CAFs have  been suggested as a capital asset financing approach that would benefit  federal departments and their subunits by addressing both of these  challenges. These subunits  would then pay the CAF a mortgage payment sufficient to cover the  principal and interest payment on the Treasury loan. The CAF would use  those receipts only to repay Treasury and not to finance new assets. In addition, if all existing capital assets of a  department and its subunits were transferred to the CAF, the CAF would  impute an annual capital usage charge on those assets to using agencies. CAFs Would Be Positioned at the Department Level and Create a More Complex Process for Financing Capital

Although CAFs do not currently exist, we can describe how they would  likely operate based on written proposals and our discussions with budget  experts. The CAF would receive appropriations for the full cost of an asset (or  useful segment of an asset) in the form of borrowing authority. For each project funded through the CAF, the subunit’s annual budget  request would need to include the annual mortgage payment in each year,  for the useful life of the asset (or until the asset was sold or transferred). A CAF, however, would be appropriated  up-front borrowing authority. CAF Benefits Can Be Achieved through Alternative Means Without the Added Budget Complexity

CAFs have been proposed as a way to address two challenges that arise  from the full up-front funding requirement for capital projects. Allocating Annual Capital Costs and Improving Decision Making for Capital Assets May Be Achieved through Existing Initiatives

Officials we interviewed reacted to our presentation of the CAF mechanism  by describing current agency initiatives and existing mechanisms that they  believe can better achieve the ultimate goal of improving budgeting and  decision making for capital. Hence, both would reflect the annual cost of  capital in the subunits’ budgets. Several Issues to Weigh When Considering Implementation of CAFs

While in theory CAFs could be implemented at most agencies, there are  several complex issues that Congress would need to consider before  adopting such a mechanism. As with new assets, the capital charge on existing assets  would not affect the deficit. If CAFs were applied only to new assets going forward,  programs would not reflect the full annual cost of capital for decades and  programs purchasing new capital would appear more expensive than those  using existing capital. Even if this and other issues were tackled and  improved information about capital costs was provided to managers, there  is little assurance that CAFs alone would create incentives for programs to  reassess their use of capital. Almost everyone we consulted concluded that implementation issues  would overwhelm the potential benefits of a CAF. More importantly,  current efforts under way in agencies would achieve the same goals as a  CAF without introducing the difficulties. Given this, as long as alternative  efforts uphold the principle of up-front funding, then a CAF mechanism  does not seem to be worth the complexity and implementation challenges  that it would create. Treasury, GSA, USDA and  DOI generally agreed with the report. OMB recognizes the usefulness  of asset management and cost accounting systems regardless of whether  CAFs are adopted.
Why GAO Did This Study

CAFs have been discussed as a new mechanism for financing federal capital assets. As envisioned, CAFs would have two goals. First, CAFs would potentially improve decision making by reflecting the annual cost for the use of capital in program budgets. Second, they would help ameliorate at the subunit level the effect of large increases in budget authority for capital projects (i.e., spikes), without forfeiting congressional controls requiring the full cost of capital assets to be provided up-front. Through discussions with budget experts and by working with two case studies, the Departments of Agriculture and of the Interior, we are able to describe in this report (1) how CAFs would likely operate, (2) the potential benefits and difficulties of CAFs, including alternative mechanisms for obtaining the benefits, and (3) several issues to weigh when considering implementation of CAFs.

What GAO Found

Capital acquisition funds (CAF) have been suggested as department-level funds that would use appropriated up-front borrowing authority to buy new departmental subunit assets. These subunits would then pay the CAF a mortgage payment sufficient to cover the principal and interest payment on the Treasury loan. The CAF would use those receipts only to repay Treasury and not to finance new assets. If existing capital assets were transferred to the CAF, subunits would pay an annual capital usage charge to the CAF. CAFs might achieve the goals intended, but these goals can be achieved through simpler means. Alternative mechanisms, such as asset management systems, cost accounting systems, and working capital funds may achieve the goal of allocating annual capital costs and improving decision making for capital assets. Our case study agencies generally did not indicate problems with budget authority spikes. They budget in useful segments, use accumulated no-year authority, or finance capital assets using working capital funds. Many concerns about CAFs were raised, including the long-term feasibility of making fixed annual mortgage payments and the added complexity CAFs would create. Implementation would raise a number of issues. If CAFs were applied only to new assets going forward, all programs would not reflect the full annual cost of capital for decades. Yet the difficulties of including existing capital are numerous. Even if these issues were tackled, there is little assurance that CAFs alone would create new incentives for programs to reassess their use of capital since CAF payments would not affect the deficit. Implementation issues could overwhelm the potential benefits of a CAF. More importantly, current efforts under way in agencies would reflect asset costs as part of program costs without introducing the difficulties of a CAF. As long as alternative efforts uphold the principle of up-front funding, CAFs do not seem to be worth the implementation challenges they would create. Except for OMB, agencies generally agreed with our conclusions.