Capital Considerations
ederal managers responsible for spending the approximately $70 billion the government earmarks to buy capital assets each year are feeling the ache of growing pains. New performance-oriented requirements for buying and managing assets are spurring a capital management evolution--one that's dramatically changing the way government does business.
Until recently, replacing old buildings, computers, cars and other things that keep the wheels of government turning involved a simple formula: Agency officials decided on a project, asked the Office of Management and Budget and Congress for the money, and kept their fingers crossed that the requests would be funded. There was little analysis to find the most efficient asset combination and almost no consideration of how a specific purchase would fit into an agency's broader agenda. At the same time, funding often depended more on appropriators' pet priorities than on a well-planned or justified request.
The appropriations game will always be infused with a certain amount of politics, but now Congress and the Clinton administration want capital asset decisions to be more data-based and performance-driven. "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 William Greenwalt, a Senate Governmental Affairs Committee staffer. "We're talking about accountability and what the taxpayers are getting for their investment."
Hard Lessons
Congress and the President want to avoid debacles like the Health Care Financing Administration's Medicare Transaction System procurement. The project's goal was to consolidate into a single computer system fed by a handful of regional centers the work now done by about 70 contractors using nine systems at 45 sites. HCFA launched the project to improve efficiency of a system that will have to process increasing numbers of Medicare claims as the baby boom generation ages.
But poor planning and inadequate contractor oversight caused project cost estimates to skyrocket from $151 million in 1992 to $1 billion in 1997, according to the General Accounting Office. Congress suspended funding for the project during fiscal 1998, forcing HCFA to reconsider its approach. About $80 million already had been spent. Testifying before the House Committee on Government Reform and Oversight's subcommittees on human resources and government management, a GAO official criticized HCFA for pursuing a vague plan and for not providing "strong managerial oversight."
HCFA is not alone in struggling to manage its capital assets. In general, agencies have chronic capital management problems, Paul Posner, GAO's director of budget issues, said at an April capital planning conference in Washington jointly sponsored by OMB and GAO. Agencies too often choose new assets merely as knee-jerk replacements for aging ones, rather than ensuring they will directly contribute to improving performance and meeting long-term goals, he said.
Some agencies rush prematurely to deploy cutting-edge, but unproven, technology, ultimately wasting millions, even billions of dollars, Posner added, noting that some Defense Department weapons systems fall into this category. Because lawmakers often have over-ambitious expectations of capital projects, Congress too must take some blame.
"We have a need in the federal government to instill a discipline, a process" to manage the life cycle of capital assets, G. Edward DeSeve, deputy director for management at OMB, told conferees. Beyond that, there's a critical need to integrate capital planning and management into the bigger picture to make sure assets are serving their purpose and furthering agency goals. "That's the point," Posner said. "You can't separate capital planning out from the broader management planning."
New Requirements
Planning capital investment in isolation is worse than bad business practice. It also runs counter to several recent laws and presidential directives requiring agencies 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. Now, major capital asset proposals must meet a variety of tests before they will be considered for funding, and agencies have to prove they are using and maintaining existing assets before new ones will be granted.
The Clinton administration laid a framework for this performance-based approach in 1993 with its National Performance Review, now the National Partnership for Reinventing Government. Later that year, Congress codified the concept in the Government Performance and Results Act, which required the strategic performance planning that has preoccupied many agencies in the years since.
In 1994, Congress extended the idea to federal purchasing with the Federal Acquisition Streamlining Act. The law requires agencies to develop measurable cost, schedule and performance goals for major purchases. Agencies must terminate projects that don't meet at least 90 percent of their baseline goals. In 1996, more specific requirements for information technology acquisitions became law with the Clinger-Cohen information technology management reform law.
Clinton's "Principles of Budgeting for Capital Asset Acquisition," included in the last two administration budget requests, reinforced the performance approach to assets. The principles instruct agencies to manage risk throughout the planning, budgeting and acquisition process, and to link long-range capital asset plans to broader performance goals.
To help agencies implement these mandates, OMB synthesized new requirements in its Circular A-11, Part 3, "Planning, Budgeting, and Acquisition of Fixed Assets." The budget office also worked with an interagency group composed of more than 80 employees from 14 agencies to develop a best practices-based Capital Programming Guide. 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."
The next version of OMB's guide, in progress at press time, will incorporate findings from GAO's April 1998 "Executive Guide: Leading Practices in Capital Decision-Making." After studying capital management at the Coast Guard, General Electric, Mobil Corp. and other leading private firms, as well as in several state governments, GAO identified five principles for capital management success:
- Integrate organizational goals into the capital decision-making process by assessing the usefulness of existing assets. Identify asset gaps and consider how best to fill them, whether through acquisition or other means such as contracting out.
- Evaluate and select capital assets using an investment approach, viewing new investments and existing assets as a portfolio. This calls for prioritizing asset decisions based on adequate financial, technical and risk data and having a multi-year capital plan linked to strategic objectives that helps guide budget decisions.
- Budget to protect projects against the unpredictable appropriations process. For example, break expensive projects into stand-alone segments that themselves will be useful additions to the capital portfolio even if future segments are not funded.
- Use project management techniques such as financial incentives for contractors to meet cost, schedule and technical performance goals, as well as penalties for failure. Also helpful are project management teams composed of various technical and operational experts who can uncover potential problems.
- Evaluate results using audits or other means, and incorporate lessons learned into decision-making. Determine not only whether an asset met its technical specifications, but also whether it met original performance goals.
These principles play out most successfully when organization leaders identify a clear mission that is translated into policy via strategic planning. The resulting goals and objectives must be communicated to all levels of the organization. Officials need good information and data systems to make informed decisions about asset condition and needs, GAO says.
Congress and OMB recognize that agencies may feel daunted by these new expectations. "We're at the beginning," Posner noted. "We know we're a long way from this ideal."
Role Model
Some agencies are closer than others. At the Coast Guard, widely considered a leader in capital asset management, officials have linked capital decisions to budget and strategic planning by integrating their business, performance and capital planning operations into a single, interconnected Results Act-inspired model. The goal is to maximize desired outcomes--for example, eliminate deaths, injuries and property damage associated with maritime transportation, fishing and recreational boating--for the minimum possible cost.
The Coast Guard capital plan, which closely parallels the structure outlined in OMB's Capital Programming Guide, serves as a portfolio management tool. The document shows 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 more cheaply. 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.
No longer does the agency simply seek to replace individual assets when they reach the end of their useful lives. Instead, 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. "By paying more in the acquisition stage, you may actually reduce the operation costs later on," notes Rear Adm. Thad Allen, director of resources at the Coast Guard.
The Coast Guard sometimes splits capital purchases into stand-alone stages. For example, if the goal is to buy 30 boats, the agency might break the funding request into a base-year contract for the lead ship and necessary maintenance parts, with options to buy the other ships in stages over a period of years. "Even if no further funds are provided, the vessel already funded would be a useful asset for the agency," GAO noted in its best practices report.
The Coast Guard also has won praise for managing asset procurements to reduce financial risk to the agency, as urged by OMB and Congress. Agency managers used fixed-price performance specification contracts for an ongoing acquisition that, for an estimated $466 million, will replace their entire fleet of buoy tenders, medium-sized ships used for a variety of tasks including buoy maintenance. They told contractors what was expected of a new fleet and awarded the contract to the lowest bidder, says Lawrence Weintraub, assistant inspector general for auditing at the Transportation Department. 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."
That's not to say that the Coast Guard has found all the answers to successful capital management, however. After reviewing the proposed Deepwater Capability Replacement Project--a more expansive acquisition effort that seeks to replace or modernize ships, aircraft and other equipment used for drug interdiction, search and rescue and other deep-sea operations--GAO found that the agency had not sufficiently supported its justification for spending the estimated $9.8 billion over 20 years needed for the project. In October, GAO reported the Coast Guard didn't do an adequate job of assessing existing asset conditions or their ability to meet current and future mission needs (RCED-99-6). OMB had drawn similar conclusions in January 1998, when it told the agency to withdraw the justification and develop better supporting data.
Among the lessons learned from this experience was that the Coast Guard and its parent agency, the Transportation Department, needed formal acquisition review mechanisms to catch such data shortcomings, GAO noted. In other words, even agencies heralded as good capital asset managers still are struggling to get it right.
Common Hurdles
Agencies experience different management challenges depending on their mission, history and political circumstances. But those striving for good capital management face some common hurdles.
Topping the list is the simple truth that there isn't enough money to go around. Since the 1990 Budget Enforcement Act created caps on discretionary funding, money for big-ticket investments has been increasingly scarce. According to a 1998 study by Congress' Joint Economic Committee, discretionary outlays have fallen 12 percent in inflation-adjusted 1998 dollars since 1990. As a result, agencies face ever-tougher competition for appropriations.
At the same time, there is often a disconnect between an agency's planning and justification for capital asset requests and congressional decisions to fund them. "That's what we call the big 'P,' the big political factor," says Jerry Frostman, director of program planning and coordination services at the Veterans Health Administration.
Of the 36 construction projects VHA wanted funded from fiscal 1996 to 1998, only 14 were funded at the level requested in President Clinton's budget. Another 14 weren't included in the President's request but still were funded by Congress. Six were included in the budget request but not funded, and two were funded at levels lower than requested. In Frostman's view, the political element doesn't completely undermine the planning process. But it clearly sets up "a second kind of track" for funding, he says.
Once assets are purchased, agencies often can't take good care of them on the paltry maintenance budgets Congress provides. VHA, which owns hundreds of health care facilities--some of which are more than 100 years old--has "grossly underfunded" maintenance accounts, according to officials. Food and Drug Administration officials tell a similar story. By their estimates, the agency needs about $112 million a year to adequately maintain its buildings, laboratories and other assets. But Congress only appropriates about $8 million for the job. FDA officials say they keep a running list of backlogged maintenance projects. They're forced to defer most of this spending, and when projects gain "emergency" status, money is diverted from other operating funds to pay for the work.
Agencies also face enormous logistical challenges in trying to keep precise tallies of assets, spare parts and maintenance records--all essential information for managing an asset's life-cycle. The FDA failed to receive a clean audit on its fiscal 1996 financial statements in part because auditors were not satisfied that reported property and equipment numbers were accurate. And at an April hearing before the House Commerce Committee's oversight and investigations panel, a committee staffer testified that the Health and Human Services Department IG found in March 1997 that "the inventory control records of the FDA were such that it would be impossible for the agency to account for all its property either on the books or in its possession." Responding to the criticism, FDA launched a wall-to-wall inventory, the results of which will serve as baseline information for future inventories and routine audits.
Even agencies with fairly sophisticated inventory systems have trouble. The use of handheld computers has helped simplify inventory information collection and storage for the Patent and Trademark Office, for example, but the agency couldn't locate 15 computers a vendor claimed to have delivered in fiscal 1997. "PTO paid the vendor for the workstations under dispute; however, PTO is uncertain whether all of these workstations had in fact been delivered and accepted," the Commerce Department inspector general reported in its fiscal 1997 audit.
PTO also has had difficulty convincing the public that it spends wisely on capital purchases. After completing an exhaustive planning process, the agency recently decided to spend $1.3 billion on a 20-year lease for a new office building. The department's inspector general and a congressional subcommittee approved the effort, yet the National Taxpayers Union and other groups have launched a public campaign declaring the project a wasteful boondoggle. These critics may have overlooked PTO's contention that by consolidating employees now spread across 18 buildings, the agency expects to save millions of dollars in the long run.
Meeting the Challenge
Hurdles aside, most agencies analyzed by the Government Performance Project clearly are taking new capital management expectations seriously, especially those related to planning. It's too soon to know how well the new processes will serve agency decision-makers, but the early signs are promising.
At VHA, a sophisticated, albeit young process starts with individual medical facilities identifying capital needs. Their plans are collected by the 22 Veterans Integrated Service Network directors, who oversee facilities in their geographical area. Then network capital plans are submitted to headquarters, where officials request project funding from Congress according to how directly assets will contribute to the agency's strategic priorities.
The Environmental Protection Agency also has a bottom-up capital planning process. Each agency laboratory, program office and regional office maintains a facility master plan, which is formally updated every five years and tweaked more often as necessary. During the annual budget process, offices develop lists of asset priorities after considering life-cycle costs and benefits of various alternatives. EPA's Office of Administration and Resources Management then reviews the requests and recommends to the administrator which projects to fund.
Agencies whose capital assets primarily are information technology-related have similar multi-stage plans. The Social Security Administration puts major IT purchase proposals through a four-stage investment review process that closely follows OMB's capital programming guide. Potential purchases go through cost-benefit analyses and are evaluated for their impact on mission achievement. Managers also consider alternatives such as leasing equipment or software, or hiring additional staff.
At PTO, a five-stage capital planning process starts with individual business units such as the trademark division identifying asset gaps. Unit managers then work with the chief information officer to identify assets or alternatives such as contracting out that would best fit agency needs. Final selections are incorporated into the agency's information-technology strategic plan and its broader business plan. The Occupational Safety and Health Administration and the FDA also use IT business planning processes that incorporate information on how purchases will support program and agency goals.
This type of planning can only benefit agencies, says Coast Guard capital-planning veteran Allen. "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. 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. You shouldn't underestimate the value of just going through the process."
Capital ManagementManagement Grades EPA B VHA B FAA C FEMA C INS C Customs * FDA * FHA * FNS * FSIS * HCFA * IRS * OSHA * PTO * SSA * * Combined with Information Technology grade Rating Criteria - Careful strategic analysis.
- Use of appropriate information to justify capital purchases.
- Integration of capital budget planning and operating budget planning.
- Appropriate maintenance conducted.
Best Practices Engage in strategic capital planning. The Patent and Trademark Office has recognized that achieving its strategic goals depends on having new facilities. Consider costs and benefits of assets and their alternatives. At the Social Security Administration, information technology asset decisions go through a four-step review process that analyzes costs and benefits of purchasing, leasing and contracting.
Assess life-cycle costs. The Environmental Protection Agency considers expected operating costs as well as purchase price before making any asset decisions.
Allow front-line offices to identify mission-critical asset needs. The Veterans Health Administration process starts with individual medical facilities identifying their needs; then headquarters prioritizes these when requesting funding.
Keep accurate inventories. Agencies are struggling with how best to track assets and spare parts to allow for regular maintenance and general management. While its system isn't foolproof, PTO's innovative strategy involves using handheld computers to update records.