Good afternoon. Thank you for inviting me to testify about capital budgeting. It is truly a privilege to have this opportunity to share my views with you. I commend the President of the United States for forming this Commission and each of you for serving in your respective capacities. Capital budgeting is so very important because it would radically change how the government approaches the appropriations process. We must no longer manage by crisis. We must instead use budgeting as a tool to plan for any foreseeable need. I would also applaud the efforts of the Office of Management and Budget that led to the development the Capital Programming Guide that is used by federal agencies as a reference on planning and budgeting for capital assets. I am very encouraged by the progress that has been made in providing guidelines for agencies to apply in their capital planning.
 

        As the Senate's only accountant, I find it interesting that not a single accountant was appointed to the Commission. If the purpose of this group is to study the potential use of capital budgeting on the federal level, I believe the Commission could have benefitted from expertise an accountant would have brought to your table. The insights he or she could have shared regarding capital budgeting would have been very useful. That is why I would like to share what I have gained from my service as an accountant, a federal and state legislator, and a mayor.
 

        Before I get into the workings of a capital budget, I want to clarify what I consider to be the proper definition of "capital," what it includes and what it does not include. I know there are many differing views about the proper use of this word. In this, as in all matters, it is vitally important how we define our terms. That is why the Commission's charge includes a definition of "capital," which is of the utmost importance if we are to ensure the integrity of the budgetary process. For my part, I will use the traditional definition for capital which appears in OMB's Capital Programming Guide. Capital assets are "land, structures, equipment, and intellectual property (including software) that are used by the Federal Government and have an estimated useful life of two years or more."
 

        Capital is tangible -- physical property and assets, the "bricks and mortar." Capital is not spending on maintenance, operations or salaries. Capital does not include anything that must be replaced or funded on an annual or regularly scheduled basis. This definition of capital excludes education spending, welfare payments, most military funding, health care and other similar programs that some refer to as a human capital investment or the asset of knowledge resulting from research and development. Federal grants made to state and local governments that are used for capital assets would not be included in an agency's capital budget.
 

        Three examples will help to illustrate this definition. First, a missile weapons delivery system could be considered capital, but the missiles themselves would not be capital assets because they must be replaced on a periodic basis. Second, funding for education -- although it is an investment for future generations, it could not be considered a capital asset because it is funded annually and it is not a tangible asset, it even requires annual funding. Education is not optional. Third, environmental restoration for decommissioning purposes could be considered a capital asset if the restored property is to be sold. An example of this is the Department of Defense's decontamination and decommissioning efforts. We cannot allow certain items and programs to be funded through a capital budget because it would politicize the placement of certain types of spending within the federal budget.
 

        I believe the current process encourages agencies to only plan for short-term annual budgetary needs. This puts agencies in a position in which it is to their advantage to use this artificial state of emergency as leverage against Congress to receive the additional funding they want. We are encouraging manage by crisis instead of management by plan. How can members of Congress say "No" to an agency that cannot pay for a necessary capital project because there was no plan for a crisis on the part of the agency? This "management by crisis" tendency may be somewhat mitigated by the recently passed Government Performance and Results Act, or GPRA. This Act requires agencies and departments to formulate strategic plans that include a mission statement and program goals. The agencies' performance plans will be submitted as part of the president's fiscal 1999 budget. However, it is still very early to thoroughly evaluate the impact of GPRA on the budget and appropriations process.
 

        Other Congressional initiatives that have been implemented to strengthen the accountability of agencies and their need to achieve results and budget properly are the Clinger-Cohen Act, the Federal Acquisition Streamlining Act, and the Brown Act. The Chief Financial Officers and Government Management Reform acts require that agencies get audited financial statements beginning March 1, 1998. For the first time long-term spending and investments can be evaluated during the budget process.
 

        One example I would cite I am very familiar with because it involves Yellowstone National Park and my home state of Wyoming. Yellowstone National Park needs $5 million for a sewer system facility ($5 million out of an $18 million budget) but the Park Service did not request funding for this system in the President's budget proposal. It was not until after the President's budget proposal was submitted that the Park Service requested additional funding for the capital investment of a sewer system. This proves that Yellowstone National Park did not have a sufficient plan and clear goals so that they could budget for this large capital expenditure. In order for the Park to supplement their annual funds, it has consistently used crisis situations such as this. With both the requirements of GPRA and a capital budget, the Park Service would not have an excuse for this type of deficiency in planning. The Park Service would be forced to use a means other than their present crisis management technique to address their needs. If the Park Service had followed a budget planning phase similar to that in OMB's Capital Programming Guide it would not be in its current situation.
 

        In the first step of the budgeting phase, The Capital Programming Guide recommends an agency submit an asset request to the OMB with the demonstration that it is justified by a cost-benefit analysis. OMB then determines if the agency submission requires modifications or is not applicable to its mission. The agency will then make the necessary revisions so that it might be included in the President's budget. The last step involves my Colleagues in Congress and I as we exercise Congressional oversight before our approval is given. The Park Service moved directly to Congressional approval and avoided the important scrutiny and approval process of the OMB.
 

        The strategic planning process could be greatly enhanced and complemented by the use of capital budgeting on an agency by agency basis. If agencies are required to use a capital budget, Congress would be much less willing to fund the agencies that manage by crisis, or the current status quo. Tying strategic planning to capital budgeting will require agencies to perform as a business by forcing them to consider the cost and strategic importance to their missions.
 

        Now that I have explained how the term "capital" should be defined and the plight of the current agency budgeting process, I would like to share my thoughts on the type of capital budgeting to implement. There are as many types of capital budgeting as there are definitions for "capital."
 

        I propose not a system dividing the federal budget into a capital budget and current services budget, but capital budgeting only on an agency by agency basis. I have already referred to the benefits strategic planning holds for each agency as it is used to form a budget. Each agency should list all of the capital purchases, vehicles, buildings, etc., that are needed to sustain their mission for future years. I have found out that many agencies or departments have no idea how much capital they have. The agencies need cash flow budgets so that as the cash arrives the purchases can be made without extensive deficits. If Congress had the resolve to allow agencies to retain user fees derived for the purpose of the agencies' capital assets, the agencies would be more prone to utilize these fees instead of relying on general revenue from the Treasury Department.
 

        Trust funds, or reserve funds, could be set up within the agencies to budget from for their capital requirements. The agency would designate a portion of their appropriations for the specific purpose of the capital reserve, or trust fund. The use of these funds would be restricted to their original capital asset purpose. Use of the fund would be tied to a contractual agreement with Congress. The use of the fund could only be changed if the agency requests the modification of use and Congress provides that specific authorization. The calculation of depreciation would not be used in this form of capital budgeting.
 

        The agencies could not dip into their trust fund before their strategic plans allow, unless they pay a penalty up front by the use of bonding. This provides the necessary incentive for the agency to effectively plan and avoid management by crisis.
 

        I have examined the General Accounting Office's (GAO) case studies of capital budgeting in several federal agencies and bureaus. Congress has allowed the U.S. Geological Survey's (USGS) Working Capital Fund (WCF) account to include an "investment component" to assist in funding the bureau's capital projects. This type of capital budgeting is similar, but not identical, to my proposal. The USGS can fund capital acquisitions from the Working Capital Fund (WCF) and the Surveys, Investigations, and Research (SIR) account. The WCF account receives its funding from fee-for-service and investment components. The fee-for-service component uses a fee to fund its specific operations. The investment component is funded by planned contributions from the SIR account, which is funded by appropriations. GAO noted that the USGS has attempted to reflect congressional requirements regarding the use of the investment part of the WCF. USGS requires a "delegated authority" within the respective division to approve the investment plans. The contributions to the WCF must be made for a length of at least two years with the planned purchase occurring in the third year or later.
 

        I mention the USGS as an example because it uses agency capital budgeting, although not my proposed form of it. I do not believe this form of capital budgeting has enough congressional oversight for the use of the investments. GAO's Budgeting for Federal Capital study correctly indicates that the increased use of the investment component of capital financing "must be accompanied by adequate controls on agency and government-wide investment component spending to ensure that funds are used as intended and prevent increases in the deficit." We must be sure that whatever capital budgeting power we give to the agencies, Congress will be able to ensure the appropriate use of the funds.
 

        In conclusion, I believe that capital budgeting at the agency level would be useful for consistent accounting and budgeting. It can be an effective planning tool for agencies to use in connection with the requirements of the Government Performance and Results Act. OMB also recommends that agencies should apply the "Three Pesky Questions" when determining the feasibility of investment in a capital asset. In my opinion, these questions are necessary and not "pesky." They are: 1) ensuring that the functions of the proposed capital assets are "mission critical"; 2) Ensuring that no other governmental or private entity can support it more efficiently; and 3) Ensuring that agency business practices are optimized at the lowest cost. Capital budgeting could be good business. Government should strive to become more business-like in its operations and decision making processes.
 

        Thank you for the opportunity to testify before the Commission. I would be pleased to answer any questions you may have on this important subject.