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entitled 'Capital Financing: Potential Benefits of Capital Acquisition 
Funds Can Be Achieved through Simpler Means' which was released on May 
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Report to the Chairman, Subcommittee on Government Management, Finance, 
and Accountability, Committee on Government Reform, House of 
Representatives: 

April 2005: 

Capital Financing: 

Potential Benefits of Capital Acquisition Funds Can Be Achieved through 
Simpler Means: 

GAO-05-249: 

GAO Highlights: 

Highlights of GAO-05-249, a report to the Chairman, Subcommittee on 
Government Management, Finance, and Accountability, Committee on 
Government Reform, House of Representatives: 

Why GAO Did This Study: 

CAFs have been discussed as a new mechanism for financing federal 
capital assets. As envisioned, CAFs would have two goals. First, CAFs 
would potentially improve decision making by reflecting the annual cost 
for the use of capital in program budgets. Second, they would help 
ameliorate at the subunit level the effect of large increases in budget 
authority for capital projects (i.e., spikes), without forfeiting 
congressional controls requiring the full cost of capital assets to be 
provided up front. Through discussions with budget experts and by 
working with two case studies, the Departments of Agriculture and of 
the Interior, we are able to describe in this report (1) how CAFs would 
likely operate, (2) the potential benefits and difficulties of CAFs, 
including alternative mechanisms for obtaining the benefits, and 
(3) several issues to weigh when considering implementation of CAFs.

What GAO Found: 

Capital acquisition funds (CAF) have been suggested as department-level 
funds that would use appropriated up-front borrowing authority to buy 
new departmental subunit assets. These subunits would then pay the CAF 
a mortgage payment sufficient to cover the principal and interest 
payment on the Treasury loan. The CAF would use those receipts only to 
repay Treasury and not to finance new assets. If existing capital 
assets were transferred to the CAF, subunits would pay an annual 
capital usage charge to the CAF.

CAFs might achieve the goals intended, but these goals can be achieved 
through simpler means. Alternative mechanisms, such as asset management 
systems, cost accounting systems, and working capital funds may achieve 
the goal of allocating annual capital costs and improving decision 
making for capital assets. Our case study agencies generally did not 
indicate problems with budget authority spikes. They budget in useful 
segments, use accumulated no-year authority, or finance capital assets 
using working capital funds. Many concerns about CAFs were raised, 
including the long-term feasibility of making fixed annual mortgage 
payments and the added complexity CAFs would create.

Implementation would raise a number of issues. If CAFs were applied 
only to new assets going forward, all programs would not reflect the 
full annual cost of capital for decades. Yet the difficulties of 
including existing capital are numerous. Even if these issues were 
tackled, there is little assurance that CAFs alone would create new 
incentives for programs to reassess their use of capital since CAF 
payments would not affect the deficit.

Implementation issues could overwhelm the potential benefits of a CAF. 
More importantly, current efforts under way in agencies would reflect 
asset costs as part of program costs without introducing the 
difficulties of a CAF. As long as alternative efforts uphold the 
principle of up-front funding, CAFs do not seem to be worth the 
implementation challenges they would create. Except for OMB, agencies 
generally agreed with our conclusions.

Up-Front Financing of Federal Capital Assets under a CAF: 

[See PDF for image]

[End of figure]

www.gao.gov/cgi-bin/getrpt?GAO-05-249.

To view the full product, including the scope and methodology, click on 
the link above. For more information, contact Susan J. Irving at (202) 
512-9142 or irvings@gao.gov.

[End of section]

Contents: 

Letter: 

Results in Brief: 

Background: 

Scope and Methodology: 

CAF Operations Would Create a New Financing System and New Oversight 
Responsibilities: 

CAF Benefits Can Be Achieved through Alternative Means Without the 
Added Budget Complexity: 

Several Issues to Weigh When Considering Implementation of CAFs: 

Conclusion: 

Agency Comments and Our Response: 

Appendixes: 

Appendix I: Comments from the Department of the Treasury: 

Appendix II: Comments from the Department of the Interior: 

Figures Figures: 

Figure 1: Up-Front Financing of Federal Capital Assets before and after 
Establishing CAFs: New Asset Obtained in Year 1: 

Figure 2: NPS Asset Management Plan: 

Figure 3: Illustration of Budget Spikes and Potential Smoothing Effects 
of a CAF at ARS: 

Abbreviations: 

ABC: activity-based costing: 

APHIS: Animal and Plant Health Inspection Service: 

ARS: Agricultural Research Service: 

BA: budget authority: 

BLM: Bureau of Land Management: 

BPA: Bonneville Power Administration: 

CAF: capital acquisition fund: 

CBO: Congressional Budget Office: 

CPAIS: Corporate Property Automated Information System: 

DOD: U.S. Department of Defense: 

DOI: U.S. Department of the Interior: 

FASAB: Federal Accounting Standards Advisory Board: 

FBF: Federal Buildings Fund: 

FMS: Financial Management Service: 

FS: Forest Service: 

FTS: Federal Technology Service: 

GSA: General Services Administration: 

INFRA: Infrastructure: 

IT: information technology: 

NASA: National Aeronautics and Space Administration: 

NPS: National Park Service: 

NRC: National Research Council: 

OMB: Office of Management and Budget: 

PBS: Public Buildings Service: 

USDA: U.S. Department of Agriculture: 

WCF: working capital fund: 

Letter April 8, 2005: 

The Honorable Todd Russell Platts: 
Chairman: 
Subcommittee on Government Management, Finance, and Accountability: 
Committee on Government Reform: 
House of Representatives: 

Dear Mr. Chairman: 

This report responds to your request that we explore the concept of 
capital acquisition funds (CAF) as a possible way to reflect the annual 
cost for the use of capital in program budgets while still maintaining 
up-front congressional control over budgetary resources. To fully 
understand how these funds would work in the federal government, we 
agreed to (1) describe how CAFs might work as a financing approach for 
federal agencies' capital investment, (2) examine the potential 
benefits and difficulties of instituting and using CAFs, and (3) 
identify any issues that Congress might consider before instituting 
CAFs. 

Since CAFs do not currently exist, we developed an in-depth 
understanding of the CAF mechanism through a review of written CAF 
proposals and interviews with budget experts at the Office of 
Management and Budget (OMB) and the Congressional Budget Office (CBO). 
We then presented a detailed description of CAFs to officials at the 
Departments of Agriculture (USDA) and of the Interior (DOI) and some of 
their agencies. We obtained their insights and opinions on the 
applicability of the mechanism at their agencies and on how CAFs might 
compare to their current practices for financing capital assets. We 
also spoke with Department of the Treasury (Treasury) and General 
Services Administration (GSA) officials and congressional staff to gain 
their perspective on CAFs. Our work was conducted in Washington, D.C., 
from May 2004 through January 2005 in accordance with generally 
accepted government auditing standards. We obtained comments on a draft 
of this report from OMB, Treasury, GSA, DOI, and USDA. Written comments 
from Treasury and DOI are reproduced in appendix I and II. We have 
incorporated technical comments as appropriate throughout the report. 

Results in Brief: 

In recent years, various interested parties[Footnote 1] have reported 
on the different ways that federal agencies can improve planning, 
budgeting, and decision making for capital assets. One common 
recommendation has been to consider the creation of new capital asset 
financing mechanisms, CAFs. The theory behind this recommendation is 
that CAFs would both help improve decision making by allocating capital 
costs to subunits[Footnote 2] of departments on an annual basis and 
also help alleviate, at the subunit level, the large, year-to-year 
increases in budget authority (BA)[Footnote 3] (referred to in this 
report as "spikes") that sometimes occur with up-front financing of 
capital assets without changing the requirement for up-front funding at 
the department level. 

CAFs would operate at the department level and would to some extent 
complicate the current process for financing federal capital assets. 
Instead of providing departmental subunits with up-front appropriations 
to directly purchase capital assets, Congress would appropriate up-
front borrowing authority to the departmental CAF for the full cost of 
an asset.[Footnote 4] The CAF then would borrow from the Treasury's 
general fund to acquire the asset. The subunit would receive the asset 
and make a "mortgage payment"[Footnote 5] to the CAF. This mortgage 
payment would then be forwarded to Treasury as repayment for the 
borrowed funds; it would not be used to finance new assets. If existing 
capital assets were transferred to the CAF, the CAF would impute an 
annual capital usage charge on those assets to using agencies. The CAF 
would collect these charges on existing capital and forward them to 
Treasury; they could not be used for future projects. See figure 1 for 
an example of the current capital financing process compared to the 
process under a CAF mechanism. 

Figure 1: Up-Front Financing of Federal Capital Assets before and after 
Establishing CAFs: New Asset Obtained in Year 1: 

[See PDF for image] 

[A] This example assumes the asset is acquired at the beginning of the 
fiscal year and rented for the entire year. The mortgage payment equals 
approximately $644,000, assuming a $10 million loan for 30 years at a 5 
percent interest rate with monthly payments. 

[End of figure] 

This new system for financing assets would increase management and 
oversight responsibilities for Treasury, departments with CAFs, OMB, 
and CBO. Treasury would have to set up CAF accounts and manage and 
report on the borrowing authority and mortgage payments; it would 
consider charging an administrative fee to cover the costs of these new 
responsibilities. Departments would have to account for the 
transactions between the CAF, Treasury, and the subunits, and perform 
oversight responsibilities. OMB would have to issue guidelines to 
determine the types of assets to include in the CAF and the method for 
calculating a capital usage charge for existing capital. OMB and 
Congress would have oversight responsibilities, which would need to be 
spelled out. In addition, OMB and CBO would have to determine the 
scoring of both the initial up-front borrowing authority and the 
subsequent appropriations for the annual mortgage payments. Although on 
a gross basis the BA would be appropriated twice, the payments are 
purely intragovernmental and offset one another so no adjustments would 
be needed to any appropriation subcommittee allocations[Footnote 6] for 
new assets. If existing capital assets are included in a CAF, the 
scoring of annual capital usage charges would have to be determined. 

CAFs might improve decision making by allocating capital costs to 
programs. This could be part of a broader effort to include full costs 
in program budgets as a way of facilitating comparison across programs. 
CAFs might also ameliorate the spikes in BA for subunits that are 
sometimes said to inhibit capital acquisition. However, we found that 
agencies are implementing or using alternative mechanisms to address 
these challenges. For example, some agencies are developing and 
beginning to use asset management systems that should allow them to 
evaluate and record the condition of existing assets, estimate the 
funding required to sustain capital assets over time, and prioritize 
maintenance and improvements.[Footnote 7] Other agencies are using full 
cost information from accounting systems to aid in budget decisions, 
although more progress is needed before their cost accounting systems 
can fully inform decision making, including capital planning and 
budgeting. 

Regarding spikes in BA, the case study subunits we spoke with generally 
did not consider them to be an impediment to acquiring needed capital. 
They explained that spikes are sometimes created by the changing 
priorities and funding decisions of Congress rather than agency budget 
requests. In other cases, agencies avoid spikes by funding capital in 
useful segments or using no-year authorities.[Footnote 8] Both of these 
approaches allow an agency to spread the total cost of an asset over 
time by either completing a project in phases or accumulating numerous 
years of funding in no-year accounts until the total amount of up-front 
BA has been appropriated. In addition, agency working capital funds 
(WCF)[Footnote 9] and the Federal Buildings Fund (FBF)[Footnote 10] at 
GSA are being used to finance some capital assets. By using these 
funds, which charge a rent payment or user fee, capital costs are 
allocated to programs and spikes in BA are averted. 

In addition to describing alternative methods for achieving CAF goals, 
many of those we spoke with voiced concerns about CAFs. Case study 
agency and Treasury officials raised questions about the long-term 
feasibility of making fixed annual mortgage payments, especially in 
times of constrained budgets. Some subunits and congressional 
appropriations staff were concerned about shifting more control over 
capital assets from the subunit to the department level. In general, 
almost all agency officials, congressional staff, and budget experts 
that we interviewed concluded that CAFs sounded complicated and many 
questioned whether the challenges that CAFs are designed to address 
were problematic enough to warrant their adoption; especially given the 
additional budget complexities CAFs create. 

We identified several other pertinent issues to weigh when considering 
the implementation of CAFs. Perhaps the most difficult issue to tackle 
would be the implementation of an annual capital usage charge on 
existing capital assets. The argument in favor of these charges is that 
they would allow programs to show the full annual cost of capital in 
their budgets and in doing so establish a level playing field for 
federal capital investment to allow for comparisons across programs. 
The annual capital usage charge also might influence agency managers to 
dispose of excess capital assets. If existing capital is not included, 
it would be decades before all programs showed the full annual cost of 
capital in their budgets, and programs purchasing new capital would 
appear more expensive than those using existing capital. However, there 
is no agreement on the need for such a charge or how it would be 
computed. 

Beyond that, although cost allocation efforts may increase the 
transparency of total program costs, it is not clear that CAFs would 
really create incentives for managers to make better decisions about 
new or existing capital assets, especially if annual mortgage payments 
and capital usage charges are automatically included in subunit 
appropriations. For existing capital assets, mission responsibilities, 
legal requirements for federal property sales, and financial costs 
would likely constrain an agency's ability to dispose of surplus 
assets. If implemented, CAFs would create a whole new set of 
circumstances that would need to be addressed if an asset (which would 
be owned by the CAF) is sold or transferred--how would a "sale price" 
be determined between federal agencies, how would the full repayment of 
CAF debts be ensured, and how would the agencies' budgets be adjusted? 
Finally, even if guidelines indicate that most capital assets should be 
included in the CAF, it is likely that some capital assets would 
continue to be funded through currently existing mechanisms such as 
WCFs, FBF, and the Federal Technology Service's (FTS) Information 
Technology (IT) Fund.[Footnote 11]

In the past, we saw some merit in the broad concept behind 
CAFs[Footnote 12] and agreed that CAFs should be explored as a 
financing mechanism. After having done an in-depth examination of the 
specifics and after discussing the perspectives of others who would be 
involved in implementing CAFs, we now see that implementation 
challenges are significant and that agencies have adopted other 
mechanisms to address challenges CAFs were designed to address. It is 
clear that in a mechanical sense CAFs could operate as intended, albeit 
by increasing the complexity of capital asset financing. However, we 
found there is little assurance that this increased complexity will 
better achieve what is already being accomplished through the 
alternative mechanisms discussed in this report. Without stronger 
justification and a clear plan for handling the potential difficulties 
raised in this report, CAFs would absorb the time and energy of those 
involved in budgeting for capital without commensurate benefit. 

We obtained comments on a draft of this report from OMB, Treasury, GSA 
and our case study agencies--USDA and DOI. Treasury, GSA, USDA and DOI 
generally agreed with the report. Treasury, USDA, DOI and OMB provided 
technical comments, which have been incorporated as appropriate. OMB 
provided oral comments and agreed with our description of the mechanics 
of CAFs and concurred that spikes in BA for capital assets could be 
alleviated through other means. OMB also recognized the problems with 
CAFs that are highlighted in this report, including those related to 
existing capital, and agreed that the complications of designing and 
operating CAFs might outweigh the benefits. However, they disagreed 
with our description of the goals of CAFs because they view CAFs as 
part of a broader effort to have program budgets reflect full annual 
costs in order to change incentives for decision makers. They do not 
believe alternative mechanisms achieve that goal. 

We recognize that if the sole or primary purpose of a CAF is to embed 
costs in the program budgets, then the alternatives discussed in this 
report do not achieve that purpose. However we believe, as highlighted 
in the Report of the President's Commission to Study Capital Budgeting, 
that the primary goal of CAFs is to improve decision making for 
capital. Asset management and cost accounting systems, when fully 
implemented, provide invaluable information that will assist decision 
makers in determining how much and what types of capital are needed. 
While this information may not necessarily be reflected in program 
budgets, it is available to aid in budget and program decision making. 
The fact that many of these systems are in relatively early stages of 
development also increases our concern about CAFs. In a recent report, 
we noted the belief among some agency officials, congressional 
appropriations committee staff, and budget experts that improving 
underlying financial and performance information should be a 
prerequisite to efforts to restructure program budgets.[Footnote 13] We 
argue this would also be true for CAFs, since without adequate measures 
of program costs and an ability to identify capital priorities, a new 
financing mechanism would do nothing to address the basic challenges of 
determining how much and what types of capital are needed. Moreover, we 
are not convinced that CAFs and the annual mortgage payments they would 
require would change incentives for program managers or other decision 
makers, especially if annual mortgage payments and capital usage 
charges are automatically included in subunit appropriations. In 
conclusion, we remain of the view that the operational challenges of 
CAFs outweigh the benefits and that alternative mechanisms described in 
this report can more simply promote improved decision making. 

Background: 

The federal government acquires a wide variety of capital assets for 
its own use including land, structures, equipment, vehicles, and 
information technology. Large sums of taxpayer funds are spent on these 
assets, and their performance affects how well agencies achieve their 
missions. To directly acquire an asset, agencies generally are required 
to have full up-front BA for the total asset cost--usually a sizable 
amount.[Footnote 14] This requirement allows Congress to recognize the 
full budgetary impact of capital spending at the time a commitment is 
made; however, it also means that the full cost of an asset must be 
absorbed in the annual budget of an agency or program, despite the fact 
that benefits may accrue over many years. This up-front funding 
requirement has presented two challenges for capital planning and 
budgeting at the federal level. 

One challenge is how to permit "full cost" analysis and to promote more 
effective capital planning and budgeting by allocating capital costs on 
an annual basis to programs that use capital. Allocating capital costs 
over the assets' useful lives ensures that the full annual cost of 
resources a program uses is considered when evaluating the program's 
effectiveness. It can make program managers more aware of on-going 
capital costs, thus promoting more effective decision making for 
capital. It may also contribute to equalizing comparisons across 
different programs or different approaches to achieving similar goals. 

A second challenge is how to address the possible bias against the 
acquisition of necessary capital assets that may be created by spikes 
(large, temporary, year-to-year increases in BA), which can make 
capital assets seem prohibitively expensive in an era of resource 
constraints. GAO has reported in the past that agencies view up-front 
funding as an impediment to capital acquisition because of the 
resulting spike in BA.[Footnote 15] CAFs have been suggested as a 
capital asset financing approach that would benefit federal departments 
and their subunits by addressing both of these challenges. CAFs would 
be department-level funds that use annually appropriated authority to 
borrow from the Treasury to purchase federally-owned assets[Footnote 
16] needed by subunits of the department. These subunits would then pay 
the CAF a mortgage payment sufficient to cover the principal and 
interest payment on the Treasury loan. The CAF would use those receipts 
only to repay Treasury and not to finance new assets. 

The CAF concept was formally proposed in the February 1999 Report of 
the President's Commission to Study Capital Budgeting[Footnote 17] as a 
mechanism that would help improve the process by which annual budget 
decisions are made by promoting better planning and budgeting of 
capital expenditures for federally owned facilities. The report states 
that by ensuring that individual programs are charged the true cost of 
using capital assets, the CAF encourages managers to make more 
efficient use of those assets. The Commission report also argues that 
CAFs could help smooth out the spikes in BA experienced by subunits 
with capital project requests. By aggregating all up-front BA for 
capital requests at the department level, subunit budgets would reflect 
only an annual payment for capital. Since the Commission report, CBO, 
GAO, and the National Research Council (NRC) have all agreed that CAFs 
should be explored as a capital financing mechanism.[Footnote 18]

CAFs were also discussed in the President's Fiscal Year 2004 Budget 
issued in February 2003.[Footnote 19] The section on "Budget and 
Performance Integration" briefly described the concept and reports that 
draft legislation creating CAFs has been developed, discussed with 
agencies, and improved. It said that CAFs would be one way to show the 
uniform annual cost for the use of capital without changing the 
requirement for up-front appropriations. At this time, OMB's interest 
in CAFs appears to have waned. CAFs were not mentioned in the 
President's Budget in either fiscal year 2005 or 2006 and the CAF 
legislation described has not been introduced. 

Scope and Methodology: 

To address our objectives, we reviewed the available literature 
describing the CAF concept. We also interviewed budget experts at OMB 
and CBO to gain a more thorough understanding of how CAFs would operate 
and discuss issues involved with their implementation. This permitted 
us to describe a theoretical CAF with some operational detail. 
Additionally, we sought the views of the many parties that would be 
affected if CAFs were established. Since agency and congressional 
officials were generally unaware of the CAF concept, we developed a 
brief summary describing the general mechanics of a CAF and shared that 
summary prior to interviews in order to generate discussion. 

To get the department perspective, we chose USDA and DOI as case 
studies. Both of these departments have substantial and varied capital 
needs.[Footnote 20] Capital assets acquired by USDA and DOI include 
land, buildings, research equipment, laboratories, quarantine 
facilities, dams, bridges, parklands, roads, trails, vehicles, 
aircraft, and information technology (hardware and software). In 
addition, each department has multiple subunits that use capital assets 
to achieve their missions--important for examining the question of 
subunit spikes. We interviewed officials at the department and subunit 
levels to gather their opinions and insights on the operation, 
benefits, and difficulties of CAFs. Specifically within USDA we spoke 
with officials in the Animal and Plant Health Inspection Service 
(APHIS), the Agricultural Research Service (ARS), and the Forest 
Service (FS). Within DOI, we spoke with officials in the National Park 
Service (NPS) and the Bureau of Land Management (BLM). During these 
discussions, agency officials also compared CAFs (as described in our 
summary) with current practices used for planning, budgeting, and 
acquisition of capital assets. 

Since congressional approval would be necessary for the creation and 
operation of CAFs, we spoke with staff on the House and Senate Budget 
Committees, the House and Senate Appropriations Subcommittees on the 
Interior, and the House Appropriations Subcommittee on 
Agriculture[Footnote 21] to get their opinions on the proposed CAF 
mechanism. We also interviewed officials at Treasury, which would be 
responsible for managing the borrowing authority. In addition, we spoke 
with officials at GSA to discuss how a CAF might affect the FBF, used 
by some federal agencies to acquire federal office space and the FTS, 
used by some federal agencies to acquire IT. 

Finally, we reviewed agency documents including asset management plans, 
accounting system descriptions, capitalization policies, and working 
capital fund information. We also examined our prior work, financial 
accounting standards, and various legal and budgetary sources 
specifically related to federal property management. 

We recognize that our findings on agency perspective, which are based 
on interviews with five subunits within two departments, may not be 
applicable to all agencies within the federal government. However, we 
were struck by the consistency in department and subunit reaction to 
the concept, especially when followed by comparable reactions from 
congressional officials. Our work was conducted in Washington, D.C., 
from May 2004 through January 2005 in accordance with generally 
accepted government auditing standards. 

CAF Operations Would Create a New Financing System and New Oversight 
Responsibilities: 

Implementing CAFs would change the current process for financing new 
federal capital projects. In addition, if all existing capital assets 
of a department and its subunits were transferred to the CAF, the CAF 
would impute an annual capital usage charge on those assets to using 
agencies. This additional complication could be avoided if CAFs were 
limited to new assets. However, this would mean it would be decades 
before all programs showed the full annual cost of capital in their 
budgets. 

Although in many respects CAFs are accounting devices to record 
financial transactions, their creation would create new management and 
oversight responsibilities for many federal entities. Treasury would 
have primary responsibility for administering the borrowing authority. 
Both Treasury and those departments with CAFs would be required to keep 
track of the many CAF transactions. The management and oversight 
responsibilities of the departments would need to be clearly spelled 
out in order for CAFs to operate effectively. OMB would likely have to 
issue guidelines on operation specifics and OMB and the congressional 
appropriations committee staff would have to review the CAFs to ensure 
they were operating properly. OMB and CBO would score (estimate) the 
CAFs' and subunits' BA--both the initial authority to borrow and the 
subsequent appropriations used for repayment. The scoring of the annual 
capital usage charges, if CAFs were applied to existing capital, has 
not yet been developed. 

CAFs Would Be Positioned at the Department Level and Create a More 
Complex Process for Financing Capital: 

Although CAFs do not currently exist, we can describe how they would 
likely operate based on written proposals and our discussions with 
budget experts. CAFs would be established at the department level as 
separate accounts that would receive up-front authority to borrow 
(provided in appropriation acts) on a project-by-project basis, for the 
construction and acquisition of large capital projects for all of the 
subunits within a department. For those departments with subunits split 
between two appropriation subcommittees, it is likely that two CAFs 
would be necessary. For example, DOI receives appropriations through 
two subcommittees: the Energy and Water Development Subcommittee, which 
is responsible for Bureau of Reclamation (Reclamation) programs; and 
the Interior and Related Agencies Subcommittee, which is responsible 
for all other Interior programs. CBO, OMB, and agency officials we 
spoke with generally believed that having a CAF that crossed 
subcommittee jurisdictions would create many problems, thus it would 
likely be necessary for departments to have a separate CAF for each 
subcommittee with which they work. Using the example above, DOI would 
have one CAF for Reclamation and a second for the remaining subunits 
within DOI. Alternatively, CAFs could be situated at the appropriation 
subcommittee level rather than the department level, with each of the 
13 subcommittees appropriating to their respective CAF for the agencies 
under their jurisdiction.[Footnote 22] Some congressional officials did 
not seem to think that this would be the most effective arrangement and 
raised the point that increased resources might be needed at the 
subcommittee level to manage CAF transactions. In addition, OMB argued 
that CAFs should be located at the department level because the 
department is the focus of accountability for planning and managing 
programs and capital assets, as well as for budget execution and 
financial reporting. 

The CAF would receive appropriations for the full cost of an asset (or 
useful segment of an asset) in the form of borrowing authority. Like 
all BA, the borrowing authority for each CAF-financed project would 
specify the purpose, amount, and duration of the authority. Unless the 
asset is to be available for use in the same fiscal year, the subunit 
itself would receive no appropriations. The CAF would use its authority 
to borrow from the Treasury's general fund to acquire the asset for the 
subunit. When the asset became usable, the subunit would begin to pay 
the CAF an amount equal to a mortgage payment consisting of interest 
and principle. These equal annual payments would consist of the 
principal amortized over the useful life of the asset and include 
interest charges at a rate determined by Treasury (based on the average 
interest rate on marketable Treasury securities of comparable 
maturity). The CAF would use these mortgage payments to repay Treasury 
for the funds borrowed plus interest. Unlike a revolving fund, the 
mortgage payments collected by the CAF would be used only to repay 
Treasury and could not be used to finance new assets. 

For each project funded through the CAF, the subunit's annual budget 
request would need to include the annual mortgage payment in each year, 
for the useful life of the asset (or until the asset was sold or 
transferred). The subunit would need annual appropriations for these 
payments, along with its other operating expenses. On the basis of our 
discussions, we conclude that the appropriations from which the 
payments are made would be discretionary as opposed to mandatory. They 
would not be provided as a line item for mortgage payments to the CAF, 
but would be part of the subunit's total appropriation. While the 
subunit would be required to make the annual payment, there would be no 
guarantee that Congress would include the additional amounts to cover 
the payment in the subunit's appropriation. 

At some point, the mortgage on an asset would be "paid off." However, 
if annual capital usage charges on existing capital were established, 
payments would continue, although the amount of the payments would 
depend on the method used to calculate the charges for existing 
capital. Any imputed charges collected by the CAF would be transferred 
to the general fund of Treasury and not be available to finance new 
assets. Later in this report we discuss in more detail the idea of 
imputing a capital usage charge on existing capital. 

Treasury Would Oversee Borrowing Authority Used to Acquire Capital 
Assets: 

Treasury is responsible for administering and managing borrowing 
authority. Treasury officials explained that within the department, the 
Financial Management Service (FMS) would have responsibility for 
setting up the accounts to correspond with each CAF created. Before a 
CAF could actually borrow from Treasury, an agreement would have to be 
signed establishing the interest rate and repayment schedule. Treasury 
officials recommended that OMB establish guidelines to specify the 
useful life of capital assets so departments would abide by an 
appropriate amortization schedule and not attempt to lower payments by 
lengthening the asset's useful life. The standards issued by the 
Federal Accounting Standards Advisory Board (FASAB) on how to account 
for property, equipment, and internal-use software could be useful in 
developing these guidelines.[Footnote 23] According to Treasury 
officials, FMS would also be responsible for preparing the warrants, an 
official document that establishes the amount of monies authorized to 
be withdrawn from the central accounts maintained by Treasury, and 
would report annually on account activity. The Bureau of Public Debt 
would have the most day-to-day interaction with the CAF. It would be 
responsible for transferring the borrowed funds to the department and 
for receiving payments. Although Treasury officials did not think it 
would be an unmanageable task, they said that tracking individual 
transactions could become complicated, depending on the level of 
detailed reporting required, and would certainly require additional 
staff time. To cover these costs, they would want to charge an 
administrative fee, as they do for trust funds. 

CAFs Would Add Complications to Oversight and Scoring: 

A CAF is an additional layer of administration that could complicate 
program management rather than streamline it. At the department level, 
the chief financial officer would likely be responsible for the 
financial operation of the CAF. Department heads would need to specify 
duties for those with capital asset management and oversight 
responsibilities according to the unique needs of the department. 
Oversight functions would include accounting for all the transactions 
between the CAF and Treasury as well as between the CAF and the 
subunits. In addition, the managerial relationship between the CAF and 
individual subunits would have to be worked out. OMB would also likely 
have new responsibilities. For example, OMB would probably have to 
develop guidelines on issues such as (1) the types of assets to include 
in the CAF, (2) the amortization schedule for various types of assets, 
(3) the method for calculating a capital usage charge on existing 
capital (along with CBO and Congress), and (4) the relationship between 
a CAF and FBF.[Footnote 24] Indeed, the NRC report argued that 
oversight and management of CAFs should actually reside at OMB. 
Although OMB officials provided no details, they agreed that they would 
have some responsibility for reviewing CAFs, as would congressional 
committees. 

As they do for all appropriation actions, CBO and OMB would score the 
CAF and subunit BA--both the initial authority to borrow and the 
subsequent appropriations used for repayment. Although the net amounts 
of BA and outlays for capital acquisitions would not change, the type 
of BA would. Currently, annual appropriations, which allow program 
managers to incur obligations and make outlays with no additional 
steps, are provided for most capital acquisitions. A CAF, however, 
would be appropriated up-front borrowing authority. On a gross basis, 
the BA would have to be appropriated twice, once as up-front borrowing 
authority and incrementally over time through appropriations for the 
annual mortgage payment. Since the annual mortgage payment is purely 
intragovernmental, the subunit's BA and outlays are offset by receipts 
in the CAF, so the total BA and outlays are not double-counted. 
Therefore, appropriation subcommittee allocations would not need to be 
adjusted if a CAF were used for new assets. 

The initial borrowing authority would be equal to the asset cost and 
would be scored up front in the CAF budget. When the annual mortgage 
payments begin, the amount provided in the subunit's budget would equal 
the mortgage payment and would be scored as discretionary BA. The 
mortgage payment would then be transferred to the CAF and, as a 
receipt, be considered mandatory BA. However, according to OMB, it 
would be treated as a discretionary offset for scoring 
purposes.[Footnote 25] The payment and receipt would completely offset 
each other within the appropriation subcommittees' totals and in the BA 
and outlay totals for the federal budget as a whole. 

When the CAF repays Treasury using the mortgage receipts, scoring would 
follow the current guidelines for debt repayment transactions. The 
mortgage receipt would be considered mandatory BA and be used to repay 
Treasury; however, the portion of the mortgage payment that corresponds 
to the amortization of the asset cost would be deducted from the BA 
(and outlay) totals. When collections are used for debt repayment, they 
are unavailable for new obligations, and therefore are not BA. If they 
were counted, the BA and outlay totals would be overstated over the 
life of the loan. According to OMB, the remaining mandatory BA would be 
obligated and outlayed for interest payments to an intragovernmental 
receipt account in Treasury, but would not be scored. At this time, the 
scoring of annual capital usage charges on existing capital assets has 
not been determined. 

CAF Benefits Can Be Achieved through Alternative Means Without the 
Added Budget Complexity: 

CAFs have been proposed as a way to address two challenges that arise 
from the full up-front funding requirement for capital projects. The 
first challenge is to facilitate program performance evaluation and 
promote more effective capital planning and budgeting by allocating 
capital costs on an annual basis to those programs using the capital. 
By having annual cost information, managers can better plan and budget 
for future asset maintenance and replacement. During our interviews, we 
learned that asset management and cost accounting systems are currently 
being implemented that could be used to address this problem. These 
systems are designed to provide the information necessary for improved 
priority setting and better decision making, although we found that 
many agencies are still working to fully implement and use these 
systems. The second challenge--managing periodic spikes in BA caused by 
capital asset needs--if considered a problem at all, is managed by our 
case study agencies through existing entities and practices, such as 
the use of WCFs. Consequently, CAFs appear to offer few benefits over 
and above those provided by other mechanisms being put into place or in 
use. In addition, officials at the department and subunit level and key 
congressional staff we spoke with have a number of concerns about 
adopting CAFs as an alternative financing method. Most of those we 
spoke with said CAFs sounded like a complicated mechanism to achieve 
benefits that can be achieved in simpler ways and some worried that 
implementation of CAFs could distract from current efforts to improve 
capital decision making. 

Allocating Annual Capital Costs and Improving Decision Making for 
Capital Assets May Be Achieved through Existing Initiatives: 

Officials we interviewed reacted to our presentation of the CAF 
mechanism by describing current agency initiatives and existing 
mechanisms that they believe can better achieve the ultimate goal of 
improving budgeting and decision making for capital. We found that some 
agencies currently make use of asset management plans to collect, 
track, and analyze cost information and to assist management in budget 
decisions and priority setting. Accounting systems that report full 
costs are also being developed that will include the cost of capital 
assets in total program costs and will provide a tool for agency 
managers to make better decisions and use capital more efficiently. 
Once fully implemented, these methods will provide agencies with the 
ability to assign costs at the program level and link those costs to a 
desired result. The information provided should lead agencies to 
consider whether they will continue to need the current quantities and 
types of fixed assets they own to meet future program needs. 

The Departments of the Interior and Agriculture Are Implementing Asset 
Management Systems to Make Informed Decisions on Capital Investment: 

As we have reported in previous work, leading organizations gather and 
track information that helps them identify the gap between what they 
have and what they need to fulfill their goals and objectives.[Footnote 
26] Routinely assessing the condition of assets and facilities allows 
managers and their decision makers to evaluate the capabilities of 
current assets, plan for future asset replacements, and calculate the 
cost of deferred maintenance. We found that asset management systems 
are being developed and implemented at some agencies as a mechanism to 
aid in the identification of asset holdings and prioritization of 
maintenance and improvements. 

For example, we reported in 2004 that NPS, within DOI, is currently 
implementing an asset management process.[Footnote 27] If it operates 
as planned, the agency will, for the first time, have a reliable 
inventory of its assets, a process for reporting on the condition of 
those assets, and a systemwide methodology for estimating deferred 
maintenance costs. The system requires each park to enter all of its 
assets and information on its condition into a centralized database for 
the entire park system and to conduct annual condition assessments and 
regular comprehensive assessments. This new process will not be fully 
implemented until fiscal year 2006 or 2007, and will require years of 
sustained commitment by NPS and other stakeholders. 

Figure 2: NPS Asset Management Plan: 

Department officials provided us a prototype of an asset management 
plan for the Grand Canyon National Park. The objective is to establish 
the total cost of ownership of the Grand Canyon's asset inventory and 
to provide a tool to aid managers in budget decisions, priority 
setting, and communication. It focuses on four key questions about the 
following: 

* What inventory NPS owns in the park; 
* The condition of assets; 
* Current replacement values; 
* What operations and resources are required to properly sustain the 
asset inventory; 

Information on the park's inventory is gathered from condition 
assessments, operations and maintenance budgets, staff experience, and 
industry standard sources.[A] This information helps clarify asset 
maintenance and operations requirements, which are then compared to 
agency budget data to determine if funding levels are adequate to 
sustain the capital over time. In addition, managers use a facility 
condition index plotted against an asset priority indexb to restore 
assets in priority order and identify assets for disposal. 

Source: DOI. 

[A] Industry standard sources refer to the facility condition index, 
which is considered to be a leading metric for assessing asset 
conditions. It is calculated by dividing the total project requirements 
by the replacement value of the asset. 

[B] The asset priority index is a score that park leadership assigns 
and is reflective of the asset's relevance to carrying out the park 
mission. 

[End of figure]

According to NPS documents, this approach and the information captured 
in the asset management plan provides Grand Canyon National Park 
managers with the knowledge and specifics to make informed capital 
investment decisions and to develop sound business cases for funding 
requests. The appropriators for NPS that we spoke with agreed that the 
additional funding they have provided for condition assessments and 
asset management has improved planning and decision making at NPS. 
Department officials told us that these types of asset management plans 
would eventually be completed for all capital-holding subunits within 
DOI. The completion of this management system is especially important 
for DOI because much of its mission is the upkeep and improvement of 
its capital for use by the public. 

FS, whose capital includes numerous trails, roads, and recreation 
facilities, has implemented and is continuing to enhance its asset 
management system referred to as Infrastructure (INFRA). INFRA has been 
in production since 1998 and served as the agency's primary inventory 
reporting and portfolio management tool for all owned real property 
until May 2004. FS officials said that they have used INFRA to assist 
management in prioritizing backlogs of maintenance and renovations. 
According to these officials, INFRA allows for the transfer of FS asset 
inventory data directly into USDA's asset inventory system known as the 
Corporate Property Automated Information System (CPAIS). CPAIS, which 
agency officials said was modeled after INFRA and further enhanced to 
include leased property and GSA assignments, was implemented in May 
2004 and maintains data elements necessary to track and manage owned 
property, leased property, GSA assignments, and interagency agreements. 
The system will provide the department and its subunits with the 
capability to increase asset utilization and cost management and to 
analyze and reduce maintenance expenses. The primary users of the 
system are those subunits with considerable capital needs, according to 
agency officials. ARS's capital is mostly high-priced laboratories, 
specific scientific equipment, and research facilities, and officials 
are confident that CPAIS will provide the information needed to ensure 
accountability over its real property. ARS also has its own facilities 
division made up of contractors and engineers that are equipped with 
the experience and expertise to manage and oversee their specialized 
capital projects. APHIS officials said they are in the process of doing 
facility condition assessments and hope to use the information in order 
to better align its mission with its strategic plan. 

The need for asset management systems to aid agency officials in making 
informed decisions was underscored in our report designating federal 
real property as a new high-risk area in 2003. The report highlighted 
the fact that in general, key decision makers lack reliable and useful 
data on real property assets.[Footnote 28] In February 2004, the 
President issued an Executive Order for Federal Real Property Asset 
Management. The order requires designated agencies to have a real 
property officer and to implement an asset management planning process. 
Its purpose is to promote the efficient and economical use of America's 
real property assets and to assure management accountability for 
implementing federal real property management reforms. 

Some Agencies Are Beginning to Use Full Cost Information to Make Budget 
Decisions, Although Much Work Needs to Be Done: 

We found that some agencies are currently implementing cost accounting 
methods, such as activity-based costing (ABC), to help determine the 
full cost of a product or service, including the annual cost of 
capital, and using that information to make budgeting 
decisions.[Footnote 29] For example, BLM has implemented a management 
framework that integrates ABC and performance information. We have 
previously reported that BLM's model fully distributes costs and can 
readily identify, among other things, (1) the full costs of each of its 
activities and (2) what it costs to pursue each of its strategic goals. 
The system provides detailed information that facilitates external 
reporting and can be used for internal purposes, such as developing 
budgets and analyzing the unit costs of activities and 
outputs.[Footnote 30] Integrating cost and performance information into 
one system helped BLM become a finalist for the President's Quality 
Award in 2002 in the "performance and budget integration" category. The 
bureau was recognized for implementing a disciplined approach that 
allows it to align resources, outputs, and organizational goals, and 
can lead to insights to reengineer work processes as necessary. Among 
the results of its ABC efforts, BLM has reported increased efficiency 
and success in completing deferred maintenance and infrastructure 
improvement projects. BLM was at the forefront of this cost management 
effort, which began in 1997 and has now been adopted departmentwide as 
part of DOI's vision of effective program management. 

In another report, we described how the National Aeronautics and Space 
Administration (NASA) is beginning to use accounting information to 
help make decisions about capital assets.[Footnote 31] NASA's "Full 
Cost" Initiative involves changes to accounting, budgeting, and 
management to enhance cost-effective mission performance by providing 
complete cost information for more fully informed decision making and 
management. The accounting changes allow NASA to show the full cost of 
related projects and supporting activities while the "full cost" 
budgeting uses budget restructuring to better align resources with its 
strategic plan. The accounting and budgeting portions of the initiative 
support the management decision-making process by providing not only 
better information, but also incentives to make decisions on the most 
efficient use of resources. For example, NASA officials credited "full 
cost" budgeting with helping to identify underutilized facilities, such 
as service pools--the infrastructure capabilities that support multiple 
programs and projects. NASA's service pools include wind tunnels, 
information technology, and fabrication services. If programs do not 
cover a service pool's costs, NASA officials said that it raises 
questions about whether that capability is needed. NASA officials also 
explained that when program managers are responsible for paying service 
pool costs associated with their program, program managers have an 
incentive to consider their use and whether lower cost alternatives 
exist. As a result, NASA officials said "full cost" budgeting provides 
officials and program managers a greater incentive to improve the 
management of these institutional assets. Although accounting changes 
alone are not sufficient to improve decision making and management, it 
is clear from discussions with NASA officials and agency documentation 
that the move to full costing is a critical piece of the initiative. 

Some agencies still need to make more progress before their cost 
accounting can more fully inform their decision making, including 
decisions on capital planning and budgeting. In a 2003 report looking 
at the financial management systems of 19 federal departments, we found 
that although departments are required to produce information on the 
full cost of programs and projects, some of the information is not 
detailed enough to allow them to evaluate programs and activities on 
their full costs and merits.[Footnote 32] For example, the Department 
of Defense (DOD) does not have the systems and processes in place to 
capture the required cost information from the hundreds of millions of 
transactions it processes each year. Lacking complete and accurate 
overall life-cycle cost information for weapons systems impairs DOD's 
and congressional decision makers' ability to make fully informed 
decisions about which weapons, or how many, to buy. DOD has 
acknowledged that the lack of a cost accounting system is its largest 
impediment to controlling and managing weapon systems costs. Our report 
states that departments are experimenting with methods of accumulating 
and assigning costs to obtain the managerial cost information needed to 
enhance programs, improve processes, establish fees, develop budgets, 
prepare financial reports, make competitive sourcing decisions, and 
report on performance. As departments implement and upgrade their 
financial management systems, opportunities exist for developing cost 
management information as an integral part of the systems to provide 
important information that is timely, reliable, and useful. 

CAFs Might Smooth Budget Spikes, but Benefit May Be Minor: 

The President's Commission to Study Capital Budgeting and NRC have 
suggested that a CAF might help ameliorate the spikes in agency budgets 
that often result from large periodic capital requests by smoothing 
capital costs over time and across subunits. Our analysis of recent 
trends in BA for capital acquisitions clearly shows the presence of 
spikes at the subunit level. See figure 3 for an illustration of budget 
spikes and potential smoothing effects of a CAF at ARS. 

Figure 3: Illustration of Budget Spikes and Potential Smoothing Effects 
of a CAF at ARS: 

[See PDF for image] 

Note: In this figure, the first 12 years of data are based on actual BA 
for capital assets for fiscal years 1994 through 2005. To simulate a 
long-term trend, we replicate this data for years 13 through 30. A 20-
year repayment term is used to calculate the annual mortgage payment, 
which does not include an interest charge. We obtained BA data for 
capital assets from OMB's MAX database as described in the Scope and 
Methodology section. 

[End of figure] 

However, these spikes did not appear to be a major concern to the case 
study subunits we spoke with nor did they consider them a barrier in 
meeting capital needs. Given current practices for financing capital 
assets, it seems that some program managers and Congress have found 
ways to cope with spikes in the absence of CAFs. As a result, the 
benefit of smoothing costs with a CAF would be minimal. 

Some Spikes May Be Created by Congressional Funding Decisions: 

Our prior work indicates that some agencies have complained that large 
spikes in their budget hinder their ability to acquire the needed 
funding to complete capital projects[Footnote 33] and reveals that some 
agencies have turned to alternative financing mechanisms, such as 
incremental funding, operating leases, and public-private partnerships, 
that allow them to obtain assets without full, up-front BA.[Footnote 
34] A few agency officials we spoke with said that because of the up-
front funding requirement, they have sometimes opted for operating 
leases instead of capital leases or constructing buildings. Operating 
leases are generally more expensive than construction, purchase, or 
capital leases for long-term needs but do not have to be funded up 
front. Nevertheless, the agencies we spoke with reported that spikes 
are often created by the changing priorities of Congress and its 
willingness to provide up-front funding for favored capital projects. 
For example, ARS officials reported that appropriators have increased 
the agency's budget in a given year to fund a new or expanded facility 
that the subcommittee considered a priority. Historically, the 
appropriations subcommittee for ARS (and all USDA agencies except FS) 
has been active in initiating capital projects and following through 
with the up-front funding necessary to build or acquire assets. From 
ARS's perspective, budget spikes are not problematic because of the 
perceived ease in obtaining needed funds. DOI also reported that some 
of its subunits have received "waves" of funding for capital projects 
largely dependent upon the priorities of Congress and the President. 
Within DOI, BLM officials agreed that budget spikes were mostly a 
result of congressional add-ons. On the other hand, NPS reported that 
most of its capital projects are just not large enough to cause a 
noticeable budget spike. 

Staff from the congressional budget committee suggested that 
deliberations during the appropriations process result in some 
smoothing at the subcommittee level. The smoothing effects may not be 
apparent to agencies when they review their individual budgets, but 
they are evident from a governmentwide perspective. Historical analysis 
shows that federal nondefense capital spending has remained relatively 
constant over the past 30 years.[Footnote 35]

Spikes Are Being Managed by Funding Useful Segments or Using No-Year 
Authority: 

When spikes might be a problem, the departments and subunits we spoke 
with have been able to manage them by dividing projects into useful 
segments and accumulating funds with no-year authority. USDA and FS 
reported that they have broken capital projects into useful segments 
and requested the funding accordingly to minimize dramatic fluctuations 
in capital costs. For example, USDA is currently renovating its 
headquarters in Washington, D.C., and is using funds the department 
receives every other year to finance the overhaul of one discrete 
section of the building at a time. APHIS and BLM have also broken up 
large projects by funding the survey and design phases in the first 
year and requesting funds for construction in subsequent years. In 
addition, ARS and APHIS have authorities that allow them to accumulate 
a specified amount or percentage of unobligated funds until the amount 
is sufficient to cover the full up-front costs of the desired asset. 
For example, ARS is building an animal health center in Iowa, which 
costs an estimated $460 million. ARS received $124 million in fiscal 
year 2004 towards the project and can accumulate that money in its no-
year account until the total amount to cover the costs is collected. In 
its efforts to consolidate field offices, APHIS officials told us they 
were granted authority to convert $2 million in unobligated balances 
into no-year money each year for 3 years. The $6 million it was able to 
accumulate allowed it to fund the consolidation with up-front funding. 
The bureau hopes to expand this authority to apply to other capital, 
including helicopters and airplanes. 

WCFs and FBF Can Be Used Both to Finance Capital Assets Without Spikes 
and to Allocate Capital Costs: 

WCFs, a type of revolving fund,[Footnote 36] are a mechanism that can 
be used both to spread the cost of capital acquisition over time and to 
incorporate capital costs into operating budgets. As reported 
previously,[Footnote 37] we found that WCFs can be effective for 
agencies with relatively small, ongoing capital needs because the WCFs, 
through user charges, spread the cost of capital over time in order to 
build reserves for acquiring new or replacement assets. Also, WCFs help 
to ensure that capital costs are allocated to programs that use capital 
by promoting full cost accounting. Since WCFs are designed to be self-
financing, the user charges must be sufficient to recoup the full cost 
of operations and include charges, such as depreciation, to help fund 
capital replacement. 

Some we spoke with use WCFs to finance capital assets such as IT 
initiatives and equipment. For example, USDA's WCF provided funds to 
the National Finance Center, one of its activity centers, to purchase 
and implement a financial system. Department officials explained that 
after the system became operational, the Finance Center charged the 28 
user entities a depreciation expense to recoup the costs of purchasing 
the system so it could repay the WCF. In another example, the FS's WCF 
purchases radio equipment, aircraft, IT, and other motor-driven 
equipment. The equipment is rented out to administrative entities 
within the agency, such as the National Forests and Research Experiment 
Stations, and to outside agencies for a charge that recoups the costs 
of operation, maintenance, and depreciation. The user charge is 
adjusted to include sufficient funds to replace the equipment. Agency 
officials would like to expand the WCF beyond just equipment and 
establish a facilities maintenance fund. Through this fund, they would 
apply a standard charge per square foot plus a replacement cost 
component. The charges would be used for ongoing maintenance and 
replacement and they believe would help influence line officers to 
reexamine capital needs. BLM's WCF functions similar to that of the 
FS's WCF. BLM's WCF purchases vehicles, then charges fees to users of 
the vehicles and uses the revenue to buy replacement vehicles. In both 
of these examples, the WCF is designed to accumulate the funds to 
absorb the up-front costs of the capital while the user entities incur 
the annual costs of using the capital. 

This mechanism operates similarly to a CAF, but with more flexibility 
in the funding requirements. First, since WCFs are revolving funds, 
they allow agencies to purchase new capital without a specific 
congressional appropriation whereas a CAF would require a new 
appropriation to purchase new capital. Second, WCFs are not subject to 
fiscal year limitations (they have no-year authority) while CAFs would 
have project-by-project borrowing authority specified in appropriation 
acts. Third, WCFs reflect annual capital costs through a depreciation 
charge whereas CAFs would reflect this cost through an annual mortgage 
payment of principal and interest.[Footnote 38] Hence, both would 
reflect the annual cost of capital in the subunits' budgets. 

To obtain federal office space, many agencies lease from and make 
rental payments to GSA, which deposits those funds into the FBF. 
Although leasing is recognized as being more expensive in the long run 
than ownership, some agencies lease because it does not require as much 
up-front funding as ownership (i.e., to avoid spikes). Although a CAF 
is conceptualized to reduce the amount of up-front funding needed by 
subunits when acquiring capital assets (while still requiring up-front 
funding at the department level), it is not clear that having a CAF 
would encourage subunits to build rather than lease office space. Two 
agency officials we spoke with said that they would likely continue 
leasing and one commented that if planning outright ownership, it would 
be easier to deal with obtaining the traditional up-front funding than 
worry about the annual mortgage payments required by a CAF. Through 
their charges, both WCFs and FBF spread the cost of capital over time 
and ensure that capital costs are properly allocated to the user 
programs. 

Agency Officials, Congressional Staff and Other Key Players Have 
Numerous Concerns About CAFs: 

Agency officials, congressional staff, and other key players raised 
numerous concerns about CAFs. For example, department and subunit 
officials are concerned that there is no guarantee or assurance that 
the annual mortgage payments to be collected by the CAF will be 
adequately funded in annual subunit appropriations. In addition, some 
subunits and appropriators are reluctant to shift more control for 
capital planning and budgeting to the department level. Congressional 
staff also raised concerns about the feasibility of the congressional 
mind shift that would be required to fund capital through a mechanism 
such as a CAF, especially if a charge on existing capital is included, 
and questioned the value that a CAF would really add to agency planning 
and budget decision making that could not be obtained through other 
means. CBO and GSA were also apprehensive and cautious about the 
usefulness of the CAF concept when operating details were described in 
full. Most budget experts and agency officials we spoke with agreed 
that the complexities involved in operating a CAF would likely outweigh 
the possible benefits. A few worried that CAFs might even divert 
attention from the current initiatives under way to improve asset 
management and full costing. 

Concerns over Receipt of Annual Mortgage Payment: 

Treasury, which would assume responsibility for collecting debt 
repayments, was concerned that there would be no guarantee that future 
appropriations would finance the mortgage payments, nor would there be 
any enforcement mechanism by which Treasury could enforce repayment. 
Treasury officials feared that over time other types of spending would 
take priority over debt repayment. They based their concerns on the 
record of some other programs that have struggled to repay debt or for 
which debt has been "forgiven" or otherwise excused. For example, the 
Black Lung Disability Trust Fund, which provides disability benefits 
and medical services to eligible workers in the coal mining industry, 
has growing debt and will never become solvent under current 
conditions.[Footnote 39] Although Black Lung Disability Fund revenues 
are now sufficient to cover current benefits, they do not cover either 
repayment of the over $8 billion owed the Treasury or interest on that 
debt. Another example is the Bonneville Power Administration (BPA), 
which is a federal electric power marketing agency in the Pacific 
Northwest with authority to borrow from Treasury on a permanent, 
indefinite basis in amounts not exceeding $4.45 billion at any time. 
BPA finances its operations with power revenues and the loans from 
Treasury, and has authority to reduce its debt using "fish credits." 
This crediting mechanism, authorized by Congress in 1980, allows BPA to 
reduce its payments to Treasury by an amount equal to mitigation 
measures[Footnote 40] funded on behalf of nonpower purposes, such as 
fish mitigation efforts in the Columbia and Snake River systems. BPA 
took this credit for the first time in 1995 and has taken it every year 
since that time. The annual credit allowed varies, but has ranged 
between about $25 million and $583 million, including the use in 2001 
and 2003 of about $325 million total unused "fish credits" that had 
accumulated since 1980. 

Some officials at the department and subunit level also raised concerns 
about the long-run feasibility of fulfilling their mortgage payments 
over the entire repayment period given that the payments are made from 
their annual appropriations, which they expect to become increasingly 
constrained. The mortgage payments would be relatively uncontrollable 
items within an agency's budget, to the detriment of other, more 
controllable items, such as personnel costs. Because the mortgage costs 
would not change unless the asset is sold, managers would have less 
flexibility in making budgeting decisions within stagnant or possibly 
declining annual budgets that occur in times of fiscal restraint. BLM 
officials said this type of fixed obligation, which could consume an 
increasing share of its budget, could hinder its ability to address 
emergency needs that arise during the year. For example, they cited a 
case in which the agency reprogrammed resources to deal with a 
landslide that occurred on the Oregon coast in late 2003. BLM delayed 
other projects in order to redirect funds for the removal and 
stabilization of the landslide and to reopen Galice Creek Road, which 
is a major artery for public access, recreation, and commercial 
activity such as timbering, as well as BLM and FS administration. BLM 
officials questioned whether the fixed payment to the CAF would 
constrain their ability to make adjustments such as this. Many agency 
officials were skeptical of the idea that they could fulfill annual 
mortgage payments to a CAF without squeezing program operations and 
some said they would rather deal with the up-front funding requirement 
than have to worry about annual mortgage payments. 

The alternative to force-fitting a mortgage payment within agencies' 
annual appropriations is to adjust agency budgets with an automatic add-
on equal to agencies' mortgage payments. While this would relieve 
budget pressures at the agency level, it would probably not provide 
incentives or influence managers to improve capital asset management 
and decision making. 

Concerns About Shifting More Control over Capital Assets to the 
Department Level: 

Under the CAF concept, requests for capital projects would come from 
the department level and the CAF would own all capital assets. This 
would shift more control of capital planning and decision making from 
the subunit to the department level. Some agencies and one 
appropriation subcommittee staffer said they would not favor this 
shift. Several agencies feel that they have the expertise and 
experience to better assess their own capital needs, which are often 
mission specific. For example, ARS's capital consists of mostly 
scientific equipment, laboratories, and research facilities designed 
for conducting agricultural research in various climates. In fact, the 
agency has its own facilities division consisting of contractors and 
engineers who are involved in the management and oversight of capital 
projects. Similarly, APHIS's facilities are mission specific. BLM's use 
of activity-based costing allows it to assign capital costs to the 
program level and track those costs to desired outputs. Consequently, 
the bureau has a more intimate understanding of its capital needs and 
how capital contributes to carrying out its mission. One agency raised 
the point that departmental management might force bureaus to share 
facilities or later decide to use an asset for purposes other than 
those originally intended. While some of these departmental decisions 
might be beneficial, some agencies were skeptical of departmental 
decision making. 

Concerns over Problems Not Addressed, Additional Complexity, and 
Limited Benefits: 

The officials we interviewed stated that there are important problems 
in capital budgeting that CAFs do not address. Before the smoothing 
effects of a CAF can be realized in the out years, the department must 
still receive full up-front funding to begin new capital projects or 
acquire new assets. And as noted above, some agency officials stated 
that the annual mortgage payments may be even more of a dilemma than 
the up-front funding requirement. Since a CAF assumes up-front funding, 
some agencies may still seek to use some of the alternative financing 
mechanisms that they already use, such as operating leases or enhanced-
use leases, to meet capital needs without first having to secure 
sufficient appropriations to cover the full cost of the asset.[Footnote 
41] As currently envisioned, CAFs would probably not help improve 
capital planning concerns, such as the need for improved budgeting and 
management of asset life-cycle costs. According to the NRC 
report,[Footnote 42] operation and maintenance costs are typically 60 
to 85 percent of the total life-cycle costs of a facility while design 
and construction typically account for only 5 to 10 percent of those 
costs.[Footnote 43] For example, agencies must properly determine the 
funds needed for increasing staff in new and expanded facilities in 
order to avoid staffing shortages. 

Almost everyone we spoke with agreed that CAFs sounded complicated and 
many questioned whether the challenges in budgeting for capital that 
CAFs were designed to address were great enough to warrant CAFs as a 
solution. Congressional budget committee and appropriations 
subcommittee staff agreed that CAFs might be beneficial in theory but 
were probably not worth the additional budget complexity they would 
create. Budget committee staff considered the proposed benefits of a 
CAF to be abstract and uncertain coupled with a sizeable likelihood for 
repayment problems in the out years. In addition, they saw no obvious 
dilemma prompting the need for CAFs. While this capital financing 
approach may be appealing in theory since it promotes strategic 
planning and broadened, forward-looking perspectives, budget 
practitioners cautioned the adoption of an approach involving such 
layers of complexity in the absence of a clearly stated, agreed-upon 
problem that the new approach is expected to address. Further, they saw 
a need for agencies to complete their implementation of capital asset 
management and cost accounting systems, which can help achieve some of 
the same benefits that CAFs were meant to achieve. A good asset 
management system including inventories and asset condition would 
likely be a necessary precursor to successfully implementing CAFs. All 
of these factors weaken the case for CAFs as an improved approach to 
current capital financing practices. 

Several Issues to Weigh When Considering Implementation of CAFs: 

While in theory CAFs could be implemented at most agencies, there are 
several complex issues that Congress would need to consider before 
adopting such a mechanism. For example, proposals to apply CAFs to 
existing capital would require the development of a formula to 
calculate an annual capital usage charge, which is likely to be a 
difficult and contentious undertaking. Key players including OMB, CBO, 
and Congress would need to work together to develop an agreed-upon 
method to estimate an appropriate capital usage charge for various 
types of assets. And even if the full cost of programs, including the 
cost of existing capital, was more accurately reflected in the budget 
through the use of CAFs, incentives to cut capital costs may not 
materialize except in times of severe budget cuts. Even then, managers' 
abilities to eliminate unneeded capital assets would probably be 
limited given mission responsibilities and legal requirements that 
dictate the disposal of surplus federal property. To remedy this, 
additional funding or agency flexibilities would be needed, as would 
provisions to ensure debt repayment if CAF-financed assets were 
transferred or sold. Additionally, it is likely that some capital 
projects for federal office space, IT, and land would continue to be 
financed outside of the CAF through mechanisms such as the FBF, WCFs, 
or the GSA IT Fund. 

Imputing an Annual Capital Charge on Existing Capital May Offer 
Benefits but Would Be Difficult and Contentious: 

There are arguments that the CAF concept be applied to existing capital 
assets as well as new capital assets to ensure that the full costs of 
all programs are reflected in the budget. OMB points out that if CAFs 
were not applied to all capital, it would be many decades before 
programs reflected full annual costs and before the cost of alternative 
inputs could be compared. Developing an annual capital usage charge for 
existing assets would establish a level playing field for federal 
capital investment and allow for comparisons across programs. In 
addition, this new charge could influence agency managers to get rid of 
excess capital assets. 

Accomplishing these goals would require developing a standard method of 
computing an appropriate annual capital usage charge. Subunits would 
pay these charges to the department's CAF using appropriated funds, 
which would then be transferred to Treasury's general fund. In other 
words, agencies would receive appropriations to pay for the use of 
capital assets they already own and would not retain any of the funds 
to maintain or replace assets. Imputing such a charge on existing 
capital is likely to be difficult and very contentious given questions 
about how to estimate the charge and the fact that the assets were 
already funded. 

Before imputing an annual capital usage charge, key players, including 
OMB and Congress, would need to agree on some type of standard formula 
to estimate the charge. Three possible approaches to compute annual 
capital usage charges would be to (1) use historical cost for the asset 
by applying a charge as though the original cost had been financed by 
borrowing from Treasury, (2) use market rental rates, or (3) devise a 
calculation incorporating asset replacement cost, depreciation rates, 
and interest rates. There are arguments for and against each of these 
options. For example, while using historical cost would make the charge 
congruent with accounting data; the charge would not reflect the 
current cost of using capital and so might be less meaningful for 
evaluating costs. Although using market rates would theoretically be 
the right measure for comparing the cost of using resources for federal 
versus private purposes, the fact that many government assets fill 
unique purposes means there is not a measure of market value for them. 
For example, some agencies occupy historic buildings, such as the Old 
Executive Office Building, for which a comparable market-based value 
would be difficult to determine. The third approach might be considered 
an agreeable middle ground, but applying depreciation rates poses 
problems since they are largely arbitrary. Agreement on whether to 
apply Treasury or market interest rates would be necessary. 

Some agency officials and congressional staff suggested that any 
charges on existing capital should reflect the life-cycle costs of 
maintaining assets and, similar to a WCF, receipts collected should be 
made available for future maintenance and renovation costs. We have 
reported that repair and maintenance backlogs in federal facilities are 
significant and that the challenges of addressing facility 
deterioration are prevalent at major real property-holding 
agencies.[Footnote 44] However, research and discussions on CAF design 
indicate that CAF receipts could only go to Treasury and not for future 
projects. Officials were also skeptical about how to accurately charge 
for highly specialized capital. For example, ARS has more than 100 
laboratories located in various regions of the country, as well as 
abroad, which are designed to carry out mission responsibilities 
ranging from the study of crop production to human nutrition to animal 
disease control. The highly technical and diverse nature of its 
objectives requires capital assets that are suitable for varied 
climates, soils, and other agricultural factors, which pose unique and 
difficult challenges in establishing capital usage charges that would 
be viewed as acceptable by agency officials. 

If key players were able to agree on the method for calculating usage 
charges on existing capital assets, they would also have to examine the 
budgetary effects of such charges. Budget scorekeepers--OMB, CBO, and 
the budget committees--would need to develop additional scoring rules 
to clarify how the usage charges would be treated in the budget. Unlike 
charges on new capital, there is no corresponding debt to repay. As a 
result scorekeepers would have to specify how to score the usage 
charges as they are transferred from the CAF to Treasury. Although 
these charges would not change agency or government outlays or the 
deficit, they could require a permanent increase in agencies' total BA, 
which would require Congress to consider adjustments of appropriations 
subcommittee allocations.[Footnote 45] Oversight would be especially 
important for these transactions since CAF collections would be greater 
than needed to repay Treasury loans, creating a temptation to use 
accruing balances for other purposes. 

Similar questions about how to charge for and how to score capital 
usage charges for existing assets would eventually pertain to new 
capital funded through the CAF. Once an asset is fully "paid off" 
through the CAF, it is comparable to existing capital and would 
similarly incur an annual capital usage charge. Some might argue that 
payments should continue in the same amounts as before, while others 
may call for the calculation of a new capital usage charge for "paid 
off" assets based upon the formula used for capital that existed before 
the creation of CAFs. In any case, numerous decisions on capital usage 
charges for existing capital would need to be made prior to 
implementing CAFs. 

Aside from the specifics of how to develop appropriate capital usage 
charges, most agency officials and congressional staff with whom we 
spoke were skeptical of the need for such a charge. Many said that the 
cost of maintaining capital assets--which is reflected in agency 
budgets--and depreciation expenses--which are reflected in agency 
accounting systems along with asset maintenance costs--sufficiently 
represent the cost of existing capital assets and help inform 
managers.[Footnote 46] As discussed earlier, asset management systems 
and full cost accounting approaches are also beginning to provide the 
information managers need to make better decisions about the 
maintenance or disposal of existing assets and the need for new 
capital. Some congressional staff thought the mind shift required for 
Congress to agree to impute this new charge on existing capital assets 
would be even more difficult than that required for purchasing new 
capital using borrowing authority. 

In the countries of New Zealand, Australia, and the United Kingdom, 
charges on existing capital are being used to encourage the efficient 
use of assets. These charges, similar to interest charges, are 
generally used to reflect the opportunity cost of capital invested. In 
New Zealand, departments are appropriated a capital charge based on 
their asset base at the beginning of the year; at the end of the year 
they must pay the government a capital charge based on their year-end 
asset base. If a department has a smaller asset base at the end of the 
year than the asset base for which the appropriation was made, the 
department is permitted to keep part of the appropriation made for the 
capital charge. This spurred the New Zealand Department of Education to 
sell a number of vacant sites that it had acquired in the 1960s but 
that were no longer needed. However, officials in New Zealand's Office 
of Controller and Auditor General were uncertain about the 
effectiveness of having a charge for capital in changing behavior 
significantly. In addition, some analysts in New Zealand expressed 
concern that capital charging could drive department executives to 
decisions that are rational in the short term but damaging in the long 
term. For example, an audit official suggested that a department might 
have an incentive to try to operate with obsolete and fully depreciated 
assets in order to avoid a higher capital charge. 

Cost Allocation Efforts May Have Limited Effect on Agency Decision 
Making: 

Although one goal of CAFs is to ensure the allocation of full costs to 
programs in the budget and thereby encourage managers to make more 
informed decisions about capital assets, additional incentives to 
evaluate new or existing asset needs are unlikely to be created except 
during times of severe budget cuts or downsizing. For new assets funded 
through the CAF, the mortgage payments made out of the subunits 
appropriations would be equal to those received by the CAF and thus the 
payments would offset each other within the department budget and at 
the appropriations subcommittee level and would not affect the deficit. 
Although the information on total program costs might be made more 
transparent, it is not clear that this would create stronger incentives 
for more careful deliberation on future asset needs than having these 
costs shown through available methods such as cost accounting systems 
or the use of working capital funds. 

A charge on existing assets might also have limited impact. If 
appropriation subcommittee allocations were simply raised to 
accommodate new capital usage charges, programs would appear more 
expensive but perhaps not differentially so. As with new assets, the 
capital charge on existing assets would not affect the deficit. As a 
result, incentives for rationalizing existing capital would not 
necessarily be created. Even during tight budget years, when mandatory 
CAF payments would squeeze operating budgets and be most likely to 
force trade-offs among capital assets, managers may be constrained by 
mission responsibilities, legal requirements, or the cost of disposing 
of assets. Consequently, agencies might have to argue for increased 
funding or case-by-case exemptions, which Congress has granted in the 
past.[Footnote 47]

Some agencies questioned the effectiveness of applying a charge to 
influence managers' decision making given the unique locations or types 
of assets required to accomplish mission goals. BLM officials said an 
annual capital usage charge would have a limited impact on their 
ability to dispose of capital assets because of its stewardship role 
over the nation's public lands. Similarly, ARS officials justified 
having locations dispersed all over the country because its research 
activities are diverse and require facilities in various climates and 
environments. As discussed, Congress also plays a role in determining 
where ARS will conduct its research. Likewise, many of APHIS's capital 
assets are mission specific, including animal quarantine stations, 
sterile insect-rearing facilities, and laboratories, and typically do 
not have a comparable counterpart in the commercial sector. APHIS 
officials said this limits managers' abilities to sell or transfer 
assets because the land often must be converted to original condition, 
a costly undertaking. For some subunits we spoke with, destruction of 
certain assets, which also has an up-front cost, is the only viable 
option for eliminating unneeded assets. For example, NPS and FS have 
many facilities located on public land. If no longer needed, some of 
these facilities cannot be sold or transferred and would have to be 
demolished. According to FS officials, when they determine that an 
asset has exhausted its useful life and needs to be disposed of, the 
agency will incur the cost for removal and recover the salvage value. 

Many agencies are subject to certain legal requirements that create 
disincentives for disposing of surplus property. In these cases, 
agencies would need additional funding or more flexibility to modify 
asset holdings if improved decision making were to be realized. For 
example, under the National Environmental Policy Act, agencies may need 
to assess the environmental impact of their decisions to dispose of 
property. In general, agencies are responsible for environmental 
cleanup of properties contaminated with hazardous substances prior to 
disposal, which can involve years of study and amount to considerable 
costs. Agencies that own properties with historic designations--which 
is common in the federal portfolio and certainly within the inventories 
of USDA and DOI--are required under the National Historic Preservation 
Act to ensure that historic preservation is factored into how the 
property is eventually used. The Stewart B. McKinney Homeless 
Assistance Act, as amended, sets forth a requirement that consideration 
be given to making surplus federal property, including buildings and 
land, available for use by states, local governments, and nonprofit 
agencies to assist homeless people. 

If none of these restrictions apply and an agency is able to sell an 
asset, most cannot retain the proceeds from the sale of unneeded 
property even up to the cost of disposal. However, Congress has granted 
special authorities in some cases. For example, FS officials told us it 
owned a number of trails and roads on public lands that ran through the 
city of Los Angeles, California. When the city expanded, it was no 
longer feasible to maintain the roads and trails. As a result, the 
agency was granted authority to sell the land and use the proceeds to 
build a new ranger station.[Footnote 48] We have said that agencies be 
allowed to retain enough of the proceeds from an asset sale to recoup 
the cost of disposal, and that in some cases it may make sense to 
permit agencies to retain additional proceeds for reinvestment in real 
property where a need exists.[Footnote 49]

Issues Regarding Property Sales Would Further Complicate CAF 
Implementation: 

Provisions would also need to be established to ensure the full 
repayment of CAF debts in the event that an agency sells or transfers a 
capital asset before it reaches the end of its useful life (the 
repayment period). Two possible options would be to (1) transfer the 
outstanding debt to a new "owner" agency of the asset or (2) allow the 
"seller" agency to sell the asset and use the proceeds from the sale to 
repay the outstanding CAF debt. Both of these options would produce 
complications and issues to resolve. For example, transferring the 
asset would require all parties involved, including Treasury, to record 
adjustments to their CAF accounting systems and oblige subunits to 
adjust their budget requests accordingly. After the transfer, it is not 
clear whether the "seller" agency's budget would be reduced by an 
amount equal to the asset's mortgage payment. However, if that was 
done, it would lessen or eliminate the incentive for the "seller" 
agency to sell or transfer the asset. If the asset was sold instead of 
transferred, an appropriate "sale price" would need to be determined as 
well as the appropriate disposition of the sale proceeds. For example, 
if the asset was sold for an amount that is greater than the 
outstanding CAF debt, the Treasury general fund would receive full 
repayment on the asset plus excess revenue. On the other hand, if an 
asset was sold for an amount less than the outstanding debt, the CAF 
would default on the loan unless additional receipts for debt repayment 
were appropriated. Finally, some subunits may argue to refinance their 
mortgage if a lower Treasury interest rate became available and lower 
payments would result. Again, before CAFs are implemented, proposals on 
how to handle such circumstances would need to be addressed. 

Some Capital Would Likely Continue to Be Obtained through Existing 
Means: 

The CAF's scope of coverage would need to be addressed by any CAF 
proposal. Capital assets are generally defined as land, structures, 
equipment and intellectual property (such as software) that are used by 
the federal government and have estimated useful lives of 2 years or 
more. However, departments have some discretion in defining capital. 
The Commission report suggested that OMB issue guidance on which 
capital items belong in the CAF to ensure uniform implementation of the 
CAF proposal. Alternatively, each department could use its current 
department guidelines and definitions to determine which capital to 
fund through the CAF. Whatever parameters are put in place, some 
capital assets would likely continue to be funded outside the CAF 
through existing mechanisms. 

For example, for federal office space, the Commission and NRC reports 
state that agencies would generally continue to lease space from GSA 
and pay rent to FBF. FBF, a governmentwide revolving fund, is used to 
acquire office buildings and the space is then rented out to federal 
agencies. Most agencies are not allowed to lease their own office space 
unless GSA delegates its authority to do so to that agency, which GSA 
has done in the past. Under the CAF mechanism, if GSA were to delegate 
this authority, the CAF would lease the office space. The NRC report 
recommends that agencies should use their CAF for office space 
acquisition only if it could be done more effectively and efficiently 
than through GSA. GSA would negotiate the acquisition of space for 
multiple agencies that seek to collocate in a single facility. 

Agencies also have the option to purchase IT through FTS and its IT 
Fund. For a fee, FTS provides expertise and assistance in acquiring and 
managing IT products. Those agencies that chose to use this service may 
argue for continuing to finance these projects outside of the CAF so 
that they are not paying a fee to FTS as well as interest on the 
borrowed funds. Some officials also questioned the effectiveness of 
using borrowing authority to finance IT purchases when their useful 
life is typically no more than 10 years and is often 5 years or less, 
thus indicating that officials may argue to fund some IT projects 
outside the CAF. Departments and subunits would also likely continue to 
rent certain capital assets from WCFs or to use their WCFs to purchase 
some capital. As discussed, WCFs rely on user charges to fund ongoing 
maintenance and replacement of capital assets and the collections are 
used by some departments and subunits to finance capital assets, such 
as vehicles and IT. 

Land, such as wilderness areas, is also likely to remain outside the 
CAF. Land retains its value so concepts such as depreciation and 
amortization do not apply to it. However, one subunit official stated 
that using borrowing authority to buy land might be beneficial if it 
meant that land could be purchased at a faster rate to obtain 
environmentally sensitive land before it is damaged. 

Conclusion: 

There is little doubt that in the mechanical sense CAFs could work as a 
new system for financing capital assets. However, the implementation 
and operation of the CAF concept would be complicated. Managing the 
extra layer of responsibilities for CAF administration and oversight 
would require the devotion of resources within departments, subunits, 
and Treasury and to a lesser extent, OMB, CBO, and Congress. Accounting 
for CAF transactions would be complex and burdensome. The annual debt 
repayment would be a source of concern for Treasury and agency 
officials, especially as more assets were financed through the CAF and 
mortgage payments became a larger percentage of agency appropriations. 

Beyond the complexities inherent in financing capital assets using 
borrowing authority is a list of difficult issues that would have to be 
resolved before benefits could be realized. The most difficult of these 
issues, applying a capital usage charge to existing capital, would also 
be the most important to address if annual capital costs were to be 
allocated to program budgets. If CAFs were applied only to new assets 
going forward, programs would not reflect the full annual cost of 
capital for decades and programs purchasing new capital would appear 
more expensive than those using existing capital. Even if this and 
other issues were tackled and improved information about capital costs 
was provided to managers, there is little assurance that CAFs alone 
would create incentives for programs to reassess their use of capital. 
Even in times of severe budget constraints, it is probable that 
managerial flexibility to adjust the amount of assets used by a program 
would continue to be limited by agency missions, legal restrictions, 
and limited funds for asset disposal. Given the execution complexities 
and implementation concerns, the ensuing question seems to be whether 
there are simpler methods that can be used to achieve the same benefits 
as CAFs. 

We believe there is strong evidence that both benefits attributed to 
CAFs could be more easily obtained through existing mechanisms. Asset 
management and cost accounting systems, when fully implemented, will be 
important tools for promoting more effective planning and budgeting for 
capital. Cost accounting systems can provide the same information on 
capital costs as CAFs are intended to provide, while the information 
provided by asset management systems could be even more crucial for 
helping managers with limited budgets prioritize capital asset 
maintenance and replacement. For existing capital, incentives to 
rationalize assets might be created if agencies were allowed to retain 
proceeds to recoup the cost of disposal, or in some cases, for 
reinvestment in real property. While some of our case study agencies 
did not view spikes as a problem, those that did felt they were 
managing them well through the use of WCFs, no-year authority, and 
acquiring assets through useful segments. In any case, spikes in 
spending for capital assets are likely to continue as congressional and 
presidential priorities change over time. 

When described in detail to executive branch and congressional 
officials, we learned that the CAF proposal would likely have few 
proponents. Almost everyone we consulted concluded that implementation 
issues would overwhelm the potential benefits of a CAF. More 
importantly, current efforts under way in agencies would achieve the 
same goals as a CAF without introducing the difficulties. Given this, 
as long as alternative efforts uphold the principle of up-front 
funding, then a CAF mechanism does not seem to be worth the complexity 
and implementation challenges that it would create. 

Agency Comments and Our Response: 

We obtained comments on a draft of this report from OMB, Treasury, GSA 
and our case study agencies--USDA and DOI. Treasury, GSA, USDA and DOI 
generally agreed with the report. Treasury, USDA, DOI and OMB provided 
technical comments, which have been incorporated as appropriate. OMB 
agreed with our description of the mechanics of CAFs and concurred that 
spikes in BA for capital assets could be alleviated through other 
means. OMB also acknowledged the problems with CAFs that are 
highlighted in this report, including those related to existing 
capital, and agreed that the complications of designing and operating 
CAFs might outweigh the benefits. However, they disagreed with our 
description of the primary goal of CAFs and therefore do not believe 
alternative mechanisms achieve the same goal. 

OMB supports having program budgets reflect full annual budgetary costs 
in order to change incentives for decision makers. In addition to 
proposing to budget for accruing retirement benefit costs, OMB has 
suggested budgeting for accruing hazardous waste clean-up costs and 
budgeting for capital through CAFs. Budgeting for full annual budgetary 
costs should facilitate decision makers' ability to compare total 
resources used with results achieved across government programs. For 
capital, OMB has suggested CAFs as a possible method to allocate and 
embed the cost of capital assets at the program budget level. OMB 
recognizes the usefulness of asset management and cost accounting 
systems regardless of whether CAFs are adopted. It is OMB's opinion 
that these tools do not ensure that the costs of capital are captured 
in individual program budgets and therefore do not affect incentives 
for decision makers in allocating resources among and within programs. 
We disagree on several points. 

We recognize that if the sole or primary purpose of a CAF is to embed 
costs in the program budgets, then the alternatives discussed in this 
report do not achieve that purpose. However we believe, as highlighted 
in the Report of the President's Commission to Study Capital Budgeting, 
that the primary goal of CAFs is to improve decision making for 
capital. We are not convinced that CAFs and the annual mortgage 
payments they would require would achieve this more effectively than 
other mechanisms. We argue instead that the information provided by 
asset management and cost accounting systems, when fully implemented, 
could assist decision makers in efficiently allocating budgetary 
resources. While this information may not necessarily be reflected in 
program budgets, it is available to aid in budget and program decision 
making. The fact that many of these systems are in relatively early 
stages of development also increases our concern about CAFs. In a 
recent report, we noted the belief among some agency officials, 
congressional appropriations committee staff, and budget experts that 
improving underlying financial and performance information should be a 
prerequisite to efforts to restructure program budgets.[Footnote 50] We 
argue this would also be true for CAFs, since without adequate measures 
of program costs and an ability to identify capital priorities, a new 
financing mechanism would do nothing to address the basic challenges of 
determining how much and what types of capital are needed. 

It is also unclear that CAFs would create new incentives as OMB argues. 
As we describe in the section titled "Cost Allocation Efforts May Have 
Limited Effect on Agency Decision Making," if the annual mortgage 
payments offset each other within the department budget and at the 
appropriations subcommittee level, the deficit would not be affected, 
and it is unlikely incentives would be changed. Even during tight 
budget years, when CAF payments would squeeze operating budgets, 
managers may be unable to change the amount of capital assets they use 
because of mission responsibilities, legal requirements, or the cost of 
disposing of assets. 

We also recognize the value of linking resources to results in 
comparing programs; however, it is unclear that CAFs are necessary or 
would even work to accomplish this. Institutionalizing CAFs could 
permit program comparison, but fair evaluations would only be possible 
if existing capital were included. Therefore, the difficult issue of 
including existing capital would have to be addressed. Alternatively, 
we believe that cost accounting systems, when well developed within and 
across agencies, provide a similar opportunity for comparing programs. 
In conclusion, we remain of the view that the operational challenges of 
CAFs outweigh the benefits and that alternative mechanisms described in 
this report can more simply accomplish the goals of CAFs. 

As we agreed with your office, unless you publicly announce the 
contents of this report earlier, we plan no further distribution of it 
until 30 days from its issuance date. At that time we will send copies 
of this report to the Director of the Office of Management and Budget, 
the Administrator of the General Services Administration, the Secretary 
of the Department of the Interior, the Secretary of the Department of 
Agriculture, and the Secretary of the Department of the Treasury. We 
will also make copies available to others upon request. This report 
will also be available at no charge on the GAO Web site at [Hyperlink, 
http://www.gao.gov]. If you or your staff have any questions regarding 
the information in this report, please contact me at (202) 512-9142 or 
Christine Bonham at (202) 512-9576. Key contributors to this report 
were Jennifer A. Ashford, Leah Q. Nash, and Seema V. Dargar. 

Sincerely yours,

Signed by: 

Susan J. Irving: 
Director, Federal Budget Analysis: 
Strategic Issues: 

[End of section]

Appendixes: 

Appendix I: Comments from the Department of the Treasury: 

DEPARTMENT OF THE TREASURY: 
WASHINGTON, D.C. 20220: 

MAR 2 2005: 

Ms. Susan J. Irving: 
Director, Federal Budget Analysis: 
Strategic Issues: 
U.S. Government Accountability Office: 
441 G Street, N.W. 
Washington, D.C. 20548: 

Dear Ms. Irving: 

The Department of the Treasury has received for comment a copy of the 
draft report entitled Capital Financing: Potential Benefits of Capital 
Acquisition Funds Can Be Achieved through Simpler Means (GAO-05-249). 
Our comments are as follows: 

We are in general agreement with the conclusions contained in the 
report that implementing capital acquisition funds (CAF) to purchase 
capital assets would be challenging and complex, not only from an 
accounting and budget standpoint but also from increased management and 
oversight responsibilities for Treasury and other stakeholders. 

We recommend that the discussion of Bonneville Power Administration's 
(BPA) "fish credits" be stricken from pp. 28-29 of the report for the 
following reasons: 

1. In about 1980, Congress gave BPA the statutory authority to offset 
the dollar amount of the non-power portion of its statutorily required 
fish recovery efforts against its total annual payment to Treasury. 
These offset credits are commonly called "fish credits."

2. This statutory offset authority provides BPA with a means, outside 
of the normal budget/appropriations process, to reimburse BPA 
ratepayers, who pay for power produced by Federal Columbia River Power 
System, for the non-power-related portion of these fish recovery costs. 
The BPA ratepayers are, however, responsible for paying the power-
related portion of these costs. This is the reason why Congress gave 
BPA in 1980 the statutory authority to use "fish credits." Congress did 
not give BPA this statutory authority in 1994 to help BPA solve its 
current financial difficulties, as is stated on pp. 28-29. This "fish 
credit" statutory authority actually predates the explosion in BPA's 
fish recovery costs that occurred in 1994 by about 14 years. It was 
given to BPA in 1980 as a means for BPA to avoid delays in the 
appropriations process. 

3. From about 1980 until 1994, BPA used appropriations, and not the 
statutorily authorized "fish credits," to cover the power and the non-
power-related portions of its required fish recovery costs because 
these costs were not very high then. However, in 1994, BPA began using 
"fish credits" on an annual basis, instead of seeking high annual 
appropriations, which were needed because its fish recovery costs had 
exploded due to changes to the Endangered Species Act, among other 
things. In addition to the use of annual "fish credits" to reimburse 
its ratepayers for the non-power-related portion of its fish costs, BPA 
was also allowed, under certain OMB/Treasury prescribed conditions, to 
use up to about $325 million in retroactive "fish credits" that had 
"accrued" from 1980 until 1993. 

Thank you for the opportunity to respond to this draft GAO report. If 
you have any questions or wish to discuss these comments further, 
please contact me at (202) 622-0750: 

Sincerely,

Signed by: 

Barry K. Hudson: 
Acting Chief Financial Officer: 

cc: Donald Hammond: Fiscal Assistant Secretary: 
Christine Bonham: 
Assistant Director, Federal Budget Analysis: 
Strategic Issues: 
U.S. Government Accountability Office: 

GAO's Comments: 

We believe that the discussion of BPA's use of "fish credits" is an 
appropriate example for the section on agencies' repayment of their 
borrowing from Treasury. Although these credits were provided by 
Congress, their use for offsetting payments on Treasury debt has been 
controversial and opposed by some members of Congress and other 
interested parties. However, we have made technical changes to the 
section based on Treasury's comments. 

[End of section]

Appendix II: Comments from the Department of the Interior: 

United States Department of the Interior: 

OFFICE OF THE ASSISTANT SECRETARY POLICY, MANAGEMENT AND BUDGET: 
Washington, DC 20240: 

FEB 23 2005: 

Ms. Susan J. Irving: 
Director, Federal Budget Analysis: 
Strategic Issues: 
U.S. Government Accountability Office: 
441 G. Street N.W. 
Washington, D.C. 20548: 

Dear Ms. Irving: 

Re: GAO Draft Report 05-249: Capital Financing, Potential Benefits of 
Capital Acquisition Funds Can Be Achieved Through Simpler Means: 

Thank you for the opportunity to comment on the above referenced draft 
report on Capital Financing. 

The Department of the Interior agrees with the major conclusion of the 
report that the benefits attributed to Capital Acquisition Funds (CAFs) 
could be more easily obtained through existing mechanisms: 

"Asset management and cost accounting systems, when fully implemented, 
will be important tools for promoting more effective planning and 
budgeting for capital. Cost accounting systems can provide the same 
information on capital costs as CAFs are intended to provide, while the 
information provided by asset management systems could be even more 
crucial for helping managers with limited budgets prioritize capital 
asset maintenance and replacement.."

We believe that Interior, through several initiatives, is already 
providing more effective planning and budgeting for capital. 

-Interior has implemented a Capital Planning and Investment Control 
(CPIC) process that involves review of all capital asset projects 
valued at $2.0 million or greater and fully considers the annual 
operating costs of proposed projects. This process is evolving to shift 
to life-cycle management, where the planning focus in on asset 
investments rather than just project formulation and project execution. 

-Interior is in the process of implementing a robust, common, 
automated, off-the-shelf asset management system. Deployment began in 
2002 in the National Park Service and was followed by the Bureau of 
Land Management, U.S. Geological Survey, Fish and Wildlife Service, the 
Bureau of Indian Affairs for its irrigation systems and safety of dams 
program, and the DOI National Business Center for the Interior Main and 
South buildings. The Bureau of Reclamation began using the same system 
in 1995 for its water facilities. The BIA continues to use the 
comprehensive facilities maintenance management system already in 
place, that provides the functionality and business process features 
that will provide information to manage BIA non-irrigation facilities 
over their entire useful life. 

-Phased implementation of the Department's Financial and Business 
Management System (FBMS) has begun in three of eight Interior bureaus. 
This system will provide timely financial and business information, 
such as property inventories, and standardize DOI's business practices 
across all bureaus. The common, automated asset management system 
referenced in the paragraph above will be configured on a single 
platform and be linked to FBMS. 

-Interior, in response to Executive Order 13327 Federal Real Property 
Asset Management issued in February 2004, has developed and submitted 
to the Office of Management and Budget (OMB) its initial agency-wide 
asset management plan. This plan institutionalizes a common framework 
government-wide for the life cycle management of assets. 

The report also states that spikes in funding can be avoided by funding 
capital in useful segments and by using no-year authorities, but 
probably will continue with shifts in executive and legislative branch 
priorities. While Interior will not ultimately control the executive or 
legislative shifts in priorities with their attendant fluctuations in 
funding, it does use no-year budget accounts for construction 
activities; and bureaus phase projects into useful segments when budget 
targets will not permit full funding in one year. 

We also note for your attention three technical changes that need to be 
made. First, in the paragraph at the top of page 12, the Bureau of 
Reclamation should replace the Bureau of Land Management in two places, 
as the named Interior bureau under the aegis of the Energy and Water 
Development Subcommittee. Second, in the first full paragraph on page 
29, BLM officials believe that the report is addressing the National 
Park Service because BLM has no parks. 

In conclusion, we believe that the complicated CAF funding mechanisms 
would probably produce little improvements in capital financing but 
would require many more staff in Interior, the Department of Treasury, 
OMB, and most likely in the legislative branch to administer it. 
Further, the complexity and complications of an annual mortgage for 
each capital asset would be difficult to explain to a field program 
manager and might reduce his/her feeling of ownership and control of 
the very assets the CAF concept is designed to improve. 

Sincerely,

Signed by: 

P. Lynn Scarlett: 
Assistant Secretary Policy, Management and Budget: 

[End of section]

(450331): 

FOOTNOTES

[1] These interested parties include the President's Commission on 
Capital Budgeting, OMB, CBO, GAO, and others referenced throughout this 
report. 

[2] Throughout this report we use the term "subunit" to mean any 
agency, bureau, or program that falls under the jurisdiction of a 
department-level entity. For example, the Agricultural Research Service 
would be a subunit within USDA. We sometimes use the word agency in 
place of the term subunit. 

[3] Budget authority is authority provided by law to enter into 
financial obligations that will result in immediate or future outlays 
involving federal government funds. An appropriation act is the most 
common means of providing budget authority. The basic forms of budget 
authority include (1) appropriations, (2) borrowing authority, (3) 
contract authority, and (4) authority to obligate and expend offsetting 
receipts and collections. 

[4] Authority to borrow is a type of budget authority and thus is 
subject to congressional control. It refers to the statutory authority 
that permits a federal agency to incur obligations and make payments to 
liquidate obligations out of borrowed monies. This does not include the 
Treasury's authority to borrow from the public or other sources under 
31 U.S.C. 31. It can be provided in appropriations acts, authorization 
acts, or in permanent law. 

[5] Throughout this report we use the term "mortgage payment" to mean 
an amount equal to the interest and amortization on an acquired capital 
asset. 

[6] In this report, subcommittee allocations refer to the distribution 
by the House and Senate appropriations committees of total new BA and 
outlays to the 13 appropriations subcommittees as required by the 
Congressional Budget and Impoundment Control Act of 1974. This 
allocation limits the total budget authority and outlays available for 
all accounts under the subcommittees' jurisdiction. 

[7] We describe some of the asset management systems in this report and 
in GAO, Budget Issues: Agency Implementation of Capital Planning 
Principles Is Mixed, GAO-04-138 (Washington, D.C.: Jan. 16, 2004). 
However, it was beyond the scope of both these reports to evaluate the 
effectiveness of the systems described. 

[8] No-year authority refers to budget authority that remains available 
for obligation for an indefinite period of time, usually until the 
objectives for which the authority was made available are attained. 

[9] A working capital fund is a revolving fund that operates as an 
accounting entity. The assets are capitalized and all income is in the 
form of offsetting collections derived from the funds' operations and 
available in their entirety to finance the funds' continuing cycle of 
operations without fiscal year limitation. 

[10] The FBF is a governmentwide revolving fund established in 1972 and 
is the principal funding mechanism for the Public Buildings Service 
(PBS). Within GSA, PBS leases office space to federal customer 
agencies. PBS collects rent from federal tenants, which is deposited 
into the FBF. Congress exercises control over the FBF through the 
appropriations process that sets annual limits on how much of the fund 
can be expended for various activities. In addition, Congress may 
appropriate additional amounts for the FBF. 

[11] The IT fund is a full-cost recovery revolving fund that provides 
federal agencies with IT products and services. FTS recovers both the 
costs of products and services and the costs of their delivery through 
the IT Fund. The IT Fund was authorized by the Paperwork Reduction 
Reauthorization Act of 1986 as included in section 821(a)(1) of Public 
Law 99-500 and 99-691; 40 U.S.C. 322. 

[12] GAO, Accrual Budgeting: Experiences of Other Nations and 
Implications for the United States, GAO/AIMD-00-57 (Washington, D.C.: 
Feb. 18, 2000). 

[13] GAO, Performance Budgeting: Efforts to Restructure Budgets to 
Better Align Resources with Performance, GAO-05-117SP (Washington, 
D.C.: February 2005), 15. 

[14] While complying with up-front funding, agencies may choose to 
structure capital purchases into a series of useful segments. A useful 
segment of a capital project is a component that either (1) provides 
information that allows the agency to plan the capital project, develop 
the design, and assess the benefits, costs, and risks before proceeding 
to full acquisition (or canceling the acquisition) or (2) results in a 
useful asset for which the benefits exceed the costs even if no further 
funding is appropriated. 

[15] GAO, Budget Issues: Budgeting for Capital, GAO/AIMD-97-5 
(Washington, D.C.: Nov. 12, 1996); Budget Issues: Alternative 
Approaches to Finance Federal Capital, GAO-03-1011 (Washington, D.C.: 
Aug. 21, 2003); and Capital Financing: Partnerships and Energy Savings 
Performance Contracts Raise Budgeting and Monitoring Concerns, GAO-05-
55 (Washington, D.C.: Dec. 16, 2004). 

[16] It would not be appropriate or useful to include in the CAF grants 
to states or localities for what, in other contexts, may be deemed to 
be capital expenditures, such as those for highways. The grant itself 
is the program; highways and other federally assisted capital assets 
are not owned by the federal government and are not being used by the 
federal government in its own operations, so there are no federal 
programs to which the cost of using this capital should be allocated 
for budget decision making. 

[17] The President's Commission to Study Capital Budgeting, Report of 
the President's Commission to Study Capital Budgeting (Washington, 
D.C.: February 1999). 

[18] CBO, The Budgetary Treatment of Leases and Public/Private Ventures 
(Washington, D.C.: February 2003); GAO/AIMD-00-57; NRC, Investments in 
Federal Facilities: Asset Management Strategies for the 21ST Century 
(Washington, D.C.: The National Academies Press, 2004). 

[19] OMB, Analytical Perspectives, Budget of the United States 
Government, Fiscal Year 2004 (Washington, D.C.: 2003), 13. 

[20] We used character class data from OMB's MAX system to identify 
departments with substantial capital budget authority over the last 12 
years. These character classes include Construction and Rehabilitation 
(1312 and 1314), Major Equipment (1322 and 1324), and Purchases and 
Sales of Land and Structures (1340). Major equipment includes capital 
purchases of information technology but excludes the support services 
related to information technology purchases. MAX is the computer system 
used to collect and process information needed to prepare the 
President's Budget. 

[21] We were unable to meet with staff from the Senate Appropriations 
Subcommittee on Agriculture. 

[22] The President's Commission to Study Capital Budgeting, Report of 
the President's Commission, 33 and NRC, Investments in Federal 
Facilities, 82. 

[23] Statement of Federal Financial Accounting Standards, No. 6, 
Accounting for Property, Plant and Equipment and No. 10, Accounting for 
Internal Use Software. 

[24] All of these issues are discussed in more detail in other sections 
of this report. 

[25] According to OMB officials, this treatment of budget authority can 
be used for certain transactions. 

[26] GAO, Executive Guide: Leading Practices in Capital Decision-
Making, GAO/AIMD-99-32 (Washington, D.C.: December 1998). 

[27] GAO-04-138. In this report we also found that three of four case 
study agencies--NPS, the Department of Veterans Affairs, and the 
National Oceanic and Atmospheric Administration--lacked current asset 
condition data. 

[28] GAO, High-Risk Series: Federal Real Property, GAO-03-122 
(Washington, D.C.: January 2003). 

[29] Statement of Federal Financial Accounting Standards, No. 4, 
Managerial Cost Accounting Concepts and Standards for the Federal 
Government, recommends that federal entities report the full costs of 
outputs in general-purpose financial reports. 

[30] GAO, Bureau of Reclamation: Opportunities Exist to Improve 
Managerial Cost Information and Cost Recovery, GAO-02-973 (Washington, 
D.C.: Sept. 20, 2002). 

[31] GAO-05-117SP. 

[32] GAO, Financial Management: Sustained Efforts Needed to Achieve 
FFMIA Accountability, GAO-03-1062 (Washington, D.C.: Sept. 30, 2003). 

[33] GAO/AIMD-97-5. 

[34] GAO, Budget Issues: Incremental Funding of Capital Assets, GAO-01-
432R (Washington, D.C.: Feb. 26, 2001) and GAO-03-1011. 

[35] OMB, Historical Tables, Budget of the U.S. Government, Fiscal Year 
2005 (Washington, D.C.: 2004), Table 9.3, 160-161. 

[36] Revolving funds are accounts authorized to be credited with 
collections that are earmarked to finance a continuing cycle of 
business-type operations without fiscal year limitation. 

[37] GAO-97-5. 

[38] OMB noted that these two costs are not identical since CAF 
mortgage payments would reflect an interest cost whereas WCFs do not 
reflect an interest cost. However, besides depreciation, some WCFs are 
able to charge additional amounts for future asset replacement. 

[39] The debt resulted from advances originally obtained to cover 
benefit payments that coal taxes, the primary source of fund revenues, 
could not provide. 

[40] BPA is required by law to mitigate the impacts to fish and 
wildlife to the extent they are affected by the construction and 
operation of the Federal Columbia River Power System. 

[41] For a thorough discussion of alternative financing approaches, see 
GAO-03-1011. 

[42] NRC, Investments in Federal Facilities, 27. 

[43] Land acquisition, programming, conceptual planning, renewal or 
revitalization, and disposal account for the remaining 5 to 35 percent. 

[44] GAO-03-122, 15. 

[45] Although the scoring has not been determined, the subunit's 
payment to the CAF for existing assets would likely require budget 
authority since the payment is not for debt repayment. 

[46] OMB noted that neither the budget nor accounting systems reflect 
imputed interest costs and therefore do not reflect full economic 
costs. 

[47] For example, Congress has provided FS and BLM with specific 
authorities to sell land in Los Angeles, California and near Las Vegas, 
Nevada. These authorities allowed the agencies to retain the sale 
proceeds and use them for new projects. 

[48] In fiscal year 2002, Congress granted FS additional authorities to 
sell or exchange excess buildings and other structures located on 
National Forest System lands and under the jurisdiction of FS. The 
agency was allowed to retain proceeds from the sales until the proceeds 
were expended for maintenance and rehabilitation activities within the 
FS region in which the building or structure was located. In fiscal 
year 2003, Congress extended this authority allowing for some of the 
sale proceeds to be used for construction of replacement facilities. 
Pub. L. No. 107-63, Sec. 329, 115 STAT. 471 (Nov. 5, 2001) and Pub. L. 
No. 108-7, Sec. 325, 117 STAT. 275-276 (Feb. 20, 2003). 

[49] GAO-03-122, 41. 

[50] GAO-05-117SP, 15. 

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