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Solution: Federal Capital Revolving Fund

As previously discussed, State and local governments separate capital projects from operating expenses and make decisions about capital projects in a separate capital budget.  As a result, capital projects compete with each other for limited funding but do not compete directly with operating expenses.

Total funding for capital investment is limited by each State or local government’s taxing capacity and ability to borrow, which in turn is constrained by its credit rating.  Since the capital budget includes the full cost of each capital project — construction of a $10 million building is booked as a $10 million cost — the combination of the total spending constraint and recognition of full cost forces decision makers to deal with the inherent trade-offs when funding demands exceed resources and encourages them to evaluate, rank, and fund capital projects based on their relative merits.  Also, since debt service on borrowing to finance capital projects is charged to the operating budget, decision makers must consider the impact on future taxpayers as the assets are used to provide benefits.

While there are good reasons not to introduce a full capital budget for the Federal Government, we could apply the main features of a capital budget by making use of the division of the Federal budget between mandatory and discretionary spending.  In broad terms, the Government’s operating expenses are funded by annual discretionary appropriations, and its long-term commitments are mandatory spending.  Both categories are included in the Federal unified budget, but they are functionally separate and subject to different budget enforcement regimes.  The Administration’s 2020 Budget includes a legislative proposal that takes advantage of this unique division of spending to include what is effectively a capital budget for expensive federally-owned capital assets within the Federal budget.  The proposal is described in the Budget Process chapter of the FY 2020 Analytical Perspectives budget document, starting on page 138.

The Administration transmitted proposed legislation on June 12, 2018.  The legislation would appropriate $10 billion to a new Federal Capital Revolving Fund that would be available to finance capital projects.  These purchases would be on the mandatory ledger.  The legislation would require purchasing agencies to use annual appropriations to repay the revolving fund over 15 years.  The repayments would be on the discretionary scorecard.  As a result, capital funding decisions would be made in the revolving fund on the basis of full cost, but the costs would be spread over several years in agencies’ discretionary operating budgets.

The chart below shows the cash flows under this proposal and the scoring for budget enforcement purposes, assuming approval of a $1.5 billion GSA project.  (If you are like me and prefer to see a table instead of a chart, click here.) The steps are as follows:

  1. Congress would first appropriate $10 billion to a new Federal Capital Revolving Fund. The appropriation would be assumed to be spent on capital projects and therefore be scored as a PAYGO cost.
  2. The Fund would be used to finance federally-owned, non-defense capital projects with a minimum $250 million price tag only if an appropriations Act approves the project and appropriates the first required annual repayment of the financing.  In this example, the Fund would transfer $1.5 billion to GSA. These cash flows would be classified as mandatory pursuant to rules included in the legislative proposal. Since transfers between Federal agencies offset within the budget, they would not have a net PAYGO cost.
  3. GSA would use the $1.5 billion transfer to pay for the project. The payments would be classified as mandatory outlays. They would have a zero PAYGO cost because the spending was already scored and included in the baseline when the Fund was capitalized by the initial $10 billion appropriation or when agencies repay the Fund.  Scoring the actual payment for the project would double-count the cost.
  4. GSA would use discretionary appropriations to reimburse the Fund through 15 annual level repayments, which would score against the discretionary caps.  To protect against gaming, scoring rules included in the legislation would require CBO and OMB to charge the discretionary caps for the required repayments even if future appropriations Acts failed to provide the necessary funding.
  5. Agencies’ repayments would sit in the Fund and be available to finance projects that are approved in future appropriations Acts.