Achieving the Benefits of Accruals in a Cash Environment Justine Kilpatrick U.S. Office of Management and Budget 6 th Annual OECD Public Sector Accrual Symposium

Separation of Powers  The United States is characterized by separation of powers between the Legislature and Executive. Power has also been divided by party for most of the 1970s through 1990s.  Congress does not vote on the budget as a whole, but on authorizing laws and 13 Appropriations, which they may modify in substance and detail.  “No money shall be drawn from the Treasury, but in Consequence of Appropriations made by Law.”

Controlled, Yet Flexible  Each section of an Appropriations Act that provides an amount of funding available for a specified time and for a specified purpose is tracked in a separate Treasury account.  The budget is not simply cash outlays. Budget authority may be enacted for single or multiple years. While obligations must be in those years, outlays may occur whenever the obligations are liquidated.

The Principle: Cost Up Front  The budget is a financial plan for allocating resources within the government and between government and the rest of the economy. Cost up front helps to control execution of the intended allocation.  Requiring budget authority for full cost up front provides the appropriate information and incentives when comparing the cost of a program against its benefits, the cost/benefit of one program with another, and the cost of alternative means of achieving a specified goal.

Pulling Up Financial Transactions  For exchange financial transactions, the net present value of cash flows pulls cost up front.  This approach is used to budget for direct loans and loan guarantees under credit reform.  Net present value is appropriate for insurance programs also. Skill at estimating insurance program costs is improving, but not yet used for budgeting.  NPV is used to pull up front the full BA for capital leases. Operating leases budget for annual plus close-out costs.

Budgeting for Capital Up Front  A task force under President Reagan and a public Commission under President Clinton assessed whether cost up front was the best way to budget for capital. Both concluded that cost up front was right.  The Reagan Task Force developed the concept of a useful segment -- a component of an investment project with benefits exceeding cost even if there were no future budget authority.  The Clinton Commission set capital in the context of strategic planning. They suggested trying out the use of capital acquisition funds.

Contentious Issues  Does everybody have a “capital budget”? Do they all “budget” for depreciation?  Is there a problem of underinvestment? Of misallocation of investment?  Is there a bias for or against capital?  Should capital be financed by borrowing? How does that relate to growth? Equity?  What is the best framework for making investment decisions? Is it the same for Federal capital as for national capital?

Continuing Reforms  Invest in “usable segments” so that benefits exceed cost without more BA.  Follow the Capital Programming Guide for planning, budgeting, procurement, and management in use.  Set investment in the context of long- term strategic and program planning. Budget to achieve goals effectively.  Oversee budget justification and asset management throughout government.

Seeking Results  The United States is shifting focus to budgeting and managing for outcomes.  The fourth revision of strategic plans is underway (1997, 2000, 2003, & 2006).  The Program Assessment Rating Tool has been applied to 800 programs, and made transparent on ExpectMore.gov.  Annual Performance and Accountability Reports show agency performance and financial results.

Budgeting for Results  Agencies are justifying budgets around strategic goals and supporting programs.  Funds for each PART have been identified by Treasury and budget accounts.  Overviews and some whole justifications are posted on the Web. Congressional interest in posting all is sprouting.  Web transparency and development of a government-wide electronic budgeting system could encourage performance budgeting.

Matching Cost with Programs  Align one or two budget accounts or sub-accounts with each program. Data is available to assess how close this is.  Appropriate BA for the full resources used by that program to those accounts. There may be resistance to doing this.  For most inputs, the budgetary and accrual measures are relatively close.  Where that is not the case, make payments from the program to a support account.

Support Account Accrual Before Budget Retiree BenefitsRetirement Fund Retiree BenefitsRetirement Fund Hazardous SubstanceCleanup Fund Hazardous SubstanceCleanup Fund Budget Before Accrual Inventory AcquisitionSupply, Working Capital Fund Inventory AcquisitionSupply, Working Capital Fund Capital AcquisitionCAF - Capital Acquisition Fund Key Accrual Timing Differences

Two Perspectives of Capital Retaining the value of cost up front Require budget authority for the full cost of a useful segment with benefits greater than cost without future budget authority. Gaining value: matching cost to programs Get the BA as borrowing authority from Treasury, and require each program to pay its share of the “mortgage” during the asset’s useful life.

A Capital Acquisition Fund Agency CAF Treasury PrivateContractor Operation of Program of Program Borrow $10 million in year 1 Purchase $10 million park facility in year 1 (BA/OL) Pay rent for park facility: $800 thousand each year for 30 years (BA/OL) Repay principal + interest: $800 thousand each year for 30 years Collect rent for park facility: $800 thousand each year for 30 years (-BA/-OL) BA Budget Authority OL Outlays CAF Capital Acquisition Fund

Issues in Implementation Historical vs Current Cost  Historical cost permits borrowing and repayment, which seems logical.  Current cost is theoretically better, but requires “sweeping” any gains. Dealing with Perceptions  There is no double counting.  Program cost is not really higher. Including Existing Assets … or else full cost is far in the future

The Budget Drives Decisions Matching cost and results in the budget puts information on both at the point of decision-making and provides incentives to maximize effectiveness and efficiency.  The budget drives and provides context for policy development and legislation.  The budget allocates resources among purposes and programs.  Appropriations establish the structure for budget execution and program management.