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Staff Summary of Testimony to the PCSCB: Abel, Financial Executives Institute

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James J. Abel, Executive Vice President and CFO, Lamson & Sessions, on behalf of Financial Executives Institute (FEI) (appearance on May 8, 1998)

Testimony: Mr. Abel urged the Federal government to emulate the private sector by developing a highly disciplined mission definition and capital allocation process and proposed a Federal capital budget pilot program. This proposal would protect the concepts of full funding and up-front scoring and retain the visibility of the unified budget.

Capital budgeting helps companies develop long-term (usually five years) strategies to accomplish business objectives and identify the costs of reaching those objectives. Capital should be analyzed separately from current operations. To lump them together as is currently done in the Federal unified budget is to obscure and frustrate the role capital should play.

Mr. Abel described capital budgeting in the private sector as multi-step process. First, companies define their mission and determine the capital assets needed to achieve their objectives. Then companies utilize analytical tools (e.g. net present value) to make investment and project priority decisions. As investments are approved, a financial reporting system monitors the progress on capital projects (on a monthly, quarterly, and annual basis) and ensures the stated objectives are being met. Finally, financial reports are reviewed by executive management and used to make policy modifications and develop subsequent strategic plans.

FEI proposes that a Federal capital budget include only federally-owned physical capital assets - not other Federal investment spending with long-term benefits, such as research and development and education and training. Issues to be addressed when considering a Federal capital budget include possible violations of the existing appropriations process policy and law, the inclusion of depreciation in operating budgets, and deficit financing of investments.

The program would create and implement a mission definition and capital allocation program for three classes of fixed investment (major weapons system, information system, and infrastructure project) and then establish a capital budget separate from the department or agency. The pilot program includes financial management and control systems and is subject to regular evaluation.

Questions from the Commissioners: The questions focused on the details of the FEI capital budget proposal with particular emphasis on defense capital.

Q.    Would implementing a separate capital budget only for physical capital create a bias against other Federal investment spending with long-term benefits such as research and development?
A.    Yes, this may create a bias. However, in order to effectively introduce a Federal capital budget it is necessary to proceed gradually. Once the physical capital budget process is evaluated, other types of Federal investment spending may be added to the capital.

President's Commission to Study Capital Budgeting

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