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Problem: Funding Expensive Federally-Owned Capital Projects Within Discretionary Caps Is Next To Impossible

Having a sustainable capital plan for the maintenance, replacement, and financing of capital assets is a budget best practice.  (See the recommendation of the Government Finance Officers Association.)  We provide lots of guidance to agencies about developing and implementing robust capital plans.  (See OMB’s Capital Planning Guide.)  The recommended principles and policies are sound, but they largely go for naught at the point where it matters most — when Congress provides funding to agencies.  We simply do not have a budget mechanism that encourages capital planning in the appropriations process

Unlike State and local governments, the Federal Government does not separate capital spending from operating expenses and make decisions about capital projects in a separate capital budget.  Instead, all spending is lumped together, and capital projects compete directly with operating expenses for funding.  With caps on total discretionary appropriations, funding for ongoing programs crowds out funding for expensive capital projects.  Funding a new, state-of-the-art FBI building costing $2-3 billion would require cutting ongoing programs by a like amount, which is politically unrealistic.  An effective budget process would include a way to accommodate funding spikes this large.

Funding operations at the expense of capital investment would not be a cause for concern if it were an occasional outcome of the budget process.  However, with multi-year caps on discretionary spending, the cumulative effects can be substantial.  This is very clear in the funding levels for GSA’s Federal Buildings Fund (FBF), which rents general purpose office space to federal agencies.  Appropriations Acts since 2011 have constrained the FBF’s funding by $6 billion, effectively eliminating its budget for capital investment.

State and local governments handle this problem by separating capital from operating expenses and making funding decisions about capital projects in a separate capital budget.  The capital budget includes the full cost of capital decisions — construction of a $10 million building is recognized as a $10 million cost. Total funding for capital investment is constrained by each State or local government’s taxing capacity and ability to borrow.  Borrowing capacity, in turn, is constrained by the State or local government’s credit rating.  The combination of a limit on total spending and budgeting for full cost forces decision makers to deal with the inherent trade-offs when demands exceed resources and encourages them to evaluate, rank, and fund capital projects based on their relative merits.  In addition, since debt service on borrowing to finance capital projects is charged to the operating budget, decision makers have to consider the future impact on taxpayers.

A separate capital  budget for the Federal Government is not advisable for several reasons.  (See the discussion beginning on page 138 of the Budget Process chapter of the Analytical Perspectives volume of the 2020 Budget).  However, State and local capital budgets include 4 elements that can be replicated within the Federal unified budget to achieve the same benefits:

  1. Funding for capital investment is separated from funding for operating expenses, so capital projects do not compete directly with operating expenses.
  2. Total funding for new capital investment is limited, so decision makers must prioritize funding for new capital projects.
  3. The full cost of each approved capital project is recorded in the capital budget so that decision makers must deal with the inherent trade-offs when resources are limited.
  4. Debt service on bonds issued to pay for capital projects is charged to the operating budget, so decision makers must consider this future burden on taxpayers when they approve capital projects.

Read on to see how the proposed Federal Capital Revolving Fund incorporates these elements.