Achieving the BenefitsAchieving the Benefits of Accruals in a Cash of Accruals in a Cash

EnvironmentEnvironment

Justine KilpatrickJustine KilpatrickU.S. Office of Management and BudgetU.S. Office of Management and Budget

66thth Annual OECD Public Sector Annual OECD Public Sector Accrual SymposiumAccrual Symposium

Separation of PowersSeparation of Powers The United States is characterized by The United States is characterized by

separation of powers between the separation of powers between the Legislature and Executive. Power has Legislature and Executive. Power has also been divided by party for most of also been divided by party for most of the 1970s through 1990s. the 1970s through 1990s.

Congress does not vote on the budget Congress does not vote on the budget as a whole, but on authorizing laws as a whole, but on authorizing laws and 13 Appropriations, which they and 13 Appropriations, which they may modify in substance and detail. may modify in substance and detail.

““No money shall be drawn from the No money shall be drawn from the Treasury, but in Consequence of Treasury, but in Consequence of Appropriations made by Law.” Appropriations made by Law.”

Controlled, Yet FlexibleControlled, Yet Flexible

Each section of an Appropriations Act Each section of an Appropriations Act that provides an amount of funding that provides an amount of funding available for a specified time and for a available for a specified time and for a specified purpose is tracked in a specified purpose is tracked in a separate Treasury account. separate Treasury account.

The budget is not simply cash outlays. The budget is not simply cash outlays. Budget authority may be enacted for Budget authority may be enacted for single or multiple years. While single or multiple years. While obligations must be in those years, obligations must be in those years, outlays may occur whenever the outlays may occur whenever the obligations are liquidated. obligations are liquidated.

The Principle: Cost Up FrontThe Principle: Cost Up Front The budget is a financial plan for The budget is a financial plan for

allocating resources within the allocating resources within the government and between government government and between government and the rest of the economy. Cost up and the rest of the economy. Cost up front helps to control execution of the front helps to control execution of the intended allocation.intended allocation.

Requiring budget authority for full Requiring budget authority for full cost up front provides the appropriate cost up front provides the appropriate information and incentives when information and incentives when comparing the cost of a program comparing the cost of a program against its benefits, the cost/benefit of against its benefits, the cost/benefit of one program with another, and the one program with another, and the cost of alternative means of achieving cost of alternative means of achieving a specified goal. a specified goal.

Pulling Up Financial Transactions Pulling Up Financial Transactions For exchange financial transactions, For exchange financial transactions,

the net present value of cash flows the net present value of cash flows pulls cost up front.pulls cost up front.

This approach is used to budget for This approach is used to budget for direct loans and loan guarantees under direct loans and loan guarantees under credit reform.credit reform.

Net present value is appropriate for Net present value is appropriate for insurance programs also. Skill at insurance programs also. Skill at estimating insurance program costs is estimating insurance program costs is improving, but not yet used for improving, but not yet used for budgeting.budgeting.

NPV is used to pull up front the full BA NPV is used to pull up front the full BA for capital leases. Operating leases for capital leases. Operating leases budget for annual plus close-out costs. budget for annual plus close-out costs.

Budgeting for Capital Up FrontBudgeting for Capital Up Front A task force under President Reagan and a A task force under President Reagan and a

public Commission under President Clinton public Commission under President Clinton assessed whether cost up front was the best assessed whether cost up front was the best way to budget for capital. Both concluded that way to budget for capital. Both concluded that cost up front was right.cost up front was right.

The Reagan Task Force developed the concept The Reagan Task Force developed the concept of a useful segment -- a component of an of a useful segment -- a component of an investment project with benefits exceeding cost investment project with benefits exceeding cost even if there were no future budget authority.even if there were no future budget authority.

The Clinton Commission set capital in the The Clinton Commission set capital in the context of strategic planning. They suggested context of strategic planning. They suggested trying out the use of capital acquisition funds. trying out the use of capital acquisition funds.

Contentious IssuesContentious Issues

Does everybody have a “capital budget”? Does everybody have a “capital budget”? Do they all “budget” for depreciation? Do they all “budget” for depreciation?

Is there a problem of underinvestment? Is there a problem of underinvestment? Of misallocation of investment? Of misallocation of investment?

Is there a bias for or against capital?Is there a bias for or against capital?

Should capital be financed by borrowing? Should capital be financed by borrowing? How does that relate to growth? Equity? How does that relate to growth? Equity?

What is the best framework for making What is the best framework for making investment decisions? Is it the same for investment decisions? Is it the same for Federal capital as for national capital?Federal capital as for national capital?

Continuing ReformsContinuing Reforms

Invest in “usable segments” so that Invest in “usable segments” so that benefits exceed cost without more BA.benefits exceed cost without more BA.

Follow the Capital Programming Guide Follow the Capital Programming Guide for planning, budgeting, procurement, for planning, budgeting, procurement, and management in use.and management in use.

Set investment in the context of long-Set investment in the context of long-term strategic and program planning. term strategic and program planning. Budget to achieve goals effectively.Budget to achieve goals effectively.

Oversee budget justification and asset Oversee budget justification and asset management throughout government.management throughout government.

Seeking ResultsSeeking Results The United States is shifting focus to The United States is shifting focus to

budgeting and managing for outcomes.budgeting and managing for outcomes.

The fourth revision of strategic plans is The fourth revision of strategic plans is underway (1997, 2000, 2003, & 2006).underway (1997, 2000, 2003, & 2006).

The Program Assessment Rating Tool The Program Assessment Rating Tool has been applied to 800 programs, and has been applied to 800 programs, and made transparent on ExpectMore.gov.made transparent on ExpectMore.gov.

Annual Performance and Accountability Annual Performance and Accountability Reports show agency performance and Reports show agency performance and financial results. financial results.

Budgeting for ResultsBudgeting for Results Agencies are justifying budgets around Agencies are justifying budgets around

strategic goals and supporting programs. strategic goals and supporting programs.

Funds for each PART have been identified Funds for each PART have been identified by Treasury and budget accounts. by Treasury and budget accounts.

Overviews and some whole justifications Overviews and some whole justifications are posted on the Web. Congressional are posted on the Web. Congressional interest in posting all is sprouting.interest in posting all is sprouting.

Web transparency and development of a Web transparency and development of a government-wide electronic budgeting government-wide electronic budgeting system could encourage performance system could encourage performance budgeting. budgeting.

Matching Cost with ProgramsMatching Cost with Programs

Align one or two budget accounts or Align one or two budget accounts or sub-accounts with each program. Data sub-accounts with each program. Data is available to assess how close this is. is available to assess how close this is.

Appropriate BA for the full resources Appropriate BA for the full resources used by that program to those accounts. used by that program to those accounts. There may be resistance to doing this. There may be resistance to doing this.

For most inputs, the budgetary and For most inputs, the budgetary and accrual measures are relatively close.accrual measures are relatively close.

Where that is not the case, make Where that is not the case, make payments from the program to a payments from the program to a support account. support account.

Support AccountSupport AccountAccrual Before BudgetAccrual Before Budget Retiree BenefitsRetiree Benefits Retirement FundRetirement Fund Hazardous SubstanceHazardous Substance Cleanup FundCleanup Fund

Budget Before AccrualBudget Before Accrual Inventory AcquisitionInventory Acquisition Supply, Working Supply, Working

Capital FundCapital FundCapital AcquisitionCapital Acquisition CAF - Capital CAF - Capital

Acquisition FundAcquisition Fund

Key Accrual Timing DifferencesKey Accrual Timing Differences

Two Perspectives of CapitalTwo Perspectives of Capital

Retaining the value of cost up frontRetaining the value of cost up front

Require budget authority for the full cost Require budget authority for the full cost of a useful segment with benefits of a useful segment with benefits greater than cost without future budget greater than cost without future budget authority.authority.

Gaining value: matching cost to programsGaining value: matching cost to programs

Get the BA as borrowing authority from Get the BA as borrowing authority from Treasury, and require each program to Treasury, and require each program to pay its share of the “mortgage” during pay its share of the “mortgage” during the asset’s useful life.the asset’s useful life.

A Capital Acquisition FundA Capital Acquisition Fund

AgencyAgencyCAFCAF

TreasuryTreasury

PrivatePrivateContractoContracto

rr

OperationOperation of of

ProgramProgram

Borrow Borrow $10 million $10 million in year 1in year 1

Purchase $10 million park Purchase $10 million park facility in year 1 (BA/OL)facility in year 1 (BA/OL)

Pay rent for park facility: Pay rent for park facility: $800 thousand each year $800 thousand each year for 30 years (BA/OL) for 30 years (BA/OL)

Repay principal + Repay principal + interest: $800 interest: $800 thousand each thousand each year for 30 yearsyear for 30 years

Collect rent for park facility: Collect rent for park facility: $800 thousand each year for $800 thousand each year for 30 years (-BA/-OL)30 years (-BA/-OL)

BA Budget AuthorityBA Budget AuthorityOL OutlaysOL OutlaysCAF Capital Acquisition FundCAF Capital Acquisition Fund

Issues in ImplementationIssues in Implementation

Historical vs Current CostHistorical vs Current Cost

Historical cost permits borrowing and Historical cost permits borrowing and repayment, which seems logical.repayment, which seems logical.

Current cost is theoretically better, Current cost is theoretically better, but requires “sweeping” any gains.but requires “sweeping” any gains.

Dealing with PerceptionsDealing with Perceptions There is no double counting.There is no double counting. Program cost is not really higher.Program cost is not really higher.

Including Existing AssetsIncluding Existing Assets

… … or else full cost is far in the futureor else full cost is far in the future

The Budget Drives DecisionsThe Budget Drives Decisions

Matching cost and results in the budget Matching cost and results in the budget puts information on puts information on bothboth at the point of at the point of decision-making and provides incentives decision-making and provides incentives to maximize effectiveness and efficiency.to maximize effectiveness and efficiency.

The budget drives and provides context The budget drives and provides context for policy development and legislation.for policy development and legislation.

The budget allocates resources among The budget allocates resources among purposes and programs.purposes and programs.

Appropriations establish the structure Appropriations establish the structure for budget execution and program for budget execution and program

management.management.