6. FEDERAL INVESTMENT
Investment spending is spending that yields longterm
benefits. Its purpose may be to improve the efficiency
of internal Federal agency operations or to increase
the Nation’s overall stock of capital for economic
growth. The spending can be direct Federal spending
or grants to State and local governments. It can be
for physical capital, which yields a stream of services
over a period of years, or for research and development
or education and training, which are intangible but also
increase income in the future or provide other longterm
benefits.
Most presentations in the Federal budget combine
investment spending with spending for current use.
This chapter focuses solely on Federal and federally
financed investment.
In this chapter, investment is discussed in the following
sections:
• a description of the size and composition of Federal
investment spending;
• a discussion of the performance of selected Federal
investment programs; and
• a presentation of trends in the stock of federally
financed physical capital, research and development,
and education.
PART I. DESCRIPTION OF FEDERAL INVESTMENT
For more than fifty years, the Federal budget has
included a chapter on Federal investment—defined as
those outlays that yield long-term benefits—separately
from outlays for current use. In recent years the discussion
of the composition of investment has displayed
estimates of budget authority as well as outlays.
The classification of spending between investment
and current outlays is a matter of judgment. The budget
has historically employed a relatively broad classification,
encompassing physical investment, research,
development, education, and training. The budget further
classifies investments into those that are grants
to State and local governments, such as grants for highways
or education, and all other investments, called
‘‘direct Federal programs,’’ in this analysis. This ‘‘direct
Federal’’ category consists primarily of spending for assets
owned by the Federal Government, such as defense
weapons systems and general purpose office buildings,
but also includes grants to private organizations and
individuals for investment, such as capital grants to
Amtrak or higher education loans directly to individuals.
Presentations for particular purposes could adopt different
definitions of investment:
• To suit the purposes of a traditional balance sheet,
investment might include only those physical assets
owned by the Federal Government, excluding
capital financed through grants and intangible assets
such as research and education.
• Focusing on the role of investment in improving
national productivity and enhancing economic
growth would exclude items such as national defense
assets, the direct benefits of which enhance
national security rather than economic growth.
• Concern with the efficiency of Federal operations
would confine the coverage to investments that
reduce costs or improve the effectiveness of internal
Federal agency operations, such as computer
systems.
• A ‘‘social investment’’ perspective might broaden
the coverage of investment beyond what is included
in this chapter to include programs such
as childhood immunization, maternal health, certain
nutrition programs, and substance abuse
treatment, which are designed in part to prevent
more costly health problems in future years.
The relatively broad definition of investment used
in this section provides consistency over time—historical
figures on investment outlays back to 1940 can
be found in the separate Historical Tables volume.
Table 6–2 at the end of this section allows
disaggregation of the data to focus on those investment
outlays that best suit a particular purpose.
In addition to this basic issue of definition, there
are two technical problems in the classification of investment
data involving the treatment of grants to
State and local governments and the classification of
spending that could be shown in more than one category.
First, for some grants to State and local governments
it is the recipient jurisdiction, not the Federal Government,
that ultimately determines whether the money
is used to finance investment or current purposes. This
analysis classifies all of the outlays in the category
where the recipient jurisdictions are expected to spend
most of the money. Hence, the community development
block grants are classified as physical investment, although
some may be spent for current purposes. General
purpose fiscal assistance is classified as current
spending, although some may be spent by recipient jurisdictions
on physical investment.
Second, some spending could be classified in more
than one category of investment. For example, outlays
for construction of research facilities finance the acqui74
ANALYTICAL PERSPECTIVES
sition of physical assets, but they also contribute to
research and development. To avoid double counting,
the outlays are classified in the category that is most
commonly recognized as investment. Consequently, outlays
for the conduct of research and development do
not include outlays for research facilities, because these
outlays are included in the category for physical investment.
Similarly, spending for physical investment and
research and development related to education and
training is included in the categories of physical assets
and the conduct of research and development.
When direct loans and loan guarantees are used to
fund investment, the subsidy value is included as investment.
The subsidies are classified according to their
program purpose, such as construction or education and
training. For more information about the treatment of
Federal credit programs, refer to Chapter 7, ‘‘Credit
and Insurance’’, in this volume.
This section presents spending for gross investment,
without adjusting for depreciation.
Composition of Federal Investment Outlays
Major Federal Investment
The composition of major Federal investment outlays
is summarized in Table 6–1. They include major public
physical investment, the conduct of research and development,
and the conduct of education and training. Defense
and nondefense investment outlays were $368.5
billion in 2004. They are estimated to increase to $396.5
billion in 2005 and are projected to decline slightly
to $395.1 billion in 2006. Major Federal investment
outlays will comprise an estimated 15 percent of total
Federal outlays in 2006 and 3.1 percent of the Nation’s
gross domestic product (GDP). Greater detail on Federal
investment is available in Table 6–2 at the end
of this section. That table includes both budget authority
and outlays.
Physical investment. Outlays for major public physical
capital investment (hereafter referred to as physical investment
outlays) are estimated to be $183.5 billion
in 2006. Physical investment outlays are for construction
and rehabilitation, the purchase of major equipment,
and the purchase or sale of land and structures.
More than three-fifths of these outlays are for direct
physical investment by the Federal Government, with
the remainder being grants to State and local governments
for physical investment.
Direct physical investment outlays by the Federal
Government are primarily for national defense. Defense
outlays for physical investment are estimated to be
$88.9 billion 2006. Almost all of these outlays, or an
estimated $81.3 billion, are for the procurement of
weapons and other defense equipment, and the remainder
is primarily for construction on military bases, family
housing for military personnel, and Department of
Energy defense facilities.
Outlays for direct physical investment for nondefense
purposes are estimated to be $30.2 billion in 2006.
These outlays include $16.2 billion for construction and
rehabilitation. This amount includes funds for water,
power, and natural resources projects of the Corps of
Engineers, the Bureau of Reclamation within the Department
of the Interior, and the Tennessee Valley Authority;
construction and rehabilitation of veterans hospitals
and Indian Health Service hospitals and clinics;
facilities for space and science programs; Postal Service
facilities; and construction for embassy security. Outlays
for the acquisition of major equipment are estimated
to be $13.7 billion in 2006. The largest amounts
are for the air traffic control system.
Grants to State and local governments for physical
investment are estimated to be $64.4 billion in 2006.
More than two-thirds of these outlays, or $45.9 billion,
are to assist States and localities with transportation
infrastructure, primarily highways. Other major grants
for physical investment fund sewage treatment plants,
community and regional development, and public housing.
Conduct of research and development. Outlays for the
conduct of research and development are estimated to
be $124.9 billion in 2006. These outlays are devoted
to increasing basic scientific knowledge and promoting
research and development. They increase the Nation’s
security, improve the productivity of capital and labor
for both public and private purposes, and enhance the
quality of life. More than half of these outlays, an estimated
$73.5 billion, are for national defense. Physical
investment for research and development facilities and
equipment is included in the physical investment category.
Nondefense outlays for the conduct of research and
development are estimated to be $51.4 billion in 2006.
These are largely for the National Aeronautics and
Space Administration, the National Science Foundation,
the National Institutes of Health, and research for nuclear
and non-nuclear energy programs.
A more complete and detailed discussion of research
and development funding appears in Chapter 5, ‘‘Research
and Development’’ in this volume.
Conduct of education and training. Outlays for the
conduct of education and training are estimated to be
$86.7 billion in 2006. These outlays add to the stock
of human capital by developing a more skilled and productive
labor force. Grants to State and local governments
for this category are estimated to be $52.3 billion
in 2006, three-fifths of the total. They include education
programs for the disadvantaged and individuals with
disabilities, other education programs, training programs
in the Department of Labor, and Head Start.
Direct Federal education and training outlays are estimated
to be $34.3 billion in 2006. Programs in this
category are primarily aid for higher education through
student financial assistance, loan subsidies, the veterans
GI bill, and health training programs.
This category does not include outlays for education
and training of Federal civilian and military employees.
Outlays for education and training that are for physical
investment and for research and development are in
75 6. FEDERAL INVESTMENT
Table 6–1. COMPOSITION OF FEDERAL INVESTMENT OUTLAYS
(In billions of dollars)
2004
Actual
Estimate
2005 2006
FEDERAL INVESTMENT
Major public physical capital investment:
Direct Federal:
National defense ................................................................................................... 83.6 87.5 88.9
Nondefense ........................................................................................................... 27.4 31.7 30.2
Subtotal, direct major public physical capital investment ............................... 111.0 119.1 119.1
Grants to State and local governments ................................................................... 59.4 61.9 64.4
Subtotal, major public physical capital investment .............................................. 170.4 181.1 183.5
Conduct of research and development:
National defense ........................................................................................................ 65.3 71.4 73.5
Nondefense ................................................................................................................ 48.0 51.1 51.4
Subtotal, conduct of research and development ................................................. 113.4 122.4 124.9
Conduct of education and training:
Grants to State and local governments ................................................................... 47.9 51.8 52.3
Direct Federal ............................................................................................................ 36.8 41.1 34.3
Subtotal, conduct of education and training ........................................................ 84.7 92.9 86.7
Total, major Federal investment outlays ..................................................... 368.5 396.5 395.1
MEMORANDUM
Major Federal investment outlays:
National defense ........................................................................................................ 149.0 158.8 162.4
Nondefense ................................................................................................................ 219.5 237.6 232.7
Total, major Federal investment outlays .............................................................. 368.5 396.5 395.1
Miscellaneous physical investment:
Commodity inventories .............................................................................................. –1.4 0.2 –1.0
Other physical investment (direct) ............................................................................ 2.8 3.3 3.0
Total, miscellaneous physical investment ............................................................ 1.4 3.5 2.0
Total, Federal investment outlays, including miscellaneous physical investment ....... 369.8 399.9 397.1
the categories for physical investment and the conduct
of research and development.
Miscellaneous Physical Investment Outlays
In addition to the categories of major Federal investment,
several miscellaneous categories of investment
outlays are shown at the bottom of Table 6–1. These
items, all for physical investment, are generally unrelated
to improving Government operations or enhancing
economic activity.
Outlays for commodity inventories are primarily for
the purchase or sale of agricultural products pursuant
to farm price support programs. Sales are estimated
to exceed purchases by $1.0 billion in 2006.
Outlays for other miscellaneous physical investment
are estimated to be $3.0 billion in 2006. This category
includes primarily conservation programs. These are
entirely direct Federal outlays.
Detailed Table on Investment Spending
The following table provides data on budget authority
as well as outlays for major Federal investment divided
according to grants to State and local governments and
direct Federal spending. Miscellaneous investment is
not included because it is generally unrelated to improving
Government operations or enhancing economic
activity.
76 ANALYTICAL PERSPECTIVES
Table 6–2. FEDERAL INVESTMENT BUDGET AUTHORITY AND OUTLAYS: GRANT AND DIRECT FEDERAL PROGRAMS
(in millions of dollars)
Description
Budget Authority Outlays
2004
Actual
2005
Estimate
2006
Estimate
2004
Actual
2005
Estimate
2006
Estimate
GRANTS TO STATE AND LOCAL GOVERNMENTS
Major public physical investments:
Construction and rehabilitation:
Transportation:
Highways ............................................................................................................................. 34,231 34,078 33,573 30,188 32,014 34,360
Mass transportation ............................................................................................................ 7,813 8,450 8,517 7,567 8,183 8,284
Air transportation ................................................................................................................ 3,649 3,697 2,531 2,958 3,042 3,264
Subtotal, transportation .................................................................................................. 45,693 46,225 44,621 40,713 43,239 45,908
Other construction and rehabilitation:
Pollution control and abatement ........................................................................................ 2,445 2,190 1,938 2,066 1,961 1,886
Community and regional development .............................................................................. 6,207 6,063 4,276 6,761 6,783 6,766
Housing assistance ............................................................................................................. 6,843 6,508 5,846 7,659 7,877 7,924
Other construction .............................................................................................................. 393 434 204 613 444 329
Subtotal, other construction and rehabilitation .............................................................. 15,888 15,195 12,264 17,099 17,065 16,905
Subtotal, construction and rehabilitation ............................................................................ 61,581 61,420 56,885 57,812 60,304 62,813
Other physical assets .................................................................................................................. 1,772 1,585 1,279 1,599 1,619 1,542
Subtotal, major public physical capital ................................................................................... 63,353 63,005 58,164 59,411 61,923 64,355
Conduct of research and development:
Agriculture ................................................................................................................................... 267 270 148 269 275 218
Other ........................................................................................................................................... 414 389 353 327 343 454
Subtotal, conduct of research and development ................................................................... 681 659 501 596 618 672
Conduct of education and training:
Elementary, secondary, and vocational education ..................................................................... 36,609 37,175 37,191 32,194 36,298 36,840
Higher education ......................................................................................................................... 510 506 33 499 615 515
Research and general education aids ........................................................................................ 728 801 738 714 822 822
Training and employment ............................................................................................................ 3,476 3,509 4,232 4,064 3,378 3,655
Social services ............................................................................................................................. 9,936 10,120 9,541 9,746 10,002 9,795
Agriculture ................................................................................................................................... 444 451 437 424 426 410
Other ........................................................................................................................................... 260 281 249 234 261 272
Subtotal, conduct of education and training .......................................................................... 51,963 52,843 52,421 47,875 51,802 52,309
Subtotal, grants for investment .............................................................................................. 115,997 116,507 111,086 107,882 114,343 117,336
DIRECT FEDERAL PROGRAMS
Major public physical investment:
Construction and rehabilitation:
National defense:
Military construction and family housing ............................................................................ 6,666 7,154 7,365 6,368 6,291 6,937
Atomic energy defense activities and other ...................................................................... 811 527 639 754 564 632
Subtotal, national defense ............................................................................................. 7,477 7,681 8,004 7,122 6,855 7,569
Nondefense:
International affairs ............................................................................................................. 1,464 1,471 1,591 1,319 1,403 1,477
General science, space, and technology .......................................................................... 1,706 2,034 2,214 1,485 1,860 2,332
Water resources projects ................................................................................................... 3,061 3,249 2,753 2,812 3,083 2,978
Other natural resources and environment ......................................................................... 1,117 1,025 888 972 1,087 996
Energy ................................................................................................................................ 1,537 1,492 1,475 1,534 1,493 1,443
Postal Service ..................................................................................................................... 638 1,065 847 456 491 702
Transportation ..................................................................................................................... 51 194 101 55 152 190
Veterans hospitals and other health facilities .................................................................... 1,288 1,912 1,531 1,748 2,633 2,792
Federal Prison System ....................................................................................................... 161 25 –289 282 128 199
GSA real property activities ............................................................................................... 1,747 1,616 1,670 1,329 1,518 1,729
Other construction .............................................................................................................. 2,672 2,576 1,178 2,140 2,971 1,358
77 6. FEDERAL INVESTMENT
Table 6–2. FEDERAL INVESTMENT BUDGET AUTHORITY AND OUTLAYS: GRANT AND DIRECT FEDERAL PROGRAMS—Continued
(in millions of dollars)
Description
Budget Authority Outlays
2004
Actual
2005
Estimate
2006
Estimate
2004
Actual
2005
Estimate
2006
Estimate
Subtotal, nondefense ..................................................................................................... 15,442 16,659 13,959 14,132 16,819 16,196
Subtotal, construction and rehabilitation ............................................................................ 22,919 24,340 21,963 21,254 23,674 23,765
Acquisition of major equipment:
National defense:
Department of Defense ...................................................................................................... 83,072 78,345 78,043 76,232 80,255 80,870
Atomic energy defense activities ....................................................................................... 385 381 473 296 387 470
Subtotal, national defense ............................................................................................. 83,457 78,726 78,516 76,528 80,642 81,340
Nondefense:
General science and basic research ................................................................................. 603 588 676 569 612 621
Space flight, research, and supporting activities ............................................................... 542 710 650 475 751 563
Postal Service ..................................................................................................................... 598 1,389 672 452 914 972
Air transportation ................................................................................................................ 3,367 3,183 3,254 3,527 3,624 3,312
Water transportation (Coast Guard) ................................................................................... 919 941 1,209 671 851 920
Other transportation (railroads) .......................................................................................... 1,218 1,207 360 1,282 1,259 360
Hospital and medical care for veterans ............................................................................. 920 725 1,096 1,734 1,367 2,067
Law enforcement activities ................................................................................................. 1,851 1,794 1,880 1,348 1,962 1,740
Department of the Treasury (fiscal operations) ................................................................. 506 319 304 481 455 387
Department of Commerce (NOAA) .................................................................................... 719 865 913 638 762 927
GSA general services funds .............................................................................................. 750 768 906 672 807 906
Other .................................................................................................................................. 721 804 788 854 911 882
Subtotal, nondefense ..................................................................................................... 12,714 13,293 12,708 12,703 14,275 13,657
Subtotal, acquisition of major equipment .......................................................................... 96,171 92,019 91,224 89,231 94,917 94,997
Purchase or sale of land and structures:
National defense ..................................................................................................................... –40 –38 –27 –40 –38 –27
Natural resources and environment ....................................................................................... 251 187 164 302 328 200
General government ............................................................................................................... 170 161 168 222 224 205
Other ....................................................................................................................................... 56 59 –13 37 36 –13
Subtotal, purchase or sale of land and structures ............................................................ 437 369 292 521 550 365
Subtotal, major public physical investment ............................................................................ 119,527 116,728 113,479 111,006 119,141 119,127
Conduct of research and development:
National defense:
Defense military ...................................................................................................................... 65,410 70,267 70,789 61,510 67,016 69,549
Atomic energy and other ........................................................................................................ 3,723 3,910 3,814 3,835 4,353 3,990
Subtotal, national defense .................................................................................................. 69,133 74,177 74,603 65,345 71,369 73,539
Nondefense:
International affairs .................................................................................................................. 264 255 255 254 258 258
General science, space, and technology:
NASA ................................................................................................................................. 7,853 7,686 10,835 8,037 7,970 6,987
National Science Foundation ............................................................................................. 3,790 3,711 3,756 3,439 3,754 3,724
Department of Energy ........................................................................................................ 2,736 2,787 2,682 2,701 2,706 2,655
Subtotal, general science, space, and technology ....................................................... 14,643 14,439 17,528 14,431 14,688 13,624
Energy .................................................................................................................................... 1,373 1,225 1,352 1,387 1,463 1,498
Transportation:
Department of Transportation ............................................................................................ 479 564 620 431 558 672
NASA ................................................................................................................................. 1,056 906 852 551 871 838
Other .................................................................................................................................. 12 16 ...................... 17 16 7
Subtotal, transportation .................................................................................................. 2,920 2,711 2,824 2,386 2,908 3,015
Health:
National Institutes of Health ............................................................................................... 26,900 27,503 27,821 24,498 26,388 27,384
All other health ................................................................................................................... 685 681 649 760 585 602
78 ANALYTICAL PERSPECTIVES
Table 6–2. FEDERAL INVESTMENT BUDGET AUTHORITY AND OUTLAYS: GRANT AND DIRECT FEDERAL PROGRAMS—Continued
(in millions of dollars)
Description
Budget Authority Outlays
2004
Actual
2005
Estimate
2006
Estimate
2004
Actual
2005
Estimate
2006
Estimate
Subtotal, health .............................................................................................................. 27,585 28,184 28,470 25,258 26,973 27,986
Agriculture ............................................................................................................................... 1,468 1,601 1,346 1,425 1,460 1,330
Natural resources and environment ....................................................................................... 2,084 2,033 1,971 1,574 1,494 1,589
National Institute of Standards and Technology .................................................................... 397 416 342 493 406 472
Hospital and medical care for veterans ................................................................................. 866 784 786 850 792 777
All other research and development ...................................................................................... 1,425 1,666 1,811 1,021 1,739 1,938
Subtotal, nondefense .......................................................................................................... 51,388 51,834 55,078 47,438 50,460 50,731
Subtotal, conduct of research and development ................................................................... 120,521 126,011 129,681 112,783 121,829 124,270
Conduct of education and training:
Elementary, secondary, and vocational education ..................................................................... 1,530 1,593 1,273 1,691 1,904 1,627
Higher education ......................................................................................................................... 25,233 29,487 27,283 25,201 28,892 22,461
Research and general education aids ........................................................................................ 1,890 1,888 1,910 1,883 1,997 1,949
Training and employment ............................................................................................................ 1,576 1,629 1,616 1,552 1,571 1,646
Health .......................................................................................................................................... 1,557 1,567 1,178 1,858 1,504 1,404
Veterans education, training, and rehabilitation ......................................................................... 2,556 2,772 3,245 2,707 3,084 3,240
General science and basic research .......................................................................................... 941 948 871 878 969 948
National defense .......................................................................................................................... 9 8 ...................... 11 8 ......................
International affairs ...................................................................................................................... 355 384 458 441 377 418
Other ........................................................................................................................................... 631 675 543 558 835 653
Subtotal, conduct of education and training .......................................................................... 36,278 40,951 38,377 36,780 41,141 34,346
Subtotal, direct Federal investment ........................................................................................ 276,326 283,690 281,537 260,569 282,111 277,743
Total, Federal investment ............................................................................................................. 392,323 400,197 392,623 368,451 396,454 395,079
PART II: PERFORMANCE OF FEDERAL INVESTMENT
Introduction. In recent years there has been
increased emphasis on improving the performance of
Government programs. This emphasis began with the
Performance and Results Act of 1993, which requires
agencies to prepare strategic plans and annual performance
plans, and then report on their actual performance
annually.
This Administration set out to ensure that agencies
worked to improve their performance, not just report
on it. Beginning in the 2004 Budget, the Administration
began to assess every Federal program by a method
known as the Program Assessment Rating Tool, or
PART. The Administration set a target of assessing
all Federal programs over five years. With this budget,
the third year of using the PART, the Administration
has assessed over 600 programs, about three-fifths of
the Federal Budget.
The PART system assesses each program in four components
(purpose, planning, management, and results/
accountability) and gives a score for each of the components.
The scores for each component are then weighted—
results/accountability carries the greatest weight—
and the program is given an overall score. A program
is rated effective if it receives an overall score of 85
percent or more, moderately effective if the score is
70 to 84 percent, adequate if the score is 50 to 69
percent, and inadequate if the score is 49 percent or
lower. The program receives a rating ‘‘Results Not Demonstrated’’
if it does not have a good long-term and
annual performance measure or does not have data to
report on its measures. Chapter 2 of this volume discusses
the PART concepts in more detail.
This section summarizes the results of the PART for
direct investment programs, defined to include capital
assets, research and development, and education and
training. Because an entire program is assessed, not
just the investment portion of the program, the assessments
for some programs may cover more than just
the investment spending. PART assessments of programs
that are grants to State and local governments
are not summarized in this chapter but are summarized
in Chapter 8, ‘‘Aid to State and Local Governments’’,
in this volume.
This section summarizes 166 programs:
• Programs for capital assets are those identified
in the PART system as ‘‘capital assets and service
acquisition’’ (60 programs);
• Programs for research and development are essentially
those identified in the PART system as ‘‘research
and development’’ (84 programs); and
79 6. FEDERAL INVESTMENT
• Programs for education and training (22 programs)
are primarily programs in the Department
of Education that are not grants to State and local
governments (e.g., Federal Pell grants to individuals).
This category also includes programs in
other agencies, such as the Montgomery GI Bill
in the Department of Veterans Affairs, the Health
Professions program in the Department of Health
and Human Services, and the Job Corps program
in the Department of Labor.
Information on these and other programs assessed
by PART is on the CD ROM that accompanies this
volume.
Summary of ratings. Table 6–3 shows that the average
weighted score for the 166 investment programs
that have been rated by PART was 67 percent, which
is a rating of ‘‘adequate’’. These programs had total
spending of $184.6 billion in 2004. Of these programs:
• 37 were rated effective ($35.8 billion);
• 48 were rated moderately effective ($57.7 billion);
• 28 were rated adequate ($50.6 billion);
• 7 were rated ineffective ($7.4 billion); and
• 46 were rated ‘‘results not demonstrated’’ ($33.2
billion);
Table 6–3. SUMMARY OF PART RATINGS AND SCORES FOR DIRECT FEDERAL INVESTMENT
PROGRAMS
(excludes grants to State and local governments for investment)
Criteria
Type of Investment
Physical
capital
Research and
development
Education
and training
All investment
programs
Average Scores
Purpose .............................................................................................. 81% 92% 79% 86%
Planning .............................................................................................. 75% 80% 75% 78%
Management ....................................................................................... 81% 86% 66% 82%
Results/Accountability ........................................................................ 48% 59% 37% 52%
Weighted Average 1 ........................................................................... 64% 73% 55% 67%
Average Rating .................................................................................. Adequate Moderately
effective
Adequate Adequate
Number of Programs
Ratings 2
Effective .............................................................................................. 10 25 2 37
Moderately effective ........................................................................... 15 31 2 48
Adequate ............................................................................................ 11 9 8 28
Ineffective ........................................................................................... 2 2 3 7
Results not demonstrated .................................................................. 22 17 7 46
Total number of investment programs rated ................................ 60 84 22 166
In millions of dollars (2004)
Effective .............................................................................................. $3,595 $31,782 $401 35,778
Moderately effective ........................................................................... 41,781 14,179 1,736 57,696
Adequate ............................................................................................ 27,600 945 22,025 50,570
Ineffective ........................................................................................... 6,389 78 886 7,353
Results not demonstrated .................................................................. 25,492 3,407 4,337 33,236
All investment programs that were rated in PART .......................... $104,857 $50,391 $29,385 $184,633
1 Weighted as follows: Purpose (20%), Planning (10%), Management (20%), Results/Accountability (50%).
2 The rating of effective indicates a score of 85 percent or more; moderately effective, 70–84 percent; adequate, 50–69 percent;
and ineffective, 49 percent or less.
Assessments of individual programs. The ratings of
the ten physical capital and education and training investment
programs with the largest funding are summarized
here. Information on research and development
is in Chapter 5, ‘‘Research and Development’’ in this
volume.
Capital Assets
Department of Defense (DOD). Air Combat Program
($13.9 billion in 2004). Rating: Moderately Effective.
This program consists of a number of individual aircraft
and helicopter research, development and procurement
programs that, taken together, comprise DOD’s invest80
ANALYTICAL PERSPECTIVES
ment in air combat capabilities. The PART analysis
showed that the program purpose is clear owing to
the unique military requirement for these systems.
Department of Defense. Shipbuilding ($12.0 billion in
2004). Rating: Adequate. This program buys new ships
and overhauls older ships for the Navy. The assessment
shows that the program has a clear purpose, and the
Navy has specific cost, schedule, and performance goals
for each shipbuilding program. The program has experienced
cost increases and schedule slips on some ship
construction programs.
Department of Defense. Missile Defense ($8.6 billion
in 2004). Rating: Moderately Effective. This program
consists of various systems and capabilities developed
by the Missile Defense Agency (MDA) and military
services. This program acquires and operates active defenses
against short, medium, and long-range missiles
in a global, multi-layered defensive system.
The assessment found that: a) the Department of Defense
has aggressively worked to fund operations and
support costs fully, and has been successful in coordinating
service and MDA budget responsibilities; b) the
Department continues to fund only two years deployment
costs per each ‘‘block’’ of missile defense deployments,
even if significant portions of those deployments
require four to five years of funding to fully implement.
This policy continues to put at risk the completion of
approved missile defense deployments; and c) MDA did
not meet its testing goals in 2004 for the Ground Based
Mid-Course Defense system, the main element of its
first operational deployment.
Tennessee Valley Authority. TVA Power ($7.7 billion
in 2004). Rating: Moderately Effective. TVA is the fifth
largest electric utility in the country, generating power
at 48 coal-fired, hydropower, nuclear, and other power
plants that it operates to meet the electricity needs
of 8.3 million people (3 percent of the U. S. market).
The PART assessment gave TVA mixed reviews. TVA
does an excellent job generating power at its existing
power plants. A decade ago TVA’s nuclear power plants
posed serious technical and safety problems but it has
overcome these problems and today its nuclear power
plants set industry standards.
However, TVA has a high level of debt compared
to many of its competitors in the electricity industry.
It also lacks a strategic plan, which makes it hard
to assess TVA’s plans to spend funds on additional
power plants and transmission lines.
Department of Energy. Environmental Management
($7.1 billion in 2004). Rating: Adequate. This program
protects human health and the environment by cleaning
up waste and contamination resulting from more than
50 years of nuclear weapons production and energy research
at 114 Department of Energy sites in the United
States and its territories. Program managers will continue
to work with Federal and State regulators to
resolve outstanding issues with revised cleanup plans.
The program has established annual cost and schedule
performance measures.
General Services Administration. GSA’s Regional IT
Solutions Program ($5.4 billion in 2004). Rating: Results
Not Demonstrated. This program provides expert
technical, acquisition, and information technology products
and services to Federal clients. This assessment
found that the program is useful to Federal agencies
that do not have in-house expertise to acquire IT products
or services. The assessment also found that the
program does not have long-term outcome goals that
relate to other Government agencies or the private sector.
Department of Defense. Airlift Program ($5.1 billion
in 2004). Rating: Moderately Effective. This program
consists of a number of individual Air Force tactical
and strategic airlift aircraft research, development and
procurement programs that, taken together, comprise
DOD’s investment in airlift capabilities. The analysis
showed that this is a coherent program with a clear
and basic long-term goal, namely to be able to move
military forces and their equipment from the U.S. to
anywhere in the world whenever required. DOD must
aggressively examine possible trade-offs within the program
that could lower the cost of meeting the airlift
requirement without sacrificing military readiness or
combat capabilities.
Department of Housing and Urban Development.
Project-Based Rental Assistance ($4.8 billion in 2004).
Rating: Ineffective. This program provides funding to
landlords who rent a certain number of affordable
apartments to low-income families or individuals. Assistance
is tied directly to the properties; tenants can
generally not move without losing their assistance. The
program receives low performance scores in part because
there is confusion over program objectives, the
program lacks strong financial accountability, and it
produces poor results relative to alternative forms of
housing assistance.
Education
Department of Education. Federal Pell Grants ($12.0
billion in 2004). Rating: Adequate. This program provides
grant aid to nearly five million needy students
to help them pay for an undergraduate education. The
assessment found that the program helps ensure that
low-income students can afford a college education.
However, the Department of Education has only been
minimally successful in achieving its long-term and annual
performance goals for its main student aid programs.
In addition, Pell grants, like other student aid,
are prone to abuse, where students who under-report
family income receive more aid than they should. The
Department estimates that net overawards in the Pell
program total more than $350 million annually.
Department of Education. Federal Family Education
Loan Program ($9.6 billion in 2004). Rating: Adequate.
Under the Federal Family Education Loan (FFEL) Program,
the Department encourages private lenders to
make loans to undergraduate and graduate students
by guaranteeing such loans in the case of default and
providing lenders with financial subsidies that ensure
81 6. FEDERAL INVESTMENT
a minimum rate of return on all loans made. Overall,
the assessment concluded that both this program and
the William D. Ford Direct Student Loan program fulfill
their purpose of ensuring that low- and middleincome
students can afford the costs of postsecondary
education. The program also has meaningful performance
measures and outcome data on these measures.
However, the Department has been minimally successful
in achieving its long-term and annual performance
goals for its main student aid programs.
PART III: FEDERALLY FINANCED CAPITAL STOCKS
Federal investment spending creates a ‘‘stock’’ of capital
that is available in the future for productive use.
Each year, Federal investment outlays add to this stock
of capital. At the same time, however, wear and tear
and obsolescence reduce it. This section presents very
rough measures over time of three different kinds of
capital stocks financed by the Federal Government:
public physical capital, research and development
(R&D), and education.
Federal spending for physical assets adds to the Nation’s
capital stock of tangible assets, such as roads,
buildings, and aircraft carriers. These assets deliver
a flow of services over their lifetime. The capital depreciates
as the asset ages, wears out, is accidentally damaged,
or becomes obsolete.
Federal spending for the conduct of research and development
adds to an ‘‘intangible’’ asset, the Nation’s
stock of knowledge. Spending for education adds to the
stock of human capital by providing skills that help
make people more productive. Although financed by the
Federal Government, the research and development or
education can be carried out by Federal or State government
laboratories, universities and other nonprofit
organizations, local governments, or private industry.
Research and development covers a wide range of activities,
from the investigation of subatomic particles
to the exploration of outer space; it can be ‘‘basic’’ research
without particular applications in mind, or it
can have a highly specific practical use. Similarly, education
includes a wide variety of programs, assisting
people of all ages beginning with pre-school education
and extending through graduate studies and adult education.
Like physical assets, the capital stocks of R&D
and education provide services over a number of years
and depreciate as they become outdated.
For this analysis, physical and R&D capital stocks
are estimated using the perpetual inventory method.
Each year’s Federal outlays are treated as gross investment,
adding to the capital stock; depreciation reduces
the capital stock. Gross investment less depreciation
is net investment. The estimates of the capital stock
are equal to the sum of net investment in the current
and prior years. A limitation of the perpetual inventory
method is that the original investment spending may
not accurately measure the current value of the asset
created, even after adjusting for inflation, because the
value of existing capital changes over time due to
changing market conditions. However, alternative
methods for measuring asset value, such as direct surveys
of current market worth or indirect estimation
based on an expected rate of return, are especially difficult
to apply to assets that do not have a private
market, such as highways or weapons systems.
In contrast to physical and R&D stocks, the estimate
of the education stock is based on the replacement cost
method. Data on the total years of education of the
U.S. population are combined with data on the current
cost of education and the Federal share of education
spending to yield the cost of replacing the Federal share
of the Nation’s stock of education.
It should be stressed that these estimates are rough
approximations, and provide a basis only for making
broad generalizations. Errors may arise from uncertainty
about the useful lives and depreciation rates of
different types of assets, incomplete data for historical
outlays, and imprecision in the deflators used to express
costs in constant dollars. The methods used to
estimate capital stocks are discussed further in the
technical note at the end of Chapter 13, ‘‘Stewardship,’’
in this volume. Additional detail about these methods
appeared in a methodological note in Chapter 7, ‘‘Federal
Investment Spending and Capital Budgeting,’’ in
the Analytical Perspectives volume of the 2004 Budget.
The Stock of Physical Capital
This section presents data on stocks of physical capital
assets and estimates of the depreciation of these
assets.
Trends. Table 6–4 shows the value of the net federally
financed physical capital stock since 1960, in constant
fiscal year 2000 dollars. The total stock grew at
a 2.2 percent average annual rate from 1960 to 2004,
with periods of faster growth during the late 1960s
and the 1980s. The stock amounted to $2,197 billion
in 2004 and is estimated to increase to $2,315 billion
by 2006. In 2004, the national defense capital stock
accounted for $661 billion, or 30 percent of the total,
and nondefense stocks for $1,536 billion, or 70 percent
of the total.
82 ANALYTICAL PERSPECTIVES
Table 6–4. NET STOCK OF FEDERALLY FINANCED PHYSICAL CAPITAL
(In billions of 2000 dollars)
Fiscal Year Total National
Defense
Nondefense
Total
Nondefense
Direct Federal Capital Capital Financed by Federal Grants
Total
Water
and
Power
Other Total Transportation
Community
and
Regional
Natural
Resources Other
Five year intervals:
1960 .................................................... 849 608 242 95 59 36 146 89 27 21 10
1965 .................................................... 937 589 348 123 74 49 225 158 32 22 13
1970 .................................................... 1,101 630 470 146 88 58 324 230 47 26 21
1975 .................................................... 1,137 545 592 166 102 64 426 282 76 42 25
1980 .................................................... 1,258 494 763 195 123 72 568 342 121 79 27
1985 .................................................... 1,462 572 890 222 136 86 668 397 146 100 26
1990 .................................................... 1,740 722 1,018 256 147 109 762 462 158 113 28
1995 .................................................... 1,882 714 1,168 297 157 141 871 534 168 123 46
Annual data:
2000 .................................................... 1,979 635 1,345 337 160 178 1,007 618 183 131 75
2001 .................................................... 2,023 631 1,391 351 163 188 1,040 640 186 132 81
2002 .................................................... 2,078 636 1,442 366 165 201 1,076 666 189 134 87
2003 .................................................... 2,138 646 1,492 380 166 213 1,112 690 193 135 94
2004 .................................................... 2,197 661 1,536 390 168 223 1,146 714 196 136 100
2005 estimate ..................................... 2,259 677 1,582 403 169 234 1,179 738 199 137 105
2006 estimate ..................................... 2,315 690 1,625 413 170 244 1,211 762 201 138 110
Real stocks of defense and nondefense capital show
very different trends. Nondefense stocks have grown
consistently since 1970, increasing from $470 billion
in 1970 to $1,536 billion in 2004. With the investments
proposed in the budget, nondefense stocks are estimated
to grow to $1,625 billion in 2006. During the
1970s, the nondefense capital stock grew at an average
annual rate of 5.0 percent. In the 1980s, however, the
growth rate slowed to 2.9 percent annually, with growth
continuing at about that rate since then.
Real national defense stocks began in 1970 at a relatively
high level, and declined steadily throughout the
decade as depreciation from investment in the Vietnam
era exceeded new investment in military construction
and weapons procurement. Starting in the early 1980s,
a large defense buildup began to increase the stock
of defense capital. By 1987, the defense stock exceeded
its earlier Vietnam-era peak. In the early 1990s, however,
depreciation on the increased stocks and a slower
pace of defense physical capital investment began to
reduce the stock from its previous levels. The increased
defense investment in the last few years has reversed
this decline, increasing the stock from an estimated
$661 billion in 2004 to $690 billion in 2006.
Another trend in the Federal physical capital stocks
is the shift from direct Federal assets to grant-financed
assets. In 1960, 39 percent of federally financed nondefense
capital was owned by the Federal Government,
and 61 percent was owned by State and local governments
but financed by Federal grants. Expansion in
Federal grants for highways and other State and local
capital, coupled with slower growth in direct Federal
investment for water resources, for example, shifted the
composition of the stock substantially. In 2004, 25 percent
of the nondefense stock was owned by the Federal
Government and 75 percent by State and local governments.
The growth in the stock of physical capital financed
by grants has come in several areas. The growth in
the stock for transportation is largely grants for highways,
including the Interstate Highway System. The
growth in community and regional development stocks
occurred largely following the enactment of the community
development block grant in the early 1970s. The
value of this capital stock has grown only slowly in
the past few years. The growth in the natural resources
area occurred primarily because of construction grants
for sewage treatment facilities. The value of this federally
financed stock has increased about 35 percent since
the mid-1980s.
The Stock of Research and Development Capital
This section presents data on the stock of research
and development capital, taking into account adjustments
for its depreciation.
Trends. As shown in Table 6–5, the R&D capital
stock financed by Federal outlays is estimated to be
$1,099 billion in 2004 in constant 2000 dollars. Roughly
half is the stock of basic research knowledge; the remainder
is the stock of applied research and development.
The nondefense stock accounted for about three-fifths
of the total federally financed R&D stock in 2004. Although
investment in defense R&D has exceeded that
of nondefense R&D in nearly every year since 1981,
the nondefense R&D stock is actually the larger of the
two, because of the different emphasis on basic research
and applied research and development. Defense R&D
spending is heavily concentrated in applied research
and development, which depreciates much more quickly
83 6. FEDERAL INVESTMENT
1 For estimates of the total education stock, see table 13–4 in Chapter 13, ‘‘Stewardship.’’
than basic research. The stock of applied research and
development is assumed to depreciate at a ten percent
geometric rate, while basic research is assumed not
to depreciate at all.
The defense R&D stock rose slowly during the 1970s,
as gross outlays for R&D trended down in constant
dollars and the stock created in the 1960s depreciated.
Increased defense R&D spending from 1980 through
1990 led to a more rapid growth of the R&D stock.
Subsequently, real defense R&D outlays tapered off,
depreciation grew, and, as a result, the real net defense
R&D stock stabilized at around $420 billion. Renewed
spending for defense R&D in recent years has begun
to increase the stock, and it is projected to increase
to $531 billion in 2006.
The growth of the nondefense R&D stock slowed from
the 1970s to the 1980s, from an annual rate of 3.8
percent in the 1970s to a rate of 2.1 percent in the
1980s. Gross investment in real terms fell during much
of the 1980s, and about three-fourths of new outlays
went to replacing depreciated R&D. Since 1988, however,
nondefense R&D outlays have been on an upward
trend while depreciation has edged down. As a result,
the net nondefense R&D capital stock has grown more
rapidly.
Table 6–5. NET STOCK OF FEDERALLY FINANCED RESEARCH AND DEVELOPMENT 1
(In billions of 2000 dollars)
Fiscal Year
National Defense Nondefense Total Federal
Total Basic
Research
Applied
Research
and
Development
Total Basic
Research
Applied
Research
and
Development
Total Basic
Research
Applied
Research
and
Development
Five year intervals:
1970 .................................................................. 261 16 245 215 67 148 475 82 393
1975 .................................................................. 276 21 256 262 97 165 538 118 421
1980 .................................................................. 279 25 255 311 131 179 590 156 434
1985 .................................................................. 321 30 291 339 174 165 659 204 455
1990 .................................................................. 403 36 367 382 229 154 785 265 520
1995 .................................................................. 423 43 380 461 294 167 884 336 547
Annual data:
2000 .................................................................. 423 48 375 543 368 175 966 416 549
2001 .................................................................. 421 50 371 563 386 177 984 436 548
2002 .................................................................. 435 52 383 579 405 175 1,014 457 557
2003 .................................................................. 454 54 401 598 424 174 1,052 478 575
2004 .................................................................. 479 55 424 620 446 174 1,099 501 598
2005 estimate .................................................. 506 56 449 643 468 175 1,149 524 624
2006 estimate .................................................. 531 57 473 665 489 176 1,196 547 649
1 Excludes stock of physical capital for research and development, which is included in Table 6–4.
The Stock of Education Capital
This section presents estimates of the stock of education
capital financed by the Federal Government.
As shown in Table 6–6, the federally financed education
stock is estimated at $1,309 billion in 2004 in
constant 2000 dollars. The vast majority of the Nation’s
education stock is financed by State and local governments,
and by students and their families themselves.
This federally financed portion of the stock represents
about 3 percent of the Nation’s total education stock. 1
Nearly three-quarters is for elementary and secondary
education, while the remaining one quarter is for higher
education.
The federally financed education stock has grown
steadily in the last few decades, with an average annual
growth rate of 5.3 percent from 1970 to 2004.
The expansion of the education stock is projected to
continue under this budget, with the stock rising to
$1,428 billion in 2006.
84 ANALYTICAL PERSPECTIVES
Table 6–6. NET STOCK OF FEDERALLY FINANCED EDUCATION
CAPITAL
(In billions of 2000 dollars)
Fiscal Year
Total
Education
Stock
Elementary
and Secondary
Education
Higher
Education
Five year intervals:
1960 ............................................................................... 70 51 20
1965 ............................................................................... 98 71 27
1970 ............................................................................... 225 176 49
1975 ............................................................................... 324 260 64
1980 ............................................................................... 458 356 102
1985 ............................................................................... 565 421 144
1990 ............................................................................... 745 550 195
1995 ............................................................................... 853 619 234
Annual data:
2000 ............................................................................... 1,120 819 302
2001 ............................................................................... 1,169 844 325
2002 ............................................................................... 1,210 873 336
2003 ............................................................................... 1,263 915 348
2004 ............................................................................... 1,309 953 355
2005 estimate ................................................................ 1,364 997 368
2006 estimate ................................................................ 1,428 1,049 379
