Issues

Capital acquisition funds (CAFs) might be useful in addressing the following issues:

• charging the use of capital uniformly and appropriately to programs so that resources can be compared with the results achieved; and

 
• ameliorating the "spikes" in budget authority and outlays that some agencies incur for capital expenditures.

For many programs, the cost of capital is not uniformly and appropriately charged to the program, so that resources can be compared with the results achieved. The acquisition cost of the capital may be paid by the program up front in one year, so that the program has very large capital costs in some years and little or no cost in other years. Alternatively, the rental cost of using capital -- or the acquisition cost of the capital -- may be paid by a central account, so that the program pays nothing. The financial cost of holding capital (interest) is seldom charged to any program.

Another problem is the scattering of capital asset acquisitions throughout agency budget accounts. The result may be spikes in budget authority (BA) and outlays for specific accounts that make it more difficult for the agency to obtain funding within budget constraints, even if the agency's total acquisition costs are at more regular levels. In some cases, the capital costs are combined with operating costs. This makes the total cost of the program less meaningful for analytical purposes, and spikes in capital costs may squeeze out operating costs.

CAFs are a possible solution. There would be at least one such fund in each department and major agency, more if necessary. They would only finance the acquisition of capital assets and would get appropriations of BA on a full funding basis. The BA would be in the form of authority to borrow from Treasury. The CAFs would purchase the assets, using borrowed funds, and rent the assets to one or more program accounts, charging a rate sufficient to cover repayments of principal and interest on borrowing from Treasury. The program account would outlay the rent out of funds appropriated for operating expenses and the CAF would receive the rent as an offsetting collection. (Thus, total budget authority and outlays -- and the surplus or deficit -- would be unaffected.) Rental collections could only be used by the CAF to repay funds borrowed from Treasury and to pay interest to Treasury. They could not be used to finance new assets.

Pros:

• Maintains principle of budgeting for the full cost of acquiring assets up front: full funding of BA, and outlays measured up front by cash disbursements.
• Allocates the cost of capital to program operating accounts in the form of rent paid to the CAF for the annual use of the capital.
• Ameliorates spikes by consolidating capital acquisitions within the agency and thereby smoothing the BA and outlays for accounts within the agency.
• Reduces crowding out in the program operating account by replacing upfront capital costs with rent.

• Depends on shifting incrementally funded programs to full funding, which Appropriations Committees rejected last year.
• Requires a discretionary BA cap increase for the shift from incremental funding over several years to BA at full funding levels in the first year. Cap increases, even for conceptual reasons, sometimes meet political resistance. (Using advance appropriations to accomplish full funding might obviate the need for a cap adjustment, because the year to year changes in BA would be smaller.)
• The advocates of Government-wide consolidation and the congressional committees that oversee GSA may object to the CAF concept, which limits aggregation to the agency level.
• Makes operating programs that do not currently include the cost of capital appear more expensive, which may cause program proponents to resist.
• Committees may attempt to "game" appropriations for rent (as they have with GSA rent on occasions) by shorting the operating accounts. (OMB scored no savings in the GSA case.)
• There are some significant technical implementing issues -- how to treat existing capital, how to handle differences between actual asset life and the term of debt.
• Complicates budget execution by adding borrowing and rental transactions.

Options

Current cost vs. historical cost.--The approach described above uses historical cost as the basis for charging rent -- the rental payments equal the amount needed to repay the debt incurred to finance the purchase of the asset. There are practical advantages to this approach, not the least of which is that it makes sense to people.

On the other hand, there is strong theoretical support for setting rent at current market cost. It is the right measure for comparing the cost of using resources for Federal vs. private purposes. It provides a level playing field for selecting asset providers among the CAF, GSA (which charges current market rent), and the private sector. A disadvantage is that it creates a mismatch between the CAF's rental collections and its repayments to Treasury. This could create balances and the temptation to use them for other purposes.

Degree of consolidation.--CAFs would be useful for appropriately budgeting capital costs even if there were one for every program. However, if the capital costs of an agency were consolidated into fewer CAFs, they would become more useful in ameliorating spikes in budget authority and outlays. Some agencies could consolidate capital costs into one CAF. Those with substantial capital for diverse missions reporting to different appropriations committees may need more than one.

Experience with GSA's Federal Buildings Fund and the Information Technology Fund shows that consolidation above the agency level can create management and decisionmaking problems. For example, GSA's failure to anticipate the full impact of Federal downsizing in FY 1996 and 1997 contributed to a major shortfall in rent. Agency heads are better able and have more incentive to determine their agencies' needs and priorities.