Sea Change

here was a time, not so long ago, when agencies needing to replace old equipment-a computer system, or a building, or even a boat-followed a fairly cut-and-dried method: They asked for what they considered the necessary money. Then the Office of Management and Budget and Congress decided, without much analysis, whether to fund the request. At times, the process led to seemingly arbitrary funding decisions, cost overruns and wasted taxpayer money.

If a new set of legislative mandates has its intended effect, those days may be gone for good. Thanks to a Congress and an administration intent on balancing the federal budget, as well as a bevy of performance-oriented laws passed in recent years, major capital asset proposals must meet an assortment of tests before they will be considered for funding. At the same time, notes G. Edward DeSeve, OMB deputy director-designate for management, the budget office and Congress now have a process by which to evaluate and prioritize requests.

The Senate Governmental Affairs Committee is watching implementation of new capital asset requirements closely. "There's been a frustration about the lack of an ability to measure government return on assets and how that's improving agencies' missions," says committee spokesman Paul Clark. "We're talking about accountability and what the taxpayers are getting for their investment."

The Coast Guard is a leader among agencies taking successful strides to improve their capital asset management process, say staffers at OMB, various congressional committees and the General Accounting Office, which included the Coast Guard in a capital asset management best-practices report released April 29. The Coast Guard's program isn't perfect, observers say, but it has shown significant improvement and deserves attention from other agencies still trying to decipher and implement the new requirements.

Given the constant need to reassess and fine-tune their program according to lessons learned, Coast Guard officials don't necessarily relish the attention. "Some people would say we're a poster child around town," says Adm. Thad Allen, director of resources at the Coast Guard. "I'm not sure we're not chasing our own reputation sometimes, because there are a lot of things we have to do. We have a system in the Coast Guard that's really in flux right now."

New Requirements

For some years now, agencies have had to pay closer attention to their capital assets, defined by OMB as land, structures, equipment and intellectual property, such as software, that have a useful life of two years or more. Since passage of the Budget Enforcement Act of 1990, which created caps on discretionary funding, money for big-ticket investments has been increasingly scarce. According to a recent study by Congress' Joint Economic Committee, discretionary outlays have fallen $77 billion, or 12 percent, in inflation-adjusted 1998 dollars since 1990. As a result, agencies face ever-tougher funding competition during the annual appropriations process.

Along with a tighter fiscal climate has come a series of mandates changing the way government operates. In 1993, the National Performance Review, now called the National Partnership for Reinventing Government, ordered agencies to look inward and revamp their management systems toward performance-oriented goals. Later that year, the Government Performance and Results Act (GPRA) codified the performance approach, mandating that agencies write annual strategic plans that measure performance against a set of goals.

The next year, Congress passed the Federal Acquisition Streamlining Act, which required agencies to develop measurable cost, schedule and performance goals for major purchases. The law ordered agencies to terminate projects that did not meet at least 90 percent of their baseline goals. In 1996, more specific requirements for information technology acquisitions became law with the Information Technology Management Reform Act, also known as the Clinger-Cohen Act.

President Clinton has reinforced the performance approach to assets in his last two budget requests with the "Principles of Budgeting for Capital Asset Acquisitions." The principles instruct agencies to manage risk throughout the planning, budgeting and acquisition process, and link long-range capital asset plans to broader performance goals.

To help agencies implement all these mandates, OMB synthesized new requirements in its Circular A-11, Part 3, "Planning, Budgeting, and Acquisition of Fixed Assets." OMB also worked with an interagency group composed of more than 80 employees from 14 agencies, including the Coast Guard, to develop a best practices-based Capital Programming Guide, which came out last July. The guide's goal, according to OMB, is to help agencies manage "a portfolio of capital assets to achieve performance goals with the lowest life-cycle costs and least risk." Portfolio management is precisely what Coast Guard officials are doing so well, observers say.

Considering Total Cost

The 208-year-old Coast Guard operates under the Transportation Department during peacetime and the Defense Department during war. Its primary duties include conducting search and rescue missions, maintaining navigation aids such as buoys and lighthouses, and enforcing fishing and environmental protection laws. The agency also interdicts drug traffickers, intercepts illegal immigrants and sees that frozen waterways are broken up to allow ships to pass during deepest winter.

Such varied missions demand a broad mix of assets. The Coast Guard's $19.1 billion collection of major equipment ranges from helicopters to small motor boats to ships to housing facilities. With asset life spans as short as a few years for some information technology assets to 50 years for shore buildings, and with replacement planning decisions often taking years to complete, managing this inventory is no easy task.

Coast Guard officials have integrated their business, performance and capital planning operations into a single, interconnected GPRA-inspired model that seeks to maximize desired outcomes-for example, eliminating deaths, injuries and property damage associated with maritime transportation, fishing and recreational boating-at the minimum possible cost. This is exactly the approach the Senate Governmental Affairs Committee is hoping all agencies will take, Clark says.

The Coast Guard's capital plan, which closely parallels the structure outlined in OMB's Capital Programming Guide, serves as its portfolio management tool. The document outlines how existing assets are meeting mission goals and how well they can be expected to do so in the future. The plan also describes how new assets might do the job better and cheaper. For example, an older ship might still be able to do a certain job, but if it requires frequent repairs and parts are increasingly hard to find, a new vessel needing less maintenance and with readily available parts might be a better alternative.

Gone is the traditional mentality that sought simply to replace individual assets when they reached the end of their useful lives. Gone too is the practice of viewing the acquisition price tag as the major determinant of whether to pursue a purchase.

Now, the focus is on total ownership cost, which includes front-end development work, the acquisition itself, operations and maintenance over the asset's lifetime, and disposal. "If you get too focused on acquisition cost, that may result in a larger operation and maintenance cost, rather than building in efficiencies in the acquisition cost," Allen says. "In other words, by paying more in the acquisition stage, you may actually reduce the operation costs later on."

The Coast Guard applied these principles to an ongoing project to replace its buoy tenders, the medium-sized ships that not only are used to maintain the buoy system, but also participate in practically all Coast Guard missions. The multiyear acquisition will replace 37 buoy tenders with 30 new ones that are smaller, faster and require fewer crew members. That is, they will be able to do their job as well as or better than the old larger fleet, but at a lower projected lifetime cost-about $14 million less a year-once all the boats are in service. With that strategy, "you're not only reducing the total number of assets you have to replace [in the future], but the assets operate at a lower cost in totality," Allen notes.

Lawrence Weintraub, assistant inspector general for auditing at the Transportation Department, says all DOT agencies could learn from the Coast Guard's buoy tender project. The agency used fixed-price performance specification contracting, under which Coast Guard officials told contractors what they expected of a new fleet of ships and awarded the contract to the lowest bidder, Weintraub says. Then they held the contractor "to the fire" to finish the job for the agreed-on cost in what Weintraub considers a "stunning example of what can be accomplished when you set out to do a good job."

Road to Success

The Coast Guard's revamped capital management process had its genesis some time before GPRA, FASA or Clinger-Cohen. Adm. Bill Kime, who served a fixed four-year term as Coast Guard commandant beginning in 1990, introduced the concept of total quality management, prompting a major internal evaluation of how agency officials managed processes. For example, they broke down the anatomy of a rescue case into component parts in an effort to make rescue work as effective and efficient as possible.

Then in 1993, the Coast Guard's Maritime Safety Directorate volunteered as a GPRA pilot agency. The directorate injected risk-based analysis into the way it operated, so that staff didn't just react to safety hazards and accidents, but actively tried to prevent them through new regulatory and education efforts. The directorate crafted a prototype performance-based business plan that would later serve as a starting point for the Coast Guard's agencywide plan.

As part of the administration's reinventing government initiative, the Coast Guard then went through two phases of major downsizing. Since 1994, agency officials have decommissioned 18 older cutters-buoy tenders and other ships longer than 65 feet-and 17 aircraft. In addition, they consolidated 11 headquarters offices into seven, merged several district offices and cut 4,000 positions. Savings so far have totaled $1.16 billion and, after further streamlining plans are implemented, are expected to reach $2.6 billion by 2002.

The Coast Guard has channeled those savings back into operations, allowing the agency to continue fulfilling its full mission despite receiving appropriations that haven't kept up with inflation.

"Any time an organization has to self-analyze, good things come of it," says a congressional staffer who has monitored the Coast Guard for more than 10 years. "The Coast Guard had to figure out how to continue providing the same level of services with less money in many areas. As a result, now they manage their operations and their assets better."

Strong leadership committed to change has been a critical element in the agency's success, observers agree. Adm. Robert Krameck, widely respected as a performance-oriented reformer, succeeded Kime in 1994. Pending Senate confirmation, Adm. James Loy, another believer in performance management, was expected to take the agency's helm May 29.

Also essential, observers say, has been the Coast Guard's willingness to listen to constructive criticism supplied by OMB, GAO, the inspector general's office and Congress. "The key is to objectively listen to your critics," Weintraub says. "If you reach an agreement as to what needs to be done, make it happen. If you don't reach an agreement, go back to the table until you do."

Matter of Control

Effective acquisition management is one thing, but Congress also is watching how well agencies control and maintain assets once they have them. This issue got heightened attention in April, when GAO released its review of the federal government's consolidated financial statements. Senate Governmental Affairs Committee Chairman Fred Thompson, R-Tenn., blasted DoD for being unable to account for a $1 million missile launcher, among other things.

While its infractions have been minor in scale when compared with DoD's, the Coast Guard also has had trouble keeping accurate tallies of the number and value of various items in its inventory. According to Transportation IG Kenneth Mead's audit report on the Coast Guard's fiscal 1997 financial statement, the agency failed to physically verify inventories for such things as buildings and spare parts, and it didn't have accurate records detailing some property values.

Part of the problem, which Mead's report acknowledged, is that many Coast Guard assets have been around for a long time. Attaching a value to ships built in the 1940s that have been updated to accommodate new weapons or computer systems over the years is difficult, notes Bill Campbell, Coast Guard chief financial officer. The same goes for historic properties. "Some of the land and lighthouses [the Coast Guard owns] predate the republic," he says.

This fiscal year, the Coast Guard has worked hard to address financial statement deficiencies. The agency is physically verifying its inventories and uncovering records that will help document ownership and original costs of older assets. The job is "one of the 12 labors of Hercules," Campbell says. "We have an awful lot of people doing an awful lot of work."

Along the way, the agency is using commercial off-the-shelf software to capture data for what will become a centralized data warehouse for all capital asset-related financial transactions. Weintraub says the IG's office is satisfied with the Coast Guard's efforts.

A historically fragmented storage system has added to the agency's inventory problems. Electronic parts for radars have been warehoused in Brooklyn, N.Y., while major spare parts for ships are in Curtis Bay, Md., and aviation spare parts are primarily in Elizabeth City, N.C.

A January 1995 GAO report on management of parts and supplies for Coast Guard cutters noted the lack of an effective inventory organizational structure or computer system. Without such a structure and system, Coast Guard managers do not know "the value, type, quantity, and condition of many of the spare and repair parts in the inventory," GAO noted. Although the Coast Guard still was able to carry out its mission effectively, GAO found, the poor management led to "costly emergency purchases and excess inventory."

But GAO's report also noted that the Coast Guard had recognized the problems and was creating a centralized system to track cutter inventory data. That effort is now part of a broader plan to consolidate all Coast Guard parts inventories, electronically at the least and physically if possible.

Eventually, Allen hopes, all maintenance records and parts inventories will be entered into a central computer system. Then, when a maintenance job gets done, he says, "not only the ship knows that, but the people who have to buy the spare parts for the ship and the managers on those platforms back at our engineering logistics command know that piece of maintenance has taken place and they can figure that into how they're going to manage that asset." The centralized inventory system will feed into Campbell's broader financial data system.

Heading for Deepwater

Having improved its capital management system, but with aging fleets of aircraft and ships capable of doing deep-sea jobs 50 miles or more from shore, the Coast Guard is embarking on what could become its largest capital asset acquisition. Dubbed "Deepwater," the plan involves almost all the agency's major ships and aircraft, as well as communications and other support equipment.

Some cutters now in service, despite having a planned life span of 30 years, are nearly 60 years old. Because of their old engines, there have been times when Coast Guard cutters have been outrun by the boats they were pursuing on suspicion of criminal activity.

Last March, the agency issued a request for proposals for Phase I of the Deepwater project. The assignment: Design a full system of assets that could fulfill the Coast Guard's off-shore responsibilities well into the 21st century.

This summer, three teams of contractors will be selected to develop competing concepts, which should be submitted by the end of 1999. Any proposals deemed acceptable will go on to Phase II, which will involve more detailed presentations with cost estimates.

With Deepwater, Allen says, "the opportunity that presents itself is to take a look at that whole scope of operations and say 'What is the right mix of surface craft, aircraft and sensors to allow you to maximize the outcomes you want to achieve and the public good you want to deliver at the lowest total ownership cost?' "

Given that the price tag for Deepwater could reach $15 billion over 20 years, Congress is urging caution. GAO is in the midst of studying the matter for the Senate Appropriations transportation subcommittee. GAO will assess the condition and capability of existing assets and determine whether a whole new system is warranted, says Randy Williamson, assistant director of GAO's Resources, Community and Economic Development Division.

What Congress wants to avoid is a repeat of the Vessel Traffic System 2000 project, says Richard Efford, staff assistant on the House Appropriations transportation subcommittee. Triggered by the Oil Pollution Act of 1990, which Congress passed to help prevent future oil spills like the one caused by the Exxon Valdez in 1989, the VTS 2000 proposal would have upgraded and expanded the existing vessel traffic safety systems in the nation's ports.

The Coast Guard wanted to fund the project largely through user fees, Efford recalls. But most users-ship and barge companies doing business at the ports, marine pilots and port authorities-considered the proposal too ambitious and expensive. A lot of work had been done and developmental money had been spent on VTS 2000 before Congress pulled the plug. The agency then worked closely with stakeholders and Congress to come up with a scaled-back approach that all parties support, Efford notes.

Political Will

The Coast Guard has learned that no matter how well agencies manage their capital assets, funding decisions often are politically charged. In 1995, agency officials proposed closing 23 of their 185 small-boat stations to save an estimated $6 million. Despite Coast Guard assurances that the closures would not hurt its ability to meet search and rescue needs, Congress responded to concerned constituents by killing the proposal.

Certain decisions will always be out of agencies' hands, but that fact shouldn't discourage federal executives from committing themselves to a performance-oriented, mission-focused capital asset program, Allen insists. "The tension you get caught in is this: Is it worth our effort to do the planning if there's not a dead-sure prospect for funding?" he says. "We need to guard against throttling back and stopping all planning just because we're concerned about the current budget environment."

Trust the system, Allen adds. "If you're going to do capital planning, you've got to try to do it right, because it's the right way to run an organization. And if the mission that you're carrying out is important to the American people, that will be reflected in congressional support to fund it. You shouldn't underestimate the value of just going through the process."