1. Incorporating Investment Decisions in Medium Term and Annual Budgets Robert H. Goldberg Office of Management and Budget Executive Office of the President Washington, D.C., U.S.A. April 25, 2005

2. Overview Characteristics of the U.S. Budget. Attributes of Capital Budgeting. Pitfalls of Capital Budgeting Conclusions

3. Characteristics of U.S. Budget Process U.S. federal budget is an annual budget but includes long- range budget estimates. Single budget for capital and operational expenditures. Budget is based on notion of Budget Authority; Funds appropriated in one year can be obligated and disbursed over time. Executive branch proposes funding; Congress approves. Congressional influence over spending priorities is large.

4. Prioritizing Resources in the U.S. Budget Process Prioritization of resources (Budget Authority) among three broad categories: –Defense –Homeland Security –Non-defense/Non-homeland security CategoryFY 2006 Proposal in billions Percent Growth over FY 2005 Defense4195 percent Homeland Security323 percent Other Operations389-1 percent Total Budget8402 percent

5. Prioritizing Spending in the US Budget Process Federal budget directly funds certain investments: Defense, space/science, water/public works, energy, VA hospitals, public buildings. Other investments made in part with federal funds but at State and local level – transportation, education, health. Within Defense – tradeoffs made between operations, personnel, and investments. Within Non Defense – Decisions made first to invest in broad areas, eg, Education vs Health; tradeoffs within those areas for operations, personnel, and investments.

6. Attributes of Capital Budgeting Elements of a Medium Term Budget Framework. OMB manages budget formulation process, ensures transparency. Budget Principles and other guidance govern how agencies should budget for capital investment. Multiyear funding flexibilities – funds appropriated in one year can be spent over time. Structure to facilitate cost estimating and planning – emphasis on life cycle costs and benefits.

7. Key Budget Principles Full funding -- Agencies should budget sufficient funds to complete a project (or a useful segment) at the time a decision is made to proceed. –Complete funding provided in year 1; Maintenance costs are budgeted annually upon completion of a project. –Funds provided in year 1 can be obligated/disbursed over time. –Ensures full cost is recognized at the time a commitment is made to undertake the investment. –Creates incentives for good cost estimating; limits the need to ask Congress for funds in future years for the same project. Regular and Advance Appropriation. Separately fund planning for procurement and construction.

8. Pitfalls of Capital Budgeting in U.S. Agencies don’t always follow budgeting principles. –Agencies prefer spreading capital costs over a period of years rather than providing sufficient funds up front. Practice known as incremental funding: Biases the budget toward starting new programs. Forces agencies to ask future Congresses for funding to complete a project. Makes it more difficult to maintain cost control. –Agencies often pursue other alternatives such as capital leases. Lack of policy-driven outyear estimates. –DoD is only agency with programmatic-driven outyear funding levels. –Outyears for other agencies are formula-driven. –Other agencies now starting long range plans – DoE, Army Corps Engineers.

9. Pitfalls of Capital Budgeting in U.S. Long term capital investments are prone to cost, schedule, performance problems. –Lack of planning, poor cost estimates –Better planning, cost estimating when costs are predictable –Cost as an independent variable Political considerations are paramount; some investments may not be necessary but proceed anyway.

10. Conclusions Budget process is key to ensuring balance between investments and fiscal controls. Existence of sound principles and structure essential but challenges exist.