June 19, 1998
Are improvements needed to give a longer-term perspective to capital needs?
The focus of legislative action on the President's budget generally is on the budget year. There are proposals before the Congress to expand budget decisionmaking to a two year cycle, but to date that support has not translated into legislative action.
Budget decisionmaking is focused on the budget year, but each year's President's budget, by law, includes a five year forecast of outlays and receipts, and recent budgets have included forecasts that extend considerably further into the future. The detailed projections that provide the basis for these forecasts are prepared by the affected agencies. For mandatory programs and receipts, the long-term forecast is a projection of current law requirements as modified by Administration proposals. For discretionary proposals, longer-term projections are generally a simple extension of the budget year request, as modified by the constraints of the Budget Enforcement Act and major long-term policy proposals. The focus of budget decisionmaking is on the budget year, but the resources appropriated for the budget year frequently are sufficient to cover the full life-cycle costs.
There have been wide variations in the degree of strategic planning underlying the projections, for capital assets and other purposes. Some agencies such as the Corps of Engineers have a long history of planning for capital projects (see attachment). However, in a number of cases, agency budget requests have concentrated on the immediate resources needed to continue capital development, without sufficient regard for overall agency goals, specific performance goals, or least cost to the government.
Some agencies such as the Defense Department and General Services Administration routinely fully fund their capital projects. In other instances, capital projects are incrementally funded. When capital assets are funded in increments, 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. Strategic planning and full funding is also an important element in managing large acquisitions effectively and holding management responsible for achieving goals.
Even when budget decisionmaking is focused on the budget year it is desirable to encourage long-term planning as a part of this process. Recently, a long-term planning and analysis process has been developed for capital assets, consistent with the recommendations of the Vice President's National Performance Review, and has been published as guidance for agencies in the Capital Programming Guide. The essential elements of this process are: planning; benefit-cost analysis; full funding of useful segments; and careful analysis and management of risk. The process integrates strategic planning under the Government Performance and Results Act (GPRA) with agency capital planning.
The Guide recommends that an executive review committee work with the agency head and be held accountable for reviewing the agency's entire capital asset portfolio on a periodic basis and for making decisions on the proper composition of agency assets to achieve strategic goals and objectives within budget limits. Planning should cover all phases of asset use, including evaluation, operation and maintenance, and disposal. The result is translated into an agency capital plan (ACP). The agency capital plan can be supported by capital plans prepared at the level of bureaus or functional areas. This guidance has been integrated into the budget preparation process.
There are any number of steps that might be taken to encourage a longer-term perspective to planning and budgeting for capital.
The Commission could support proposals to expand budget decisionmaking to at least a two year cycle that is already before the Congress as a way of encouraging a longer-term perspective for capital planning. One of the advantages of biennial budgeting would be having enacted appropriations for two years. This would give the agencies more stability and predictability in the funding of their operations. By shifting from an annual to a biennial budget preparation cycle, some time should be freed up in the second year of the biennium for agency managers to increase their efforts to improve financial management and program evaluation, as well as to improve other aspects of agency operations and planning. However, somewhat more time might be required in the first year of a biennium to prepare a budget that will result in appropriations for two years.
A Capital Programming Guide
The Commission can emphasize the importance of capital planning by encouraging agencies to follow the Capital Programming Guide in preparing their budget requests, and suggesting that Executive and Congressional decisionmaking give more emphasis to the Agency Capital Plans.
The Commission might recommend that the Capital Programming Guide be broadened to require that agencies prepare ten year capital plans.
Cost-schedule and performance goals
The Federal Acquisition and Streamlining Act (FASA) requires that cost, schedule, and performance goals be established for all major acquisitions. Projects that vary from original goals by ten percent must be reported to the Congress in an annual report. This process is intended to encourage effective long-term planning from the beginning. The Commission might cite the FASA requirement as one of the incentives for improving long-term planning.
Strategic planning/performance measurement
The guidance in the Capital Programming Guide recognizes the context of increased emphasis on strategic planning and performance measurement required by the Government Performance and Results Act, the Federal Acquisition Streamlining Act, and Clinger-Cohen. Under these new laws, a good agency budget proposal should identify a limited number of cohesive goals, a meaningful plan for achieving the goals, and the resources required. In developing a budget plan to meet goals, any planned asset acquisition should identify alternative uses of funding that are evaluated according to whether they accomplish the goals, not whether they are spending for capital or current requirements. For example, you may not get the same crime fighting benefit from buying a building for the FBI as from hiring FBI agents.
The Commission report might emphasize the importance of agencies including a long-term capital plan as a part of their strategic plan, with suitable measures of performance that can be monitored.
Budgeting for full life-cycle costs
The Capital Programming Guide emphasizes planning and budgeting for full life-cycle costs, including all direct and indirect costs for planning, procurement, (purchase price and all other costs incurred to bring it to a form and location suitable for its intended use), operations and maintenance, including service contracts, and disposal, and recommends that the costs be funded up front. If acquisition costs create "spikes" in agency budgets, then the cost of a project may be divided into economically useful segments, and funded through advance appropriations.
The Commission might emphasize the importance of recognizing full life-cycle costs as a part of good planning.
Budgeting for results
It is not always easy to match the costs of a program with the intended result. First, in a number of cases costs are not correctly attributed to the program that is responsible. A major example is that some Federal retirement costs are not attributed to the affected programs, but some capital acquisition costs are also not properly attributed. Second, the appropriation accounts are not always well aligned with the broad objectives and goals each agency must meet. Distortions in the comparison of resources with results complicate meaningful long-term planning, as well as complicate, budgeting, management, and resource allocation. To remedy this for capital needs, OMB is working on a proposal for capital acquisition funds, described in more detail in paper III. 7: "Capital Acquisition Funds."
To encourage integration of planning and budgeting for capital with
program needs, the Commission might recommend the use of capital acquisition
Currently, this process works as follows:
President and First Lady | Vice President and Mrs. Gore