1. Changes in How the Federal Government Finances Major Capital Acquisitions RAdm (Ret’d) Bryn Weadon CMM, CMA, P.Log 4 November 2009

2. Outline Capital Project funding pre 2005 Basics of Accrual budgeting Recent funding announcements Impact of new funding process

3. Capital Project Funding – Pre 2005 Managed exclusively on a cash basis Capital was often viewed as the residual after funding personnel and operations & maintenance Significant impact from short-term funding changes and project slippage Limited flexibility

4. DND Spending by Major Category 1% 49% 15% 34% Operations and Maintenance Grants and Contributions Personnel Capital 2 % 67 % 13 % 18%

5. Basics of Accrual Budgeting Operating budget expenditures are recorded as an expense in the period they are made – salaries, fuel, maintenance With some exceptions (e.g. minimum capitalization value), capital expenditures are capitalized and recorded as a budgetary expense in the period that the amortization occurs in Control is the ability to expense - the accrual budget is the ceiling on how much accrual expenses can be charged Total Expense Ceiling = cash expenses (i.e. operating budget) + capital amortization expense

6. Basics of Accrual Budgeting Assets are purchased using “investment cash” which does not count against the department’s budgetary ceiling – the supply of investment cash is a treasury function and is divorced from the department’s expense budget Unused “investment cash” is lapsed at year-end – not part of the annual carry-forward limits Unused accrual space can be used in-year for operating budget pressures – excess accrual expense is recovered from following year operating budget

7. DND Capital – Cash vs Accrual FY 06/07 – Investment Cash - $203M – Accrual Expense - $4.5M FY 07/08 – Investment Cash Planned - $1,274M – Investment Cash Actual - $1,241M – Accrual Expense Planned - $110M – Accrual Expense Actual - $74M

8. Recent Federal Budgets - DND (Accrual - $millions) Budget 2008 provided DND with 2% annual accrual budget adjustment starting in 2011/12 – replacing the ad hoc 1.5% rate in place for the previous two decades

9. Recent Federal Budgets – Coast Guard Budget 2005 - $276M cash over five years - accrual expense forecast of $27M over same time period Budget 2007 - $324M Budget 2008 - $720M for Polar Icebreaker Budget 2009 - $175M over two years

10. Impact of New Funding Process Capital is no longer the residual for DND Need for longer term planning – over 40 years in the case of shipbuilding projects Once project is approved for implementation (EPA) – less likely to be terminated due to changes in funding. Savings in personnel or operations and maintenance costs may be available to support higher amortization expense

11. Questions