Testimony: Mr. Posner discussed an agenda of reform that would be helpful within the current unified budget framework. Changes could be made reducing barriers and prompting more focused debate without causing the budget control concerns raised by a separate capital budget.

He said GAO has proposed an alternative investment framework in its prior work⁽¹⁾ to create an investment component within the existing budget constraints. He said this GAO framework is a promising way to improve investment decision-making while retaining the strengths and the discipline of the unified budget and the current budget process.

He provided examples of the strategies used by Federal agencies to accommodate up-front funding within the unified budget. The examples included budgeting by stand-alone stages within larger projects, using revolving funds, establishing savings accounts, contracting out, and sharing assets.

He said traditional capital budgeting proposals include charging depreciations to an operating budget and allowing deficit financing of capital assets, which present problems at the Federal level. Appropriating depreciation would undermine budgetary control by not recognizing the full cost of an asset at the time a decision is made to acquire it. It is important to remember that neither States nor private enterprises budget for depreciation. Deficit financing of capital would create a significant incentive to categorize as many activities as possible as capital. In addition, these deficits would reduce private saving and displace private investment.

He identified two distinct roles of the Federal government related to capital assets and investment: 1) to make the Federal government operate more efficiently; and 2) to increase the private sector's long-term productivity and growth.

Questions from the Commissioners: Questions focused on the current congressional decision-making process, the current budget treatment of capital projects, concerns over budgeting by stand-alone stages, GAO's definition of capital and investment, use of earmarked funds, specific workings of revolving funds, and supplemental information for the budget.

Q.    Could we get a copy of your study on best practices of capital budgeting in State and local governments and private sector? Is this published yet?

A.    The exposure draft entitled "Executive Guide: Leading Practices in Capital Decision-Making" (GAO/AIMD-98-10, April 1998) has been issued and provided to the Commissioners.  This study is also available on-line at www.gao.gov/special.pubs/publist.htm.

Footnotes:
1.  Budget Trends: Federal Investment Outlays, Fiscal Years 1981-2002 (GAO/AIMD-97-98, May 21, 1997), Budget Structure: Providing an Investment Focus in the Federal Budget (GAO/T-AIMD-95-178, June 29, 1995), and Budget Issues: Incorporating an Investment Component in the Federal Budget (GAO/AIMD-94-40, November 9, 1993).