Staff Summary of Testimony to the PCSCB: O'Neill, Congressional Budget Office

June E. O'Neill, Director, Congressional Budget Office (appearance on April 24, 1998)

Testimony: Director O'Neill recommended against a capital budget by focusing on two points. First, she advocated retaining the current practice of recognizing the full cost up-front at the time of making acquisition decisions, regardless of assets' expected useful life. Second, she proposed improving the current budget account structure and budget process by attributing all costs of acquiring and holding capital to the particular programs that use the assets.

To support her first point, Director O'Neill elaborated on the following:

Full cost is the correct measure for budgeting because the appropriate time to recognize a capital expenditure in the budget is when the decision to use resources becomes irreversible.
The current up-front treatment of capital spending has no bias against long-lived assets.
The use of depreciation could introduce bias and weaken budget discipline due to difficulties in defining capital.

To support the second point, Director O'Neill discussed the benefits of attributing capital costs to the programs that use the assets. She stated that if the user pays, the government is more likely to acquire and retain only those capital assets whose benefits are worth the costs. She introduced one way of adapting this practice, which is through capital acquisition funds (CAFs). However, she noted that CAF is only a conceptual proposal and practical issues remain to be addressed. CAFs are described in OMB's briefing to the Commission on January 31, 1998.⁽¹⁾

In sum, she reiterated that budgeting can be improved not by moving away from full cost recognition, but by strengthening capital cost measurements throughout the budget. She ended by asking James L. Blum, Deputy Director of CBO, if he wanted to add any remarks. He briefly expanded on CAFs by addressing the use of these accounts to recognize capital costs.

Questions from the Commissioners: Questions focused primarily on the impact of cost-benefit analyses on the political process and the specifics of CAFs.

Q. Are cost-benefit analyses worthwhile? How can they gain better attention on the Hill?
A. The analyses do have some effect on decisions. CBO has a forthcoming report, The Economic Effects of Federal Spending on Infrastructure and Other Investments, that finds a wide range of returns on federal spending for capital. The problem is that many projects have low or negative rates of return, in part because they displace investment by state and local governments and private firms.

Q. Could appropriations subcommittees allocate nothing to repay CAFs? If so, should CAFs be mandatory so that the funding is required?
A. Getting the subcommittees to embrace CAFs may be difficult but is essential to their effective use.

Footnotes:
1. OMB, "Charging Programs for the Full Cost of Using Capital" (briefing, January 31, 1998).

President's Commission to Study Capital Budgeting