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 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, 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.

Discussion

Background.--OMB has a long-standing policy of supporting full funding, and in recent years has increased efforts to implement and refine the policy.

For the Department of Defense procurement and military construction of bases, and for GSA office buildings, acquisitions are generally fully funded upfront so that the agencies know that funds will be available to complete the planned acquisition. For other agencies, the Congress has not endorsed full funding and rejected Administration proposals to fully fund major asset acquisitions. (The attached table shows selected Administration proposals for full funding in the FY 1999 Budget.)

In these other agencies an acquisition is often, although not always, begun without enactment of the full amount of budget authority needed for the acquisition. Funding is provided year by year in amounts that are only enough for the agency to incur obligations for the next increment of the project (e.g., laying the foundation of a building). Completion of the project is subject to appropriations decisions made in subsequent years. This is what is meant by incrementally funding capital acquisitions -- increments of funds are provided year by year, subject to uncertain decisions in the annual appropriations process.

Problems.--The major problem with incremental funding is that the full cost of the project does not need to be carefully planned and fully justified in advance -- only the initial increment must be justified. The result is often waste, poor risk management, weak planning, acquisition of assets not fully justified, higher acquisition costs, cancellation of major projects, the loss of sunk costs, and inadequate funding to maintain and operate the assets.

As examples of the loss of sunk costs, since 1983 the Department of Energy has canceled four major projects -- the superconducting super collider, the gas centrifuge enrichment plant, the new production reactor, and the Clinch River breeder reactor -- after spending $8.1 billion. Requests for full funding would have prompted more thorough debates at the outset, which might have kept the projects from being started in the first place.

Full funding is also an important element in managing large acquisitions effectively and holding agency management responsible. When cost, schedule, and performance goals must be adjusted each year along with each increment of funding, agencies cannot plan the project or procure it efficiently, and it is difficult to hold agency management responsible for meeting these goals.

Pros and Cons of Full Funding

Pros:

• Helps ensure that all costs and benefits are taken into account at the time decisions are made to provide resources.

 
• Cost, schedule, and performance goals that accompany full upfront funding encourages accountability by holding agencies responsible for meeting goals.

 
• Helps prevent:

• poor planning;
• acquisition of assets not fully justified;
• higher acquisition costs because incremental funding causes projects to be stretched out over many years;
• cancellation of major projects; or
• the loss of sunk costs.

• Can create spikes in appropriations, which may make Congress or the Administration reluctant to approve justified acquisitions.

 
• Can invite agencies to spend funds without proper oversight by Congress.

I. Continue current practice:

Support the current practice of allowing incremental funding.

II. Support full funding:

A.      Support full upfront funding in the budget year for the entire project.

B.      Support full funding for useful segments of a project.

If the project can be divided into several useful segments -- each of which would be worthwhile if done alone -- it may be desirable to fund each segment separately rather than fully funding the entire project. For a campus of several buildings, for example, where each building provides benefits in excess of its cost, it would be appropriate to budget separately for each building. For a large information technology system, each appropriation might provide for a complete module, with each module being a useful segment on its own and not dependent on further acquisitions in order for benefits to exceed costs.

It may sometimes be worthwhile to consider a combination of regular and advance appropriations for an acquisition, or for a useful segment if the acquisition can be divided into useful segments. (Advance appropriations are enacted in an appropriations act for a given fiscal year but are not available for obligation until a subsequent fiscal year.) Advance appropriations can provide agencies with all the budget authority for a capital asset in advance, and thus help ensure that agencies develop appropriate plans and budgets and that all costs and benefits are identified prior to providing resources. The amounts of advance appropriations can be matched to funding requirements for completing the natural components of a capital project.

Note: For these capital projects, budget authority for the entire project is requested partly in the budget year and partly in future years in advance appropriations.
  
\1\ This budget also requests advance appropriations for years beyond 2003.

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