Concept_DC_Capitol Building

OMB and Congress Propose New Way to Budget for Federal Buildings

Oct 16, 2018 | Other Spending

Both lawmakers and administration officials have recently begun advocating for a different approach to funding long-term physical federal investments. The proposed revolving fund would adopt some principles of capital budgeting, allowing federal office buildings or other federal facilities to have a separate funding mechanism. The fund would cover the upfront cost of the investment, and it would receive payments annually from the agency borrowing the money through the ordinary annual appropriations process.

What is Capital Budgeting?

Currently, the federal budgeting process is myopic – the discretionary budget for most agencies is set only one year at a time. As a result, it can be difficult to budget for very large capital purchases within the standard appropriations process. For instance, a rebuilt or relocated FBI headquarters is estimated to cost between $3.3 billion and $3.8 billion, which is almost half of the FBI's full budget request this year ($8.9 billion). Appropriating it in one year would mean a temporary 43 percent increase in the FBI budget. However, because appropriations caps are set annually, the temporary increase in the FBI's budget would need to be offset with a same-size decrease in the FBI budget, a cut elsewhere in the Commerce-Science-Justice appropriations bill, or elsewhere in the discretionary budget. Budgeting one year at a time makes it difficult to pay for these types of long-term projects.

States generally circumvent these issues by having a separate capital budget for long-term projects like construction and infrastructure. This type of capital budget allows states to borrow while only the annual costs are reflected in their operating budget. The federal government does not have a capital budget but does employ a few elements of it: interest costs are accounted for annually and certain credit programs are measured by their net impact rather than gross spending.

Because federal appropriations handle costs one year at a time, agencies are incentivized to adopt long-term operating leases rather than purchasing properties outright. The annual cost of this is smaller, but the long-term costs can add up to much more than if the building had been purchased. In an example highlighted by the Bipartisan Policy Center, the Department of Transportation is paying more than double by leasing instead of buying its headquarters:

At the end of the 15-year lease, with an average lease payment of approximately $50 million, the government will have spent $750 million to rent a building that only cost $326 million to construct and will be left with no equity to show for it and no ability to purchase it at a bargain price. 

Since current budgeting rules make it difficult for agencies to buy or build buildings, even if the purchase would produce long-term cost savings, this area is ripe for workable and innovative reforms. While moving fully to capital budgeting has the potential to complicate the budget process and allow increased borrowing that would not typically appear in the ordinary federal budget, certain elements of capital budgeting (i.e., this revolving fund) could be adopted within the framework of the current appropriations process.

Proposed Fund Adopts Elements of Capital Budgeting

Both the President’s budget and House Transportation and Infrastructure Committee Chairman Bill Shuster’s (R-PA) highway funding proposal have an innovative solution to allow a limited form of capital budgeting – only for federal buildings – while complying with the spirit of current budget rules. Both include nearly identical provisions to create a Federal Capital Revolving Fund (FCRF) that could cover the upfront costs, which agencies would reimburse over time.

With an initial $10 billion mandatory appropriation, the FCRF would be allowed to transfer up to $2.5 billion annually to agencies that wish to make capital purchases without eating up the entirety of the cost from the initial year’s discretionary budget. Appropriators would still choose each project selected to tap the FCRF, and agencies would then pay back the fund in annual increments over 15 years through regular appropriations.

The Office of Management and Budget (OMB) explained how capital investments face challenges in the current appropriations process, noting in the FY 2019 President’s budget:

Large-dollar Federal capital investments can be squeezed out in [the annual appropriations] competition, forcing agency managers to turn to operating leases to meet long-term Federal requirements. These alternatives are more expensive than ownership over the long-term because: (1) Treasury can always borrow at lower interest rates; and (2) to avoid triggering scorekeeping and recording requirements for capital leases, agencies sign shorter-term consecutive leases of the same space.

The proposal would require offsets for the initial $10 billion because of the statutory pay-as-you-go (PAYGO) law, but it would offer more flexibility than the current discretionary appropriations process. 

We are ordinarily wary of creation of a fund that could create incentives to misuse the money through gimmicks in Changes in Mandatory Programs (CHIMPs) or rescissions if scorekeeping agencies (namely, the Congressional Budget Office) find that lawmakers wouldn’t otherwise spend those funds. Any consideration of a FCRF would need proper rules in place with enforceable limits to prevent this kind of gimmickry. Encouragingly, it appears that Shuster’s legislation does include language limiting the budget gimmicks that the proposal could create and holding appropriators accountable for paying back the fund.

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Adopting elements from capital budgeting while maintaining budget discipline is an innovative idea with the potential to create long-term savings. It deserves consideration.