0.8
  Other physical investment (direct)......       4.1       3.9       3.7
                                           -----------------------------
    Total, miscellaneous physical                                       
     investment...........................       3.1       3.1       2.9
                                           -----------------------------
Total, Federal investment outlays,                                      
 including miscellaneous physical                                       
 investment...............................     230.9     228.9     221.5
                                                                        
------------------------------------------------------------------------
                                                                        

  Outlays for direct physical investment for nondefense purposes are 
estimated to be $15.1 billion in 1998. These outlays include $12.2 
billion for construction and rehabilitation. This amount funds water, 
power, and natural resources projects of the Army Corps of Engineers, 
the Bureau of Reclamation within the Department of the Interior, the 
Tennessee Valley Authority, and the power administrations in the 
Department of Energy; construction and rehabilitation of veterans 
hospitals and Postal Service facilities; and facilities for space and 
science programs. Outlays for the acquisition of major equipment are 
estimated to be $6.8 billion in 1998. The largest amounts are for the 
air traffic control system and the Postal Service. For the purchase or 
sale of land and structures, collections are expected to exceed 
disbursements by $3.9 billion in 1998, largely due to the planned sale 
of the United States Enrichment Corporation and the privatization of Elk 
Hills. These sales explain most of the decline in outlays from 1996 to 
1998.
  Grants to State and local governments for physical investment are 
estimated to be $39.9 billion in 1998. More than three fifths of these 
outlays, or $24.5 billion, are to assist States and localities with 
transportation infrastructure. Other major grants for physical 
investment fund sewage treatment plants, community development, and 
public housing.
  Conduct of research and development.--Outlays for the conduct of 
research and development are estimated to be $70.2 billion in 1998. 
These outlays are devoted to increasing basic scientific knowledge and 
promoting related research and development. They increase the Nation's 
security, improve the productivity of capital and labor for both public 
and private purposes, and enhance the quality of life. Slightly more 
than half of these outlays, an estimated $37.4 billion in 1998, are for 
national defense. Physical investment for research and development 
facilities and equipment is included in the physical investment 
category.
  Nondefense outlays for the conduct of research and development are 
estimated to be $32.8 billion in 1998. This is almost entirely direct 
spending by the Federal Government, and is largely for the space 
programs, the National Science Foundation, the National Institutes of 
Health, and research for nuclear and non-nuclear energy programs.
  Conduct of education and training.--Outlays for the conduct of 
education and training are estimated to be $45.6 billion in 1998. These 
outlays add to the stock of human capital by developing a more skilled 
and productive labor force. Grants to State and local governments for 
this category are estimated to be $27.1 billion in 1998, more than half 
of the total. They include education programs for the disadvantaged and 
the handicapped, vocational and adult education programs, training 
programs in the Department of Labor, and Head Start. Direct education 
and training outlays by the Federal Government are estimated to be $18.5 
billion in 1998. Programs in this category are primarily aid for higher 
education through student financial assistance, 

[[Page 103]]

loan subsidies, the veterans GI bill, and health training programs.
  This category does not include outlays for education and training of 
Federal civilian and military employees. Outlays for education and 
training that are for physical investment and for research and 
development are in the categories for physical investment and the 
conduct of research and development.

                                        Miscellaneous Investment Outlays

  In addition to the categories of major Federal investment, several 
miscellaneous categories of investment outlays are shown at the bottom 
of Table 6-1. These items, all for physical investment, are generally 
unrelated to improving Government operations or enhancing economic 
activity. Outlays for commodity inventories are for the purchase or sale 
of agricultural products pursuant to farm price support programs and the 
purchase and sale of other commodities such as oil and gas. Sales are 
estimated to exceed purchases by $0.8 billion in 1998.
  Outlays for other miscellaneous physical investment are estimated to 
be $3.7 billion in 1998. This category includes primarily conservation 
programs. These outlays are entirely for direct Federal spending.

                 Detailed Tables on Investment Spending

  This section provides data on budget authority as well as outlays for 
major Federal investment. For the first time these estimates extend four 
years beyond the budget year to 2002. Table 6-2 displays budget 
authority (BA) and outlays (O) by major programs according to defense 
and nondefense categories. The greatest level of detail appears in Table 
6-3, which shows budget authority and outlays divided according to 
grants to State and local governments and direct Federal spending. 
Miscellaneous investment is not included in these tables because it is 
generally unrelated to improving Government operations or enhancing 
economic activity.

[[Page 104]]

                              Table 6-2.  FEDERAL INVESTMENT BUDGET AUTHORITY AND OUTLAYS: DEFENSE AND NONDEFENSE PROGRAMS                              
                                                                (In millions of dollars)                                                                
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                 Estimate                               
                Description                                              1996    -----------------------------------------------------------------------
                                                                        Actual       1997        1998        1999        2000        2001        2002   
--------------------------------------------------------------------------------------------------------------------------------------------------------
             NATIONAL DEFENSE                                                                                                                           
Major public physical investment:                                                                                                                       
  Construction and rehabilitation.........  BA                            4,670       5,008       5,555       4,516       3,767       3,540       3,155 
                                            O                             5,409       4,816       4,526       4,613       3,617       3,223       2,804 
  Acquisition of major equipment..........  BA                           42,975      44,435      42,923      50,833      57,219      60,871      68,552 
                                            O                            49,645      45,924      43,408      44,841      47,877      51,932      55,688 
  Purchase or sale of land and structures.  BA                              -77         -86         -87         -54         -26         -26         -26 
                                            O                               -77         -86         -87         -54         -26         -26         -26 
                                                                     -----------------------------------------------------------------------------------
    Subtotal, major public physical         BA                           47,568      49,357      48,391      55,295      60,960      64,385      71,681 
     investment.                                                                                                                                        
                                            O                            54,977      50,654      47,847      49,400      51,468      55,129      58,466 
                                                                     -----------------------------------------------------------------------------------
Conduct of research and development.......  BA                           37,810      39,491      38,744      37,872      35,834      35,328      36,640 
                                            O                            39,428      38,916      37,416      37,917      36,326      35,492      35,882 
Conduct of education and training           BA                                8           5           2           8          15          15          15 
 (civilian).                                                                                                                                            
                                            O                                 9           6           3           6          12          15          15 
                                                                     -----------------------------------------------------------------------------------
  Subtotal, national defense investment...  BA                           85,386      88,853      87,137      93,175      96,809      99,728     108,336 
                                            O                            94,414      89,576      85,266      87,323      87,806      90,636      94,363 
                NONDEFENSE                                                                                                                              
Major public physical investment:                                                                                                                       
  Construction and rehabilitation:                                                                                                                      
    Highways..............................  BA                           17,884      21,973      22,304      22,168      22,072      22,043      22,034 
                                            O                            19,653      19,645      19,653      19,392      19,191      18,915      18,763 
    Mass transportation...................  BA                            3,517       4,828       4,971       4,971       4,971       4,971       4,971 
                                            O                             3,698       3,900       3,568       3,717       3,922       4,101       4,255 
    Rail transportation...................  BA                              119         244         434         434         434         434         434 
                                            O                               282         211         379         511         435         437         436 
    Air transportation....................  BA                            1,606       2,284       2,395       1,049       1,050       1,051       1,052 
                                            O                             1,675       1,575       1,446       1,235       1,123       1,076       1,068 
    Water transportation..................  BA                              129         137         120         121         122         122         122 
                                            O                               125         117         116         120         115         119         121 
    Community development block grants....  BA                            4,650       4,600       4,600       4,600       4,100       4,100       4,100 
                                            O                             4,545       4,837       4,641       4,845       4,633       4,438       4,216 
    Other community and regional            BA                            1,351       1,379       1,408       1,338       1,156       1,171       1,165 
     development.                                                                                                                                       
                                            O                             1,530       1,805       1,495       1,325       1,339       1,259       1,219 
    Pollution control and abatement.......  BA                            3,637       3,797       4,564       4,556       3,885       3,853       3,872 
                                            O                             3,668       3,499       3,752       4,044       4,133       4,098       3,938 
    Water resources.......................  BA                            1,878       2,068       2,312       2,012       2,045       1,927       1,943 
                                            O                             2,318       2,334       1,869       1,991       2,087       1,958       1,904 
    Housing assistance....................  BA                            5,664       4,655       5,052       4,827       4,726       4,761       4,797 
                                            O                             6,757       7,216       6,963       6,915       6,652       6,149       5,880 
    Energy................................  BA                            1,827       1,292       1,183       1,112       1,130       1,119       1,133 
                                            O                             1,918       1,378       1,147       1,141       1,163       1,150       1,160 
    Veterans hospitals and other health...  BA                            1,113       1,230       1,358       1,341       1,357       1,373       1,388 
                                            O                             1,404       1,316       1,465       1,429       1,395       1,375       1,375 
    Postal Service........................  BA                            1,132       1,870       1,376         964         721         783       1,996 
                                            O                             1,138       1,063       1,251       1,195         986         870       2,205 
    GSA real property activities..........  BA                        ..........  ..........  ..........  ..........  ..........  ..........  ..........
                                            O                             1,478       1,418       1,175       1,028         965         916         941 
    Other programs........................  BA                            1,776       1,785       1,640       1,418       1,311       1,312       1,312 
                                            O                             2,293       2,179       1,971       2,152       1,937       1,711       1,590 
                                                                     -----------------------------------------------------------------------------------
      Subtotal, construction and            BA                           46,283      52,142      53,717      50,911      49,080      49,020      50,319 
       rehabilitation.                                                                                                                                  
                                            O                            52,482      52,493      50,891      51,040      50,076      48,572      49,071 
                                                                     -----------------------------------------------------------------------------------
  Acquisition of major equipment:                                                                                                                       
    Air transportation....................  BA                            1,903       1,969       1,924       2,073       2,029       2,090       2,152 
                                            O                             2,490       1,948       1,903       1,905       1,927       1,956       2,078 
    Postal Service........................  BA                            1,890       3,545       1,075         586         180         221         665 
                                            O                               987       2,478       1,378       1,793         236         210         505 
    Other.................................  BA                            3,915       3,131       3,465       3,494       2,851       2,782       2,707 
                                            O                             3,835       3,965       3,545       4,307       4,177       3,530       3,480 
                                                                     -----------------------------------------------------------------------------------
      Subtotal, acquisition of major        BA                            7,708       8,645       6,464       6,153       5,060       5,093       5,524 
       equipment.                                                                                                                                       
                                            O                             7,312       8,391       6,826       8,005       6,340       5,696       6,063 
                                                                     -----------------------------------------------------------------------------------

[[Page 105]]

  Purchase or sale of land and structures.  BA                              183         194      -4,040         229         241         243        -295 
                                            O                               410         441      -3,875         432         435         428        -126 
  Other physical assets (grants)..........  BA                              926         911       1,063       1,120       1,118       1,127       1,066 
                                            O                               692         994       1,137       1,068       1,110       1,111       1,085 
                                                                     -----------------------------------------------------------------------------------
    Subtotal, major public physical         BA                           55,100      61,892      57,204      58,413      55,499      55,483      56,614 
     investment.                                                                                                                                        
                                            O                            60,896      62,319      54,979      60,545      57,961      55,807      56,093 
                                                                     -----------------------------------------------------------------------------------
Conduct of research and development:                                                                                                                    
  General science, space, and technology..  BA                           10,719      10,779      11,115      11,205      11,202      11,317      11,354 
                                            O                             9,745      10,424      10,707      10,872      10,838      10,854      10,960 
  Energy..................................  BA                            2,548       2,312       2,542       2,650       2,464       2,396       2,354 
                                            O                             2,938       2,577       2,796       2,771       2,753       2,658       2,552 
  Transportation..........................  BA                            1,794       1,960       2,005       1,910       1,893       1,919       1,938 
                                            O                             1,654       1,810       2,135       2,090       2,132       2,153       2,180 
  Health..................................  BA                           11,820      12,647      12,951      12,984      13,026      13,068      13,112 
                                            O                            10,267      12,059      12,655      12,925      12,998      13,023      13,060 
  Natural resources and environment.......  BA                            1,781       1,841       1,901       1,865       1,891       1,906       1,939 
                                            O                             1,593       1,620       1,673       1,652       1,668       1,668       1,698 
  All other research and development......  BA                            2,693       2,687       2,840       3,046       3,097       3,171       3,256 
                                            O                             2,797       2,879       2,824       3,015       3,062       3,117       3,183 
                                                                     -----------------------------------------------------------------------------------
    Subtotal, conduct of research and       BA                           31,355      32,226      33,354      33,660      33,573      33,777      33,953 
     development.                                                                                                                                       
                                            O                            28,994      31,369      32,790      33,325      33,451      33,473      33,633 
                                                                     -----------------------------------------------------------------------------------
Conduct of education and training:                                                                                                                      
  Education, training, employment and                                                                                                                   
   social services:                                                                                                                                     
    Elementary, secondary, and vocational   BA                           13,660      16,899      18,241      18,703      19,129      19,451      19,628 
     education.                                                                                                                                         
                                            O                            14,739      16,111      16,387      18,451      18,722      19,072      19,400 
    Higher education......................  BA                           12,713       9,452      13,212      14,578      14,700      14,998      14,418 
                                            O                            12,172       9,141      11,348      13,390      13,678      13,825      13,179 
    Research and general education aids...  BA                            1,762       1,993       2,000       1,834       1,940       1,977       1,994 
                                            O                             1,906       1,914       2,035       1,817       1,926       1,959       1,994 
    Training and employment...............  BA                            5,068       5,675       5,987       6,286       6,594       5,417       5,549 
                                            O                             5,175       4,910       5,402       6,044       6,252       5,742       5,444 
    Social services.......................  BA                            6,072       6,539       6,942       7,202       7,467       7,757       8,059 
                                            O                             5,940       6,447       6,637       6,820       7,029       7,285       7,569 
                                                                     -----------------------------------------------------------------------------------
      Subtotal, education, training, and    BA                           39,275      40,558      46,382      48,603      49,830      49,600      49,648 
       social services.                                                                                                                                 
                                            O                            39,932      38,523      41,809      46,522      47,607      47,883      47,586 
                                                                     -----------------------------------------------------------------------------------
  Veterans education, training, and         BA                            1,274       1,526       1,503       1,598       1,603       1,653       1,671 
   rehabilitation.                                                                                                                                      
                                            O                             1,373       1,558       1,580       1,617       1,619       1,661       1,679 
  Health..................................  BA                              793         882         728         720         718         715         712 
                                            O                               760         864         804         728         719         708         704 
  Other education and training............  BA                            1,519       1,510       1,453       1,461       1,485       1,458       1,481 
                                            O                             1,485       1,505       1,434       1,466       1,476       1,460       1,470 
                                                                     -----------------------------------------------------------------------------------
    Subtotal, conduct of education and      BA                           42,861      44,476      50,066      52,382      53,636      53,426      53,512 
     training.                                                                                                                                          
                                            O                            43,550      42,450      45,627      50,333      51,421      51,712      51,439 
                                                                     -----------------------------------------------------------------------------------
  Subtotal, nondefense investment.........  BA                          129,316     138,594     140,624     144,455     142,708     142,686     144,079 
                                            O                           133,440     136,138     133,396     144,203     142,833     140,992     141,165 
                                                                     ===================================================================================
Total, major Federal investment...........  BA                          214,702     227,447     227,761     237,630     239,517     242,414     252,415 
                                            O                           227,854     225,714     218,662     231,526     230,639     231,628     235,528 
--------------------------------------------------------------------------------------------------------------------------------------------------------

[[Page 106]]

                              Table 6-3. FEDERAL INVESTMENT BUDGET AUTHORITY AND OUTLAYS: GRANT AND DIRECT FEDERAL PROGRAMS                             
                                                                (in millions of dollars)                                                                
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                 Estimate                               
                Description                                              1996    -----------------------------------------------------------------------
                                                                        Actual       1997        1998        1999        2000        2001        2002   
--------------------------------------------------------------------------------------------------------------------------------------------------------
   GRANTS TO STATE AND LOCAL GOVERNMENTS                                                                                                                
                                                                                                                                                        
Major public physical investments:                                                                                                                      
  Construction and rehabilitation:                                                                                                                      
    Highways..............................  BA                           17,879      21,972      22,302      22,166      22,070      22,041      22,032 
                                            O                            19,644      19,588      19,475      19,333      19,172      18,902      18,751 
    Mass transportation...................  BA                            3,517       4,828       4,971       4,971       4,971       4,971       4,971 
                                            O                             3,698       3,900       3,568       3,717       3,922       4,101       4,255 
    Rail transportation...................  BA                                1          69          10          10          10          10          10 
                                            O                                16          33          48          36          10          10          10 
    Air transportation....................  BA                            1,550       2,230       2,347       1,000       1,000       1,000       1,000 
                                            O                             1,655       1,519       1,395       1,185       1,075       1,028       1,018 
    Pollution control and abatement.......  BA                            2,314       2,417       2,474       2,211       2,190       2,207       2,225 
                                            O                             2,368       2,127       2,119       2,032       2,155       2,279       2,188 
    Other natural resources and             BA                              174         161          44          44          44          44          44 
     environment.                                                                                                                                       
                                            O                               255         283          75          48          43          43          43 
    Community development block grants....  BA                            4,650       4,600       4,600       4,600       4,100       4,100       4,100 
                                            O                             4,545       4,837       4,641       4,845       4,633       4,438       4,216 
    Other community and regional            BA                            1,106       1,013       1,152       1,110         926         938         929 
     development.                                                                                                                                       
                                            O                             1,172       1,227       1,170       1,137       1,121       1,032         987 
    Housing assistance....................  BA                            4,554       4,622       4,567       4,342       4,241       4,276       4,312 
                                            O                             6,007       6,335       5,999       5,845       5,508       5,022       4,767 
    National defense......................  BA                        ..........  ..........  ..........  ..........  ..........  ..........  ..........
                                            O                                16           9           4           1   ..........  ..........  ..........
    Other construction....................  BA                              134         130         119         115         116         116         116 
                                            O                               222         212         179         159         126         119         118 
                                                                     -----------------------------------------------------------------------------------
      Subtotal, construction and            BA                           35,879      42,042      42,586      40,569      39,668      39,703      39,739 
       rehabilitation.                                                                                                                                  
                                            O                            39,598      40,070      38,673      38,338      37,765      36,974      36,353 
                                                                     -----------------------------------------------------------------------------------
  Other physical assets...................  BA                              978         962       1,120       1,177       1,178       1,187       1,128 
                                            O                               757       1,075       1,208       1,130       1,169       1,170       1,145 
                                                                     -----------------------------------------------------------------------------------
    Subtotal, major public physical         BA                           36,857      43,004      43,706      41,746      40,846      40,890      40,867 
     capital.                                                                                                                                           
                                            O                            40,355      41,145      39,881      39,468      38,934      38,144      37,498 
                                                                     -----------------------------------------------------------------------------------
Conduct of research and development:                                                                                                                    
  Agriculture.............................  BA                              223         223         223         223         223         223         223 
                                            O                               224         234         223         221         215         193         207 
  Other...................................  BA                               89         258         126         127         127         129         130 
                                            O                                79          94         238         180         162         158         159 
                                                                     -----------------------------------------------------------------------------------
    Subtotal, conduct of research and       BA                              312         481         349         350         350         352         353 
     development.                                                                                                                                       
                                            O                               303         328         461         401         377         351         366 
                                                                     -----------------------------------------------------------------------------------
Conduct of education and training:                                                                                                                      
  Elementary, secondary, and vocational     BA                           12,881      16,111      17,342      17,797      18,212      18,527      18,694 
   education.                                                                                                                                           
                                            O                            13,930      15,288      15,574      17,573      17,828      18,168      18,486 
  Higher education........................  BA                               63          83          39          40          41          42          44 
                                            O                               108          77          74          38          40          41          42 
  Research and general education aids.....  BA                              243         439         311         317         348         356         361 
                                            O                               288         286         377         334         346         349         356 
  Training and employment.................  BA                            3,998       4,513       4,500       4,764       5,035       3,824       3,920 
                                            O                             4,162       3,783       4,208       4,666       4,751       4,184       3,839 
  Social services.........................  BA                            5,828       6,299       6,693       6,945       7,201       7,482       7,775 
                                            O                             5,702       6,185       6,391       6,573       6,774       7,022       7,297 
  National defense (civilian).............  BA                        ..........  ..........  ..........  ..........  ..........  ..........  ..........
                                            O                                 2   ..........  ..........  ..........  ..........  ..........  ..........
  Agriculture.............................  BA                              428         426         418         418         418         418         418 
                                            O                               403         419         420         418         418         418         418 
  Other...................................  BA                               94          78          81          72          73          73          74 
                                            O                               100          82          84          81          76          72          72 
                                                                     -----------------------------------------------------------------------------------
   Subtotal, conduct of education and       BA                           23,535      27,949      29,384      30,353      31,328      30,722      31,286 
    training.                                                                                                                                           
                                            O                            24,695      26,120      27,128      29,683      30,233      30,254      30,510 
                                                                     -----------------------------------------------------------------------------------
  Subtotal, grants for investment.........  BA                           60,704      71,434      73,439      72,449      72,524      71,964      72,506 
                                            O                            65,353      67,593      67,470      69,552      69,544      68,749      68,374 

[[Page 107]]

          DIRECT FEDERAL PROGRAMS                                                                                                                       
                                                                                                                                                        
Major public physical investment:                                                                                                                       
  Construction and rehabilitation:                                                                                                                      
    National defense:                                                                                                                                   
      Military construction...............  BA                            2,815       3,220       2,519       2,537       2,565       2,491       1,633 
                                            O                             3,382       3,102       2,934       2,793       2,132       1,855       1,432 
      Family housing......................  BA                            1,016       1,017         679         722         436         441         433 
                                            O                             1,078       1,007         916         788         372         376         372 
      Atomic energy defense activities and  BA                              839         771       2,357       1,257         766         608       1,089 
       other.                                                                                                                                           
                                            O                               933         698         672       1,031       1,113         992       1,000 
                                                                     -----------------------------------------------------------------------------------
        Subtotal, national defense........  BA                            4,670       5,008       5,555       4,516       3,767       3,540       3,155 
                                            O                             5,393       4,807       4,522       4,612       3,617       3,223       2,804 
                                                                     -----------------------------------------------------------------------------------
    International affairs.................  BA                              157         218         200         200         200         200         200 
                                            O                               279         265         230         219         213         215         215 
    General science, space, and technology  BA                              423         349         338         259         252         254         260 
                                            O                               611         487         423         406         333         327         321 
    Water resources projects..............  BA                            1,728       1,935       2,272       1,972       2,005       1,887       1,903 
                                            O                             2,090       2,082       1,799       1,946       2,047       1,918       1,864 
    Other natural resources and             BA                            1,644       1,637       2,350       2,631       1,967       1,913       1,908 
     environment.                                                                                                                                       
                                            O                             1,672       1,684       1,900       2,279       2,252       2,089       2,016 
    Energy................................  BA                            1,827       1,292       1,183       1,112       1,130       1,119       1,133 
                                            O                             1,918       1,378       1,147       1,141       1,163       1,150       1,160 
    Postal Service........................  BA                            1,132       1,870       1,376         964         721         783       1,996 
                                            O                             1,138       1,063       1,251       1,195         986         870       2,205 
    Transportation........................  BA                              307         366         593         595         597         598         599 
                                            O                               419         407         675         703         606         606         608 
    Housing assistance....................  BA                            1,110          33         485         485         485         485         485 
                                            O                               750         881         964       1,070       1,144       1,127       1,113 
    Veterans hospitals and other health     BA                            1,066       1,183       1,317       1,304       1,320       1,336       1,351 
     facilities.                                                                                                                                        
                                            O                             1,347       1,272       1,418       1,384       1,351       1,336       1,338 
    Federal Prison System.................  BA                              245         310         149          97   ..........  ..........  ..........
                                            O                               486         309         393         527         410         253         181 
    GSA real property activities..........  BA                                1         157   ..........  ..........  ..........  ..........  ..........
                                            O                             1,579       1,757       1,262       1,028         965         916         941 
    Other construction....................  BA                              764         750         868         723         735         742         745 
                                            O                               611         847         760         805         841         791         756 
                                                                     -----------------------------------------------------------------------------------
      Subtotal, construction and            BA                           15,074      15,108      16,686      14,858      13,179      12,857      13,735 
       rehabilitation.                                                                                                                                  
                                            O                            18,293      17,239      16,744      17,315      15,928      14,821      15,522 
                                                                     -----------------------------------------------------------------------------------
  Acquisition of major equipment:                                                                                                                       
    National defense:                                                                                                                                   
      Department of Defense--Military       BA                           42,641      44,179      42,664      50,583      56,969      60,624      68,310 
       (Procurement).                                                                                                                                   
                                            O                            49,252      45,668      43,164      44,601      47,641      51,698      55,457 
      Atomic energy defense activities....  BA                              334         256         259         250         250         247         242 
                                            O                               393         256         244         240         236         234         231 
                                                                     -----------------------------------------------------------------------------------
        Subtotal, national defense........  BA                           42,975      44,435      42,923      50,833      57,219      60,871      68,552 
                                            O                            49,645      45,924      43,408      44,841      47,877      51,932      55,688 
                                                                     -----------------------------------------------------------------------------------
    General science and basic research....  BA                              252         239         244         250         251         251         251 
                                            O                               199         262         271         271         263         256         246 
    Space flight, research, and supporting  BA                              763         744         575         574         558         540         526 
     activities.                                                                                                                                        
                                            O                               545         698         638         610         595         575         564 
    Energy................................  BA                              218         183         170         194         203         202         215 
                                            O                               221         195         193         222         231         231         243 
    Postal Service........................  BA                            1,890       3,545       1,075         586         180         221         665 
                                            O                               987       2,478       1,378       1,793         236         210         505 
    Air transportation....................  BA                            1,903       1,969       1,924       2,073       2,029       2,090       2,152 
                                            O                             2,490       1,948       1,903       1,905       1,927       1,956       2,078 
    Water transportation (Coast Guard)....  BA                              228         245         242         242         242         242         242 
                                            O                               240         179         196         216         226         239         245 
    Other transportation (railroads)......  BA                              330         362   ..........  ..........  ..........  ..........  ..........
                                            O                               322         262         159         104   ..........  ..........  ..........
    Social security.......................  BA                              257          86          63          68          73          78          84 

[[Page 108]]
                                            O                               164         103         153         164         176         189         203 
    Hospital and medical care for veterans  BA                              767         513         483         483         483         483         483 
                                            O                               614         564         483         489         490         490         490 
    Department of Justice.................  BA                              377         444         480         288         296         304         314 
                                            O                               294         378         293         348         216         146         151 
    Department of the Treasury............  BA                              643         230         628         619         119         119         119 
                                            O                               616         541         106         551         599         148          98 
    General supply fund...................  BA                        ..........  ..........  ..........  ..........  ..........  ..........  ..........
                                            O                               497         556         673         703         748         655         694 
    Other.................................  BA                               28          34         523         719         566         503         411 
                                            O                                58         146         309         567         574         542         486 
                                                                     -----------------------------------------------------------------------------------
      Subtotal, acquisition of major        BA                           50,631      53,029      49,330      56,929      62,219      65,904      74,014 
       equipment.                                                                                                                                       
                                            O                            56,892      54,234      50,163      52,784      54,158      57,569      61,691 
                                                                     -----------------------------------------------------------------------------------
  Purchase or sale of land and structures:                                                                                                              
    National defense......................  BA                              -77         -86         -87         -54         -26         -26         -26 
                                            O                               -77         -86         -87         -54         -26         -26         -26 
    International affairs.................  BA                               10          10          10          10          10          10          10 
                                            O                                11          11          10          10           9           9           9 
    Sale of the United States Enrichment    BA                        ..........  ..........     -1,800   ..........  ..........  ..........  ..........
     Corporation.                                                                                                                                       
                                            O                         ..........  ..........     -1,800   ..........  ..........  ..........  ..........
    Privatization of Elk Hills............  BA                        ..........  ..........     -2,415   ..........  ..........  ..........  ..........
                                            O                         ..........  ..........     -2,415   ..........  ..........  ..........  ..........
    Other.................................  BA                              173         184         165         219         231         233        -305 
                                            O                               399         430         330         422         426         419        -135 
                                                                     -----------------------------------------------------------------------------------
      Subtotal, purchase or sale of land    BA                              106         108      -4,127         175         215         217        -321 
       and structures.                                                                                                                                  
                                            O                               333         355      -3,962         378         409         402        -152 
                                                                     -----------------------------------------------------------------------------------
    Subtotal, major public physical         BA                           65,811      68,245      61,889      71,962      75,613      78,978      87,428 
     investment.                                                                                                                                        
                                            O                            75,518      71,828      62,945      70,477      70,495      72,792      77,061 
                                                                     -----------------------------------------------------------------------------------
Conduct of research and development:                                                                                                                    
  National defense:                                                                                                                                     
    Defense military......................  BA                           35,402      37,060      36,371      35,544      33,541      33,054      34,403 
                                            O                            36,936      36,485      35,067      35,626      34,077      33,264      33,682 
    Atomic energy and other...............  BA                            2,408       2,431       2,373       2,328       2,293       2,274       2,237 
                                            O                             2,492       2,431       2,349       2,291       2,249       2,228       2,200 
                                                                     -----------------------------------------------------------------------------------
      Subtotal, national defense..........  BA                           37,810      39,491      38,744      37,872      35,834      35,328      36,640 
                                            O                            39,428      38,916      37,416      37,917      36,326      35,492      35,882 
                                                                     -----------------------------------------------------------------------------------
  International affairs...................  BA                              253         191         247         253         257         265         270 
                                            O                               419         379         339         317         320         327         332 
  General science, space, and technology:                                                                                                               
    NASA..................................  BA                            7,844       7,797       8,009       8,034       8,025       8,133       8,164 
                                            O                             6,963       7,524       7,767       7,841       7,734       7,738       7,802 
    National Science Foundation...........  BA                            2,204       2,277       2,367       2,373       2,379       2,386       2,392 
                                            O                             2,077       2,195       2,201       2,272       2,332       2,344       2,386 
    Other general science.................  BA                              671         705         739         798         798         798         798 
                                            O                               705         705         739         759         772         772         772 
                                                                     -----------------------------------------------------------------------------------
      Subtotal, general science, space,     BA                           10,972      10,970      11,362      11,458      11,459      11,582      11,624 
       and technology.                                                                                                                                  
                                            O                            10,164      10,803      11,046      11,189      11,158      11,181      11,292 
                                                                     -----------------------------------------------------------------------------------
  Energy..................................  BA                            2,548       2,312       2,542       2,650       2,464       2,396       2,354 
                                            O                             2,938       2,577       2,796       2,771       2,753       2,658       2,552 
  Transportation:                                                                                                                                       
    Department of Transportation..........  BA                              508         531         651         629         634         641         647 
                                            O                               479         489         730         702         699         699         682 
    NASA..................................  BA                            1,222       1,198       1,273       1,200       1,178       1,197       1,210 
                                            O                             1,120       1,261       1,194       1,234       1,296       1,321       1,366 
                                                                     -----------------------------------------------------------------------------------
      Subtotal, transportation............  BA                            4,278       4,041       4,466       4,479       4,276       4,234       4,211 
                                            O                             4,537       4,327       4,720       4,707       4,748       4,678       4,600 
                                                                     -----------------------------------------------------------------------------------

[[Page 109]]

  Health:                                                                                                                                               
    National Institutes of Health.........  BA                           11,263      11,996      12,333      12,378      12,428      12,479      12,530 
                                            O                             9,642      11,469      12,060      12,326      12,414      12,448      12,492 
    All other health......................  BA                              548         642         613         601         593         584         577 
                                            O                               616         581         590         594         579         570         563 
                                                                     -----------------------------------------------------------------------------------
      Subtotal, health....................  BA                           11,811      12,638      12,946      12,979      13,021      13,063      13,107 
                                            O                            10,258      12,050      12,650      12,920      12,993      13,018      13,055 
                                                                     -----------------------------------------------------------------------------------
  Agriculture.............................  BA                              953         963         975         980         991       1,002       1,013 
                                            O                               944         948         962         974         982       1,027       1,026 
  Natural resources and environment.......  BA                            1,778       1,838       1,898       1,862       1,888       1,903       1,936 
                                            O                             1,587       1,619       1,671       1,650       1,666       1,666       1,696 
  National Institute of Standards and       BA                              416         429         480         506         518         564         620 
   Technology.                                                                                                                                          
                                            O                               374         428         440         463         491         514         543 
  Hospital and medical care for veterans..  BA                              256         263         235         235         235         235         235 
                                            O                               231         261         241         234         233         233         233 
  All other research and development......  BA                              579         603         643         811         835         842         854 
                                            O                               596         605         599         787         803         805         822 
                                                                     -----------------------------------------------------------------------------------
    Subtotal, conduct of research and       BA                           68,853      71,236      71,749      71,182      69,057      68,753      70,240 
     development.                                                                                                                                       
                                            O                            68,119      69,957      69,745      70,841      69,400      68,614      69,149 
                                                                     -----------------------------------------------------------------------------------
Conduct of education and training:                                                                                                                      
  Elementary, secondary, and vocational     BA                              779         788         899         906         917         924         934 
   education.                                                                                                                                           
                                            O                               809         823         813         878         894         904         914 
  Higher education........................  BA                           12,650       9,369      13,173      14,538      14,659      14,956      14,374 
                                            O                            12,064       9,064      11,274      13,352      13,638      13,784      13,137 
  Research and general education aids.....  BA                            1,519       1,554       1,689       1,517       1,592       1,621       1,633 
                                            O                             1,618       1,628       1,658       1,483       1,580       1,610       1,638 
  Training and employment.................  BA                            1,070       1,162       1,487       1,522       1,559       1,593       1,629 
                                            O                             1,013       1,127       1,194       1,378       1,501       1,558       1,605 
  Health..................................  BA                              793         882         728         720         718         715         712 
                                            O                               760         864         804         728         719         708         704 
  Veterans education, training, and         BA                            1,274       1,526       1,503       1,598       1,603       1,653       1,671 
   rehabilitation.                                                                                                                                      
                                            O                             1,373       1,558       1,580       1,617       1,619       1,661       1,679 
  General science and basic reserach......  BA                              502         523         519         518         518         518         518 
                                            O                               469         502         484         518         516         530         518 
  National defense........................  BA                                8           5           2           8          15          15          15 
                                            O                                 7           6           3           6          12          15          15 
  International affairs...................  BA                              236         218         199         199         199         199         199 
                                            O                               279         233         210         201         199         199         199 
  Other...................................  BA                              503         505         485         511         543         525         556 
                                            O                               472         531         482         495         522         504         535 
                                                                     -----------------------------------------------------------------------------------
    Subtotal, conduct of education and      BA                           19,334      16,532      20,684      22,037      22,323      22,719      22,241 
     training.                                                                                                                                          
                                            O                            18,864      16,336      18,502      20,656      21,200      21,473      20,944 
                                                                     -----------------------------------------------------------------------------------
  Subtotal, direct Federal investment.....  BA                          153,998     156,013     154,322     165,181     166,993     170,450     179,909 
                                            O                           162,501     158,121     151,192     161,974     161,095     162,879     167,154 
                                                                     ===================================================================================
Total, major Federal investment...........  BA                          214,702     227,447     227,761     237,630     239,517     242,414     252,415 
                                            O                           227,854     225,714     218,662     231,526     230,639     231,628     235,528 
--------------------------------------------------------------------------------------------------------------------------------------------------------

[[Page 110]]

     Part II: PLANNING, BUDGETING, AND ACQUISITION OF CAPITAL ASSETS

  The previous section discussed Federal investment broadly defined. The 
focus of this section is much narrower--the review of planning and 
budgeting for capital assets during the past year and the resultant 
budget proposals for capital assets owned by the Federal Government and 
used to deliver Federal services. Capital assets consist of Federal 
buildings, information technology, and other facilities and major 
equipment, including weapons systems, federally owned infrastructure, 
and space satellites.\1\ With proposed major agency restructuring, 
organizational streamlining, and other reforms, good planning may 
suggest reduced spending for some assets, such as office buildings, and 
increased spending for others, such as information technology, to 
increase the productivity of a smaller workforce.
---------------------------------------------------------------------------
  \1\ This is almost the same as the definition in Part I of this 
chapter for spending for direct Federal construction and rehabilitation, 
major equipment, and purchase of land, except that capital assets 
excludes grants to private groups for these purposes (e.g., grants for 
equipment for research and grants to AMTRAK). A more complete definition 
can be found in the glossary to the ``Principles of Budgeting for 
Capital Asset Acquisitions,'' which is at the end of this Part.
---------------------------------------------------------------------------
  In recent years the Office of Management and Budget (OMB) and the 
Congress have reviewed the Federal Government's performance in planning, 
budgeting, risk management, and the acquisition of capital assets. The 
reviews indicate that the performance is uneven across the Government. 
The problems have many causes and as a result, there is no single 
solution. Agencies that are strong in this area may be able to provide 
best practices that could assist agencies that need improvement. In 
meeting the objective of improving the Government's performance, it is 
essential that the caliber of government planning and budgeting for 
capital assets be improved.

    Improving Planning, Budgeting, and Acquisition of Capital Assets

  Risk Management.--Recent OMB reviews have found a recurring theme in 
many capital asset acquisitions--that risk management should become more 
central to the planning, budgeting, and acquisition process. Failure to 
analyze and manage the inherent risk in all capital asset acquisitions 
may have contributed to cost overruns, schedule shortfalls, and 
acquisitions that fail to perform as expected. Failure to adopt capital 
asset requirements that are within the capabilities of the market and 
budget limitations may also have contributed to these problems. For each 
major project a risk analysis that includes how risks will be isolated, 
minimized, monitored, and controlled may help prevent these problems. 
The proposals in this budget, together with recent legislation enacted 
by Congress, are designed to help the Government manage better its 
portfolio of capital assets.
  Long-Term Planning and Analysis.--Planning and managing capital 
assets, especially better management of risk, has historically been a 
low priority for some agencies. Attention focuses on coming-year 
appropriations, and justifications are often limited to lists of desired 
projects. The increased use of long-range planning linked to performance 
goals required by the Government Performance and Results Act would 
provide a better basis for justifications. It would increase foresight 
and improve the odds for cost-effective investments.
  A need for better risk management, integrated life-cycle planning, and 
operation of capital assets at many agencies was evident in the OMB 
reviews. Research equipment was acquired with inadequate funding for its 
operation. New medical facilities sometimes were built without funds for 
maintenance and operation. New information technology sometimes was 
acquired without planning for associated changes in agency operations.
  Congressional concern.--Congress has expressed its concern about 
planning for capital assets with legislation and other actions that 
complement Administration efforts to ensure better performance:
<bullet>    The Government Performance and Results Act of 1993 (GPRA) is 
          designed to help ensure that program objectives are more 
          clearly defined and resources are focused on meeting these 
          objectives.
<bullet>    The Federal Acquisition Streamlining Act of 1994 (FASA), 
          Title V, requires agencies to improve the management of large 
          acquisitions. Title V requires agencies to institute a 
          performance-based planning, budgeting, and management approach 
          to the acquisition of capital assets. As a result of improved 
          planning efforts, agencies are required to establish cost, 
          schedule, and performance goals that have a high probability 
          of successful achievement. For projects that are not achieving 
          90 percent of original goals, agencies are required to discuss 
          corrective actions taken or planned to bring the project 
          within goals. If they cannot be brought within goals, agencies 
          should identify how and why the goals should be revised, 
          whether the project is still cost beneficial and justified for 
          continued funding, or whether the project should be canceled.
<bullet>    The Information Technology Management Reform Act of 1996 
          (ITMRA) is designed to ensure that information technology 
          acquisitions support agency missions developed pursuant to 
          GPRA. ITMRA also requires a performance-based planning, 
          budgeting, and management approach to the acquisition of 
          capital assets.
<bullet>    The General Accounting Office recently released a study, 
          Budget Issues: Budgeting for Federal Capital (November 1996), 
          written in response to a congressional request, which 
          recommended that OMB continue its focus on fixed assets.
  OMB concern.--Since 1994, OMB has devoted particular attention to 
improving the process of planning, budgeting, and acquiring capital 
assets.

[[Page 111]]

<bullet>    Separate OMB reviews that focused on capital assets have 
          occurred for the last three budgets.
<bullet>    After seeking out and analyzing the problems, which differed 
          from agency to agency, OMB issued guidance on this issue in 
          1994. This guidance was repeated in 1995 and reissued in 1996 
          as OMB Circular A-11: Part 3: ``Planning, Budgeting, and 
          Acquisition of Fixed Assets'' (July 1996) (hereafter referred 
          to as Part 3). Part 3 identified other OMB guidance on this 
          issue.\2\
---------------------------------------------------------------------------
  \2\ Other OMB guidance includes: (1) OMB Circular No. A-109, Major 
System Acquisitions, which establishes policies for planning major 
systems that are generally applicable to fixed asset acquisitions. (2) 
OMB Circular No. A-94, Guidelines and Discount Rates for Benefit-Cost 
Analysis of Federal Programs, which provides guidance on benefit-cost, 
cost-effectiveness, and lease-purchase analysis to be used by agencies 
in evaluating Federal activities including fixed asset acquisition. It 
includes guidelines on the discount rate to use in evaluating future 
benefits and costs, the measurement of benefits and costs, the treatment 
of uncertainty, and other issues. This guidance must be followed in all 
analyses submitted to OMB in support of legislative and budget programs. 
(3) Executive Order No. 12893, ``Principles for Federal Infrastructure 
Investments,'' which provides principles for the systematic economic 
analysis of infrastructure investments and their management. (4) OMB 
Bulletin No. 94-16, Guidance on Executive Order No. 12893, ``Principles 
for Federal Infrastructure Investments,'' which provides guidance for 
implementing this order and appends the order itself. (5) the revision 
of OMB Circular A-130, Management of Federal Information Resources 
(February 20, 1996), which provides principles for internal management 
and planning practices for information systems and technology (published 
in the Federal Register, February 20, 1996, pp. 6433-6434).
---------------------------------------------------------------------------
             Agencies were requested to approach planning for capital 
          assets in the context of strategic plans to carry out their 
          missions, and to consider alternative methods of meeting their 
          goals. Systematic analysis of the full life-cycle expected 
          costs and benefits was required, along with risk analysis and 
          assessment of alternative means of acquiring assets. The 
          Administration proposes to make agencies responsible for the 
          capital assets they use, and to work throughout the coming 
          year to improve agency risk management, planning, budgeting, 
          acquisition, and operation of these assets.
<bullet>    In the FY 1997 Budget a year ago, the Administration 
          proposed a separate allowance of $1.4 billion for full funding 
          of selected capital assets in the Department of Energy, NASA, 
          and the Department of the Interior. Congress responded 
          favorably by enacting a portion of this allowance for the 
          Department of Energy.
<bullet>    OMB memorandum 97-02, Funding Information Systems 
          Investments (October 25, 1996) was issued to establish clear 
          and concise decision criteria regarding investments in major 
          information technology investments.
<bullet>    As part of this Budget, OMB is:
     --requesting full funding in regular or advance appropriations for 
         new capital projects and for many capital projects formerly 
         funded incrementally. These requests are shown in Table 6-5 and 
         discussed in the accompanying text.
     --issuing the ``Principles of Budgeting for Capital Asset 
         Acquisitions,'' which appear at the end of this Part and are 
         also available as a separate publication. These principles 
         offer guidelines to agencies to help carry out better planning, 
         analysis, risk management, and budgeting for capital asset 
         acquisitions. The principles include a proposed new Budget 
         Enforcement Act scorekeeping rule to enforce full funding of 
         capital projects.
     --Later this year OMB plans to publish a ``Capital Programming 
         Guide.'' This Guide is being developed by an interagency task 
         force that includes participation from the General Accounting 
         Office. A draft of the Guide is currently in circulation for 
         comment. Its purpose is to provide professionals in the Federal 
         Government a basic reference on capital assets management 
         principles to assist them in planning, budgeting, acquiring, 
         and managing the asset once in use. The draft Guide emphasizes 
         risk management and the importance of analyzing capital assets 
         as a portfolio.

  From Planning to Budgeting.--Long-range agency plans should channel 
fully justified budget-year and out-year capital acquisition proposals 
into the budget process. Agencies were asked to submit projections of 
both budget authority and outlays for high-priority capital asset 
proposals not only for the budget year but for the four subsequent years 
through 2002 as well. In addition, OMB held a separate review on capital 
assets again as part of the 1998 budget review process. This provided an 
overview of requests, flagged issues, and considered cross-cutting 
recommendations. Agency-specific capital asset issues were highlighted 
in the agency reviews.
  Attention was given to whether the ``lumpiness'' of some capital 
assets--large one-year temporary increases in funding--disadvantaged 
them in the budget review process. In some cases, agencies aggregate 
capital asset acquisitions into budget accounts containing only such 
acquisitions; such accounts tend to smooth out year-to-year changes in 
budget authority and outlays and avoid crowding other expenditures. In 
other cases, agencies or program managers do not hesitate to request 
``spikes'' in spending for asset acquisitions, and the review process 
accommodates them. But some agencies go out of their way to avoid such 
spikes, and some agencies have trouble accommodating them. Part 3 
encouraged agencies to accommodate justified spikes in their own 
internal reviews, and the OMB review in some cases made special 
allowance for these one-time increases.
  Full Funding of Capital Assets.--Good budgeting requires that 
appropriations for the full costs of asset acquisition be provided up 
front to help ensure that all costs and benefits are fully taken into 
account when decisions are made about providing resources. Full funding 
was endorsed by the General Accounting Office in its recent report, 
Budgeting for Federal Capital (November 1996). This rule is followed for 
most Department of Defense procurement and construction programs and for 
General Services Administration buildings. In other areas too often it 
is not. When it is not followed and capital assets are funded in 
increments, without certainty if or when future funding will be 
available, it can and occasionally does result in poor risk management, 
weak planning, acquisition of assets 

[[Page 112]]

not fully justified, higher acquisition costs, cancellation of major projects, the loss of sunk costs, and inadequate funding to maintain and operate the assets. Full funding is also an important element in managing large acquisitions effectively and holding management responsible for achieving goals.
  This budget requests full funding with regular or advance 
appropriations for new capital projects and for many capital projects 
funded incrementally in the past. Projects that might have been funded 
in increments in past years and are fully funded in this budget are 
identified below in Table 6-5 and discussed in the accompanying text. 
Next year additional effort will be made to include full funding for all 
new capital projects, or at least economically and programmatically 
viable segments (or modules) of new projects.
  Other Budgeting Issues.--Other budgeting decisions can also aid in 
acquiring capital assets. Availability of funds for one year often may 
not be enough time to complete the acquisition process. Most agencies 
request that funds be available for more than one year to complete 
acquisitions efficiently, and Part 3 encouraged this. As noted, many 
agencies aggregate asset acquisition in budget accounts to avoid 
lumpiness. In some cases, these are revolving funds that ``rent'' the 
assets to the agency's programs.
  To promote better program performance, agencies are also being 
encouraged by OMB to examine their budget account structures to align 
them better with program outputs and outcomes and to charge the 
appropriate account with significant costs used to achieve these 
results. The asset acquisition rental accounts, mentioned above, would 
contribute to this. Budgeting this way would provide information and 
incentives for better resource allocation among programs and a continual 
search for better ways to deliver services. It would also provide 
incentives for efficient capital asset acquisition and management.

  Acquisition of Capital Assets.--Improved planning, budgeting, and 
acquisition strategies are necessary to increase the ability of agencies 
to acquire capital assets within, or close to, the original estimates of 
cost, schedule, and performance used to justify project budgets and to 
maintain budget discipline. The OMB initiative along with enactment of 
FASA (Title V) and ITMRA require agencies to institute a performance-
based planning, budgeting, and management approach to the acquisition of 
capital assets.
  OMB, working with the agencies over the last year, began separate but 
related efforts to develop an integrated management approach that 
employs performance based acquisition management as part of a 
disciplined capital programming process. OMB also wants the capital 
asset acquisition goals incorporated into the annual performance plan 
called for by GPRA so that a unified picture of agency management 
activities is presented and acquisition performance goals are linked to 
the achievement of program and policy goals. This integrated approach 
will not only eliminate duplication in reporting agency actions but, 
most importantly, will foster more effective implementation of 
performance-base acquisition management.
  The first effort was the issuance of OMB Circular A-11, Part 3, 
Planning, Budgeting and Acquisition of Fixed Assets, in July 1996. Part 
3 presents unified guidance to agencies on planning, budgeting, and 
acquisition management of fixed assets. It also presents unified 
guidance designed to coordinate the collection of agency information for 
OMB reports to the Congress required by FASA Title V and ITMRA. Part 3 
for this budget limited reporting to high-priority acquisitions with 
expansion to all acquisitions planned for the 1999 Budget. Part 3 
required agencies to provide information to OMB on the extent of 
planning and risk mitigation efforts accomplished for new projects to 
ensure a high probability that the cost, schedule and performance goals 
established will be successfully achieved. For ongoing projects agencies 
are to provide information on the achievement of, or deviation from, 
goals. For projects that are not achieving 90 percent of original goals, 
agencies are required to discuss corrective actions taken, or 
contemplated, to bring the project within goals or, if not, how and why 
the goals should be revised and whether the project is still cost 
beneficial and justified for continued funding or should be canceled. 
Acquisition goals submitted with the 1998 Budget, if approved by OMB, 
are the baseline goals for all future monitoring of project progress for 
both management purposes and reporting to Congress as required by FASA 
Title V and ITMRA.
  As the second effort, on October 25, 1996, OMB memorandum 97-02, 
Funding Information Systems Investments, was issued to establish clear 
and concise decision criteria regarding investments in major information 
technology investments. As a general presumption, OMB will recommend new 
or continued funding only for those major system investments that 
satisfy these criteria and expands coverage to all capital investments.
  At the Appendix to this Part are the Principles of Budgeting for 
Capital Asset Acquisitions, which incorporate the above criteria and 
expand coverage to all capital investments. OMB recognizes that many 
agencies are in the middle of ongoing projects initiated prior to 
enactment of ITMRA and FASA Title V, and may not be able to satisfy the 
criteria immediately. For those systems that do not satisfy the 
criteria, OMB considered requests to use 1997 and 1998 funds to support 
reevaluation and replanning of the project as necessary to achieve 
compliance with the criteria or to determine that the project would not 
meet the criteria and should be canceled.
  As a result of these two initiatives, capital asset acquisitions are 
to have baseline cost, schedule, and performance goals for future 
tracking purposes or they are to be either reevaluated and changed or 
canceled if no longer cost beneficial.

  Outlook.--The effort to improve planning and budgeting for capital 
assets will continue in 1997.

[[Page 113]]

<bullet>    The Administration will work with the Congress to increase 
          the number of projects that are fully funded with regular or 
          advance appropriations.
<bullet>    OMB will be working with congressional committees, the 
          President's Management Council, the Chief Financial Officers 
          Council, and the Chief Information Officers Council to help 
          agencies with their responsibility for capital assets through 
          the alignment of budgetary resources with program results. OMB 
          will also work with these groups to implement the ``Principles 
          of Budgeting for Capital Asset Acquisitions,'' which are shown 
          as an Appendix to this Part.
<bullet>    In the OMB review process, proposals for the acquisition of 
          capital assets and related issues of lumpiness or ``spikes'' 
          will continue to receive special attention. Agencies will be 
          encouraged to give the same special attention to future asset 
          acquisition proposals.
<bullet>    To ensure that the full costs and benefits of all budget 
          proposals are fully taken into account in allocating 
          resources, agencies will be required to propose full funding 
          for acquisitions in their budget requests.
<bullet>    OMB will finalize the guidance to implement the requirements 
          of FASA Title V within the civilian agencies and develop 
          materials for OMB use in reviewing agency planning for new 
          acquisitions and performance information on acquisitions in 
          process.
<bullet>    As noted earlier, OMB plans to issue a ``Capital Programming 
          Guide'' that will assist professionals in the Federal 
          Government in risk management, planning, budgeting, acquiring, 
          and operating efficiently capital asset acquisitions.

                       Major Acquisition Proposals

  For the definition of major capital assets described above this budget 
requests $61.8 billion of budget authority for 1998. This includes $45.8 
billion for the Department of Defense and $16.0 billion for other 
agencies. The major requests are shown in the accompanying Table 6-4: 
``Capital Asset Acquisitions,'' which distributes the funds generally 
according to the categories for buildings, information technology, and 
other acquisitions.

                                                               Buildings

  This category includes both general purpose office buildings and 
special purpose buildings, such as hospitals, prisons, and courthouses. 
This budget includes $10.9 billion of budget authority for 1998 for the 
major building acquisitions.
  Department of Defense.--The budget includes $3.7 billion for 1998 for 
general construction on military bases and family housing. This funding 
will be used to:
<bullet>    support the fielding of new systems;
<bullet>    enhance operational readiness, including deployment and 
          support of military forces;
<bullet>    provide housing for military personnel and their families;
<bullet>    implement base closure and realignment actions; and
<bullet>    correct safety deficiencies and environmental problems.
  General Services Administration.--The 1998 budget requests $1.7 
billion in obligations for GSA for the construction or renovation of 
buildings. These funds will allow for new construction for U.S. Courts 
and the acquisition of general purpose office space in locations where 
long-term needs show that ownership is preferable to leasing.
  Department of Energy.--This budget requests $1.5 billion for 1998 for 
assets in this category. The largest item is a request for $0.9 billion 
for the National Ignition Facility, which will be used to perform 
experiments, including inertial confinement fusion experiments, at high 
pressures and temperatures. These investments are also discussed in the 
text that accompanies Table 6-5.
  Department of Veterans Affairs.--The 1998 budget requests $0.5 billion 
in budget authority for new construction and rehabilitation of veterans 
hospitals, clinics, nursing homes, and other health care facilities; for 
construction of a new national cemetery and expansion of two existing 
national cemeteries; and for improvements to regional benefits offices.
  Department of Health and Human Services.--This budget requests $0.5 
billion for the Department of Health and Human Services for buildings. 
This includes capital projects for the National Institutes of Health 
Clinical Research Center and improved facilities for the Indian Health 
Service. Both are discussed with Table 6-5 and the request for advance 
appropriations.
  Other agencies.--The largest item in this category is for the Postal 
Service ($1.4 billion in 1998). Other building acquisitions include the 
Research Triangle Park consolidated facility in North Carolina for the 
Environmental Protection Agency; the Department of State for buildings 
abroad; the Department of Justice for new prison construction and 
related capital projects, and a National Laboratory Center and fire 
research facility for the Bureau of Alcohol, Tobacco, and Firearms. 
Funds are also requested in the Commerce Department for new construction 
of a fisheries laboratory in Santa Cruz, California, to support NOAA's 
environmental stewardship mission and a new facility at the Goddard 
Space Flight Center in Maryland.

                                                  Information Technology

  This category covers capital purchases for information technology and 
includes computer hardware, major software, and renovations required for 
this equipment. This budget includes $3.3 billion in budget authority 
for 1998 for major information technology.

[[Page 114]]

                 Table 6-4.  CAPITAL ASSET ACQUISITIONS                 
                (Budget authority in billions of dollars)               
------------------------------------------------------------------------
                                               1996     1997      1998  
                                              actual  proposed  proposed
------------------------------------------------------------------------
             MAJOR ACQUISITIONS                                         
Buildings:                                                              
  Department of Defense....................     4.6       4.9       3.7 
  General Services Administration \1\......     1.3       1.5       1.7 
  Department of Energy.....................     0.2       0.2       1.5 
  Department of Veterans Affairs...........     0.5       0.6       0.5 
  Department of Health and Human Services..     0.4       0.5       0.5 
  Other agencies...........................     2.3       3.0       3.0 
                                            ----------------------------
  Subtotal, buildings......................     9.3      10.7      10.9 
                                                                        
Information technology:                                                 
  Department of Defense....................     1.3       1.5       1.4 
  Internal Revenue Service.................     0.6       0.2       0.6 
  Other agencies...........................     1.1       0.9       1.3 
                                            ----------------------------
  Subtotal, information technology.........     3.0       2.6       3.3 
                                                                        
Other acquisitions:                                                     
  Department of Defense....................    40.5      42.0      40.7 
  Department of Transportation.............     2.2       2.3       2.2 
  Department of Energy.....................     1.9       1.8       2.0 
  Army Corps of Engineers..................     1.2       1.5       1.8 
  Other agencies...........................     5.9       6.8       4.5 
                                            ----------------------------
  Subtotal, other acquisitions.............    51.7      54.4      51.2 
                                            ============================
Total, major acquisitions \2\..............    64.1      67.7      65.5 
                                                                        
Sale of major assets.......................  .......  ........     -4.2 
Acquisitions in smaller accounts...........     0.7       0.7       0.5 
                                            ----------------------------
Total, capital asset acquisitions \3\......    64.7      68.4      61.8 
------------------------------------------------------------------------
* indicates $50 million or less.                                        
\1\ Obligations.                                                        
\2\ Includes accounts with acquisitions of $50 million or more in one   
  year.                                                                 
\3\ This total is derived from the direct Federal major public physical 
  investment budget authority on Table 6-3 ($61.9 billion for 1998).    
  Table 6-4 excludes an estimate of spending for assets not owned by the
  Federal Government ($2.5 billion for 1998), and includes obligations  
  for the General Services Administration ($2.5 billion in 1998).       

  Department of Defense.--The budget requests $1.4 billion for 1998 for 
the Department of Defense for information technology capital purchases. 
These funds will be used to purchase hardware and software to support 
worldwide communications to bases and deployed forces, improve 
information security for critical computer systems, replace obsolete 
equipment, and improve the information processing capabilities for the 
department. Virtually every function within the Department, including 
logistics, communications, command and control, intelligence, 
acquisition management, finance, personnel, health, and environmental 
security will be supported by these information technology investments.
  Internal Revenue Service (IRS) Information Technology Investments.--
The budget requests $0.6 billion in budget authority for 1998 for 
information technology investments in 1999. These efforts and proposed 
advance appropriations for 1999 will ensure that future capital 
investments by the IRS will improve customer service by providing 
alternative means of filing returns and paying taxes, improve telephone 
service for taxpayers; and give employees immediate access to complete 
information and modern tools to do their jobs. These investments are 
also discussed in the text that accompanies Table 6-5, which displays 
advance appropriations for capital acquisitions.
  Other agencies.--Other major information technology purchases include 
funds to support science and space activities for NASA; to support law 
enforcement activities in the Department of Justice; to support the 
delivery of veterans health care services and improve the processing of 
veterans benefits claims, and for the General Services Administration. 
Also included are funds to support modernization of the National Weather 
Service in the Department of Commerce. This is discussed in the text 
accompanying Table 6-5.

                                                      Other Acquisitions

  This category includes facilities and major equipment not included 
above. The budget requests $51.2 billion for 1998 for the acquisitions 
included in this capital assets category. Most of this is for defense 
procurement of weapons.
  Department of Defense.--The budget requests $40.7 billion for 1998 to 
procure or modify weapons systems and related support equipment. This 
includes tactical fighter aircraft, airlift aircraft, naval vessels, 
tanks, helicopters, missiles, and vehicles.
  Department of Transportation.--The budget requests $2.2 billion for 
the Department of Transportation, which includes funds to modernize the 
air traffic control system and funds for the Coast Guard to acquire 
vessels and modernize shore facilities. Requests for advance 
appropriations for the air traffic control system in the Federal 
Aviation Administration are discussed with Table 6-5.
  Department of Energy.--This budget includes $2.0 billion for major 
facilities and equipment. These are largely for general science and 
research activities, environmental restoration, weapons activities, 
nuclear and non-nuclear energy activities, and the Bonneville Power 
Administration. This budget requests full upfront funding for many of 
these projects. These data are shown in Table 6-5 and described in the 
accompanying text.
  Army Corps of Engineers.--The budget requests $1.8 billion for 1998 
for capital assets for the Army Corps of Engineers. These funds finance 
construction, rehabilitation, and related activity for water resources 
development projects that provide navigation, flood control, water 
supply, hydroelectric, and other benefits. Table 6-5 identifies the 
amounts of upfront funding and advance appropriations requested for 
these programs and the accompanying text discusses these activities.
  Other agencies.--The largest item in this category is equipment for 
the Postal Service ($1.1 billion in 1998). Other major acquisitions in 
this category are for the Tennessee Valley Authority for dams, locks, 
and other facilities; the purchase of vehicles by the General Services 
Administration, and medical equipment to support the delivery of 
veterans health care.

                     Full Funding of Major Projects

  This budget proposes full funding for new capital projects and for 
many projects formerly funded incrementally.

[[Page 115]]

  The importance of full funding was discussed earlier in this Part and 
is also explained in the ``Principles of Budgeting for Capital Asset 
Acquisitions,'' which appears as an Appendix to this Part. This budget 
proposes to use this principle more consistently than in past years. 
Table 6-5 shows spending for capital projects proposed for full funding 
in this budget that might have been funded in increments in the past. 
This budget requests $7.7 billion in budget authority for 1998 and $14.4 
billion in advance appropriations for 1999-2003, for a total request of 
$22.1 billion for these projects for these years.

                                                 Army Corps of Engineers

  This budget requests $380 million in 1998 to fully fund upfront new 
projects and $228 million for 1998 and $575 million for 1999-2002 to 
fully fund ongoing projects that can be completed in 2002 or earlier. 
These funds finance construction, rehabilitation, and related activity 
for water resources development projects that provide navigation, flood 
control, water supply, hydroelectric, and other benefits.

                                                  Department of Commerce

  This budget requests $503 million for 1998 and $2,332 million in 
advance appropriations for 1999-2003 for capital asset acquisitions in 
the National Oceanic and Atmospheric Administration (NOAA). These 
acquisitions support the largest modernization in the history of the 
National Weather Service. The modernization is well underway and 
demonstrating improvements in weather forecasts and warnings that lead 
to lives and property saved. The budget supports this multi-year effort 
to develop and deploy advanced technology, including advanced radar 
equipment, other ground observing systems, and geostationary and polar-
orbiting satellites that will greatly improve the timeliness and 
accuracy of severe weather and flood warnings while reducing staffing 
requirements. The total request of $3,989 million in budget authority 
for 1998-2010 will complete the systems acquisition related to the 
modernization of the National Weather Service, procure the current and 
follow-on geostationary satellite series, the current polar orbiting 
satellite system, and several construction projects including 
construction of a new fisheries laboratory and science center.

                 Table 6-5.  PROPOSED SPENDING TO FULLY FUND SELECTED CAPITAL ASSET ACQUISITIONS                
                                    (Budget authority in millions of dollars)                                   
----------------------------------------------------------------------------------------------------------------
                                                                           Advance appropriations               
                                                Regular    -----------------------------------------------------
                                            appropriations                                                 Sum  
                                                 1998         1999     2000     2001     2002     2003    1999- 
                                                                                                           2003 
----------------------------------------------------------------------------------------------------------------
          ARMY CORPS OF ENGINEERS                                                                               
                                                                                                                
Construction:                                                                                                   
  Projects with full upfront funding \1\..          380     .......  .......  .......  .......  .......  .......
  Projects with advance appropriations \2\          228         277      177       89       32  .......      575
                                           ---------------------------------------------------------------------
  Subtotal, Army Corps of Engineers.......          608         277      177       89       32  .......      575
                                                                                                                
          DEPARTMENT OF COMMERCE                                                                                
                                                                                                                
National Oceanic and Atmospheric                                                                                
 Administration: Capital Assets                                                                                 
 Acquisition: \3\                                                                                               
  Projects with advance appropriations \2\          503         724      551      480      375      202    2,332
                                                                                                                
           DEPARTMENT OF ENERGY                                                                                 
                                                                                                                
National Defense Assets Acquisition:                                                                            
 Projects with full upfront funding \1\...        2,166     .......  .......  .......  .......  .......  .......
Science Assets Acquisition: Projects with                                                                       
 full upfront funding \1\.................          127     .......  .......  .......  .......  .......  .......
Energy Assets Acquisition: Projects with                                                                        
 full upfront funding \1\.................           42     .......  .......  .......  .......  .......  .......
                                           ---------------------------------------------------------------------
  Subtotal, Department of Energy..........        2,335     .......  .......  .......  .......  .......  .......
                                                                                                                
  DEPARTMENT OF HEALTH AND HUMAN SERVICES                                                                       
                                                                                                                
National Institutes of Health: Projects                                                                         
 with advance appropriations \2\..........           90          90       40  .......  .......  .......      130
Indian Health Service: Projects with                                                                            
 advance appropriations \2\...............           39          39       31  .......  .......  .......       70
                                           ---------------------------------------------------------------------
  Subtotal, Department of Health and Human                                                                      
   Services...............................          129         129       71  .......  .......  .......      200
                                                                                                                
        DEPARTMENT OF THE INTERIOR                                                                              
Bureau of Reclamation: Water and Related                                                                        
 Resources:                                                                                                     
  Projects with full upfront funding \1\..           17     .......  .......  .......  .......  .......  .......
  Projects with advance appropriations \2\            6          11        9  .......        1  .......       21
                                           ---------------------------------------------------------------------
    Subtotal, Bureau of Reclamation.......           23          11        9  .......        1  .......       21
National Park Service: Projects with                                                                            
 advance appropriations: \2\                                                                                    
  Construction............................           52          48       35       20       31       26      160
  Everglades Restoration Fund.............          100         100      100      100  .......  .......      300
                                           ---------------------------------------------------------------------
    Subtotal, National Park Service.......          152         148      135      120       31       26      460
                                           ---------------------------------------------------------------------
  Subtotal, Department of the Interior....          175         159      144      120       32       26      481
                                                                                                                
           DEPARTMENT OF JUSTICE                                                                                
                                                                                                                
Federal Bureau of Investigation: Salaries                                                                       
 and expenses: Projects with advance                                                                            
 appropriations \2\.......................           84          48  .......  .......  .......  .......       48
                                                                                                                
       DEPARTMENT OF TRANSPORTATION                                                                             
                                                                                                                
Federal Aviation Administration:                                                                                
 Facilities and Equipment: \3\                                                                                  
  Projects with advance appropriations \2\          679         675      724      424      206      118    2,147
                                                                                                                
        DEPARTMENT OF THE TREASURY                                                                              
                                                                                                                
Internal Revenue Service: Information                                                                           
 Technology Investments: Projects with                                                                          
 advance appropriations \2\...............          500         500  .......  .......  .......  .......      500
                                                                                                                
      NATIONAL AERONAUTICS AND SPACE                                                                            
              ADMINISTRATION                                                                                    
                                                                                                                
Human Space Flight: Projects with advance                                                                       
 appropriations: \2\ International Space                                                                        
 Station..................................        2,121       2,109    1,915    1,597    1,147  .......    6,768
Science, Aeronautics, and Technology:                                                                           
 Projects with advance appropriations: \2\                                                                      
  Space Infrared Telescope Facility                                                                             
   (SIRTF)................................           81         135      130      117       26  .......      408
  Stratospheric Observatory for Infrared                                                                        
   Astronomy (SOFIA)......................           46          57       49       32  .......  .......      138
  X-33 Experimental Launch Vehicle........          330         314       75  .......  .......  .......      389
                                           ---------------------------------------------------------------------
    Subtotal, science, aeronautics, and                                                                         
     technology...........................          457         505      254      150       26  .......      934
Mission Support: Projects with advance                                                                          
 appropriations: \2\ Tracking and Data                                                                          
 Relay Satellite (TDRS)--H, I, J..........          158         120       58       70       98       53      399
                                           ---------------------------------------------------------------------
  Subtotal, NASA..........................        2,736       2,735    2,226    1,817    1,271       53    8,101
                                           =====================================================================
Total.....................................        7,749       5,247    3,893    2,930    1,916      399   14,384
----------------------------------------------------------------------------------------------------------------
\1\ Budget authority to complete the project is requested in the budget year.                                   
\2\ Budget authority to complete the project is requested partly in the budget year and partly in future years  
  in advance appropriations.                                                                                    
\3\ This budget requests advance appropriations for years beyond 2003 for these programs.                       

Department of Energy

  This budget proposes full upfront funding of $2.3 billion in budget 
authority for 1998 for major asset acquisitions for defense, science, 
and energy activities in the Department of Energy.
  Defense.--This budget requests $2.2 billion to complete useful 
segments of all new and ongoing construction projects supporting 
national security programs in the Department of Energy.
      Weapons activities.--Funds are requested for twenty two projects 
    that support the nuclear weapons activities mission. The largest 
    project is the National Ignition Facility (NIF), which will be used 
    to perform experiments, including inertial confinement fusion 
    experiments, at high pressures and temperatures. The budget requests 
    $876 million to complete NIF, which will be located at the Lawrence 
    Livermore National Laboratory. Other major projects include the Dual 
    Axis Radiographic Hydrodynamic Facility at the Los Alamos National 
    Laboratory, the Contained Firing Facility Addition at the Lawrence 
    Livermore National Laboratory, the Chemical and Materials Laboratory 
    Upgrade at Los Alamos National Laboratory and infrastructure 
    improvement projects at several facilities.
      Environmental management.--Funds are requested for twenty-five 
    projects that support the defense environmental management mission. 
    Waste management projects include improvements to hazardous/
    radioactive tank farm systems at the Savannah River and Hanford 
    sites, landfill construction at Oak Ridge, construction of the 
    initial tank retrieval system for high level waste at the Hanford 
    site, a new hazardous waste treatment and processing facility at the 
    Pantex Plant and a decontamination and waste treatment facility at 
    Lawrence Livermore National Laboratory. In the nuclear material and 
    facility stabilization program, projects include spent nuclear fuel 
    dry storage at Idaho National Engineering Laboratory, a plutonium 
    stabilization system for the Hanford Site, an actinide packaging and 
    storage facility at Savannah River, a spent nuclear fuel canister 
    storage and stabilization facility at Hanford, and utility system 
    upgrades at Idaho.
      Naval reactors development.--Funds are requested for four small 
    projects to upgrade infrastructure at the Department of Energy's 
    Bettis and Knolls laboratories in support of naval reactors 
    development.
  Science Assets Acquisition (High-Energy and Nuclear Physics).--This 
budget requests $127 million for five projects that support the general 
science mission. Completion of two new accelerator facilities, the 
Relativistic Heavy Ion Collider at Brookhaven National Laboratory and 
the Main Injector at Fermi National Laboratory (Fermilab), will provide 
significant new capabilities for exploring the physics of nuclear and 
sub-nuclear matter. Two small projects provide for engineering and 
prototyping neutrino and colliding beam experiments at Fermilab. The 
final project will replace 30-year old switching gear at the Stanford 
Linear Accelerator Center's master substation.
  Energy Assets Acquisition.--This budget requests $42 million in 1998 
for seventeen research and infrastructure projects that support the 
energy mission. Eleven projects rectify environment, safety, and health 
hazards or renovate or replace inefficient general purpose facilities at 
Oak Ridge, Argonne, Lawrence, Berkeley, and Brookhaven National 
Laboratories. Three projects add energy research capabilities at the 
Combustion Research Facility (Sandia National Laboratories, Livermore), 
National Renewable Energy Laboratory, and Los 

[[Page 117]]

Alamos National 
Laboratory. In addition, three waste-related projects are included: a 
low-level waste handling project at Oak Ridge National Laboratory, a 
spent nuclear fuels project at Idaho National Engineering Laboratory, 
and a facility for depleted uranium storage at K-25 in Oak Ridge.

                                 Department of Health and Human Services

  This budget requests advance appropriations for three construction 
projects in the Department of Health and Human Services. The first 
project, the Clinical Research Center of the National Institutes of 
Health (NIH), is an advanced clinical research facility that will house 
laboratories and hospital beds under one roof. This will allow the 
continuation of the best possible clinical research at NIH. Congress 
enacted an initial $90 million for the Clinical Research Center in 1997, 
and this budget requests budget authority of $90 million for 1998 and 
advance appropriations for the remaining $130 million for 1999 and 2000.
  This budget also requests $39 million in appropriations for 1998 and 
$70 million in advance appropriations over the two years 1999-2000 for 
construction of two Indian Health Service facilities, both of which will 
replace antiquated hospitals currently in use. The funds will finance a 
proposed new hospital to serve the Fort Defiance area of the Navajo 
reservation in Arizona and a new ambulatory care center to serve the 
Hopi reservation, also in Arizona.

                                              Department of the Interior

  This budget requests $175 million in 1998 budget authority and $481 
million in advance appropriations for 1999-2003 to fully fund projects 
in the Bureau of Reclamation and the National Park Service.
  Bureau of Reclamation.--This budget requests $23 million in regular 
appropriations for 1998 for the Bureau of Reclamation and $21 million 
over the years 1999-2001 in advance appropriations to fully fund five 
water resources projects. These funds will finance the modification of 
an existing dam to meet current safety criteria, river front and levee 
work to reduce flood damages, and drainwater reuse facilities to improve 
aquifer water quality.
  National Park Service.--The National Park Service needs to build or 
restore its buildings and other structures over the next few years. 
Funding stability is particularly needed for the National Park Service 
(NPS) to restore the Elwha River in Olympic National Park, Washington, 
by acquiring and removing two dams. Before NPS can acquire the dams, the 
Secretary of the Interior must determine that funds to complete 
restoration are available. In addition to $8 million already 
appropriated and $25 million requested in regular appropriations for 
1998, advance appropriations of $78 million after 1998 would fully fund 
the $111 million project and provide the funding stability needed for 
the Secretary to determine that funds are available. Advance 
appropriations are also requested for seven other parks that have an 
ongoing project requiring outyear funding: Sequoia National Park ($16 
million); Independence National Historical Park ($11 million); Lincoln 
and Jefferson Memorials ($9 million); Washington Monument ($2 million); 
Riis Park in Gateway National Recreation Area ($5.5 million); Minuteman 
National Historical Park ($1.2 million); and Everglades National Park 
($31.5 million starting in 2002). For 1998 the budget requests $27 
million in regular appropriations for these projects.
  This budget proposes a specific fund to provide a steady source of 
funding for land acquisition and related activities furthering 
Everglades restoration, including a critical water management project to 
modify the flow of water into Everglades National Park. This budget 
requests regular appropriations of $100 million for 1998 and advance 
appropriations of $100 million annually through 2001, of which $59.2 
million would be used for the Everglades Modified Water Delivery 
project. An additional $16 million in 2002 and $15.5 million in 2003 in 
advance appropriations are included in the National Park Service 
construction account to complete funding for the $91 million project.

                                                   Department of Justice

  This budget requests $84 million in budget authority for 1998 and $48 
million in advance appropriations for 1999 to complete automation of the 
FBI fingerprint system.

                                            Department of Transportation

  Federal Aviation Administration.--This Budget requests $679 million in 
1998 and an additional $2.1 billion for 1999-2003, with additional 
requests through 2005, for 13 multi-year capital projects to improve and 
modernize the FAA's air traffic control, communications, and aviation 
weather information systems. These projects are: Aviation Weather 
Services Improvements, Terminal Digital Radar, Terminal Automation 
(STARS), Wide Area Augmentation System for GPS, Display System 
Replacement, Weather and Radar Processor, Voice Switching and Control 
System, Tower Automation Program, Oceanic Automation System, 
Aeronautical Data Link, Operational and Supportability Implementation 
System (OASIS), Northern California TRACON, and Alaskan NAS 
Interfacility Communications System.

                                              Department of the Treasury

  Internal Revenue Service.--This budget requests $500 million in budget 
authority for 1998 and $500 million in advance appropriations for 1999 
to finance information technology investments beginning in 1999. During 
1997 and 1998, the IRS and the Treasury Department are significantly 
modifying the business plans for modernizing the IRS tax administration 
and systems by focusing on reengineering work processes and exploring 
private sector technology opportunities. These efforts will ensure that 
future capital investments by the IRS will improve customer service by 
providing alternative means of filing returns and paying taxes, improve 
telephone service for taxpayers; and give employees imme-

[[Page 118]]

diate access to 
complete information and modern tools to do their jobs.

                    National Aeronautics and Space Administration (NASA)

  This budget requests $2.7 billion in budget authority for 1998 and 
$8.1 billion in advance appropriations over the years 1999-2003 to fully 
fund capital asset acquisitions and related project costs in NASA.
  Human Space Flight (International Space Station).--This budget 
requests $2.1 billion in 1998 and $6.8 billion in advance appropriations 
over the years 1999-2002 to fully fund the remaining costs of the 
International Space Station. This will be an international laboratory in 
low earth orbit on which American, Russian, Canadian, European, and 
Japanese astronauts will conduct unique scientific and technological 
investigations in a microgravity environment. During 1993 the program 
underwent a major redesign to reduce program costs. The first launch to 
begin construction of the Station is scheduled for late 1997 and final 
assembly by 2002. Advance appropriations will enable NASA to complete 
the program as promised, on schedule, and within the $2.1 billion annual 
and $17.4 billion total program constraints. Congress has already 
appropriated $8.5 billion through 1997.
  Science, Aeronautics, and Technology.--This budget requests $457 
million in budget authority for 1998 and $934 million in advance 
appropriations over the years 1999-2002 to fully fund its activities.
      Space Infrared Telescope Facility (SIRTF).--SIRTF is the last of 
    four major space observatories being built by NASA. It has been the 
    highest priority new mission in astrophysics for many years and will 
    conduct infrared astronomy from space. The project will provide 
    major improvements in sensitivity over previous infrared missions 
    and will enable observations of previously hidden portions of the 
    universe. SIRTF is presently planning for launch in 2002, and is 
    expected to have a 2.5-year lifetime. The Administration is 
    requesting $489 million from 1998 through 2002 to build and launch 
    the telescope.
      Stratospheric Observatory for Infrared Astronomy (SOFIA).--SOFIA 
    will fly in the Earth's stratosphere, between 41,000 and 45,000 
    feet, carrying a 98-inch (2.5 meter) telescope to view objects in 
    the universe in the infrared region of the electromagnetic spectrum. 
    At this altitude, in the clear, dry environment on the very edge of 
    space, SOFIA will enable scientists to study radiant heat patterns 
    from stars, planets and other celestial sources. With up to 160 
    flights annually and operational lifetime in excess of 20 years, 
    SOFIA will be able to conduct a wide array of scientific 
    investigations and provide hands-on, real-world educational 
    opportunities for an anticipated 500 teachers and students. Total 
    development cost will be $235 million, with $51 million already 
    appropriated and the remaining $184 million being sought for 1998 
    through 2001. The first flight is expected in 2001.
      X-33 Experimental Launch Vehicle.--The X-33 is a half-scale 
    experimental launch vehicle that is intended to pave the way for a 
    full scale reusable launch vehicle after the turn of the century. 
    Such a vehicle could dramatically reduce the cost of putting 
    payloads into space. The X-33 is scheduled to make as many as 
    fifteen flights during a 10-month period, beginning in March 1999. 
    It will fly up to 15 times the speed of sound at altitudes 
    approaching 50 miles. Total project cost for development and flight 
    tests is $1,076 million. Congress appropriated $357 million through 
    1997 and the Administration is requesting $719 million for the 
    remaining funds for 1998 through 2000.
  Mission Support.--The Tracking and Data Relay Satellite (TDRS) (H, I, 
J). system is a constellation of geosynchronous satellites that 
primarily provides NASA's communications needs between its spacecrafts 
in low-earth orbit and associated ground controllers. TDRS satellites H, 
I and J will replace satellites currently in orbit starting in 1999. 
Total cost for the development of the three spacecrafts and the 
associated launch services is $937 million. Congress has appropriated 
$380 million through 1997 and the Administration is requesting the 
remaining $557 million from 1998 through 2003 in regular and advance 
appropriations.

[[Page 119]]

     Appendix to Part II: PRINCIPLES OF BUDGETING FOR CAPITAL ASSET 
                              ACQUISITIONS

                        Introduction and Summary

  The Administration plans to use the following principles in budgeting 
for capital asset acquisitions. These principles address planning, costs 
and benefits, financing, and risk management requirements that should be 
satisfied before a proposal for the acquisition of capital assets can be 
included in the Administration's budget. A Glossary describes key terms. 
A ``Capital Programming Guide'' is being developed that will provide 
detailed information on future planning and acquisition of capital 
assets.
  The principles are organized in the following four sections:
  A. Planning. This section focuses on the need to ensure that capital 
assets support core/priority missions of the agency; the assets have 
demonstrated a projected return on investment that is clearly equal to 
or better than alternative uses of available public resources; the risk 
associated with the assets is understood and managed at all stages; and 
the acquisition is implemented in phased, successive segments, unless it 
can be demonstrated there are significant economies of scale at 
acceptable risk from funding more than one segment or there are multiple 
units that need to be acquired at the same time.
  B. Costs and Benefits. This section emphasizes that the asset should 
be justified primarily by benefit-cost analysis, including life-cycle 
costs; that all costs are understood in advance; and that cost, 
schedule, and performance goals are identified that can be measured 
using an earned value management system or similar system.
  C. Principles of Financing. This section stresses that useful segments 
are to be fully funded with regular or advance appropriations or both, 
enforced by a proposed new Budget Enforcement Act scorekeeping rule; 
that as a general rule, planning segments should be financed separately 
from procurement of the asset; and that agencies are encouraged to 
aggregate assets in capital acquisition accounts and take other steps to 
accommodate lumpiness or ``spikes'' in funding for justified 
acquisitions.
  D. Risk Management. This section is to help ensure that risk is 
analyzed and managed carefully in the acquisition of the asset. 
Strategies can include separate accounts for capital asset acquisitions, 
the use of apportionment to encourage sound management, and the 
selection of efficient types of contracts and pricing mechanisms in 
order to allocate risk appropriately between the contractor and the 
Government. In addition cost, schedule, and performance goals are to be 
controlled and monitored by using an earned value management system or a 
similar system; and if progress toward these goals is not met there is a 
formal review process to evaluate whether the acquisition should 
continue or be terminated.
  A Glossary defines key terms, including capital assets. As defined 
here, capital assets are land, structures, equipment, and intellectual 
property (including software) that are used by the Federal Government, 
including weapon systems. Not included are grants to States or others 
for their acquisition of capital assets.

                               A. Planning

  Investments in major capital assets proposed for funding in the 
Administration's budget should:

 1...  support core/priority mission functions that need to be performed
        by the Federal Government;                                      
                                                                        
 2...  be undertaken by the requesting agency because no alternative    
        private sector or governmental source can support the function  
        more efficiently;                                               
                                                                        
 3...  support work processes that have been simplified or otherwise    
        redesigned to reduce costs, improve effectiveness, and make     
        maximum use of commercial, off-the-shelf technology;            
                                                                        
 4...  demonstrate a projected return on the investment that is clearly 
        equal to or better than alternative uses of available public    
        resources. Return may include: improved mission performance in  
        accordance with measures developed pursuant to the Government   
        Performance and Results Act; reduced cost; increased quality,   
        speed, or flexibility; and increased customer and employee      
        satisfaction. Return should be adjusted for such risk factors as
        the project's technical complexity, the agency's management     
        capacity, the likelihood of cost overruns, and the consequences 
        of under- or non-performance.                                   
                                                                        
5....  for information technology investments, be consistent with       
        Federal, agency, and bureau information architectures which:    
        integrate agency work processes and information flows with      
        technology to achieve the agency's strategic goals; reflect the 
        agency's technology vision and year 2000 compliance plan; and   
        specify standards that enable information exchange and resource 
        sharing, while retaining flexibility in the choice of suppliers 
        and in the design of local work processes;                      
                                                                        
 6...  reduce risk by: avoiding or isolating custom-designed components 
        to minimize the potential adverse consequences on the overall   
        project; using fully tested pilots, simulations, or prototype   
        implementations when necessary before going to production;      
        establishing clear measures and accountability for project      
        progress; and, securing substantial involvement and buy-in      
        throughout the project from the program officials who will use  
        the system;                                                     
                                                                        

[[Page 120]]

7....  be implemented in phased, successive segments as narrow in scope 
        and brief in duration as practicable, each of which solves a    
        specific part of an overall mission problem and delivers a      
        measurable net benefit independent of future segments, unless it
        can be demonstrated that there are significant economies of     
        scale at acceptable risk from funding more than one segment or  
        there are multiple units that need to be acquired at the same   
        time; and                                                       
                                                                        
8....  employ an acquisition strategy that appropriately allocates risk 
        between the Government and the contractor, effectively uses     
        competition, ties contract payments to accomplishments, and     
        takes maximum advantage of commercial technology.               
                                                                        

  Prototypes require the same justification as other capital assets.
  As a general presumption, OMB will recommend new or continued funding 
only for those capital asset investments that satisfy these criteria. 
Funding for those projects will be recommended on a phased basis by 
segment, unless it can be demonstrated that there are significant 
economies of scale at acceptable risk from funding more than one segment 
or there are multiple units that need to be acquired at the same time. 
(For more information, see the discussion of ``economically and 
programmatically separable segments,'' in OMB Circular A-11, Part 3, 
``Planning, Budgeting and Acquisition of Fixed Assets,'' July 1996, and 
the Glossary entry, ``capital project and useful segments of a capital 
project.'')
  OMB recognizes that many agencies are in the middle of ongoing 
projects, and they may not be able immediately to satisfy the criteria. 
For those projects that do not satisfy the criteria, OMB will consider 
requests to use 1997 and 1998 funds to finance additional planning, as 
necessary, to support the establishment of realistic cost, schedule, and 
performance goals for the completion of the project. This planning could 
include: the redesign of work processes, the evaluation of alternative 
solutions, the development of information system architectures, and, if 
necessary, the purchase and evaluation of prototypes. Realistic goals 
are necessary for agency portfolio analysis to determine the viability 
of the project, to provide the basis for fully funding the project to 
completion, and setting the baseline for management accountability to 
deliver the project within goals.
  Because OMB considers this information essential to agencies' long-
term success, OMB will use this information both in preparing the 
Administration's budget and, in conjunction with cost, schedule, and 
performance data, as apportionments are made. Agencies are encouraged to 
work with their OMB representative to arrive at a mutually satisfactory 
process, format, and timetable for providing the requested information.

                          B. Costs and Benefits

  The justification of the project should evaluate and discuss the 
extent to which the project meets the above criteria and should also 
include:

1....  an analysis of the project's total life-cycle costs and benefits,
        including the total budget authority required for the asset,    
        consistent with policies described in OMB Circular A-94:        
        ``Guidelines and Discount Rates for Benefit-Cost Analysis of    
        Federal Programs'' (October 1992);                              
                                                                        
2....  an analysis of the risk of the project including how risks will  
        be isolated, minimized, monitored, and controlled, and, for     
        major programs, an evaluation and estimate by the Chief         
        Financial Officer of the probability of achieving the proposed  
        goals;                                                          
                                                                        
3....  if, after the planning phase, the procurement is proposed for    
        funding in segments, an analysis showing that the proposed      
        segment is economically and programmatically justified--that is,
        it is programmatically useful if no further investments are     
        funded, and in this application its benefits exceed its costs;  
        and                                                             
                                                                        
 4...  show cost, schedule, and performance goals for the project (or   
        the useful segment being proposed) that can be measured         
        throughout the acquisition process using an earned value        
        management system or similar system. Earned value is described  
        in OMB Circular A-11, Part 3, ``Planning, Budgeting and         
        Acquisition of Fixed Assets,'' (July 1996), Appendix 300C.      
                                                                        

                       C. Principles of Financing

Principle 1: Full Funding

  Budget authority sufficient to complete a useful segment of a capital 
project (or the entire capital project, if it is not divisible into 
useful segments) must be appropriated before any obligations for the 
useful segment (or project) may be incurred.

   Enforcement: This budget proposes a new Budget Enforcement Act 
scorekeeping rule to enforce this principle. The proposed rule is the 
following:
  ``An appropriations act that provides only partial funding for a 
useful segment of a capital project will be scored for the estimated 
total budget authority for the useful segment in the fiscal year in 
which the partial funding is provided, unless the appropriation language 
clearly prohibits obligations from being incurred until complete funding 
for the useful segment is provided.
  ``A useful segment of a capital project is defined as a component of a 
capital project that provides either:
<bullet>    information that allows the agency to plan the capital 
          project, develop the design, and assess the benefits, costs, 
          and risks before proceeding to full 

[[Page 121]]

          acquisition of the useful 
          asset (or canceling the acquisition). This information comes 
          from activities, or planning segments, that include but are 
          not limited to market research of available solutions, 
          architectural drawings, geological studies, engineering and 
          design studies, and prototypes. Because of uncertainty 
          regarding the identification of separate planning segments for 
          research and development activities, the application of full 
          funding concepts to research and development planning will 
          need more study pending preparation of the 1999 budget; or
<bullet>    a useful asset for which the benefits exceed the costs even 
          if no further funding is appropriated.''

   Explanation: Good budgeting requires that appropriations for the full 
costs of asset acquisition be enacted in advance to help ensure that all 
costs and benefits are fully taken into account at the time decisions 
are made to provide resources. Full funding with regular appropriations 
in the budget year also leads to tradeoffs within the budget year with 
spending for other capital assets and with spending for purposes other 
than capital assets. Full funding increases the opportunity to use 
performance-based fixed price contracts, allows for more efficient work 
planning and management of the capital project, and increases the 
accountability for the achievement of the baseline goals.
  When full funding is not followed and capital projects or useful 
segments are funded in increments, without certainty if or when future 
funding will be available, the result is sometimes poor planning, 
acquisition of assets not fully justified, higher acquisition costs, 
cancellation of major projects, the loss of sunk costs, or inadequate 
funding to maintain and operate the assets.

Principle 2: Regular and Advance Appropriations

  Regular appropriations for the full funding of a capital project or a 
useful segment of a capital project in the budget year are preferred. If 
this results in spikes that, in the judgment of OMB, cannot be 
accommodated by the agency or the Congress, a combination of regular and 
advance appropriations that together provide full funding for a capital 
project or a useful segment should be proposed in the budget.

   Explanation: Principle 1 (Full Funding) is met as long as a 
combination of regular and advance appropriations provide budget 
authority sufficient to complete the capital project or useful segment. 
Full funding in the budget year with regular appropriations alone is 
preferred because it leads to tradeoffs within the budget year with 
spending for other capital assets and with spending for purposes other 
than capital assets. In contrast, full funding for a capital project 
over several years with regular appropriations for the first year and 
advance appropriations for subsequent years may bias tradeoffs in the 
budget year in favor of the proposed asset because with advance 
appropriations the full cost of the asset is not included in the budget 
year. Advance appropriations, because they are scored in the year they 
become available for obligation, may constrain the budget authority and 
outlays available for regular appropriations of that year.
  If, however, the lumpiness caused by regular appropriations cannot be 
accommodated within an agency or Appropriations Subcommittee, advance 
appropriations can ameliorate that problem while still providing that 
all of the budget authority is enacted in advance for the capital 
project or useful segment. The latter helps ensure that agencies develop 
appropriate plans and budgets and that all costs and benefits are 
identified prior to providing resources. In addition, amounts of advance 
appropriations can be matched to funding requirements for completing 
natural components of the useful segment. Advance appropriations have 
the same benefits as regular appropriations for improved planning, 
management, and accountability of the project.

Principle 3: Separate Funding of Planning Segments

  As a general rule, planning segments of a capital project should be 
financed separately from the procurement of a useful asset.

  Explanation: The agency must have information that allows it to plan 
the capital project, develop the design, and assess the benefits, costs, 
and risks before proceeding to procurement of the useful asset. This is 
especially important for high risk acquisitions. This information comes 
from activities, or planning segments, that include but are not limited 
to market research of available solutions, architectural drawings, 
geological studies, engineering and design studies, and prototypes. The 
construction of a prototype that is a capital asset, because of its cost 
and risk, should be justified and planned as carefully as the project 
itself. The process of gathering information for a capital project may 
consist of one or more planning segments, depending on the nature of the 
asset. Funding these segments separately will help ensure that the 
necessary information is available to establish cost, schedule, and 
performance goals before proceeding to procurement.
  If budget authority for planning segments and procurement of the 
useful asset are enacted together, OMB may wish to apportion budget 
authority for one or several planning segments separately from 
procurement of the useful asset.

Principle 4: Accommodation of Lumpiness or ``Spikes'' and Separate 
    Capital Acquisition Accounts

  To accommodate lumpiness or ``spikes'' in funding justified capital 
acquisitions, agencies, working with OMB, are encouraged to aggregate 
financing for capital asset acquisitions in one or several separate 
capital acquisition budget accounts within the agency, to the extent 
possible within the agency's total budget request.

   Explanation: Large, temporary, year-to-year increases in budget 
authority, sometimes called lumps or spikes, may create a bias against 
the acquisition 

[[Page 122]]

of justified capital assets. Agencies, working with OMB, 
should seek ways to avoid this bias and accommodate such spikes for 
justified acquisitions. Aggregation of capital acquisitions in separate 
accounts may:
<bullet>    reduce spikes within an agency or bureau by providing 
          roughly the same level of spending for acquisitions each year;
<bullet>    help to identify the source of spikes and to explain them. 
          Capital acquisitions are more lumpy than operating expenses; 
          and with a capital acquisition account, it can be seen that an 
          increase in operating expenses is not being hidden and 
          attributed to one-time asset purchases;
<bullet>    reduce the pressure for capital spikes to crowd out 
          operating expenses; and
<bullet>    improve justification and make proposals easier to evaluate, 
          since capital acquisitions are generally analyzed in a 
          different manner than operating expenses (e.g., capital 
          acquisitions have a longer time horizon of benefits and life-
          cycle costs).

                           D. Risk Management

  Risk management should be central to the planning, budgeting, and 
acquisition process. Failure to analyze and manage the inherent risk in 
all capital asset acquisitions may contribute to cost overruns, schedule 
shortfalls, and acquisitions that fail to perform as expected. For each 
major capital project a risk analysis that includes how risks will be 
isolated, minimized, monitored, and controlled may help prevent these 
problems.
  The project cost, schedule and performance goals established through 
the planning phase of the project are the basis for approval to procure 
the asset and the basis for assessing risk. During the procurement phase 
performance-based management systems (earned value or similar system) 
must be used to provide contractor and Government management visibility 
on the achievement of, or deviation from, goals until the asset is 
accepted and operational. If goals are not being met, performance-based 
management systems allow for early identification of problems, potential 
corrective actions, and changes to the original goals needed to complete 
the project and necessary for agency portfolio analysis decisions. These 
systems also allow for Administration decisions to recommend meaningful 
modifications for increased funding to the Congress, or termination of 
the project, based on its revised expected return on investment in 
comparison to alternative uses of the funds. Agencies must ensure that 
the necessary acquisition strategies are implemented to reduce the risk 
of cost escalation and the risk of failure to achieve schedule and 
performance goals. These strategies may include:

1....  having budget authority appropriated in separate capital asset   
        acquisition accounts;                                           
                                                                        
 2...  apportioning budget authority for a useful segment;              
                                                                        
 3...  establishing thresholds for cost, schedule, and performance goals
        of the acquisition, including return on investment, which if not
        met may result in cancellation of the acquisition;              
                                                                        
 4...  selecting types of contracts and pricing mechanisms that are     
        efficient and that provide incentives to contractors in order to
        allocate risk appropriately between the contractor and the      
        Government;                                                     
                                                                        
 5...  monitoring cost, schedule, and performance goals for the project 
        (or the useful segment being proposed) using an earned value    
        management system or similar system. Earned value is described  
        in OMB Circular A-11, Part 3, ``Planning, Budgeting and         
        Acquisition of Fixed Assets'' (July 1996), Appendix 300C; and   
                                                                        
 6...  if progress is not within 90 percent of goals, or if new         
        information is available that would indicate a greater return on
        investment from alternative uses of funds, institute senior     
        management review of the project through portfolio analysis to  
        determine the continued viability of the project with           
        modifications, or the termination of the project, and the start 
        of exploration for alternative solutions if it is necessary to  
        fill a gap in agency strategic goals and objectives.            
                                                                        

                               E. Glossary

Appropriations

  An appropriation provides budget authority that permits Government 
officials to incur obligations that result in immediate or future 
outlays of Government funds.

 Regular annual appropriations: These appropriations are:
<bullet>    enacted normally in the current year;
<bullet>    scored entirely in the budget year; and
<bullet>    available for obligation in the budget year and subsequent 
          years if specified in the language. (See ``Availability,'' 
          below.)

 Advance appropriations: Advance appropriations may be accompanied by 
regular annual appropriations to provide funds available for obligation 
in the budget year as well as subsequent years. Advance appropriations 
are:
<bullet>    enacted normally in the current year;
<bullet>    scored after the budget year (e.g., in each of one, two, or 
          more later years, depending on the language); and
<bullet>    available for obligation in the year scored and subsequent 
          years if specified in the language. (See ``Availability,'' 
          below.)

Availability: Appropriations made in appropriations acts are available 
for obligation only in the budget year unless the language specifies 
that an appropriation is available for a longer period. If the language 
specifies that the funds are to remain available until the end 

[[Page 123]]

of a certain year beyond the budget year, the availability is said to be 
``multi-year.'' If the language specifies that the funds are to remain 
available until expended, the availability is said to be ``no-year.'' 
Appropriations for major procurements and construction projects are 
typically made available for multiple years or until expended.

Capital Assets

  Capital assets are land, structures, equipment, and intellectual 
property (including software) that are used by the Federal Government 
and have an estimated useful life of two years or more. Capital assets 
exclude items acquired for resale in the ordinary course of operations 
or held for the purpose of physical consumption such as operating 
materials and supplies. The cost of a capital asset includes both its 
purchase price and all other costs incurred to bring it to a form and 
location suitable for its intended use.
  Capital assets may be acquired in different ways: through purchase, 
construction, or manufacture; through a lease-purchase or other capital 
lease, regardless of whether title has passed to the Federal Government; 
through an operating lease for an asset with an estimated useful life of 
two years or more; or through exchange. Capital assets include leasehold 
improvements and land rights; assets owned by the Federal Government but 
located in a foreign country or held by others (such as Federal 
contractors, state and local governments, or colleges and universities); 
and assets whose ownership is shared by the Federal Government with 
other entities. Capital assets include not only the assets as initially 
acquired but also additions; improvements; replacements; rearrangements 
and reinstallations; and major repairs but not ordinary repairs and 
maintenance.
  Examples of capital assets include the following, but are not limited 
to them:
<bullet>    office buildings, hospitals, laboratories, schools, and 
          prisons;
<bullet>    dams, power plants, and water resources projects;
<bullet>    furniture, elevators, and printing presses;
<bullet>    motor vehicles, airplanes, and ships;
<bullet>    satellites and space exploration equipment;
<bullet>    information technology hardware and software; and
<bullet>    Department of Defense weapons systems.
  Capital assets may or may not be capitalized (i.e., recorded in an 
entity's balance sheet) under Federal accounting standards. Examples of 
capital assets not capitalized are Department of Defense weapons 
systems, heritage assets, stewardship land, and some software.
  Capital assets do not include grants for acquiring capital assets made 
to state and local governments or other entities (such as National 
Science Foundation grants to universities or Department of 
Transportation grants to AMTRAK). Capital assets also do not include 
intangible assets such as the knowledge resulting from research and 
development or the human capital resulting from education and training, 
although capital assets do include land, structures, equipment, and 
intellectual property (including software) that the Federal Government 
uses in research and development and education and training.

Capital Project and Useful Segments of a Capital Project

  The total capital project, or acquisition of a capital asset, includes 
useful segments that are either planning segments or useful assets.

 Planning segments: A planning segment of a capital project provides 
information that allows the agency to develop the design; assess the 
benefits, costs, and risks; and establish realistic baseline cost, 
schedule, and performance goals before proceeding to full acquisition of 
the useful asset (or canceling the acquisition). This information comes 
from activities, or planning segments, that include but are not limited 
to market research of available solutions, architectural drawings, 
geological studies, engineering and design studies, and prototypes. The 
process of gathering information for a capital project may consist of 
one or more planning segments, depending on the nature of the asset. If 
the project includes a prototype that is a capital asset, the prototype 
may itself be one segment or may be divisible into more than one 
segment. Because of uncertainty regarding the identification of separate 
planning segments for research and development activities, the 
application of full funding concepts to research and development 
planning will need more study pending preparation of the 1999 budget.

 Useful asset: A useful asset is an economically and programmatically 
separate segment of the asset procurement stage of the capital project 
that provides an asset for which the benefits exceed the costs, even if 
no further funding is appropriated. The total capital asset procurement 
may include one or more useful assets, although it may not be possible 
to divide all procurements in this way. Illustrations follow:
   Illustration 1: If the construction of a building meets the 
justification criteria and has benefits greater than its costs without 
further investment, then the construction of that building is a ``useful 
segment.'' Excavation is not a useful segment because no useful asset 
results from the excavation alone if no further funding becomes 
available. For a campus of several buildings, a useful segment is one 
complete building if that building has programmatic benefits that exceed 
its costs regardless of whether the other buildings are constructed, 
even though that building may not be at its maximum use.
   Illustration 2: If the full acquisition is for several items (e.g., 
aircraft), the useful segment would be the number of complete aircraft 
required to achieve benefits that exceed costs even if no further 
funding becomes available. In contrast, some portion of several aircraft 
(e.g., engines for five aircraft) would not be a useful segment if no 
further funding is available, nor would one aircraft be a useful segment 
if two or more are required for benefits to exceed costs.

[[Page 124]]

   Illustration 3: For information technology, a module (the information 
technology equivalent of ``useful segment'') is separable if it is 
useful in itself without subsequent modules. The module should be 
designed so that it can be enhanced or integrated with subsequent 
modules if future funding becomes available.

Earned Value

  Earned value refers to a performance-based management system for 
establishing baseline cost, schedule, and performance goals for a 
capital project and measuring progress against the goals. Earned value 
is described in OMB Circular A-11, Part 3, ``Planning, Budgeting and 
Acquisition of Fixed Assets'' (July 1996), Appendix 300C.

Funding

Full funding: Full funding means that appropriations--regular 
appropriations or advance appropriations--are enacted that are 
sufficient in total to complete a useful segment of a capital project 
before any obligations may be incurred for that segment. Full funding 
for an entire capital project is required if the project cannot be 
divided into more than one useful segment. If the asset can be divided 
into more than one useful segment, full funding for a project may be 
desirable, but is not required to constitute full funding.

 Incremental (partial) funding: Incremental (partial) funding means that 
appropriations--regular appropriations or advance appropriations--are 
enacted for just part of a useful segment of a capital project, if the 
project has useful segments, or for part of the capital project as a 
whole, if it is not divisible into useful segments. Under incremental 
funding for a capital asset, which is not permitted under these 
principles, the funds could be obligated to start the segment (or 
project) despite the fact that they are insufficient to complete a 
useful segment or project.

Risk Management

  Risk management is an organized method of identifying and measuring 
risk and developing, selecting, and managing options for handling these 
risks. Before beginning any procurement, managers should review and 
revise as needed the acquisition plan to ensure that risk management 
techniques considered in the planning phase are still appropriate.
  There are three key principles for managing risk when procuring 
capital assets: (1) avoiding or limiting the amount of development work; 
(2) making effective use of competition and financial incentives; and 
(3) establishing a performance-based acquisition management system that 
provides for accountability for program successes and failures, such as 
an earned value system or similar system.
  There are several types of risk an agency should consider as part of 
risk management. The types of risk include:
<bullet>    schedule risk;
<bullet>    cost risk;
<bullet>    technical feasibility;
<bullet>    risk of technical obsolescence;
<bullet>    dependencies between a new project and other projects or 
          systems (e.g., closed architectures); and
<bullet>    risk of creating a monopoly for future procurement.

[[Page 125]]

               Part III: FEDERALLY FINANCED CAPITAL STOCKS

  Federal investment spending creates a ``stock'' of capital that is 
available in the future for productive use. Each year, Federal 
investment outlays add to the stock of capital. At the same time, 
however, wear and tear and obsolescence reduce it. This section presents 
very rough measures over time of three different kinds of capital stocks 
financed by the Federal Government: public physical capital, research 
and development (R&D), and education.
  Federal spending for physical assets adds to the Nation's capital 
stock of tangible assets, such as roads, buildings, and aircraft 
carriers. These assets deliver a flow of services over their lifetime. 
The capital depreciates as the asset is used, wears out, or becomes 
obsolete.
  Federal spending for the conduct of research, development, and 
education adds to an ``intangible'' asset, the Nation's stock of 
knowledge. Although financed by the Federal Government, the research and 
development or education can be performed by Federal or State government 
laboratories, universities and other nonprofit organizations, or private 
industry. Research and development covers a wide range of activities, 
from the investigation of subatomic particles to the exploration of 
outer space; it can be ``basic'' research without particular 
applications in mind, or it can have a highly specific practical use. 
Similarly, education includes a wide variety of programs, assisting 
people of all ages beginning with pre-school education and extending 
through graduate studies and adult education. Like physical assets, the 
capital stocks of R&D and education provide services over a number of 
years and depreciate as they become outdated.
  For this analysis, physical and R&D capital stocks are estimated using 
the perpetual inventory method. In this method, the estimates are based 
on the sum of net investment in prior years. Each year's Federal outlays 
are treated as gross investment, adding to the capital stock; 
depreciation and discards reduce the capital stock. Gross investment 
less depreciation and discards is net investment. A limitation of the 
perpetual inventory method is that investment spending is not 
necessarily an accurate measure of the value of the asset created. 
However, alternative methods for measuring asset value, such as direct 
surveys of current market worth or indirect estimation based on an 
expected rate of return, are difficult to apply to assets that do not 
have a private market, such as highways or weapons systems.
  In contrast to physical and R&D stocks, the estimate of the education 
stock is based on the replacement cost method. Data on the total years 
of education of the U.S. population are combined with data on the cost 
of education and the Federal share of education spending to yield the 
cost of replacing the Federal share of the Nation's stock of education.
  Additional detail about the methods used to estimate capital stocks 
appears in a methodological note at the end of this section. It should 
be stressed that these estimates are rough approximations, and provide a 
basis only for making broad generalizations. Errors may arise from 
uncertainty about the useful lives and depreciation rates of different 
types of assets, incomplete data for historical outlays, and imprecision 
in the deflators used to express costs in constant dollars.

                      The Stock of Physical Capital

  This section presents data on stocks of physical capital assets and 
estimates of the depreciation on these assets.

  Trends.--Table 6-6 shows the value of the net federally financed 
physical capital stock since 1960, in constant fiscal year 1992 dollars. 
\3\ After rising in the 1960s, the total stock held constant through the 
1970s and began rising again in the early 1980s. The stock reached a 
high of $1,497 billion in 1995 and is estimated to decline slightly to 
$1,454 billion by 1998. In 1996, the national defense capital stock 
accounted for $672 billion, or 45 percent of the total, and nondefense 
stocks for $819 billion, or 55 percent of the total.
---------------------------------------------------------------------------
  \3\ Constant dollar stock estimates are expressed in chained 1992 
dollars, consistent with the revisions to the National Income and 
Product Accounts (NIPAs) released in January 1996.

                                                                  Table 6-6.  NET STOCK OF FEDERALLY FINANCED PHYSICAL CAPITAL                                                                  
                                                                                  (In billions of 1992 dollars)                                                                                 
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                                             Nondefense                                         
                                                                                                  ----------------------------------------------------------------------------------------------
                                                                                                                 Direct Federal Capital             Capital Financed by Federal Grants          
                                  Fiscal Year                                    Total   National             ----------------------------------------------------------------------------------
                                                                                          Defense     Total              Water                                     Community                    
                                                                                                   Nondefense   Total     and     Other    Total   Transportation     and      Natural    Other 
                                                                                                                         Power                                      Regional  Resources         
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Five year intervals:                                                                                                                                                                            
  1960........................................................................      785       581        205       101       62       39      104           68           16         12         8
  1965........................................................................      864       583        281       119       71       47      162          123           19         11        10
  1970........................................................................      963       597        366       131       80       52      235          178           28         12        16
  1975........................................................................      959       513        446       143       89       54      303          212           49         23        19
  1980........................................................................    1,007       440        567       165      105       60      402          249           83         52        18
  1985........................................................................    1,155       513        642       183      111       72      459          278           99         66        16
Annual data:                                                                                                                                                                                    
  1990........................................................................    1,405       691        714       211      114       97      503          311          104         73        16
  1991........................................................................    1,443       715        728       217      114      102      511          316          103         74        17
  1992........................................................................    1,473       728        745       227      116      110      518          322          103         75        18
  1993........................................................................    1,491       729        761       235      116      118      527          329          103         75        21
  1994........................................................................    1,496       718        778       240      116      124      538          336          103         75        24
  1995........................................................................    1,497       698        799       247      116      131      552          344          104         76        29
  1996........................................................................    1,491       672        819       254      115      139      565          351          105         75        34
  1997 est....................................................................    1,479       641        838       261      114      147      577          358          106         74        40
  1998 est....................................................................    1,454       607        847       261      112      149      586          363          106         73        45
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

  Real stocks of defense and nondefense capital show very different 
trends. Nondefense stocks have grown consistently since 1970, increasing 
from $366 billion in 1970 to $819 billion in 1996. With the investments 
proposed in the budget, nondefense stocks are estimated to grow to $847 
billion in 1998. During the 1970s, the nondefense capital stock grew at 
an average annual rate of 4.5 percent. In the 1980s, however, the growth 
rate slowed to just over half that rate, or 2.3 percent annually, with 
growth continuing at about that rate since then.
  Real national defense stocks began in 1970 at a relatively high level, 
and declined steadily throughout the decade, as depreciation from the 
Vietnam era exceeded new investment in military construction and weapons 
procurement. Starting in the early 1980s, however, a large defense 
buildup began to increase the stock of defense capital. By 1988, the 
defense stock had exceeded its size at the height of the Vietnam War. In 
the last few years, depreciation on this increased stock and a slower 
pace of defense investment have begun to reduce the stock somewhat from 
its recent levels. The stock is estimated to fall from $672 billion in 
1996 to $607 billion in 1998.
  Another trend in the Federal physical capital stocks is the shift from 
direct Federal assets to grant-financed assets. In 1960, 49 percent of 
federally financed nondefense capital was owned by the Federal 
Government, and 51 percent was owned by State and local governments but 
financed by Federal grants. Expansion in Federal grants for highways and 
other state and local capital, coupled with relatively slow growth in 
direct 

[[Page 126]]

Federal investments by agencies such as the Bureau of Reclamation 
and Corps of Engineers, shifted the composition of the stock 
substantially. In 1996, 31 percent of the nondefense stock was owned by 
the Federal Government and 69 percent by State and local governments.
  The growth in the stock of physical capital financed by grants has 
come in several areas. The growth in the stock for transportation is 
largely grants for highways, including the Interstate Highway System. 
The growth in community and regional development stocks occurred largely 
with the enactment of the community development block grant in the early 
1970s. The value of this capital stock has been unchanged in the past 
few years. The growth in the natural resources area occurred primarily 
because of construction grants for sewage treatment facilities. The 
value of this federally financed stock has also been relatively stable 
since the mid-1980s.
  Table 6-7 shows nondefense physical capital outlays both gross and net 
of depreciation since 1960. Total nondefense net investment has been 
consistently positive over the period covered by the table, indicating 
that new investment has exceeded depreciation on the existing stock. The 
reduced amount of net investment in 1998 reflects the sale of the United 
States Enrichment Corporation and the privatization of the Elk Hills gas 
and oil field. For some categories in the table, such as water and power 
programs, net investment has been negative in some years, indicating 
that new investment has not been sufficient to offset estimated 
depreciation. The net investment in this table is the change in the net 
nondefense physical capital stock displayed in Table 6-6.

                                          Table 6-7.  COMPOSITION OF GROSS AND NET FEDERAL AND FEDERALLY FINANCED NONDEFENSE PUBLIC PHYSICAL INVESTMENT                                         
                                                                                  (In billions of 1992 dollars)                                                                                 
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
                                                    Total nondefense               Direct Federal investment                            Investment financed by Federal grants                   
                                                       investment         ----------------------------------------------------------------------------------------------------------------------
                                              ----------------------------                              Composition                                       Composition of net investment         
                                                                                                          of net                                ------------------------------------------------
                 Fiscal Year                                                                            investment                                                                              
                                                                           Gross  Depreciation   Net  -------------- Gross  Depreciation   Net   Transportation   Community     Natural         
                                               Gross  Depreciation   Net                               Water                                         (mainly         and       resources   Other
                                                                                                        and   Other                                 highways)      regional       and           
                                                                                                       power                                                     development  environment       
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
Five year intervals:                                                                                                                                                                            
  1960.......................................   21.2        7.9      13.3    6.2        3.9       2.3    1.2    1.1   15.0        4.0      11.0        11.2          -0.4         -0.2       0.4
  1965.......................................   30.4       10.7      19.6    9.2        4.8       4.4    1.9    2.5   21.2        6.0      15.2        13.5           1.5           -*       0.3
  1970.......................................   30.1       14.3      15.9    6.4        5.7       0.7    0.9   -0.2   23.7        8.6      15.1         9.3           4.1          0.4       1.3
  1975.......................................   31.5       17.6      13.9    9.3        6.4       2.9    2.5    0.4   22.2       11.2      11.1         4.1           3.1          3.6       0.4
  1980.......................................   44.8       20.6      24.2   11.3        6.9       4.4    2.6    1.8   33.5       13.7      19.7         8.3           6.1          5.9      -0.5
  1985.......................................   42.7       24.8      17.9   13.3        7.9       5.4    0.9    4.5   29.4       16.9      12.5         8.1           2.7          2.2      -0.5
Annual data:                                                                                                                                                                                    
  1990.......................................   43.0       29.7      13.4   15.2        9.6       5.6    0.8    4.8   27.8       20.1       7.7         5.9           0.1          0.8       0.9
  1991.......................................   44.5       30.7      13.7   16.1       10.1       6.1    0.2    5.8   28.3       20.7       7.7         5.7          -0.1          0.9       1.1
  1992.......................................   49.3       31.9      17.4   20.3       10.6       9.7    1.6    8.0   29.1       21.3       7.7         5.7          -0.1          0.7       1.5
  1993.......................................   49.7       33.2      16.6   19.2       11.2       8.0    0.3    7.6   30.6       22.0       8.6         6.6          -0.4          0.3       2.1
  1994.......................................   51.3       34.4      16.9   17.1       11.7       5.4   -0.7    6.1   34.2       22.7      11.5         7.2           0.2          0.1       3.9
  1995.......................................   56.4       35.7      20.7   19.0       12.2       6.8    0.2    6.6   37.4       23.5      13.9         8.1           0.8          0.5       4.5
  1996.......................................   57.2       37.1      20.1   20.0       12.7       7.3   -0.7    8.0   37.2       24.3      12.9         7.4           0.9         -0.6       5.2
  1997 est...................................   57.1       38.5      18.7   20.1       13.3       6.8   -1.4    8.1   37.0       25.1      11.9         6.4           0.9         -0.9       5.5
  1998 est...................................   48.9       39.6       9.3   14.0       13.8       0.2   -1.9    2.1   35.0       25.8       9.1         4.9           0.4         -1.2       4.9
------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
* $50 million or less.                                                                                                                                                                          

              The Stock of Research and Development Capital

  This section presents data on the stock of research and development, 
taking into account adjustments for its depreciation.

  Trends.--As shown in Table 6-8, the R&D capital stock financed by 
Federal outlays is estimated to be $792 billion in 1996 in constant 1992 
dollars. About two-fifths is the stock of basic research knowledge; 
about three-fifths is the stock of applied research and development.
  The total federally financed R&D stock in 1996 was about evenly 
divided between defense and nondefense. Although investment in defense 
R&D has exceeded that of nondefense R&D in every year since 1979, the 
nondefense R&D stock is actually the larger of the two, because of the 
different emphasis on basic research and applied research and 
development. Defense R&D spending is heavily concentrated in applied 
research and development, which depreciates much more quickly than basic 
research. The stock of applied research and development is assumed to 
depreciate at a ten percent geometric rate, while basic research is 
assumed not to depreciate at all.

                                        Table 6-8.  NET STOCK OF FEDERALLY FINANCED RESEARCH AND DEVELOPMENT \1\                                        
                                                              (In billions of 1992 dollars)                                                             
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                     National Defense                        Nondefense                         Total Federal           
                                          --------------------------------------------------------------------------------------------------------------
                                                                     Applied                              Applied                              Applied  
               Fiscal Year                                Basic      Research                  Basic      Research                  Basic      Research 
                                              Total     Research       and         Total     Research       and         Total     Research       and    
                                                                   Development                          Development                          Development
--------------------------------------------------------------------------------------------------------------------------------------------------------
Five year intervals:                                                                                                                                    
  1970...................................         235          14          221         194          61          133         429          75          354
  1975...................................         249          19          230         237          88          149         486         107          379
  1980...................................         252          22          229         280         119          161         532         141          390
  1985...................................         287          27          260         304         157          148         592         184          408
Annual data:                                                                                                                                            
  1990...................................         357          32          325         342         205          137         699         237          461
  1991...................................         361          33          328         354         216          138         716         249          466
  1992...................................         365          34          331         367         227          139         732         262          470
  1993...................................         368          36          333         380         239          142         748         274          474
  1994...................................         371          37          334         393         250          144         764         287          477
  1995...................................         372          38          334         407         260          147         779         298          480
  1996...................................         374          39          335         418         271          147         792         310          482
  1997 est...............................         375          40          334         431         282          148         805         323          483
  1998 est...............................         373          42          332         444         293          150         817         335          482
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Excludes outlays for physical capital for research and development, which are included in Table 6-5.                                                

  The defense R&D stock rose slowly during the 1970s, as gross outlays 
for R&D trended down in constant dollars and the stock created in the 
1960s depreciated. A renewed emphasis on defense R&D spending from 1980 
through 1989 led to a more rapid growth of the R&D stock. Since then, 
defense R&D outlays have tapered off, depreciation has grown, and, as a 
result, the net defense R&D stock has stabilized.
  The growth of the nondefense R&D stock slowed from the 1970s to the 
late 1980s, from an annual rate of 3.7 percent in the 1970s to a rate of 
1.8 percent from 1980 to 1988. Gross investment in real terms fell 
during much of the 1980s, and about three-fourths of new 

[[Page 127]]

outlays went to replacing depreciated R&D. Since 1988, however, nondefense R&D outlays have been on an upward trend while depreciation has edged down. As a 
result, the net nondefense R&D capital stock has grown more rapidly.

                     The Stock of Education Capital

  This section presents estimates of the stock of education capital 
financed by the Federal government.
  As shown in Table 6-9, the federally financed education stock is 
estimated at $803 billion in 1996 in constant 1992 dollars, rising to 
$850 billion in 1998. The vast majority of the Nation's education stock 
is financed by State and local governments, and by students and their 
families themselves. This federally financed portion of the stock 
represents about 3 percent of the Nation's total education stock.\4\ 
Nearly three-quarters is for elementary and secondary education, while 
the remaining one quarter is for higher education.
---------------------------------------------------------------------------
  \4\ For estimates of the total education stock, see Table 2-4 in 
Chapter 2, ``Stewardship: Toward a Federal Balance Sheet.''

      Table 6-9.  NET STOCK OF FEDERALLY FINANCED EDUCATION CAPITAL     
                      (In billions of 1992 dollars)                     
------------------------------------------------------------------------
                                                   Elementary           
                                          Total        and       Higher 
             Fiscal Year                Education   Secondary  Education
                                          Stock     Education           
------------------------------------------------------------------------
Five year intervals:                                                    
  1960...............................          70          52         18
  1965...............................          99          73         26
  1970...............................         224         179         46
  1975...............................         307         251         57
  1980...............................         414         326         88
  1985...............................         510         383        126
Annual data:                                                            
  1990...............................         661         490        171
  1991...............................         682         503        179
  1992...............................         701         515        186
  1993...............................         726         528        198
  1994...............................         748         543        205
  1995...............................         777         557        221
  1996...............................         803         572        232
  1997 est...........................         824         585        240
  1998 est...........................         850         600        251
------------------------------------------------------------------------

  Despite a slowdown in growth during the early 1980s, the stock grew at 
an average annual rate of 5.0 percent from 1970 to 1996, and the 
expansion of the education stock is projected to continue under this 
budget.

[[Page 128]]

                           Methodological Note

  This note provides further technical detail about the estimation of 
the capital stock series presented in Tables 6-6 through 6-9.
  As stated previously, the capital stock estimates are very rough 
approximations. Sources of possible error include:

  The historical outlay series.--The historical outlay series for 
physical capital was based on budget records since 1940 and was extended 
back to 1915 using data from selected sources. There are no consistent 
outlay data on physical capital for this earlier period, and the 
estimates are approximations. In addition, the historical outlay series 
in the budget for physical capital extending back to 1940 may be 
incomplete. The historical outlay series for the conduct of research and 
development began in the early 1950s and required selected sources to be 
extended back to 1940. In addition, separate outlay data for basic 
research and applied R&D were not available for any years and had to be 
estimated from obligations and budget authority. For education, data for 
Federal outlays from the budget were combined with data for non-Federal 
spending from the institution or jurisdiction receiving Federal funds, 
which may introduce error because of differing fiscal years and 
confusion about whether the Federal Government was the original source 
of funding.
  Price adjustments.--The prices for the components of the Federal stock 
of physical, R&D, and education capital have increased through time, but 
the rates of increase are not accurately known. Estimates of costs in 
fiscal year 1992 prices were made through the application of price 
deflators from the National Income and Product Accounts (NIPAs), but 
these should be considered only approximations of the costs of these 
assets in 1992 prices. Although source data for the NIPA deflators were 
revised in January 1996 as part of a comprehensive statistical revision, 
the revised data only extended back to 1960. Price measures prior to 
1960 were estimated based on pre-revision data.
  Depreciation.--The useful lives of physical, R&D, and education 
capital, as well as the pattern by which they depreciate, are very 
uncertain. This is compounded by using depreciation rates for broad 
classes of assets, which do not apply uniformly to all the components of 
each group. As a result, the depreciation estimates should also be 
considered approximations.
  Research continues on the best methods to estimate these capital 
stocks. The estimates presented in the text could change as better 
information becomes available on the underlying investment data and as 
improved methods are developed for estimating the stocks based on those 
data.

Physical Capital Stocks

  For many years, current and constant-cost data on the stock of most 
forms of public and private physical capital--e.g., roads, factories, 
and housing--have been estimated annually by the Bureau of Economic 
Analysis (BEA) in the Department of Commerce. With the January 1996 
comprehensive revision of the NIPAs, government investment has taken 
increased prominence. Government investment in physical capital is now 
measured separately from consumption expenditures, and government 
consumption includes a measure of the consumption of the existing 
capital stock. In addition, estimates of depreciation are improved based 
on the results of recent empirical research.\5\
---------------------------------------------------------------------------
  \5\ The revisions for government investment and depreciation methods 
are discussed in ``Preview of the Comprehensive Revision of the National 
Income and Product Accounts: Recognition of Government Investment and 
Incorporation of a New Methodology for Calculating Depreciation'', 
Survey of Current Business, September 1995, pp. 33-41. BEA's most recent 
published estimates of capital stocks, prepared before the revisions, 
are contained in ``Fixed Reproducible Tangible Wealth in the United 
States'', Survey of Current Business, August 1994, pp. 54-62.
---------------------------------------------------------------------------
  The BEA data are not directly linked to the Federal budget, do not 
extend to the years covered by the budg-

[[Page 129]]

et, and do not classify as Federal the capital financed but not owned by the Federal Government. For budgetary purposes, OMB prepares separate estimates.

  Method of estimation.--The estimates were developed from the OMB 
historical data base for physical capital outlays and grants to State 
and local governments for physical capital. These are the same major 
public physical capital outlays presented in Part I. This data base 
extends back to 1940 and was supplemented by rough estimates for 1915-
1939.
  The deflators used to convert historical outlays to constant 1992 
dollars were based on composite NIPA deflators for Federal, State, and 
local consumption of durables and gross investment. Data consistent with 
the January 1996 NIPA revisions were only available back to fiscal year 
1960, so deflators prior to 1960 were extrapolated based on pre-revision 
NIPA data extending back to 1930. For 1915 through 1929, deflators were 
estimated from Census Bureau historical statistics on constant price 
public capital formation.
  The resulting series was adjusted for depreciation. The data were 
depreciated on a straight-line basis over the following assumed useful 
lives: 46 years for water and power projects; 40 years for other direct 
Federal construction and capital financed by grants (primarily 
highways); and 16 years for defense procurement and major nondefense 
equipment.

Research and Development Capital Stocks

  Method of estimation.--The estimates were developed from a data base 
for the conduct of research and development largely consistent with the 
data in the Historical Tables. Although there is no consistent time 
series on basic and applied R&D for defense and nondefense outlays back 
to 1940, it was possible to estimate the data using obligations and 
budget authority. The data are for the conduct of R&D only and exclude 
outlays for physical capital for research and development, because those 
are included in the estimates of physical capital. Nominal outlays were 
deflated by the chained price index for gross domestic product (GDP) in 
fiscal year 1992 dollars to obtain estimates of constant dollar R&D 
spending.
  The appropriate depreciation rate of intangible R&D capital is even 
more uncertain than that of physical capital. Empirical evidence is 
inconclusive. It was assumed that basic research capital does not 
depreciate and that applied research and development capital has a ten 
percent geometric depreciation rate. These are the same assumptions used 
in a study published by the Bureau of Labor Statistics estimating the 
R&D stock financed by private industry.\6\ More recent experimental work 
at the Bureau of Economic Analysis, extending estimates of tangible 
capital stocks to R&D, used slightly different assumptions. This work 
assumed straight-line depreciation for all R&D over a useful life of 18 
years, which is roughly equivalent to a geometric depreciation rate of 
11 percent. The slightly higher depreciation rate and its extension to 
basic research would result in smaller stocks than the method used 
here.\7\
---------------------------------------------------------------------------
  \6\ See U.S. Department of Labor, Bureau of Labor Statistics, The 
Impact of Research and Development on Productivity Growth, Bulletin 
2331, September 1989.
  \7\ See ``A Satellite Account for Research and Development'', Survey 
of Current Business, November 1994, pp. 37-71.
---------------------------------------------------------------------------

Education Capital Stocks

  Method of estimation.--The estimates of the federally financed 
education capital stock in Table 6-9 were calculated by first estimating 
the Nation's total stock of education capital, based on the current 
replacement cost of the total years of education of the population. To 
derive the Federal share of this total stock, the Federal share of total 
educational expenditures was applied to the total amount. The percent in 
any year was estimated by averaging the prior years' share of Federal 
education outlays in total education costs. For more information, refer 
to the technical note in Chapter 2, ``Stewardship: Toward a Federal 
Balance Sheet.''
  The stock of capital estimated in Table 6-9 is based only on spending 
for education. Stocks created by other human capital investment outlays 
included in Table 6-1, such as job training and vocational 
rehabilitation, were not calculated because of the lack of historical 
data prior to 1962 and the absence of estimates of depreciation rates.

[[Page 130]]

      Part IV: ALTERNATIVE CAPITAL BUDGET AND CAPITAL EXPENDITURE 
                              PRESENTATIONS

  A capital budget would separate Federal expenditures into two 
categories: spending for investment and all other spending. In this 
sense, Part I of the present chapter provides a capital budget for the 
Federal Government, distinguishing outlays that yield long-term benefits 
from all others. But alternative capital budget presentations have also 
been suggested.
  The Federal budget finances investment for two quite different types 
of reasons. It invests in capital--such as office buildings, computers, 
and weapons systems--that primarily contributes to its ability to 
provide governmental services to the public; some of these services, in 
turn, are designed to increase economic growth. And it invests in 
capital--such as highways, education, and research--that contributes 
more directly to the economic growth of the Nation. Most of the capital 
in the second category, unlike the first, is not owned or controlled by 
the Federal Government. In the discussion that follows, the first is 
called ``Federal capital'' and the second is called ``national 
capital.'' Table 6-10 compares total Federal investment as defined in 
this chapter with investment in Federal capital, which was defined as 
``capital assets'' in Part II of this chapter, and with investment in 
national capital.

                        Table 6-10.  ALTERNATIVE DEFINITIONS OF INVESTMENT OUTLAYS, 1998                        
                                            (In millions of dollars)                                            
----------------------------------------------------------------------------------------------------------------
                                                                                    All                         
                                                                                  Federal    Federal    National
                                                                                investment   capital    capital 
----------------------------------------------------------------------------------------------------------------
Construction and rehabilitation:                                                                                
  Grants:                                                                                                       
    Transportation............................................................      24,486  .........     24,486
    Natural resources and environment.........................................       2,194  .........      2,192
    Community and regional development........................................       5,811  .........      1,087
    Housing assistance........................................................       5,999  .........  .........
    Other grants..............................................................         183  .........         99
  Direct Federal:                                                                                               
    National defense..........................................................       4,522      4,522  .........
    General science, space, and technology....................................         423        335        423
    Natural resources and environment.........................................       3,699      2,215      3,476
    Energy....................................................................       1,147      1,147      1,147
    Transportation............................................................         675        344        675
    Veterans and other health facilities......................................       1,418      1,418      1,418
    Postal Service............................................................       1,251      1,251      1,251
    GSA real property activities..............................................       1,262      1,262  .........
    Other construction........................................................       2,347      1,440        599
                                                                               ---------------------------------
      Total construction and rehabilitation...................................      55,417     13,934     36,853
Acquisition of major equipment (direct):                                                                        
  National defense............................................................      43,408     43,408  .........
  Postal Service..............................................................       1,378      1,378      1,378
  Air transportation..........................................................       1,903      1,903      1,903
  Other.......................................................................       3,474      3,156      2,139
                                                                               ---------------------------------
   Total major equipment......................................................      50,163     49,845      5,420
Purchase or sale of land and structures.......................................      -3,962     -3,962  .........
Other physical assets (grants)................................................       1,208  .........  .........
                                                                               ---------------------------------
  Total physical investment...................................................     102,826     59,817     42,344
Research and development:                                                                                       
  Defense.....................................................................      37,416  .........      1,153
  Nondefense..................................................................      32,790  .........     32,167
                                                                               ---------------------------------
   Total research and development.............................................      70,206  .........     33,320
Education and training........................................................      45,630  .........     45,172
                                                                               =================================
Total investment outlays......................................................     218,662     59,817    120,836
----------------------------------------------------------------------------------------------------------------

  Capital budgets and other changes in Federal budgeting have been 
suggested from time to time for the Government's investment in both 
Federal and national capital. These proposals differ widely in coverage, 
depending on the rationale for the suggestion. Some would include all 
the investment shown in Table 6-1, or more, whereas others would be 
narrower in various ways. These proposals also differ in other respects, 
such as whether investment would be financed by borrowing and whether 
the non-investment budget would necessarily be balanced. Some of these 
proposals are discussed below and illustrated by alternative capital 
budget and other capital expenditure presentations, although the 
discussion does not address matters of implementation such as the effect 
on the Budget Enforcement Act. The planning and budgeting process for 
capital assets, which is a different subject, is discussed 

[[Page 131]]

in Part II of this chapter together with the steps this Administration is taking to improve it.

                      Investment in Federal Capital

  The goal of investment in Federal capital is to deliver Government 
services as efficiently and effectively as possible. The Congress 
allocates resources to Federal agencies to accomplish a wide variety of 
programmatic goals. Because these goals are diverse and most are not 
measured in dollars, they are difficult to compare with each other. 
Policy judgments must be made as to their relative importance.
  Once amounts have been allocated for one of these goals, however, 
analysis may be able to assist in choosing the most efficient and 
effective means of delivering service. This is the context in which 
decisions are made on the amount of investment in Federal capital. For 
example, budget proposals for the Department of Justice must consider 
whether to increase the number of FBI agents, the amount of justice 
assistance grants to State and local governments, or the number of 
Federal prisons in order to accomplish the department's objectives. The 
optimal amount of investment in Federal capital derives from these 
decisions. There is no efficient target for total investment in Federal 
capital as such.
  The universe of Federal capital encompasses federally owned capital 
assets. It excludes Federal grants to States for infrastructure, such as 
highways, and it excludes intangible investment, such as education and 
research. Investment in Federal capital in 1998 is estimated to be $60 
billion, or 27 percent of the total Federal investment outlays shown in 
Table 6-1. Of the investment in Federal capital, 80 percent is for 
defense and 20 percent for nondefense purposes.

                                     A Capital Budget for Capital Assets

  Discussion of a capital budget has often centered on Federal capital, 
called ``capital assets'' in Part II of this chapter--buildings, other 
construction, and equipment that support the delivery of Federal 
services. This includes capital commonly available from the commercial 
sector, such as office buildings, computers, military family housing, 
veterans hospitals, research and development facilities, and associated 
equipment; it also includes special purpose capital such as weapons 
systems, military bases, the space station, and dams. This definition 
excludes capital that the Federal Government has financed but does not 
own.\8\
---------------------------------------------------------------------------
  \8\ This definition of ``capital assets'' is broader than the 
definition of ``fixed assets'' used in last year's budget. Expenditures 
for capital assets in 1998 under this definition are $60 billion, as 
shown in Tables 6-10 and 6-11, compared to $18 billion under the 
previous definition. Almost the entire difference is due to weapons 
systems and other specialized defense investment.
---------------------------------------------------------------------------
  Some capital budget proposals would partition the unified budget into 
a capital budget, an operating budget, and a total budget. Table 6-11 
illustrates such a capital budget for capital assets as defined above. 
It is accompanied by an operating budget and a total budget. The 
operating budget consists of all expenditures except those included in 
the capital budget, plus depreciation on the stock of assets of the type 
purchased through the capital budget. The capital budget consists of 
expenditures for capital assets and, on the income side of the account, 
depreciation. The total budget is the present unified budget, largely 
based on cash for its measure of transactions, which records all outlays 
and receipts of the Federal Government. It consolidates the operating 
and capital budgets by adding them together and netting out depreciation 
as an intragovernmental transaction. The operating budget deficit is 
higher than the unified budget deficit, reflecting both the relatively 
small Federal investment in new fixed assets and the offsetting effect 
of depreciation on the existing stock. The figures in Table 6-11 and the 
subsequent tables of this section are rough estimates, intended only to 
be illustrative and to provide a basis for broad generalizations.

 Table 6-11.  CAPITAL, OPERATING, AND UNIFIED BUDGETS: FEDERAL CAPITAL, 
                                1998 \1\                                
                        (In billions of dollars)                        
                                                                        
                                                                        
------------------------------------------------------------------------
                                                                        
                    Operating Budget                                    
                                                                        
Receipts................................................       1,567    
Expenses:                                                               
  Depreciation..........................................          99    
  Other.................................................       1,628    
                                                         ---------------
    Subtotal, expenses..................................       1,727    
                                                         ---------------
  Surplus or deficit (-)................................        -160    
                                                                        
                     Capital Budget                                     
                                                                        
Income: depreciation....................................          99    
Capital expenditures....................................          60    
                                                         ---------------
  Surplus or deficit (-)................................          39    
                                                                        
                     Unified Budget                                     
                                                                        
Receipts................................................       1,567    
Outlays.................................................       1,687    
                                                         ---------------
  Surplus or deficit (-)................................        -121    
------------------------------------------------------------------------
\1\ Historical data to estimate the capital stocks and calculate        
  depreciation are not readily available for Federal capital.           
  Depreciation estimates were based on the assumption that outlays for  
  Federal capital were a constant percentage of the larger categories in
  which such outlays were classified. They are also subject to the      
  limitations explained in Part III of this chapter. Depreciation is    
  measured in terms of current cost.                                    

  Some proposals for a capital budget would exclude defense capital 
(other than military family housing). These exclusions--weapons systems, 
military bases, and so forth--would comprise nearly four-fifths of the 
expenditures shown in the capital budget of Table 6-11. If they were 
excluded, the operating deficit would essentially be the same as the 
unified budget deficit: about $1 billion higher than the unified budget 
deficit instead of $39 billion higher as shown above for the complete 
coverage of Federal capital. Excluding defense makes such a large 
difference because of its large relative size and the recent pattern of 
capital asset purchases. The large buildup that began in the early 1980s 
raised the capital stock and depreciation; the buildup was followed by a 
sharp decline in purchases, while the capital stock and depreciation 
have declined more slowly. (See the previous section of this chapter.)

[[Page 132]]

                                  Budget Discipline and a Capital Budget

  Many proposals for a capital budget, though not all, would effectively 
dispense with the unified budget and make expenditure decisions on 
capital asset acquisitions in terms of the operating budget instead. 
When the Government proposed to purchase a capital asset, the operating 
budget would include only the estimated depreciation. For example, 
suppose that an agency proposed to buy a $50 million building at the 
beginning of the year with an estimated life of 25 years and with 
depreciation calculated by the straightline method. Operating expense in 
the budget year would increase by $2 million, or only 4 percent of the 
asset cost. The same amount of depreciation would be recorded as an 
increase in operating expense for each year of the asset's life.\9\
---------------------------------------------------------------------------
  \9\ The amount of depreciation recorded as an expense in the budget 
year might be overstated by this illustration. First, most assets are 
purchased after the beginning of the year, in which case less than a 
full year's depreciation would be recorded. Second, assets may be 
constructed or built to order, in which case no depreciation would be 
recorded until the work was completed and the asset put into service. 
This could be several years after the initial expenditure.
---------------------------------------------------------------------------
  Recording the annual depreciation in the operating budget each year 
would provide little control over the decision about whether to invest 
in the first place. Most Federal investments are sunk costs and as a 
practical matter cannot be recovered by selling or renting the asset. At 
the same time, there is a significant risk that the need for a capital 
asset may change over a period of years, because either the need was not 
permanent, it was initially misjudged, or other needs become more 
important. Since the cost is sunk, however, control cannot be exercised 
later on by comparing the annual benefit of the asset services with 
depreciation and interest and then selling the asset if its annual 
services are not worth this expense. Control can only be exercised up 
front when the Government commits itself to the full sunk cost. By 
spreading the real cost of the project over time, however, use of the 
operating budget for expenditure decisions would make the budgetary cost 
of the capital asset appear very cheap when decisions were being made 
that compared it to alternative expenditures. As a result, there would 
be an incentive to purchase capital assets with little regard for need, 
and also with little regard for the least-cost method of acquisition.
  A budget is a financial plan for allocating resources--deciding how 
much the Federal Government should spend in total, program by program, 
and for the parts of each program. The budgetary system provides a 
process for proposing policies, making decisions, implementing them, and 
reporting the results. The budget needs to measure costs accurately so 
that decision makers can compare the cost of a program with its benefit, 
the cost of one program with another, and the cost of alternative 
methods of reaching a specified goal. These costs need to be fully 
included in the budget up front, when the spending decision is made, so 
that executive and congressional decision makers have the information 
and the incentive to take the total costs into account.
  The unified budget does this for investment. By recording investment 
on a cash basis, it causes the total cost to be compared up front in a 
rough and ready way with the total expected future net benefits. Since 
the budget measures only cost, the benefits with which these costs are 
compared, based on policy makers' judgment, must be presented in 
supplementary materials. Such a comparison of total cost with benefits 
is consistent with the formal method of cost-benefit analysis of capital 
projects in government, in which the full cost of a capital asset as the 
cash is paid out is compared with the full stream of future benefits 
(all in terms of present values).\10\ This comparison is also consistent 
with common business practice, in which capital budgeting decisions for 
the most part are made by comparing cash flows. The cash outflow for the 
full purchase price is compared with expected future cash inflows, 
either through a relatively sophisticated technique of discounted cash 
flows--such as net present value or internal rate of return--or through 
cruder methods such as payback periods.\11\ Regardless of the specific 
technique adopted, it usually requires comparing future returns with the 
entire cost of the asset up front--not spread over time through annual 
depreciation.\12\
---------------------------------------------------------------------------
  \10\ For example, see Edward M. Gramlich, A Guide to Benefit-Cost 
Analysis (2nd ed.; Englewood Cliffs: Prentice Hall, 1990), chap. 6; or 
Joseph E. Stiglitz, Economics of the Public Sector (2nd ed.; New York: 
Norton, 1988), chap. 10. This theory is applied in formal OMB 
instructions to Federal agencies in OMB Circular No. A--94, Guidelines 
and Discount Rates for Benefit-Cost Analysis of Federal Programs 
(October 29, 1992). General Accounting Office, Discount Rate Policy, 
GAO/OCE-17.1.1 (May 1991), discusses the appropriate discount rate for 
such analysis but not the foundation of the analysis itself, which is 
implicitly assumed.
  \11\ For a full textbook analysis of capital budgeting techniques in 
business, see Harold Bierman, Jr., and Seymour Smidt, The Capital 
Budgeting Decision (7th ed.; New York: Macmillan, 1988). Shorter 
analyses may be found, for example, in Charles T. Horngren and George 
Foster, Cost Accounting (6th ed.; Englewood Cliffs: Prentice-Hall, 
1987), chap. 19 and 20; and in Surendra S. Singhvi, ``The Capital 
Budgeting Process'' and ``The Capital Expenditure Evaluation Methods,'' 
chap. 19 and 20 in Robert Rachlin and H.W. Allen Sweeny, Handbook of 
Budgeting (3rd ed.; New York: Wiley, 1993).
  \12\ A survey of business practice conducted a few years ago found 
that such techniques are predominant. See Glenn H. Petry and James 
Sprow, ``The Theory and Practice of Finance in the 1990s,'' The 
Quarterly Review of Economics and Finance, vol. 33 (Winter 1993), pp. 
359-82. Petry and Sprow also found that such techniques are recommended 
by the most widely used textbooks in managerial finance.

---------------------------------------------------------------------------
                                 Practice Outside the Federal Government

  The proponents of making investment decisions on the basis of an 
operating budget with depreciation have sometimes claimed that this is 
the common practice outside the Federal Government. However, while the 
practice of others may differ from the Federal budget and the terms 
``capital budget'' and ``capital budgeting'' are often used, these terms 
do not normally mean that capital asset acquisitions are decided on the 
basis of annual depreciation cost. The use of these terms in business 
and State government also does not mean that businesses and States 
finance all their investment by borrowing. Nor does it mean that under a 
capital budget the extent of borrowing by the Federal Government to 
finance investment would be limited by the same forces that constrain 
business and State borrowing for investment.
  Private business firms call their investment decision making process 
``capital budgeting,'' and they record the resulting planned 
expenditures in a ``capital budget.'' However, decisions are normally 
based on up-front comparisons of the cash outflows needed to make 

[[Page 133]]

the investment with the resulting cash inflows expected in the future, as 
explained above, and the capital budget records the period-by-period 
cash outflows proposed for capital projects.\13\ This supports the 
business's goal of deciding upon and controlling the use of its 
resources.
---------------------------------------------------------------------------
  \13\ A business capital budget is depicted in Glenn A. Welsch et al., 
Budgeting: Profit Planning and Control (5th ed.; Englewood Cliffs: 
Prentice Hall, 1988), pp. 396-99.
---------------------------------------------------------------------------
  The cash-based focus of business budgeting for capital is in contrast 
to business financial statements--the income statement and balance 
sheet--which use accrual accounting for a different purpose, namely to 
record how well the business is meeting its objectives of earning profit 
and accumulating wealth for its owners. For this purpose, the income 
statement shows the profit in a year from earning revenue net of the 
expenses incurred. These expenses include depreciation, which is an 
allocation of the cost of capital assets over their estimated useful 
life. With similar objectives in mind, the Office of Management and 
Budget, the Treasury Department, and the General Accounting Office have 
adopted the use of depreciation on general property, plant, and 
equipment owned by the Federal Government as a measure of expense in 
financial statements and cost accounting for Federal agencies.\14\
---------------------------------------------------------------------------
  \14\ Office of Management and Budget, Statement of Federal Financial 
Accounting Standards No. 6, Accounting for Property, Plant, and 
Equipment (November 30, 1995), pp. 5-14 and 34-35. Depreciation would 
not be used as a measure of expense for weapons systems, space 
exploration equipment, and other ``Federal mission property'' or for 
heritage assets. Depreciation also would not be used as a measure of 
expense for physical property financed by the Federal Government but 
owned by State and local governments, or for investment that the Federal 
Government financed in human capital and research and development.
---------------------------------------------------------------------------
  Businesses finance investment from net income as well as borrowing. 
When they borrow to finance investment, they are constrained in ways 
that Federal borrowing is not. The amount that a business borrows is 
limited by its own profit motive and the market's assessment of its 
capacity to repay. The greater a business's indebtedness, other things 
equal, the more risky is any additional borrowing and the higher is the 
cost of funds it must pay. Since the profit motive ensures that a 
business will not want to borrow unless the expected return is at least 
as high as the cost of funds, the amount of investment that a business 
will want to finance is limited; it has an incentive to borrow only for 
projects where the expected return is as high or higher than the cost of 
funds. Furthermore, if the risk is great enough, a business may not be 
able to find a lender.
  No such constraint limits the Federal Government--either in the total 
amount of its borrowing for investment, or in its choice of which assets 
to buy--because of its sovereign power to tax and the wide economic base 
that it taxes. It can tax to pay for investment; and, if it borrows, its 
power to tax ensures that the credit market will judge U.S. Treasury 
securities free from any risk of default even if it borrows 
``excessively'' or for projects that do not seem worthwhile.
  Most States also have a ``capital budget,'' but the operating budget 
is not like the operating budget envisaged by proponents of making 
Federal investment decisions on the basis of depreciation. State capital 
budgets differ widely in many respects but generally relate some of the 
State's purchases of capital assets to borrowing and other earmarked 
means of financing. For the debt-financed portion of investment, the 
interest and repayment of principal are usually recorded in the 
operating budget. For the portion of investment purchased in the capital 
budget but financed by Federal grants or by taxes, which may be 
substantial, State operating budgets do not record any amount. No State 
operating budget is charged for depreciation.\15\
---------------------------------------------------------------------------
  \15\ The characteristics of State capital budgets were examined in a 
survey of State budget officers for all 50 States in 1986. See Lawrence 
W. Hush and Kathleen Peroff, ``The Variety of State Capital Budgets: A 
Survey,'' Public Budgeting and Finance (Summer 1988), pp. 67-79. More 
detailed results are available in an unpublished OMB document, ``State 
Capital Budgets'' (July 7, 1987). Two GAO reports examined State capital 
budgets and reached similar conclusions on the issues in question. See 
Budget Issues: Capital Budgeting Practices in the States, GAO/AFMD-86-
63FS (July 1986), and Budget Issues: State Practices for Financing 
Capital Projects, GAO/AFMD-89-64 (July 1989).
---------------------------------------------------------------------------
  States also do not record depreciation expense in the financial 
accounting statements for governmental funds. They record depreciation 
expense only in their proprietary (commercial-type) funds and in those 
trust funds where net income, expense, or capital maintenance is 
measured.\16\
---------------------------------------------------------------------------
  \16\ Governmental Accounting Standards Board (GASB), Codification of 
Governmental Accounting and Financial Reporting Standards as of June 30, 
1996, sections 1100.107 and 1400.114-1400.118.
---------------------------------------------------------------------------
  State borrowing to finance investment, like business borrowing, is 
subject to limitations that do not apply to Federal borrowing. Like 
business borrowing, it is constrained by the credit market's assessment 
of the State's capacity to repay. Furthermore, it is usually designated 
for specified investments, and it is almost always subject to 
constitutional limits or referendum requirements.
  Other developed nations tend to show a more systematic breakdown 
between investment and operating expenditures within their budgets than 
does the United States, even while they record capital expenditures on a 
cash basis within the same budget totals. For example, the United 
Kingdom shows the capital spending within each agency total and displays 
the sum of capital spending for the government as a whole. However, a 
survey by the Congressional Budget Office in 1993 found that all 
developed nations except Chile and New Zealand budget on a cash 
basis.\17\ New Zealand, moreover, while budgeting on an accrual basis 
that generally includes depreciation, requires the equivalent of 
appropriations for the full cost up front before a department can make 
net additions to its fixed assets; and it budgets for infrastructure 
assets that it owns on the basis of cash expenditure rather than 
depreciation.\18\ Some countries--including Sweden, Denmark, and 
Finland--formerly had separate capital budgets but abandoned them a 
number of years ago.\19\
---------------------------------------------------------------------------
  \17\ Robert W. Hartman, Statement before the Subcommittee on Economic 
Development, Committee on Public Works and Transportation, U.S. House of 
Representatives (May 26, 1993). Hartman stated: ``to our knowledge, only 
two developed countries, Chile and New Zealand, recognize depreciation 
in their budgets.'' The United Kingdom has announced plans to budget on 
an accrual basis, including the depreciation for capital assets, 
beginning with its budget for 2001-02.
  \18\ New Zealand's use of depreciation in its budget is discussed in 
GAO, Budget Issues: The Role of Depreciation in Budgeting for Certain 
Federal Investments, GAO/AIMD-95-34 (February 1995), pp. 13 and 16-17.
  \19\ The budgets in Sweden, Great Britain, Germany, and France are 
described in GAO, Budget Issues: Budgeting Practices in West Germany, 
France, Sweden, and Great Britain, GAO/AFMD-87-8FS (November 1986). 
Sweden had separate capital and operating budgets from 1937 to 1981, 
together with a total consolidated budget from 1956 onwards. The reasons 
for abandoning the capital budget are discussed briefly in the GAO 
report and more extensively by a government commission established to 
recommend changes in the Swedish budget system. One reason was that 
borrowing was no longer based on the distinction between current and 
capital budgets. See Sweden, Ministry of Finance, Proposal for a Reform 
of the Swedish Budget System: A Summary of the Report of the Budget 
Commission Published by the Ministry of Finance (Stockholm, 1974), 
chapter 10.
---------------------------------------------------------------------------

[[Page 134]]

Conclusions

  It is for reasons such as these that the General Accounting Office 
issued a report in 1993 that criticized budgeting for capital in terms 
of depreciation. Although the criticisms were in the context of what is 
termed ``national capital'' in this chapter, they apply equally to 
``Federal capital.''

      ``Depreciation is not a practical alternative for the Congress and 
    the administration to use in making decisions on the appropriate 
    level of spending intended to enhance the nation's long-term 
    economic growth for several reasons. Currently, the law requires 
    agencies to have budget authority before they can obligate or spend 
    funds. Unless the full amount of budget authority is appropriated up 
    front, the ability to control decisions when total resources are 
    committed to a particular use is reduced. Appropriating only annual 
    depreciation, which is only a fraction of the total cost of an 
    investment, raises this control issue.'' \20\
---------------------------------------------------------------------------
  \20\ GAO, Budget Issues: Incorporating an Investment Component in the 
Federal Budget, GAO/AIMD-94-40 (November 1993), p. 11. GAO had made the 
same recommendation in earlier reports but with less extensive analysis.

  After further study of the role of depreciation in budgeting for 
national capital, GAO reiterated that conclusion in another study in 
1995.\21\ ``The greatest disadvantage . . . was that depreciation would 
result in a loss of budgetary control under an obligation-based 
budgeting system.'' \22\ Although that study also focused primarily on 
what is termed ``national capital'' in this chapter, its analysis 
applies equally to ``Federal capital.'' Last year GAO extended its 
conclusions to Federal capital as well. ``If depreciation were recorded 
in the federal budget in place of cash requirements for capital 
spending, this would undermine Congress' ability to control expenditures 
because only a small fraction of an asset's cost would be included in 
the year when a decision was made to acquire it.'' \23\
---------------------------------------------------------------------------
  \21\ GAO, Budget Issues: The Role of Depreciation in Budgeting for 
Certain Federal Investments, GAO/AIMD-95-34 (February 1995), pp. 1 and 
19-20.
  \22\ Ibid., p. 17. Also see pp. 1-2 and 16-19.
  \23\ GAO, Budget Issues: Budgeting for Federal Capital, GAO/AIMD-97-5 
(November 1996), p. 28. Also see p. 4.
---------------------------------------------------------------------------

                     Investment in National Capital

                                        A Target for National Investment

  The Federal Government's investment in national capital has a much 
broader and more varied form than its investment in Federal capital. The 
Government's goal is to support and accelerate sustainable economic 
growth for the Nation as a whole and in some instances for specific 
regions or groups of people. The Government's investment concerns for 
the Nation are two-fold:
<bullet>    The effect of its own investment in national capital on the 
          output and income that the economy can produce. Reducing 
          expenditure on consumption and increasing expenditure on 
          investment that supports economic growth is a major priority 
          for the Administration. It has reordered priorities in its 
          budgets by proposing increases in selected investments.
<bullet>    The effect of Federal taxation, borrowing, and other 
          policies on private investment. The Administration's deficit 
          reduction policy has brought about an expansion of private 
          investment, most notably in producers' durable equipment.
  In its 1993 report, Incorporating an Investment Component in the 
Federal Budget, the General Accounting Office (GAO) recommended 
establishing an investment component within the unified budget--but not 
a separate capital budget or the use of depreciation--for this type of 
investment.\24\ GAO defined this investment as ``federal spending, 
either direct or through grants, that is directly intended to enhance 
the private sector's long-term productivity.'' \25\ To increase 
investment--both public and private--GAO recommended establishing 
targets for the level of Federal investment and for a declining path of 
unified budget deficits over time.\26\ Such a target for investment in 
national capital would focus attention on policies for growth, encourage 
a conscious decision about the overall level of growth-enhancing 
investment, and make it easier to set spending priorities in terms of 
policy goals for aggregate formation of national capital. GAO reiterated 
its recommendation in another report in 1995.\27\
---------------------------------------------------------------------------
  \24\ Incorporating an Investment Component in the Federal Budget, pp. 
1-2, 9-10, and 15.
  \25\ Ibid., pp. 1 and 5.
  \26\ Ibid., pp. 2 and 13-16.
  \27\ The Role of Depreciation in Budgeting for Certain Investments, 
pp. 2 and 19-20.

  Table 6-12.  UNIFIED BUDGET WITH NATIONAL INVESTMENT COMPONENT, 1998  
                        (In billions of dollars)                        
                                                                        
                                                                        
------------------------------------------------------------------------
                                                                        
Receipts.................................................      1,567    
Outlays:                                                                
  National investment....................................        121    
  Other..................................................      1,567    
                                                          --------------
   Subtotal, outlays.....................................      1,687    
                                                          --------------
  Surplus or deficit (-).................................       -121    
------------------------------------------------------------------------

  Table 6-12 illustrates the unified budget reorganized as GAO 
recommends to have a separate component for investment in national 
capital. This component is roughly estimated to be $121 billion in 1998. 
It includes infrastructure outlays financed by Federal grants to State 
and local governments, such as highways and sewer projects, as well as 
direct Federal purchases of infrastructure, such as electric power 
generation equipment. It also includes intangible investment for 
nondefense research and development, for basic research financed through 
defense, and for education and training. Much of this expenditure 
consists of grants and credit assistance to State and local governments, 
nonprofit organizations, or individuals. Only 12 percent of national 
investment consists of assets to be owned by the Federal Government. 
Military investment and some 

[[Page 135]]

other ``capital assets'' as defined 
previously are excluded, because that investment does not primarily 
enhance economic growth.

                                A Capital Budget for National Investment

  Table 6-13 roughly illustrates what a capital budget and operating 
budget would look like under this definition of investment--although it 
must be emphasized that this is not GAO's recommendation. Some 
proponents of a capital budget would make spending decisions within the 
framework of such a capital budget and operating budget. But the 
limitations that apply to the use of depreciation in deciding on 
investment decisions for Federal capital apply even more strongly in 
deciding on investment decisions for national capital. Most national 
capital is neither owned nor controlled by the Federal Government. Such 
investments are sunk costs completely and can be controlled only by 
decisions made up front when the Government commits itself to the 
expenditure.\28\
---------------------------------------------------------------------------
  \28\ GAO's conclusions about the loss of budgetary control that were 
quoted at the end of the section on Federal capital came from studies 
that predominantly considered ``national capital.''

 Table 6-13.  CAPITAL, OPERATING, AND UNIFIED BUDGETS: NATIONAL CAPITAL,
                                1998 \1\                                
                        (In billions of dollars)                        
                                                                        
                                                                        
------------------------------------------------------------------------
                                                                        
                    Operating Budget                                    
                                                                        
Receipts................................................       1,536    
Expenses:                                                               
  Depreciation \2\......................................          77    
  Other.................................................       1,567    
                                                         ---------------
    Subtotal, expenses..................................       1,644    
                                                         ---------------
  Surplus or deficit (-)................................        -108    
                                                                        
                     Capital Budget                                     
                                                                        
Income:                                                                 
  Depreciation \2\......................................          77    
  Earmarked tax receipts \3\............................          31    
                                                         ---------------
    Subtotal, income....................................         108    
Capital expenditures....................................         121    
                                                         ---------------
  Surplus or deficit (-)................................         -12    
                                                                        
                     Unified Budget                                     
                                                                        
Receipts................................................       1,567    
Outlays.................................................       1,687    
                                                         ---------------
    Surplus or deficit (-)..............................        -121    
------------------------------------------------------------------------
\1\ For the purpose of this illustrative table only, education and      
  training outlays are arbitrarily depreciated over 30 years by the     
  straight-line method. This differs from the treatment of education and
  training elsewhere in this chapter and in Chapter 2. All depreciation 
  estimates are subject to the limitations explained in Part III of this
  chapter. Depreciation is measured in terms of current cost.           
\2\ Excludes depreciation on capital financed by earmarked tax receipts 
  allocated to the capital budget.                                      
\3\ Consists of tax receipts of the highway and airport and airways     
  trust funds, which are user charges earmarked for financing capital   
  expenditures.                                                         

  In addition to these basic limitations, the definition of investment 
is more malleable for national capital than Federal capital. Many 
programs promise long-term intangible benefits to the Nation, and 
depreciation rates are much harder to determine for intangible 
investment such as research and education than they are for physical 
investment such as highways and office buildings. These and other 
definitional questions are hard to resolve. The answers could 
significantly affect budget decisions, because they would determine 
whether the budget would record all or only a small part of the cost of 
a decision when policy makers were comparing the budgetary cost of a 
project with their judgment of its benefits. The process of reaching an 
answer with a capital budget would open the door to manipulation, 
because there would be an incentive to make the operating expenses and 
deficit look smaller by classifying outlays as investment and using low 
depreciation rates. This would ``justify'' more spending by the program 
or the Government overall.\29\
---------------------------------------------------------------------------
  \29\ These problems are also pointed out in GAO, Incorporating an 
Investment Component in the Federal Budget, pp. 11-12. They are 
discussed more extensively with respect to highway grants, research and 
development, and human capital in GAO, The Role of Depreciation in 
Budgeting for Certain Federal Investments, pp. 11-14. GAO found no 
government that budgets for the depreciation of infrastructure (whether 
or not owned by that government), human capital, or research and 
development (except that New Zealand budgets for the depreciation of 
research and development if it results in a product that is intended to 
be used or marketed).
---------------------------------------------------------------------------

       A Capital Budget and the Analysis of Saving and Investment

  Data from the Federal budget may be classified in many different ways, 
including analyses of the Government's direct effects on saving and 
investment. As Parts I and III of this chapter have shown, the unified 
budget provides data that can be used to calculate Federal investment 
outlays and federally financed capital stocks. However, the budget 
totals themselves do not make this distinction. In particular, the 
budget surplus or deficit does not measure the Government's contribution 
to the nation's net saving (i.e., saving net of depreciation). A capital 
budget, it is sometimes contended, is needed for this purpose.
  This purpose, however, is now fulfilled by the Federal sector of the 
national income and product accounts (NIPAs). The NIPA Federal sector is 
designed to measure the impact of Federal receipts, expenditures, and 
deficit on the national economy. It is part of an integrated set of 
measures of aggregate U.S. economic activity that is prepared by the 
Bureau of Economic Analysis in the Department of Commerce in order to 
measure gross domestic product (GDP), the income generated in its 
production, and many other variables used in macroeconomic analysis. The 
NIPA Federal sector for past periods is published monthly in the Survey 
of Current Business with separate releases for historical data. 
Estimates for the President's proposed budget through the budget year 
are normally published in the budget documents. The NIPA translation of 
the budget, rather than the budget itself, is ordinarily used by 
economists to analyze the effect of Government fiscal policy on the 
aggregate economy.\30\
---------------------------------------------------------------------------
  \30\ See chapter 17 of this volume, ``National Income and Product 
Accounts,'' for the NIPA current account of the Federal Government based 
on the budget estimates for 1997 and 1998, and for a discussion of the 
NIPA Federal sector and its relationship to the budget.
---------------------------------------------------------------------------
  Until last year the NIPA Federal sector did not divide government 
purchases of goods and services between consumption and investment. With 
the comprehensive revision of the national income and product accounts 
in early 1996, it now makes that distinction.\31\ The 

[[Page 136]]

revised NIPA Federal sector is a current account or an operating account for the Federal Government. The current account excludes expenditures for 
structures and equipment owned by the Federal Government; it includes 
depreciation on the federally owned stock of structures and equipment as 
a measure of the cost of using capital assets and thus as part of the 
Federal Government's current expenditures. It applies this treatment to 
a comprehensive definition of federally owned structures and equipment, 
both defense and nondefense, similar to the definition of ``capital 
assets'' in this chapter.\32\ The NIPA ``current surplus or deficit'' of 
the Federal Government thus measures the Government's direct 
contribution to the Nation's net saving (given the definition of 
investment that is employed). The 1998 Federal sector deficit is 
estimated to be increased $14 billion by including depreciation rather 
than gross investment, because depreciation of federally owned 
structures and equipment is currently more than gross investment. A 
capital budget is not needed to capture this effect.
---------------------------------------------------------------------------
  \31\ This distinction is also made in the national income accounts of 
most other countries and in the System of National Accounts (SNA), which 
is guidance prepared by the United Nations and other international 
organizations. Definitions of investment may vary. Other countries and 
the SNA do not include the purchase of military equipment as investment.
  \32\ The revised NIPA Federal sector is explained in Survey of Current 
Business, ``Preview of the Comprehensive Revision of the National Income 
and Product Accounts: Recognition of Government Investment and 
Incorporation of a New Methodology for Calculating Depreciation'' 
(September 1995), pp. 33-39. Investment does not include expenditures on 
research and development or on education and training. Government 
enterprises are treated differently from general government. The NIPA 
State and local sector has been revised in the same way and includes 
depreciation on structures and equipment owned by State and local 
governments that were financed by Federal grants as well as by their own 
resources.
---------------------------------------------------------------------------

                  Borrowing to Finance a Capital Budget

  A further issue raised by a capital budget is the financing of capital 
expenditures. Some have argued that the Government ought to balance the 
operating budget and borrow to finance the capital budget--capital 
expenditures less depreciation. The rationale is that if the Government 
borrows for net investment and the rate of return exceeds the interest 
rate, the additional debt does not add a burden onto future generations. 
Instead, the burden of paying interest on the debt and repaying its 
principal is spread over the generations that will benefit from the 
investment. The additional debt is ``justified'' by the additional 
assets.
  This argument is at best a justification to borrow to finance net 
investment, after depreciation is subtracted from gross outlays, not to 
borrow to finance gross investment. To the extent that capital is used 
up during the year, there are no additional assets to justify additional 
debt. If the Government borrows to finance gross investment, the 
additional debt exceeds the additional capital assets. The Government is 
thus adding onto the amount of future debt service without providing the 
additional capital that would produce the additional income needed to 
service that debt.
  This justification, furthermore, requires that depreciation be 
measured in terms of current cost, not historical cost. When prices 
change, historical cost depreciation does not measure the extent to 
which the capital stock is used up each year.
  As a broad generalization, Tables 6-11 and 6-13 suggest that this 
rationale would not currently justify much Federal borrowing, if any at 
all, under the two capital budgets roughly illustrated in this chapter. 
For Federal capital, Table 6-11 indicates that current cost depreciation 
is more than gross investment for Federal capital--the capital budget 
surplus is $39 billion (or $1 billion excluding defense capital). The 
rationale of borrowing to finance net investment would not justify the 
Federal Government borrowing at all to finance its investment in Federal 
capital; instead, it would have to repay debt in this amount. Together 
with balancing the operating budget, this would approximately require 
the Government to eliminate its 1998 borrowing of $121 billion (the 
unified budget deficit) and also repay debt of $39 billion--a total 
difference of $160 billion. For national capital, table 6-13 indicates 
that current cost depreciation (plus the excise taxes earmarked to 
finance capital expenditures for highways and airports and airways \33\) 
is less than gross investment but almost as large--the capital budget 
deficit is $12 billion. The rationale of borrowing to finance net 
investment would justify the Federal Government borrowing only this 
amount to finance its investment in national capital. Together with 
balancing the operating budget, this would approximately require the 
Government to reduce its borrowing in 1998 from $121 billion (the 
unified budget deficit) to $12 billion.
---------------------------------------------------------------------------
  \33\ The capital budget deficit would be about $13 billion larger if 
current cost depreciation were used instead of earmarked excise taxes 
for highways and airports and airways.
---------------------------------------------------------------------------
  Even with depreciation calculated in current cost, the rationale for 
borrowing to finance net investment is not persuasive. The Federal 
Government, unlike a business or household, is responsible not only for 
its own affairs but also for the general welfare of the Nation. To 
maintain and accelerate national economic growth and development, the 
Government needs to sustain private investment as well as its own 
national investment. For more than the last decade, however, net 
national saving and investment have been low, both by historical 
standards and in comparison to the amounts needed to achieve the 
Administration's goals for accelerated growth.
  To the extent that the Government finances its own investment in a way 
that results in lower private investment, the net increase of total 
investment in the economy is less than the increase from the additional 
Federal capital outlays alone. The net increase in total investment is 
significantly less if the Federal investment is financed by borrowing 
than if it is financed by taxation, because borrowing primarily draws 
upon the saving available for private (and State and local) investment 
whereas much of taxation instead comes out of private consumption. 
Therefore, the net effect of Federal investment on economic growth would 
be reduced if it were financed by borrowing. This would be the result 
even if the rate of return on Federal investment was higher than the 
rate of return on private investment. For example, if a Federal 
investment that yielded a 15 percent rate of return crowded out 

[[Page 137]]

private investment that yielded 10 percent, the net social return would still be positive but it would only be 5 percent.\34\
---------------------------------------------------------------------------
  \34\ GAO considered deficit financing of investment but did not 
recommend it. See Incorporating an Investment Component in the Federal 
Budget, pp. 12-13.
---------------------------------------------------------------------------
  The first budget of this Administration was a bold step to increase 
the saving available for private investment while also increasing 
Federal investment for national capital. The deficit has been cut by 
nearly two-thirds during the past four years, and available resources 
have been shifted to investment in education and training and in science 
and technology. The present budget goes further, proposing budget 
balance by 2002 while protecting high priority investments. A capital 
budget is not a justification to relax current and proposed budget 
constraints. Any easing would undo the gains from the deficit reduction 
already achieved and the further gains from balancing the budget by 
2002.

[[Page 138]]

            Part V: SUPPLEMENTAL PHYSICAL CAPITAL INFORMATION

  The Federal Capital Investment Program Information Act of 1984 (Title 
II of Public Law 98-501; hereafter referred to as the Act) requires that 
the budget include projections of Federal physical capital spending and 
information regarding recent assessments of public civilian physical 
capital needs. This section is submitted to fulfill that requirement.
  This section is organized in two major parts. The first part projects 
Federal outlays for public physical capital and the second part presents 
information regarding public civilian physical capital needs.

       Projections of Federal Outlays For Public Physical Capital

  Federal public physical capital spending is defined here to be the 
same as the ``major public physical capital investment'' category in 
Part I of this chapter. It covers spending for construction and 
rehabilitation, acquisition of major equipment, and other physical 
assets. This section excludes outlays for human capital, such as the 
conduct of education and training, and outlays for the conduct of 
research and development.
  The projections are done generally on a current services basis, which 
means they are based on 1997 enacted appropriations and adjusted for 
inflation in later years. The current services concept is discussed in 
Chapter 16, ``Current Services Estimates.''
  Federal public physical capital spending was $115.9 billion in 1996 
and is projected to increase to $126.3 billion by 2007 on a current 
services basis. The largest components are for national defense and for 
roadways and bridges, which together accounted for more than two-thirds 
of Federal public physical capital spending in 1996.
  Table 6-14 shows projected current services outlays for Federal 
physical capital by the major categories specified in the Act. Total 
Federal outlays for transportation-related physical capital were $28.1 
billion in 1996, and current services outlays are estimated to increase 
to $32.7 billion by 2007. Outlays for nondefense housing and buildings 
were $11.7 billion in 1996 and are estimated to be $11.7 billion in 2007 
also. Physical capital outlays for other nondefense categories were 
$21.1 billion in 1996 and are projected to be $22.8 billion by 2007. For 
national defense, this spending was $55.0 billion in 1996 and is 
estimated on a current services basis to be $59.1 billion in 2007.

                                     

                                 Table 6-14.  CURRENT SERVICES OUTLAY PROJECTIONS FOR FEDERAL PHYSICAL CAPITAL SPENDING                                 
                                                                (In billions of dollars)                                                                
--------------------------------------------------------------------------------------------------------------------------------------------------------
                                                           1996    1997    1998    1999    2000    2001    2002    2003    2004    2005    2006    2007 
--------------------------------------------------------------------------------------------------------------------------------------------------------
Nondefense:                                                                                                                                             
  Transportation-related categories:                                                                                                                    
    Roadways and bridges................................    19.7    19.6    19.8    20.0    20.2    20.4    20.7    21.4    21.8    22.3    22.9    23.4
    Airports and airway facilities......................     4.2     3.5     3.5     3.5     3.5     3.6     3.8     3.9     4.0     4.1     4.2     4.4
    Mass transportation systems.........................     3.7     3.9     2.9     3.4     3.3     3.7     3.7     3.7     3.8     3.9     4.0     4.1
    Railroads...........................................     0.6     0.5     0.6     0.7     0.6     0.6     0.7     0.7     0.7     0.7     0.7     0.8
                                                         -----------------------------------------------------------------------------------------------
    Subtotal, transportation............................    28.1    27.5    26.9    27.6    27.7    28.3    28.9    29.7    30.4    31.1    31.9    32.7
                                                                                                                                                        
  Housing and buildings categories:                                                                                                                     
    Federally assisted housing..........................     6.8     7.2     6.6     6.2     6.1     6.1     6.1     6.3     6.3     6.4     6.5     6.6
    Hospitals...........................................     1.8     1.7     1.6     1.6     1.6     1.7     1.7     1.8     1.9     1.9     2.0     2.1
    Public buildings \1\................................     3.1     3.1     3.0     3.1     3.5     3.3     3.1     2.7     2.7     2.8     2.9     3.1
                                                         -----------------------------------------------------------------------------------------------
    Subtotal, housing and buildings.....................    11.7    12.0    11.1    10.8    11.2    11.1    11.0    10.8    10.9    11.2    11.4    11.7
                                                                                                                                                        
  Other nondefense categories:                                                                                                                          
    Wastewater treatment and related facilities.........     2.8     2.5     2.0     2.3     2.7     3.0     2.9     3.0     3.1     3.1     3.2     1.5
    Water resources projects............................     2.3     2.4     2.1     2.2     2.3     2.3     2.4     2.4     2.5     2.6     2.6     2.7
    Space and communications facilities.................     3.1     4.6     3.7     4.1     2.3     2.2     3.9     4.0     4.1     4.2     4.3     4.5
    Energy programs.....................................     2.1     1.6     1.5     1.5     1.5     1.5     1.6     1.7     1.6     1.7     1.7     1.7
    Community development programs......................     5.3     5.8     5.4     5.6     5.4     5.5     5.6     5.8     5.9     6.1     6.2     6.4
    Other nondefense....................................     5.4     5.8     1.6     5.9     6.1     6.1     6.3     6.5     6.7     6.9     7.1     6.0
                                                         -----------------------------------------------------------------------------------------------
    Subtotal, other nondefense..........................    21.1    22.7    16.3    21.5    20.2    20.6    22.6    23.4    23.9    24.6    25.2    22.8
                                                         -----------------------------------------------------------------------------------------------
  Subtotal, nondefense..................................    60.9    62.2    54.3    59.9    59.1    59.9    62.5    63.8    65.2    66.8    68.5    67.2
                                                                                                                                                        
National defense........................................    55.0    50.7    48.5    49.9    51.2    52.1    52.7    54.3    54.7    56.1    57.6    59.1
                                                         ===============================================================================================
Total...................................................   115.9   112.8   102.8   109.8   110.3   112.0   115.2   118.1   119.9   123.0   126.1   126.3
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Excludes outlays for public buildings that are included in other categories in this table.                                                          

[[Page 139]]

  Table 6-15 shows current services projections on a constant dollar 
basis, using fiscal year 1992 as the base year.
  For outlay details for most programs, see the items included in major 
public physical capital in tables 6-2 and 6-3.

                Public Civilian Capital Needs Assessments

  The Act requires information regarding the state of major Federal 
infrastructure programs, including highways and bridges, airports and 
airway facilities, mass transit, railroads, federally assisted housing, 
hospitals, water resources projects, and space and communications 
investments. Funding levels, long-term projections, policy issues, needs 
assessments, and critiques, are required for each category.
  Capital needs assessments change little from year to year, in part due 
to the long-term nature of the facilities themselves, and in part due to 
the consistency of the analytical techniques used to develop the 
assessments and the comparatively steady but slow changes in underlying 
demographics. As a result, the practice has arisen in reports in 
previous years to refer to earlier discussions, where the relevant 
information had been carefully presented and changes had been minimal.
  The needs assessment material in reports of earlier years is 
incorporated this year largely by reference to earlier editions and by 
reference to other needs assessments. The needs analyses, their major 
components, and their critical evaluations have been fully covered in 
past Supplements, such as the 1990 Supplement to Special Analysis D.
  It should be noted that the needs assessment data referenced here have 
not been determined on the basis of cost-benefit analysis. Rather, the 
data reflect the level of investment necessary to meet a predefined 
standard (such as maintenance of existing highway conditions). The 
estimates do not address whether the benefits of each investment would 
actually be greater than its cost or whether there are more cost-
effective alternatives to capital investment, such as initiatives to 
reduce demand or use existing assets more efficiently. Before investing 
in physical capital, it is necessary to compare the cost of each project 
with its estimated benefits, within the overall constraints on Federal 
spending.

                                     

             Table 6-15.  CURRENT SERVICES OUTLAY PROJECTIONS FOR FEDERAL PHYSICAL CAPITAL SPENDING             
                                     (In billions of constant 1992 dollars)                                     
----------------------------------------------------------------------------------------------------------------
                                                                                     Estimate                   
                                                           1996  -----------------------------------------------
                                                          actual   1997    1998    1999    2000    2001    2002 
----------------------------------------------------------------------------------------------------------------
Nondefense:                                                                                                     
  Transportation-related categories:                                                                            
    Roadways and bridges................................    18.1    17.6    17.4    17.1    16.8    16.5    16.4
    Airports and airway facilities......................     4.0     3.3     3.1     3.1     3.0     3.0     3.1
    Mass transportation systems.........................     3.4     3.5     2.6     2.9     2.8     3.0     2.9
    Railroads...........................................     0.6     0.5     0.6     0.7     0.5     0.5     0.5
                                                         -------------------------------------------------------
    Subtotal, transportation............................    26.1    24.9    23.7    23.7    23.2    23.1    23.0
                                                                                                                
  Housing and buildings categories:                                                                             
    Federally assisted housing..........................     6.3     6.5     5.8     5.3     5.1     5.0     4.9
    Hospitals...........................................     1.8     1.6     1.5     1.4     1.4     1.4     1.5
    Public buildings \1\................................     3.0     3.0     2.7     2.8     3.0     2.8     2.6
                                                         -------------------------------------------------------
    Subtotal, housing and buildings.....................    11.1    11.1    10.0     9.5     9.5     9.2     8.9
  Other nondefense categories:                                                                                  
    Wastewater treatment and related facilities.........     2.6     2.3     1.8     2.0     2.2     2.4     2.3
    Water resources projects............................     2.2     2.3     1.9     2.0     2.0     2.0     2.0
    Space and communications facilities.................     3.0     4.3     3.4     3.7     2.0     1.9     3.2
    Energy programs.....................................     2.1     1.5     1.4     1.3     1.3     1.3     1.3
    Community development programs......................     4.9     5.2     4.7     4.8     4.5     4.5     4.5
    Other nondefense....................................     5.2     5.4     1.4     5.3     5.3     5.2     5.2
                                                         -------------------------------------------------------
    Subtotal, other nondefense..........................    20.1    21.0    14.6    19.0    17.4    17.2    18.5
                                                         =======================================================
  Subtotal, nondefense..................................    57.2    57.0    48.3    52.2    50.1    49.5    50.4
                                                                                                                
National defense........................................    50.0    45.0    42.0    42.1    42.1    41.7    41.2
                                                         =======================================================
Total...................................................   107.3   101.9    90.3    94.3    92.2    91.3    91.5
----------------------------------------------------------------------------------------------------------------
\1\ Excludes outlays for public buildings that are included in other categories in this table.                  
                                                                                                                
                                                                                                                

[[Page 140]]

                         Significant Factors Affecting Infrastructure Needs Assessments                         
                                                                                                                
                                                    Highways                                                    
                                                                                                                
1. Projected annual growth in travel to the year 2011.........  2.15 percent                                    
2. Annual cost to maintain overall 1993 conditions and                                                          
 performance on highways eligible for Federal-aid.............  $42.8 billion (1993 dollars)                    
3. Annual cost to maintain overall 1994 conditions on bridges.  $5.1 billion (1993 dollars)                     
                                                                                                                
                                         Airports and Airway Facilities                                         
                                                                                                                
1. Airports in the National Plan of Integrated Airport Systems                                                  
 with scheduled passenger traffic.............................  554                                             
2. Air traffic control towers.................................  476                                             
3. Airport development eligible under airport improvement                                                       
 program for period 1993-1997.................................  $29.7 billion ($9.4 billion for capacity) (1992 
                                                                 dollars)                                       
                                                                                                                
                                           Mass Transportation Systems                                          
                                                                                                                
1. Yearly cost to maintain condition and performance of rail                                                    
 facilities over a period of 20 years.........................  $4.2 billion (1993 dollars)                     
2. Yearly cost to replace and maintain the urban, rural, and                                                    
 special services bus fleet and facilities....................  $3.7 billion (1993 dollars)                     
                                                                                                                
                                              Wastewater Treatment                                              
                                                                                                                
1. Total remaining needs of sewage treatment facilities.......  $127.1 billion (1992 dollars)                   
2. Total Federal expenditures under the Clean Water Act of      $67 billion                                     
 1972 through 1996.                                                                                             
3. Percent of population served by centralized treatment                                                        
 facilities that benefits from at least secondary sewage                                                        
 treatment systems............................................  94 percent                                      
4. States and territories served by State Revolving Funds.....  51                                              
                                                                                                                
                                                     Housing                                                    
                                                                                                                
1. Total unsubsidized very low income renter households with                                                    
 worst case needs (5.3 million*)                                                                                
  A. In severely substandard units............................  0.4 million                                     
  B. With a rent burden greater than 50 percent...............  5.0 million                                     
                                                                                                                
* The total is less than the sum because some renter families                                                   
 have both problems.                                                                                            
                                                                                                                
                                       Indian Health (IHS) Care Facilities                                      
                                                                                                                
1. IHS hospital occupancy rates (1996)........................  44.6 percent                                    
2. Average length of stay, IHS hospitals (days) (1996)........  4.2                                             
3. Hospital admissions (1995).................................  56,796                                          
4. Outpatient visits (1995)...................................  4,156,146                                       
5. Population (1997)..........................................  1,434,529                                       
                                                                                                                
                              Department of Veterans Affairs (VA) Hospitals (1996)                              
1. Hospitals..................................................  173                                             
2. Outpatient clinics.........................................  404                                             
3. Domiciliaries..............................................  39                                              
4. Centers for veterans.......................................  203                                             
5. VA owned nursing home beds.................................  15,712                                          
                                                                                                                
                                                 Water Resources                                                
                                                                                                                
  Water resources projects include navigation (deepwater ports and inland waterways); flood and storm damage    
protection; irrigation; hydropower; municipal and industrial water supply; recreation; fish and wildlife        
mitigation, enhancement, and restoration; and soil conservation.                                                
  Potential water resources investment needs typically consist of the set of projects that pass both a benefit- 
cost test for economic feasibility and a test for environmental acceptability. In the case of fish and wildlife 
mitigation or restoration projects, the set of eligible projects includes those that pass a cost-effectiveness  
test.                                                                                                           
                                                                                                                

                                     

                 Investment Needs Assessment References

General

  U.S. Advisory Commission on Intergovernmental Relations (ACIR). High 
Performance Public Works: A New Federal Infrastructure Investment 
Strategy for America, Washington, D.C., 1993.

  U.S. Advisory Commission on Intergovernmental Relations (ACIR). Toward 
a Federal Infrastructure Strategy: Issues and Options, A-120, 
Washington, D.C., 1992.

  U.S. Army Corps of Engineers, Living Within Constraints: An Emerging 
Vision for High Performance Public Works. Concluding Report of the 
Federal Infrastructure Strategy Programs. Institute for Water Resources, 
Alexandria, VA, 1995

  U.S. Army Corps of Engineers, A Consolidated Performance Report on the 
Nation's Public Works: An Update. Report of the Federal Infrastructure 
Strategy Pro-

[[Page 141]]

gram. Institute for Water Resources, Alexandria, VA, 1995.

Surface Transportaton

  Department of Transportation. 1995 Status of the Nation's Surface 
Transportation System: Conditions and Performance: Report to Congress. 
1995. This report discusses roads, bridges, mass transit, and maritime 
transportation.

Airports and Airways Facilities

  Federal Aviation Administration. The National Plan of Integrated 
Airport Systems Report, April 1995.

Federally Assisted Housing

  U.S. Department of Housing and Urban Development, Office of Policy 
Planning and Development, Tabulations of 1993 American Housing Survey.

Indian Health Care Facilities

  Indian Health Service. Priority System for Health Facility 
Construction (Document Number 0820B or 2046T). September 19, 1981.

  Indian Health Service. Trends in Indian Health--1995. 1995.

  Office of Audit, Office of Inspector General, U.S. Department of 
Health and Human Services. Review of Health Facilities Construction 
Program. Indian Health Service Proposed Replacement Hospital at 
Shiprock, New Mexico (CIN A-09-88-00008). June, 1989.

  Office of Audit, Office of Inspector General, U.S. Department of 
Health and Human Services. Review of Health Facilities Construction 
Program. Indian Health Service Proposed Construction Project for the 
Alaska Native Medical Center at Anchorage Alaska (CIN A-09-89-00096). 
July, 1989.

  Office of Technology Assessment. Indian Health Care (OTA 09H 09290). 
April, 1986.

Wastewater Treatment

  Environmental Protection Agency, Office of Water. 1992 Needs Survey 
Report to Congress. (EPA 832-R-93-002).

Water Resources

  National Council on Public Works Improvement. The Nation's Public 
Works, Washington, D.C., May, 1987. See ``Defining the Issues--Needs 
Studies,'' Chapter II; Report on Water Resources, Shilling et al., and 
Report on Water Supply, Miller Associates.

  Frederick, Kenneth D., Balancing Water Demands with Supplies: The Role 
of Demand Management in a World of Increasing Scarcity, Report for the 
International Bank of Reconstruction and Development, Washington, D.C. 
1992.