June 18, 1998
Does the Government have adequate information about its inventory of federally owned capital assets to do good planning, budgeting, and management?
Property accountability. Agencies need a property control system that lists the assets they own, their characteristics, location, and condition in order to plan adequately for their use, new acquisitions, and maintenance. Without this information, agencies do not know what resources they have available to meet their present needs, nor can they efficiently decide how much they need to spend for new assets and maintenance of existing assets in order to meet the goals of their strategic plans. Agencies also need more analytical information about their capital assets in order to plan effectively for capital asset acquisitions and to manage the use of capital assets efficiently and effectively.
However, the Government as a whole does not have adequate record keeping on its capital assets. Nor has it put in place a comprehensive capital programming process that by its very nature would require an accurate inventory of capital assets and their characteristics. The poor quality of its property information also degrades its financial accountability, as reflected in the audit opinions on the Government's financial statements (see section below).
OMB published the Capital Programming Guide in July 1997 to give guidance for a disciplined capital programming process extending from planning for new acquisitions through budgeting, procurement, and managing their use. The Guide requires that "capital assets . . . be planned for, acquired, and managed in light of their ability to contribute to accomplishing program outputs and outcomes, as described in the agency strategic plan."(1) In order to do this, "agencies should . . . evaluate the capacity of existing capital assets for bridging the performance gap between current and planned results. This assessment of the existing performance baseline should cover [both] assets currently in use and those being tracked in the Procurement Phase."(2)
By this means, the agency would construct a portfolio of all its capital assets and a baseline assessment that evaluated the capacity of these assets to achieve program goals. The evaluation should include the ability to meet program goals, life-cycle costs, affordability of life-cycle costs relative to expected future funding, the agency's ability to manage the asset, and associated risks. The baseline assessment should thereby help evaluate how to use existing assets most effectively to meet program goals, plan efficient operational use and maintenance, identify gaps between current and planned performance, and explore alternatives to fill the performance gap.
Other references. -- The acquisition and maintenance of capital assets are discussed in the issue papers on those subjects, and the accounting standard for deferred maintenance is summarized in the information paper on Federal accounting standards for capital investment.
Financial accountability. Agencies also need financial data on the assets they own.(3) Under present accounting standards, financial accountability requires information about the asset's acquisition date, purchase price, and estimated service life in addition to the property accountability requirements stated above. The additional information is needed, as a minimum, in order to allocate the cost of capital assets to accounting periods through depreciation. The depreciation is needed not only for financial statements but also to be assigned through a costing method to the costs of outputs and outcomes produced by the agency, which should then be compared to the performance indicators developed in accordance with the Government Performance and Results Act (GPRA). The legislative history of this Act indicates that Congress placed emphasis on comparing cost with performance, especially for the use of agency staff in managing programs.
Financial accountability for capital assets is not adequate. Even where property data are satisfactory, agencies often had little incentive to keep financial records prior to the Chief Financial Officers Act of 1990. The Consolidated Financial Statements of the U.S. Government for FY 1997 were the first to be audited for the Government as a whole. (See separate information paper.) GAO issued a disclaimer of opinion, saying they were unable to determine the reliability of significant portions of the statements. The first material deficiency they listed was for "property, plant and equipment and inventories and related products." GAO wrote:
The President has committed to an unqualified audit opinion on the Consolidated Financial Statements for FY 1999, although because of materiality this does not require an unqualified opinion on the financial statements for all agencies. He has directed that agencies develop plans, including milestones, for resolving the financial reporting deficiencies identified by the auditors of the FY 1997 financial statements; and that they provide quarterly reports on the progress of these plans to OMB. OMB and the CFO Council have revised the five-year Federal financial management plan to list as the first priority: "obtain unqualified opinion on financial statements and issue accounting standards." More accurate information on property, plant, and equipment is essential to achieve that goal.
Historical cost and current cost measures of capital assets and depreciation. In developing accounting standards for property, plant, and equipment, the Federal Accounting Standards Advisory Board (FASAB) considered whether these assets and their depreciation should be measured in terms of historical cost or current value. The majority believed that "cost" meant historical cost, that historical cost was more certain, that it was less subject to manipulation, and that the cost of revaluing assets would be prohibitive. A minority believed that current value was a better measure of economic cost, which was needed to facilitate performance evaluation, pricing, and other decision making. The minority also believed that comparable private sector facilities could provide a basis for revaluing many of the Government's general capital assets and that revaluation could be less frequent than annual.
Imputed interest on federally owned capital. FASAB also deliberated whether to impute an interest charge on capital to represent the opportunity cost of holding resources that have alternative uses or had alternative uses when constructed. The primary reason is that interest -- as much as depreciation -- is part of the economic cost of using capital and therefore is part of the full cost of outputs, which FASAB requires to be reported under its cost accounting standards. Full cost, including interest, is needed in order to evaluate program performance, set prices, control cost, and promote cost awareness. In response to an Invitation for Views issued two years ago, half of the respondents were generally supportive, a quarter expressed limited support, and a quarter were generally opposed. FASAB has begun a detailed examination of one agency to explore how such a requirement might be implemented, but other projects have had a higher priority to date.
If the Federal Government were to adopt capital acquisition funds (CAFs), as discussed in a separate issue paper, programs would automatically be charged interest on capital rented through these funds. (CAFs would also have incentive effects to allocate budgetary resources and use capital more efficiently, which imputed interest under financial accounting would not have.) Even if CAFs were adopted, however, they might not cover all capital and so would not remove the reason to consider imputed interest in financial accounting.
National income and product accounts and related series on tangible wealth. For evaluating macroeconomic policy, economists ordinarily turn to the national income and product accounts and related statistics published by the Bureau of Economic Analysis in the Department of Commerce. These series include gross domestic product (GDP) and its components; a current account for Federal Government receipts and current expenditures, which excludes investment but includes depreciation on the stock of federally owned structures and equipment (both defense and nondefense) as a measure of the cost of using capital assets and thus as part of current expenditures; fixed reproducible tangible wealth for the Federal Government and the private and state and local sectors; and a great number of other series. Since these data are not linked to the budget and do not extend to the years covered by the budget, OMB publishes separate estimates in Analytical Perspectives based on the same method but much simplified.
Series on Federal capital stocks were not routinely available in 1967, when the President's Commission on Budget Concept made its report. Although such data are not part of the budget, the Commission thought they were relevant to the macroeconomic goals that budget policy addresses. It wrote: "For the Government as a whole, estimates of the value of Government physical assets and the depreciation of these assets would be useful for studying economic growth. Such calculations might well be made by the social accountants as part of regular periodic statistics on national income and wealth."(5)
The Bureau of Economic Analysis estimates capital stocks by the perpetual inventory method of cumulating purchases less depreciation. Depreciation is measured at current cost, not historical cost; time series of capital stocks net of accumulated depreciation are published in current cost and in index numbers. Current cost depreciation is used in order to measure all activities in the prices of the current year and to obtain a valid measure of the change in the capital stock. Two years ago the estimation methods were revised, based on further theoretical analysis and empirical research. The largest change was to adopt geometric depreciation rather than straight-line depreciation for most categories of assets, with the new estimates based largely on studies of used asset prices.
The data available to estimate service lives and depreciation rates are very limited for government assets, much more than for those in the private sector. The Bureau of Economic Analysis in its 1995 strategic review said that it planned to conduct empirical studies of used asset prices for more assets, and in introducing its revised series on tangible wealth it cited this plan and also wrote that it intended to improve service lives and depreciation rates for government assets.(6)
The following options are complementary or independent, not alternatives.
1. Option 1. Capital asset management system for property and financial accountability. -- Recommend that each agency establish an integrated capital asset management system that includes property accountability consistent with the Capital Programming Guide and financial accountability consistent with Federal financial accounting standards and audit standards. OMB could be charged with working with the agencies to establish a reasonable time period to implement this system, together with intermediate steps and milestones for reaching these steps and periodic agency reports to OMB; and with ensuring that agencies implement the system on schedule.
2. Option 2. Other improvements. -- Three other types of data on federally owned capital assets have been identified:
(b) imputed interest on capital assets
(c) depreciation and capital stocks related to the national income and product accounts
For each of these, an option would be to recommend improvement and/or development if the benefits of acquiring such information were thought to be worth the cost.
3. See separate information paper on Federal accounting standards for capital investment.
4. Consolidated Financial Statements of the United States Government, Fiscal 1997, pp. 16-17.
5. Report of the President's Commission on Budget Concepts, pp. 34-35.
6. Arnold Katz and Shelby
Herman, "Improved Estimates of Fixed Reproducible Tangible Wealth," Survey
of Current Business, May 1997, p. 76.
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