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June E. O'Neill, Director, Congressional Budget Office (appearance
on April 24, 1998)
Testimony: Director O'Neill recommended against a capital budget
by focusing on two points. First, she advocated retaining the current practice
of recognizing the full cost up-front at the time of making acquisition
decisions, regardless of assets' expected useful life. Second, she proposed
improving the current budget account structure and budget process by attributing
all costs of acquiring and holding capital to the particular programs that
use the assets.
To support her first point, Director O'Neill elaborated on the following:
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Full cost is the correct measure for budgeting because the appropriate
time to recognize a capital expenditure in the budget is when the decision
to use resources becomes irreversible.
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The current up-front treatment of capital spending has no bias against
long-lived assets.
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The use of depreciation could introduce bias and weaken budget discipline
due to difficulties in defining capital.
To support the second point, Director O'Neill discussed the benefits of
attributing capital costs to the programs that use the assets. She stated
that if the user pays, the government is more likely to acquire and retain
only those capital assets whose benefits are worth the costs. She introduced
one way of adapting this practice, which is through capital acquisition
funds (CAFs). However, she noted that CAF is only a conceptual proposal
and practical issues remain to be addressed. CAFs are described in OMB's
briefing to the Commission on January 31, 1998.(1)
In sum, she reiterated that budgeting can be improved not by moving
away from full cost recognition, but by strengthening capital cost measurements
throughout the budget. She ended by asking James L. Blum, Deputy Director
of CBO, if he wanted to add any remarks. He briefly expanded on CAFs by
addressing the use of these accounts to recognize capital costs.
Questions from the Commissioners: Questions focused primarily
on the impact of cost-benefit analyses on the political process and the
specifics of CAFs.
Q. Are cost-benefit analyses worthwhile? How can they
gain better attention on the Hill?
A. The analyses do have some effect on decisions.
CBO has a forthcoming report, The Economic Effects of Federal
Spending on Infrastructure and Other Investments, that finds a wide
range of returns on federal spending for capital. The problem is that many
projects have low or negative rates of return, in part because they displace
investment by state and local governments and private firms.
Q. Could appropriations subcommittees allocate nothing
to repay CAFs? If so, should CAFs be mandatory so that the funding is required?
A. Getting the subcommittees to embrace CAFs may
be difficult but is essential to their effective use.
Footnotes:
1. OMB, "Charging Programs
for the Full Cost of Using Capital" (briefing, January 31, 1998).
President's Commission to Study
Capital Budgeting
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