Capital Acquisition Funds

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Capital Acquisition Funds

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Staff Paper Prepared for the President's Commission to Study Capital Budgeting

CAPITAL ACQUISITION FUNDS A. SUMMARY
This section is a summary discussion of capital acquisitions funds. The subsequent section discusses an illustrative example of how such a fund might work if applied to the Department of the Interior.

Issues

Capital acquisition funds (CAFs) might be useful in addressing the following issues:

charging the use of capital uniformly and appropriately to programs so that resources can be compared with the results achieved; and

ameliorating the "spikes" in budget authority and outlays that some agencies incur for capital expenditures.

Discussion

For many programs, the cost of capital is not uniformly and appropriately charged to the program, so that resources can be compared with the results achieved. The acquisition cost of the capital may be paid by the program up front in one year, so that the program has very large capital costs in some years and little or no cost in other years. Alternatively, the rental cost of using capital -- or the acquisition cost of the capital -- may be paid by a central account, so that the program pays nothing. The financial cost of holding capital (interest) is seldom charged to any program.

Another problem is the scattering of capital asset acquisitions throughout agency budget accounts. The result may be spikes in budget authority (BA) and outlays for specific accounts that make it more difficult for the agency to obtain funding within budget constraints, even if the agency's total acquisition costs are at more regular levels. In some cases, the capital costs are combined with operating costs. This makes the total cost of the program less meaningful for analytical purposes, and spikes in capital costs may squeeze out operating costs.

CAFs are a possible solution. There would be at least one such fund in each department and major agency, more if necessary. They would only finance the acquisition of capital assets and would get appropriations of BA on a full funding basis. The BA would be in the form of authority to borrow from Treasury. The CAFs would purchase the assets, using borrowed funds, and rent the assets to one or more program accounts, charging a rate sufficient to cover repayments of principal and interest on borrowing from Treasury. The program account would outlay the rent out of funds appropriated for operating expenses and the CAF would receive the rent as an offsetting collection. (Thus, total budget authority and outlays -- and the surplus or deficit -- would be unaffected.) Rental collections could only be used by the CAF to repay funds borrowed from Treasury and to pay interest to Treasury. They could not be used to finance new assets.

Pros:

Maintains principle of budgeting for the full cost of acquiring assets up front: full funding of BA, and outlays measured up front by cash disbursements.
Allocates the cost of capital to program operating accounts in the form of rent paid to the CAF for the annual use of the capital.
Ameliorates spikes by consolidating capital acquisitions within the agency and thereby smoothing the BA and outlays for accounts within the agency.
Reduces crowding out in the program operating account by replacing upfront capital costs with rent.

Cons:

Depends on shifting incrementally funded programs to full funding, which Appropriations Committees rejected last year.
Requires a discretionary BA cap increase for the shift from incremental funding over several years to BA at full funding levels in the first year. Cap increases, even for conceptual reasons, sometimes meet political resistance. (Using advance appropriations to accomplish full funding might obviate the need for a cap adjustment, because the year to year changes in BA would be smaller.)
The advocates of Government-wide consolidation and the congressional committees that oversee GSA may object to the CAF concept, which limits aggregation to the agency level.
Makes operating programs that do not currently include the cost of capital appear more expensive, which may cause program proponents to resist.
Committees may attempt to "game" appropriations for rent (as they have with GSA rent on occasions) by shorting the operating accounts. (OMB scored no savings in the GSA case.)
There are some significant technical implementing issues -- how to treat existing capital, how to handle differences between actual asset life and the term of debt.
Complicates budget execution by adding borrowing and rental transactions.

CBO specifically endorsed this proposal in its testimony. Senator Enzi and the Federal Executives Institute made roughly similar proposals.

Options

Current cost vs. historical cost.--The approach described above uses historical cost as the basis for charging rent -- the rental payments equal the amount needed to repay the debt incurred to finance the purchase of the asset. There are practical advantages to this approach, not the least of which is that it makes sense to people.

On the other hand, there is strong theoretical support for setting rent at current market cost. It is the right measure for comparing the cost of using resources for Federal vs. private purposes. It provides a level playing field for selecting asset providers among the CAF, GSA (which charges current market rent), and the private sector. A disadvantage is that it creates a mismatch between the CAF's rental collections and its repayments to Treasury. This could create balances and the temptation to use them for other purposes.

Degree of consolidation.--CAFs would be useful for appropriately budgeting capital costs even if there were one for every program. However, if the capital costs of an agency were consolidated into fewer CAFs, they would become more useful in ameliorating spikes in budget authority and outlays. Some agencies could consolidate capital costs into one CAF. Those with substantial capital for diverse missions reporting to different appropriations committees may need more than one.

Experience with GSA's Federal Buildings Fund and the Information Technology Fund shows that consolidation above the agency level can create management and decisionmaking problems. For example, GSA's failure to anticipate the full impact of Federal downsizing in FY 1996 and 1997 contributed to a major shortfall in rent. Agency heads are better able and have more incentive to determine their agencies' needs and priorities.

B. ILLUSTRATIVE EXAMPLE OF HOW A CAPITAL ACQUISITION FUND WOULD WORK FOR THE DEPARTMENT OF THE INTERIOR

What is a capital acquisition?	For this purpose, the term means the purchase or construction of physical assets--land, buildings, land, and major equipment--directly by the Federal government for its own use. It excludes grants to others for acquiring physical assets, and it excludes Federal expenditures for the conduct of R&D and education and training.
How are capital acquisitions currently distributed in Interior?	Capital acquisitions occur in eight bureaus and nineteen budget accounts. During fiscal years 1997-99 (as shown in the FY 1999 Budget), budget authority for capital acquisitions ranges from less than $1 million for some accounts to more than $500 million for one account. Attachment A shows capital expenditures (budget authority and outlays) by bureau and account in each of these fiscal years.
How would CAFs change this distribution?	Capital acquisitions could be consolidated into one fund for all of Interior. However, this would combine acquisitions funded by two subcommittees of the Appropriations Committee in both the House and Senate: the Energy and Water Development Subcommittee, which is responsible for Bureau of Reclamation programs; and the Interior and Related Agencies Subcommittee, which is responsible for all other Interior programs. Because crossing subcommittee jurisdictions would create many problems, Interior would probably need two funds. Also, this example is hypothetical; Interior officials might identify other reasons for not combining all capital acquisitions into only two funds. The CAF for the Bureau of Reclamation would consolidate acquisitions in five of the bureau's accounts. Budget authority would be $418 million in FY 1997, $372 million in FY 1998, and $357 millions in FY 1999. A CAF for the balance of Interior would consolidate acquisitions in seven bureaus and fourteen accounts. Budget authority would be $776 million in FY 1997, $1,191 million in FY 1998, and $658 millions in FY 1999.
Would this redistribution change program management and operating responsibilities?	No. The CAFs would be accounting devices, not new organizational units. The same officials would make decisions about capital acquisitions at whatever level they do this now. The same staff would take the actions necessary to acquire the assets, arrange for maintenance, etc.
Would CAFs change Congressional responsibilities?	No. Currently, the budget authority for most capital acquisitions is provided in annual appropriations acts and amounts are specified by account. In some cases, the budget authority for an account funds both capital acquisitions and operations. The subcommittees responsible for each CAF would provide the same total amount of budget authority to the CAF for capital investment as they provide now to separate accounts. They could continue to earmark amounts for specific programs or acquisitions, either in the appropriations language or in report language. For a few capital acquisitions, the budget authority is permanently appropriated in standing authorizing legislation. This would not change under the CAF concept. Although the two CAFs would be aligned with the two appropriations subcommittees (because they would be responsible for most of the budget authority), the appropriations subcommittees would continue to be responsible only for the budget authority subject to annual appropriations. The appropriate authorizing committees would continue to be responsible for the budget authority that is permanently appropriated.
Would there be any change in appropriations for capital acquisitions?	Yes. Although the amounts of budget authority and outlays appropriated for capital acquisitions would not change, the type of budget authority would. Regular budget authority, which allows program managers to incur obligations and make outlays with no additional steps, is provided for most capital acquisitions now. The CAFs would receive budget authority in the form of borrowing authority. CAFs would incur obligations for capital acquisitions using borrowing authority, just like they do with regular budget authority, but they would have to borrow the cash necessary to make outlays. They would borrow from the general fund of the Treasury in amounts sufficient to cover the cost of an acquisition (or class of acquisitions) for lengths of maturity that would equal the estimated economic life of the asset (or class of assets). Treasury would determine the interest rate based on the average interest rate on marketable Treasury securities of comparable maturity. The CAFs would have to repay the principal with interest.
How would the CAFs generate the income to repay the principal and interest?	The CAFs would use the borrowed funds to acquire capital assets and rent them to program operating accounts in the bureaus. For example, the CAF might finance the construction of a park facility and rent it to the National Park Service. The rent for a period would equal the amount of the principal payment and interest owed to Treasury in that period for that asset. The principal would be amortized over the life of the loan like a regular mortgage.
Would the CAFs be set up as revolving funds--that is, allow them to accumulate rents and use them to replace existing assets or acquire new ones, instead of repaying Treasury?	No. Rental collections could only be used by the CAF to repay funds borrowed from Treasury and to pay interest to Treasury. They could not be used to finance new assets. Revolving funds revolve because their collections are permanently appropriated to finance the fund's outlays. In effect, this is a decision in advance to fund replacement assets or new ones without subjecting them to the rigors of the budget and appropriation process in the budget year. Revolving fund acquisitions using accumulated collections don't have to compete with discretionary funds for other resource demands. This is appropriate for some public enterprise funds, which conduct a cycle of business-type activities and where customer demand regulates their expenditures. But, for taxpayer financed acquisitions, it is important to justify asset acquisitions in light of current priorities.
How would the operating account pay the rent?	The operating account would budget for the rent, along with its other operating expenses, and would use part of the budget authority it receives each year to pay the rent to the CAF. This would be a new requirement for many programs--those that now finance their capital acquisitions directly. However, many programs already rent capital from a working capital fund, GSA, or the public. The CAF approach would facilitate comparison of the cost of programs fairly with each other and with performance goals and measures.
If both the CAFs and the operating accounts get budget authority, wouldn't that be double counting?	No. It is true that, on a gross basis, budget authority for acquisitions would be appropriated twice--once as the budget authority for the CAF for the acquisition itself and incrementally over time for the program operating account as rent. However, in any fiscal year, the budget authority and outlays for the rental payment in the operating account would be offset by a collection of the same amount in the CAF. The two transactions would net to zero in the totals for Interior, for scoring discretionary spending under the Budget Enforcement Act (BEA), and in the totals for the budget as a whole. Though not a double-count, the finance charges (the CAF must pay interest on borrowing from Treasury), which are not charged now on most capital acquisitions, would increase Interior's total budget authority and outlays. The interest would be treated as mandatory spending, under the BEA. However, interest is not scored and would not require Interior or the appropriations subcommittees to make tradeoffs. Requiring the CAF to pay finance charges and including them in the rent paid by the operating account is a means of imputing this element of the acquisition cost to the Government to the agency accounts. In the budget totals, the interest payment would be offset by a receipt in the general fund of the Treasury. Attachment B shows what would be scored under the BEA for Interior accounts before and after establishing CAFs.

What's the advantage of all of this extra accounting?	The main advantage is better allocation of the cost of using capital assets to the programs. For example, for FY 1998, Congress appropriated $1,246 million of budget authority to the National Park Service's operating account. This amount did not include $198 million of budget authority for capital acquisitions, which was appropriated to the construction account. Under the CAF system of accounting, the parks program wouldn't have been charged with the $198 million in capital acquisitions in FY 1998. Instead, it would have been charged rent each year until the CAF's borrowing from Treasury was repaid. The rent would be paid from the operating account and, therefore, reflected in the cost of park operations. This would be a better method of measuring the full cost of program outputs and outcomes. It would encourage program managers to improve their use of resources. Currently, there is little incentive for managers to do anything about underutilized assets; the cost is sunk. If the program had to pay rent, however, managers would be encouraged to increase the utilization of an asset--occupy it with other activities, rent it to someone else, or request the CAF to sell it.
Will CAFs help with "spikes" in budget authority and outlays?	They will help. For example, some accounts in the Bureau of Land Management, US Geological Survey, and Bureau of Indian Affairs showed significant budget authority increases (ranging from 33 to 100 percent). The CAF containing these accounts would have shown a decline in budget authority requested of 45 percent. (See Attachment C.)
Aren't CAFs similar to GSA's Federal Building Fund? Would CAFs replace GSA's fund?	GSA's Federal Buildings Fund was created to acquire, manage, and share use of common office space. It does not acquire other, specialized assets, such as park facilities. The amounts for capital acquisition shown in this Interior example are all for specialized assets that Interior is purchasing currently, not for office space. CAFs would acquire the assets that agencies now acquire, and GSA's responsibilities would not change. However, GSA can and does delegate its authority to agencies to acquire their own office space under some circumstances. In such cases, an agency would acquire its office space through its CAF. Greater use of this delegation authority would be appropriate if agencies could demonstrate that capital asset management improved under their increased control.

Attachment A

Current Distribution of Capital Investments in the Department of the Interior (in millions of dollars)
			Capital Investments*						Account Total
			FY 1997		FY 1998		FY 1999		FY 1997		FY 1998		FY 1999
BUREAU AND ACCOUNT			BA	OL	BA	OL	BA	OL	BA	OL	BA	OL	BA	OL
Bureau of Land Management
	Construction...................................		9	9	3	7	4	6	9	9	3	7	4	6
	Land acquisition.............................		10	9	11	18	15	18	10	9	11	18	15	18
Minerals Management Service
	Oil spill research.............................		4	4	6	6	6	6	6	6	6	4	6	5
Bureau of Reclamation
	Water and related resources........		321	281	328	436	325	332	606	519	618	806	614	612
	Lower Colorado River development		57	55	8	(4)	43	37	57	55	8	(4)	43	38
	Upper Colorado River....................		24	(25)	21	72	3	9	24	(25)	21	72	3	9
	Working capital fund.....................		0	(2)	0	(26)	(26)	(1)	0	(2)	0	(26)	(26)	(1)
	Reclamation trust funds................		16	35	15	22	12	13	16	35	15	22	12	13
United States Geological Survey
	Surveys, investigations, and research		5	5	1	1	2	2	138	139	145	143	158	158
US Fish and Wildlife Service
	Construction...................................		147	86	45	109	36	77	147	86	45	109	37	77
	Land acquisition.............................		54	41	63	57	60	60	54	41	63	57	60	60
	Migratory bird conservation account		42	41	40	40	40	40	42	41	40	40	40	40
National Park Service
	Construction...................................		322	225	198	200	156	199	340	243	215	217	175	218
	Land acquisition and State assistance		54	38	143	94	138	107	54	58	143	114	138	116
	Concessions improvement accounts		22	22	24	24	24	24
	Park concessions franchise fee...		0	0	0	0	25	9	0	0	0	0	25	9
	Construction trust fund................		0	2	0	8	0	5	0	2	0	8	0	5
Bureau of Indian Affairs
	Construction...................................		107	113	125	128	152	118	107	113	125	128	152	118
Departmental Management
	Priority Federal land acquisitions and exchanges...............................		0	0	532	228	0	114	0	0	532	228	0	114

	Total Capital Investment
		Department..................................	1,194	939	1,563	1,420	1,015	1,175
		Bureaus = 8
		Accounts = 19
		Energy&Water Dev. Cmte. (BuRec)	418	344	372	500	357	390
		Bureaus = 1
		Accounts = 5
		Interior Cmte. (balance of Dept.)	776	595	1,191	920	658	785
		Bureaus = 7
		Accounts = 14

* Direct expenditures (not grants) for physical assets--in this case, buildings, land, and major equipment.

Attachment B

BUDGET ENFORCEMENT ACT SCORING OF CAPITAL ACQUISITIONS BEFORE AND AFTER ESTABLISHING CAFs (dollars in thousands)
			Year 1
			Before CAFs	After CAFs
			Program Operating Account	Program Operating Account	Capital Acquisition Fund	Total BA
Discretionary budget authority:
	Asset acquisition............................................		10,000	0	10,000	10,000
	Rent paid by operating account 1/...............		0	644	0	644
	Rent received by CAF 2/................................		0	0	-644	-644
		Total discretionary budget authority........................	10,000	644	9,356	10,000
Mandatory budget authority:
	Authority to spend offsetting collections...		0	0	644	644
	Less portion applied to debt principal 3/.....		0	0	-148	-148
	Interest 4/.........................................................		0	0	496	496
		Total mandatory budget authority........................	0	0	496	496
		Total budget authority......	10,000	644	9,852	10,496

Notes:
-- The outlay rate for all expenditures is assumed to be 100% and, since the amounts would be the same as for budget authority, they are not shown. The outlay rate for rent and interest should always be 100%. Outlays for asset acquistions might occur over more than one year, especially if the asset is constructed, rather than purchased. In any event, the outlays for acquisitions in any year after the asset is put in place would be offset by $644 thousand in rent received.
-- This example assumes the asset is acquired at the beginning of the fiscal year and rented for the entire year.
1/ $644 thousand equals the mortgage payment assuming a $10 million loan for 30 years at 5% with monthly repayments.
2/ The offset for rent received is discretionary because it cannot occur without the appropriation to the program account.
3/ The budget does not record budget authority or outlays for debt repayment (nor does it record receipts for borrowing). When collections are used for debt repayment, they are unavailable for new oblgations and, therefore, are not budget authority.
4/ The interest payment will decline, and the principal payment increase, in each subsequent year. The interest payment will be credited to an intragovernmental receipt account in Treasury. It is not scored for BEA purposes.

Attachment C

President's Commission to Study Capital Budgeting

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