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

June 19, 1998

The Coast Guard is charting a new path in comprehensive capital management by systematically linking the performance of capital assets to achievement of measurable cost and performance goals, innovatively managing acquisitions and addressing the increasing complexities of capital budgeting.

Description of Investments
The Coast Guard is a multi-mission maritime service and one of the nation's five armed Forces. Its mission is to protect the public, the environment, and U.S. economic interests--in the nation's ports and waterways, along the nation's coast, on international waters or in any maritime region as required to support national security. Since the Coast Guard's inception in 1790 with a fleet of revenue cutters, its success as an organization has relied upon skilled people operating capable platforms in an unpredictable and often dangerous marine environment. Today, with over 34,000 uniformed personnel, the Coast Guard operates a fleet of hundreds of cutters (from 65' to 399' in length), boats (less than 65 feet) and aircraft (fixed wing and helicopters), together with a shore support infrastructure and command and control systems to achieve the following strategic goals:

Safety: Eliminate deaths, injuries, and property damage associated with maritime transportation, fishing, and recreational boating.

Protection of Natural Resources: Eliminate environmental damage and natural resource degradation associated with maritime transportation, fishing, and recreational boating.

Mobility: Facilitate maritime commerce and eliminate interruptions and impediments to the economical movement of goods and people while maximizing recreational access to and enjoyment of the water.

Maritime Security: Protect our maritime borders from all intrusions by halting the flow of illegal drugs, aliens, and contraband into this country through maritime routes; preventing illegal fishing; and suppressing violations of federal law in the maritime region.

National Defense: Defend the nation as one of the five U.S. Armed Forces. Enhance regional stability to support the National Security Strategy, using our unique, relevant maritime capabilities.

The Systems of Systems: Coast Guard capital assets are categorized as components of larger systems, based on mission requirements and the operating environment they operate within:

- Deepwater (outside of 50 miles from shore),
- Coastal Zone (from the shore out to about 50 miles),
- Inland (primarily river systems),
- Shore and Logistics Infrastructure, and
- Command Control and Computers, Information Systems and Reconnaissance (C4ISR).

Considered together, these five portfolios of capital assets are an interconnected infrastructure system (i.e., a "system of systems") that directly delivers public good outcomes or comprise the underlying support infrastructure.

Description of Process
The OMB Capital Planning Guide describes four phases of capital management: Planning, Budgeting, Procurement, and Management-in-Use. The Coast Guard's methodology for executing these phases is briefly described below with a recurring example for each phase. It should be noted that the various phases of capital management are not discrete--there are overlaps: management-in-use becomes a function of planning, planning continues during the acquisition phase, budgeting considerations come into play during the acquisition, etc.

Management-in-Use: Business and Capital Planning
Annually, Coast Guard program managers prepare and submit business plans that describe how they will employ assets (financial, human, information, and physical capital) to achieve the Coast Guard's strategic outcomes. One appendix to these business plans identifies the program's capital assets in the form of inventory pages. The inventory page displays the operating data for each class of capital asset (e.g., cutter, boat, and airplane), focusing on performance and cost information.

By comparing asset contribution to goals (number of hours that asset was employed in support of each strategic goals) with its operating costs (including maintenance, operating and personnel costs), this inventory page displays the annual costs of ownership and the return on capital assets (in terms of goal contribution). This inventory sheet also captures the major upgrades to that asset (primarily from the AC&I appropriation) and the projected service life which, together with ownership costs and performance trends allows sound business decisions with regard to continued employment of that asset or replacing it. These inventory sheets are directly incorporated into the OMB-required Agency Capital Plan. Aggregated together in the system of systems concept, these inventory sheets provide the foundation for making organization-wide capital decisions in consideration of available funding.

Maintaining a long range focus is required for Coast Guard capital asset managers given the long procurement lead time associated with our assets--in the case of the replacement of cutters which service navigational buoys, it has taken 15 years from initial replacement planning to full production.

Example: Although the quantitative Return on Assets (ROA) methodology described above is in its early implementation, the Coast Guard has always factored ownership costs and performance into its capital decisions. In the mid 1970's, it became clear that the Coast Guard's fleet of twenty six 180 foot seagoing buoy tenders (WLB) was nearing the end of its economic service life. Built in the 1940's, they had recently undergone service life extension projects. But even so, the cutter's reliability was rapidly decreasing, repair parts were increasingly difficult to obtain (and increasingly expensive), and most importantly, the cutter had a large crew with high personnel costs. If the Coast Guard was to sustain the capability to maintain the nation's short-range aids-to­navigation (over 35,000 buoys nation-wide), a significant capital asset decision regarding the buoy tender capability would have to be made--capability replacement planning began.

This example describes the replacement of a particular asset class. In the past, as a particular asset became too expensive to maintain, replacing the capability of that asset was initiated as a stand-alone project. In an effort to broaden the approach to asset replacement, the Coast Guard has recently adopted the system of systems portfolio approach described earlier. By optimizing the capabilities inherent in an entire portfolio of capital assets, the Coast Guard avoids expensive redundancy of capability that may arise in a simple one-for-one replacement methodology. For example, some of the functions that must be performed by the agency in the deepwater environment are surveillance activities, transporting persons, and communicating effectively among all its operational units among many others. These broad functional requirements of the operating environment drive the mission (need) analysis rather than analyses of each individual program or facility's needs. For example, the goal of the current Deepwater replacement project is to optimize such functionality across all deepwater assets (surface, air and C4ISR) at the lowest total ownership cost.

The Planning Process: Mission Analysis
The aim of the Mission Analysis Process is to validate future mission requirements and establish capabilities to meet those requirements in a particular operating environment. First, commonalties and differences among the Coast Guard operating programs that carry out missions within the various operating environments are identified by a mission analysis team. All functional requirements necessary to accomplish those missions are then considered. The team examines current and known future asset capabilities to determine where deficiencies and surpluses exist. If deficiencies in capabilities are identified, alternative solutions such as changes to tactics, doctrine, or governing laws and regulations are considered to determine whether asset acquisition is indeed necessary.

All operating facility and support program managers participate in these analyses. The program managers begin by examining the functions required to satisfy the expectations created externally in the establishing and implementing mandates. The Commandant's Strategic Goals and individual Performance Goals set the internal benchmark for performing each mission. Program managers determine current demand by examining Abstracts of Operation (a report documenting capital asset employment) and other workload indices. Capital asset managers first ascertain availability (how much can be done with available assets) and ability (what functions can be done and how well they can be performed). They then quantify cumulative asset capabilities and match these to total system requirements to determine current and projected future system capability requirements. Finally, program and support program managers project future requirements to determine if there are deficiencies in functional capabilities and availability. The project team uses outcome measures to assess the current deficiencies and, in some circumstances, existing surpluses.

Example: The analysis conducted on the WLB replacement indicated there would be little change in the buoy tending mission into the 21st century--the need to lift heavy weights and handle large floating aids will continue for some time. Additional capability requirements had emerged in marine environmental response needs. So overall capability needed for buoy tending didn't change much, but added capability to respond to pollution incidents was included in this acquisition project.

The Procurement Process: Systems Acquisition
If gaps are identified in the Mission Analysis Process, the program manager documents the requirements and submits a proposal to begin an acquisition project. The mission needs are validated in this first phase of the acquisition process. In the next phase, Concept Exploration, the operational capability requirements are identified, and trade-offs between cost and performance are analyzed. For the Deepwater capability replacement project, the Concept Exploration phase will include modeling and simulation to determine, among other things, the contribution to strategic outcomes provided by the various alternative concepts. This phase of acquisition planning also focuses on total ownership costs, which includes front-end development work, the acquisition itself, operations and maintenance costs over the asset's lifetime, and disposal costs. Too much focus on initial acquisition cost alone may lead to larger O&M costs that may be unsupportable in the agency's operating budget. The proposal's Return on Investment (ROI) can then be calculated.

Also during the Concept Exploration Phase, an acquisition strategy is determined and documented, including the establishment of cost, schedule and performance baseline. The next phase of the acquisition (Demonstration and Validation), determines which design concepts will most capably accomplish mission performance and achieve the agency goals, revalidates mission needs and validates the acquisition baseline (i.e., cost, schedule, performance) with full scale development being the next phase, followed by full scale production.

Example: Salient features of the buoy tender replacement acquisition strategy were the use of a performance-based Circular of Requirements (COR), an industry design, full and open competition leading to several contract design awards, the final down-selection of a contractor for lead cutter construction, and inclusion of option ships in the lead contract. A key element of this strategy was the implementation of a two-phased approach for lead ship contract award. Industry would submit two proposals in response to a two-phase COR. Three offerors would be awarded contracts to develop/refine the design (Phase One). Upon completion of the design contracts, the contractors would then submit proposals consistent with their development efforts and compete for lead ship design and construction. This phase allowed for construction of a lead ship plus follow on options for production of 4 low rate initial production ships (Phase Two). The full production phase would then complete the acquisition of the WLB fleet replacement (Phase Three). The production phase contract would utilize a technical data package developed by the Phase Two contractor. Since personnel costs are among the largest components of operating costs, an important selection criteria was the number of personnel required to operate the vessel.

The Budgeting Process: Managing within Funding Constraints
Acquisition Fund Plans provide for an optimized funding scheme given the available capital funding. From these Fund Plans, annual AC&I budgets are submitted in accordance with OMB directives through the normal budget process. Two particular factors complicate and impact the Coast Guard's ability to execute budgets as planned. The first is constrained budgets. To mitigate this factor, the Coast Guard has used a lease vs. buy strategy, when appropriate, to optimize funds available for recapitalization. The second factor is differing viewpoints on the use/carryover of multi-year funding.

Recapitalization Rate It's worth noting that the Coast Guard has nearly $20 billion dollars of capital assets. In this era of constrained federal budgets, the Coast Guard finds itself in a difficult capital management situation: the annual recapitalization costs of currently owned capital assets will likely exceed annual capital budgets. With this in mind, the Coast Guard meshes current acquisition costs, proposed capital acquisitions and improvements, and organizational strategic priorities, together with the notional outyear capital requirements to remain within anticipated funding levels and reduce outyear spikes. This 15-year outlook is documented in the Long-Range Resource Allocation Plan (LRRAP), submitted annually to OMB. Lease v. Buy ­ After requirements for additional capability have been validated, all options for replacing capability are explored during the analysis phase of the project. Replacement of assets/shore facilities through leasing v. buying is explored in an extensive benefit/cost analysis. Total cost of the asset (both the acquisition cost of the asset itself and the estimated life cycle operating and maintenance expenses) are factored into the Lease v. Buy decision.

Differing Viewpoints on the Use of Multi-year Funding Currently, funding for major acquisitions is appropriated as multi-year. Vessel projects receive five year funds, aircraft and other equipment (much of the IRM investment) receive three year funds while funding for personnel salaries and shore infrastructure projects is two years. The multi-year nature of the funding recognizes the requirement to have reasonable assurance that funds are available before contract solicitations are announced and the long-lead time required to prepare/release Requests for Proposals, contractor design development and government agency evaluation and award. Five-year funding and the flexibility to carry significant amounts across fiscal years provide much needed flexibility in acquisitions. In the past few years, this flexibility has been significantly diminished by the GAO/Congressional impetus to have little or no carryover of multi-year funds. Recent challenges to the buoy tender Replacement Full Production Contract funding illustrate this concern.

Example: The Coast Guard requested funding of $54 million to award the first vessel under an anticipated full production contract that would span five years and allow for acquisition of up to 11 ships. Original plans were to award a late fourth quarter FY97 full production contract but extended icebreaking trials on the Juniper (lead ship under the LRIP) and involvement in the TWA flight 800 search delayed the contract award. Revised plans were to combine the FY97 carryover with an FY98 allocation and award a contract for two hulls in FY98. At a first glance, it would appear that the multi-year aspect of vessel funding is intended to be flexible enough to provide for operational considerations such as the ones described without jeopardizing the multi-year acquisition plan. In reality, multi-year funding is treated in a similar fashion to one-year funding and expected to be obligated in the year appropriated. In language explaining a Congressional $14 million reduction to the WLB project funding request in FY98, the Appropriation Committee expressed concern over growing carryover balances

In a similar action, GAO concluded an audit in FY97 of prior year unobligated balances and recommended reprogramming of FY96 funds from a shore construction project because those funds had been carried over a year. Congress implemented the recommendation despite the fact that the funds were three year funds and the agency had plans to obligate in a continuing phase of the project.

The Coast Guard has adopted a cradle to grave approach to managing its capital assets based on a systematic and ongoing analysis of cost and performance. While the full benefit of this revolution has yet to be realized, it's clear that the agency is on the right track.

President's Commission to Study Capital Budgeting