Show Me the Money

Full, up-front funding of capital assets helps avoid some of the risks of incremental funding: poor risk management, weak planning, lack of full justification, higher costs, cancellations, loss of sunk costs and inadequate funding to maintain and operate assets, according to the General Accounting Office. Up-front funding also enables lawmakers and administration officials to make informed trade-offs among big-ticket budget items. Despite the positives, however, full, first-year funding can cause problems for agencies, GAO reported in "Budget Issues: Budgeting for Federal Capital" (AIMD-97-5, November 1996).

Funding for capital assets and most agency operations comes from the federal budget's discretionary category, which was capped by the 1990 Budget Enforcement Act. Discretionary spending has fallen from 12.2 percent of gross domestic product (GDP) in 1978 to 7.8 percent in 1995, GAO found.

As discretionary funds grow scarce, programs and assets must compete for fewer dollars. Buying a new computer system or a building may be vital to carrying out an agency's mission, but the new asset's hefty price tag will cause a spike in the agency's budget, making the item and the agency easy targets for cost-cutters. To avoid losing a funding fight or having to make deep offsetting cuts in operations or existing capital projects, managers often look for alternative, and often more expensive, ways to meet their needs.

For example, the General Services Administration's Public Buildings Service (PBS) says up-front funding plus the cap on discretionary spending have prevented it from owning enough buildings. Instead, the service opts for operating leases, for which up-front budget authority is not required. Leases cost more than owning and eat up money PBS could use for maintenance and repairs on existing buildings.

GAO contends that full, up-front funding of capital assets serves Congress and the country well. Were the true costs of capital assets obscured by incremental budgeting, congressional auditors argue, more would likely be spent on those assets. That spending might not reflect true national needs and could crimp spending on other assets. Nevertheless, GAO favors some techniques agencies use to ameliorate the pain of up-front, full funding.

  • Revolving funds spread the cost of acquiring assets over time and incorporate those costs into operating budgets. Agencies with revolving funds charge their own divisions and/or other agencies to use capital assets-rent for the use of building space, for example. This approach has an added advantage in the era of the 1993 Government Performance and Results Act: it reveals to managers the full costs of their operations, information they can use to measure whether they are achieving performance goals cost-effectively.
  • By using investment components, U.S. Geological Survey managers plan for long-term capital purchases such as research and scientific equipment, telecommunications gear and information technology. Managers can make annual "deposits" into the investment component from their annual appropriations in order to save up until they have enough to pay for planned equipment purchases, but managers must juggle priorities to come up with each year's deposit.
  • Contracting for and sharing assets help handle the funding problem by reducing agencies' need to own fixed assets. The Army Corps of Engineers now buys crushed rock rather than owning assets to produce it, for example.
  • The Coast Guard has won congressional permission to enter limited partnerships and offer loan guarantees to get private builders to construct employee housing so the agency can avoid paying the full cost up front.
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