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What Is The Problem?

Because capital projects compete directly with operating expenses for funding under the discretionary caps, and there is no adjustment mechanism to address spikes in capital needs, expensive projects frequently lose out to ongoing operating expenses. In order to fund a new FBI building costing $2.5 billion out of the FBI’s budget, Congress would have to cut FBI operating expenses by about 30%, which clearly is unrealistic.

No, a cap adjustment would be a poor solution.

We have cap adjustments for emergencies, disasters, and wildfires. They share something in common — they are all sudden and unpredictable expenses that require urgent action. That’s not the case for capital spending. The need to replace the aging FBI Building has been well known for some time. Our budget system should be sufficiently robust to address this funding need without resorting to cap adjustments.

A rational budget process would include a long-term capital plan for replacing capital assets as they wear out and adding capital assets to meet emerging needs. The capital planning process should be a permanent feature that provides adequate, but limited, funding and incentives for decision-makers to set priorities and to use the funds efficiently.

No. Long-term capital leases are a financing tool, not a budget tool. The budget issue is not how to finance expenditures. Budgets are a tool for allocating limited resources. Do we want to use $2 billion to construct a new FBI building, to construct four regional office buildings costing $500 million apiece, to pay for several thousand education grants, or to provide improved medical care to veterans? In order to make efficient decisions, we need to compare the full costs and benefits of each use of resources, whether they are financed by paying taxes immediately, by borrowing and repaying the debt using future taxes, or by shifting the financing off-budget via a long-term lease. We incur the cost up-front, when the resources are used, regardless of how they are financed. The budget needs to reflect the true up-front cost at the time decisions are made so that decision makers have the information and the incentive to make efficient choices when cost can be controlled.

For this reason, the budgetary cost of a long-term financing like a lease-purchase is the discounted present value of the lease payments over the lease term. In almost all cases, long-term leases are a financing mechanism that pushes cash payments out into the future but impose an immediate liability on the Government for full payment of all rent. The leased asset is financed by the private developer, but the lease imposes a legally-binding requirement for the Government to fully reimburse the private developer for the principal and interest on his financing. The true cost of the lease, therefore, is not the cash payment in any year of the lease; it is the value in today’s dollars of the entire stream of the rent payments under the lease. That’s the accurate measure of cost to include in the budget, not the financing payments.

Second, ownership is always a cheaper method than renting to meet a long-term need because Treasury can always finance at a lower rate. A budget system that encourages a higher cost option is inherently inefficient and sub-optimal.

Third, leasing imposes a hidden “tax” on discretionary appropriations because rent has to cover the private lessor’s financing, unlike direct ownership, where the financing costs are paid by Treasury, not by the agency that purchases the asset. This “tax” adds significantly to the amount of funding needed to pay for capital needs, leaving less room under the discretionary caps for ongoing programs and operations. For a $500 million project financed at 5% over 15 years, this “tax” would increase the cost to discretionary appropriations by $223 million (45%).

Revolving Fund Questions

A revolving fund is a special budget account that is authorized to sell goods or services and to use the proceeds to fund the next round of business. An example is the Postal Service Fund, which delivers the mail and uses the income from stamp sales to cover the costs. The income “revolves” in the sense that it stays in the Postal Service Fund and is available to fund Postal Service operations.

The intent of the proposal is to implement a permanent capital planning process within the annual appropriations process. The proposed Federal Capital Revolving Fund is essential for two reasons.

First, the revolving fund is a continuing source of financing for expensive capital projects that does not compete directly with operations for funding. The funding will allow projects to go forward as needed, but the limit on total funding means that decision-makers will have to prioritize projects.

Second, the requirement to use annual discretionary appropriations to repay the revolving fund avoids the current problem of spikes in discretionary funding needs.  Instead of having to deal with a spike, the costs are recognized as an operating expense over time and set aside to be used to fund future capital projects.

Scoring Questions

The $10 billion would be scored against the bill in which it is enacted. The 2020 Budget proposes to enact it in authorizing legislation, in which case it would be scored as a PAYGO cost.

Section 8(a) of the proposed legislation classifies purchase transfers from the revolving fund as mandatory and directs that the amounts not be scored as either a PAYGO or discretionary cost. The justification for scoring no cost is that the costs of new capital projects are implicitly assumed in the baseline as a result of the original $10 billion mandatory appropriation and the annual repayments to the revolving fund. Using balances in the revolving fund to finance capital projects should not be scored a second time for budget enforcement purposes.

Section 8(d) of the proposed legislation requires OMB and CBO to score a cost equal to the required repayments against the discretionary cap. The revolving fund is not intended to be a free lunch. The repayments make the revolving fund a permanent source of funding for future capital projects.

No, section 8(c) requires the language to be scored as a PAYGO savings, not as a discretionary offset that can be used to increase discretionary funding for other purposes. The revolving fund is intended to be a permanent source of funding for capital projects, not for other purposes.

No, section 8(e) of the proposed legislation requires the language to be scored as discretionary cost. The revolving fund is intended to be a permanent source of funding for capital projects, not for other purposes.

No, section 8(c) requires the language to be scored as a PAYGO savings, not as a discretionary offset that can be used to increase discretionary funding for other purposes. The revolving fund is intended to be a permanent source of funding for capital projects, not for other purposes.

No, section 8(c) of the proposed legislation requires the language to be scored as a PAYGO savings, not as a discretionary offset that can be used to increase discretionary funding for other purposes. The revolving fund is intended to be a permanent source of funding for capital projects, not for other purposes.

Yes, it is next to impossible for one Congress to completely bind a future Congress. However, including the scoring rules in the legislation makes it more difficult for a future Congress to override the rules because CBO follows the rules in place when it scores legislation, not any new rules included in the legislation being scored. Therefore, CBO would likely score a significant cost to future legislation that overrides the scoring rules.

Questions about agencies' participation.

Any agency listed in section 901(b) of Title 31, United States Code except for the Department of Defense. This includes:

  • The Department of Agriculture.
  • The Department of Commerce.
  • The Department of Education.
  • The Department of Energy.
  • The Department of Health and Human Services.
  • The Department of Homeland Security.
  • The Department of Housing and Urban Development.
  • The Department of the Interior.
  • The Department of Justice.
  • The Department of Labor.
  • The Department of State.
  • The Department of Transportation.
  • The Department of the Treasury.
  • The Department of Veterans Affairs.
  • The Environmental Protection Agency.
  • The National Aeronautics and Space Administration.
  • The Agency for International Development.
  • The General Services Administration.
  • The National Science Foundation.
  • The Nuclear Regulatory Commission.
  • The Office of Personnel Management.
  • The Small Business Administration.
  • The Social Security Administration.

Two reasons. First, DOD already has a robust multi-year capital planning process. Second, DOD falls under the defense discretionary cap, while the projects targeted by the proposed legislation are funded under the non-defense discretionary cap.

Section 3(g) of the proposed legislation sets a $250 million minimum project cost, which likely is far in excess of the cost of the needs of smaller agencies. Also, smaller agencies probably rent from GSA, so their needs could be met by approval of a GSA project.

Yes, section 4(i) of the proposed legislation defines “purchasing agency” broadly to mean any agency that is approved by an appropriations Act to receive a purchase transfer from the Fund to pay for a project. Normally agencies that rent from GSA would expect GSA to get the funding for such projects. GSA is funded in the annual FSGG appropriations bill, and if the FSGG bill were to approve a GSA project, then FSGG would be responsible for funding the annual repayments. The legislation anticipates that there may be times when an Appropriations Subcommittee other than FSGG is willing to sign up for the annual repayments. If so, that Subcommittee can approve the project. In such cases, section 9 of the proposed legislation requires the asset to go into GSA’s inventory. The legislation does not create new landholding authority for agencies that currently do not have it. Section 9 provides that the purchase transfer would go from the revolving fund to the approved purchase agency, that agency in turn would transfer the money to GSA, and GSA would then pay for the construction, own the property, and rent it back to the purchasing agency. Since the purchasing agency would be repaying the revolving fund and paying rent to GSA at the same time, section 9(a) of the proposed legislation requires GSA to give the purchasing agency a rent credit to prevent the agency from paying twice for the asset.

No. Section 9 of the proposed legislation states that it neither provides new real property landholding or landmanaging authority to any agency nor otherwise affects any agency’s existing real property landholding or landmanaging authority. The proposed legislation does allow for a different funding path for GSA-owned properties, which is discussed in Q4 under this section.

Section 4(a) of the proposed legislation assigns GSA the task of supervising the revolving fund. GSA would handle all payments to and from the revolving fund, calculate repayment amounts, and otherwise perform the accounting functions for the revolving fund. GSA’s would not have a role in selecting proposed projects, however, GSA obviously would be able to submit its own project proposals for consideration by the President through OMB’s annual budget preparation process and by Congress through action on appropriations Acts.

Questions about projects and project costs.

Pursuant to section 3(g) of the proposed legislation, a project must be a federal facility, which is defined in section 3(e) as land, together with improvements, structures, and fixtures having a useful life of at least 25 years. The facility must also by one in which Federal personnel perform the agency mission.

In addition to the cost of the facility itself, section 3(g) allows the cost of site, design, management and inspection, construction, and commissioning to be paid by a purchase transfer, and also purchases of associated furniture, fixtures, and equipment necessary to furnish the Federal facility for initial occupancy.

Note that pursuant to section 3(g), the following costs cannot be covered by the revolving fund: items acquired for resale in the ordinary course of operations, consumable goods such as operating materials and supplies, normal maintenance and repair of real property, salaries and other operating expenses of agencies, grants to non-Federal entities, tax incentives, Federal credit assistance provided to non-Federal entities, and capital leases pursuant to which title does not automatically pass to the Government.

Yes, section 3(g) permits using the revolving fund to pay for facilities acquired by purchase, construction, manufacture, lease-purchase, installment purchase, outlease-leaseback, exchange, or modernization by renovation. The cost of P3s and other alternative financing would be calculated pursuant to existing scoring rules so that decision makers would be able to compare those costs with other methods of acquiring the same asset.

Section 4(e) directs that no additional funds can be transferred to cover the higher cost unless first approved by an Appropriations Act, so the purchasing agency would need to return to Congress and request the additional funding.

Section 7(c) requires any excess funding to be returned to the revolving fund.

Yes, section 6(c)(2) requires GSA to recalculate the annual repayment amount so that the sum of the repayments equals the actual cost of the project.

In such circumstances, section 4(g) of the proposed legislation requires the Administrator to reduce the purchase transfer amount for all new projects by a uniform percentage so as to eliminate the excess. Ideally, the Appropriations Committees would have a system for tracking purchase transfer approvals to avoid this situation.

Section 6(d) requires the agency to continue making the annual repayments until it has fully repaid the revolving fund. If the disposal is by sale, the agency must first use the sale proceeds to repay the revolving fund. Any remaining sale proceeds stay at the purchasing agency, or at GSA for a project held in GSA’s inventory, and are permanently available to support the agency’s real property activities.

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