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Office of the Vice President

For Immediate Release Septemeber 1, 1993


Strengthen Debt Collection Programs

The federal government would be able to collect an additional $2.5 to $10 billion over the next five years by strengthening its approach for pursuing seriously delinquent debt. Lending and collection programs could be improved substantially and a fairer financial presentation could be made if agencies:

--were provided with incentives to cover the cost of collection and allowed to share in the additional recoveries;

--could fully use other agencies on a reimbursable basis and/or collection agencies to hold down the growth of delinquent debt;

--were provided with expanded authority and flexibility to use special assistant U.S. attorneys, agency counsel, or private counsel to litigate delinquent debt; and

--were required to re-evaluate their allowances for doubtful accounts.

The federal government was owed about $241 billion in non-tax debt at the end of 1992, of which $47 billion was delinquent [Endnote 1]. The Debt Collection Act of 1982 and OMB Circular A-129 require agencies to establish an aggressive but fair program to collect delinquent debt and establish mechanisms "to collect and record payments and provide accounting and management information for effective stewardship."

Each year, thousands of borrowers from the federal government default on loans from programs administered by a variety of federal agencies. After engaging in their own collection efforts, including referral to private collection contractors, the use of the salary offset program for delinquent Federal employees, and the tax refund offset program, certain agencies refer unpaid debts to the Department of Justice for collection. Justice attorneys also sue to collect unpaid criminal and civil fines and assessments.

Need for Change
Most agencies perform routine servicing of debt adequately, collecting about $87 billion in fiscal year 1992 [Endnote 2]. However, their performance in collecting seriously delinquent non-tax debt in a timely manner is very poor. Agencies consider the collection of debt as a secondary function to loan origination and other program functions. In addition, they do not have the systems and staff to pursue delinquent debt. The following are examples of the current obstacles facing program agencies attempting to collect delinquent debt.

--The missions of program agencies are to provide services to their clients. Program staffs, therefore, are sensitive to their clients' needs and reluctant to press for repayment of debt. Agency staffs have excellent knowledge and skills for delivering the program; they do not always have the skills or training to track and collect debt in a timely fashion. Although agencies are required to refer debt more than six months past due to contractors, the average age of debt referred to collection contractors exceeds two years [Endnote 3].

--Because resources are scarce, many agencies have not made the necessary investments in specialized debt collection systems, equipment, and personnel. There is no reward for most agencies for collecting debt, i.e. increased debt collection does not easily translate into increased program budget authority. One exception is the Department of Veterans Affairs (VA), which was given the flexibility to cover its administrative costs from debt recoveries. VA increased its medical care cost recovery from $23.9 million in fiscal year 1987 to $520 million in fiscal year 1993. The pivotal factor in this accomplishment was the establishment of the Medical Care Cost Recovery (MCCR) Program and the gradual expansion of its authorities. Although VA has been authorized by statute to cover certain costs since 1986, collection remained relatively low until the MCCR Program was expanded in 1990 to allow administrative costs to be funded for the succeeding year from the current year's collections [Endnote 4]. A similar example is at the Department of Education where the use of collection revenues to pay expenses associated with collections is authorized under the Higher Education Act. The Department has used this authority to pay private collection agency costs. All other debt collection costs are funded out of Education's operating budget. The idea of using collection revenues to pay expenses associated with collections could also be expanded to franchising or cross-servicing debt collection activities. Given the various sizes of agencies and staffing patterns, debt servicing could be handled by clusters of agencies working together or by franchising to establish a critical mass of expertise.

--Restrictions prevent the use of private collection agencies for the recovery of taxes and tariffs as well as debt from certain loan programs. For example, Farmers Home Administration has been prohibited by provisions in appropriations laws from using private collection agencies. Referral restrictions also exist on the Social Security Administration (SSA), Customs Service, and IRS debt.

--Department of Justice has exclusive authority for litigation of most delinquent debt cases. The U.S. Attorney's financial litigation units recovered $345 million in non-tax debts last year out of an inventory of approximately $6 billion. Critics of the U.S. Attorneys' debt collection activities contend that the U.S. Attorneys' Offices attach low priority to debt collection because it is less glamorous than their criminal and civil caseload. To improve its efforts in debt collection, Justice has a pilot program involving the use of private debt collection counsel currently ongoing in eight judicial districts.

When agencies extend credit to individuals who are already delinquent on another federal debt, these new loans are likely to result in future losses. The Credit Alert Interactive Voice Response System (CAIVRS) is a Department of Housing and Urban Development (HUD) system used to screen new HUD loan applicants through telephone access of a database of debtors delinquent on HUD loans. CAIVRS has been immensely successful and should continue to be expanded by adding the delinquent debtors of other federal agencies to the database, and by making the CAIVRS system available to other agencies for the screening of their loan applicants.

The success of the VA's MCCR Program is an example of how recoveries could be improved if an agency's administrative costs are funded by the recoveries. Collection activities would further improve if the agency could share in any additional recoveries and could use some of these recoveries for other purposes. Also, full and consistent participation by all agencies in an automated loan screening system such as CAIVRS is needed to realize the maximum savings.

Agencies know that many of the receivables on the books are not going to be collected. Yet, for various reasons, they do not feel comfortable writing the debt off. Agencies seem to equate writing the debt off with not trying to collect it. They fail to understand that writing the debt off does not mean that the agency cannot continue collection activities. Many agencies do not develop and record a meaningful allowance for doubtful accounts. For example, the IRS net receivables at the end of fiscal year 1992 were $28 billion [Endnote 5] After a financial audit the General Accounting Office (GAO) determined that the net receivables number was about $22 billion [Endnote 6]. This example points out that agencies need to do a better job estimating the allowance for doubtful debt so that a fair presentation can be made on their financial statements and reports to Treasury.

Federal loan programs should be managed in a way that empowers agency managers and recognizes both the similarities and differences among the government's many direct and guaranteed loan programs. OMB, in consultation with the Federal Credit Policy Working Group, should ensure that agencies have the governmentwide policies and tools necessary to effectively manage their programs. OMB should recognize that the agencies should have the flexibility to implement the policies and use the tools in the manner most appropriate for each loan program. Thus empowered, managers should be held accountable for the results of their programs, rather than the extent to which they use particular tools or techniques to achieve the results.

To avoid unnecessary losses and efficiently collect any debts owed the government, agencies should adopt strategies that would be expected to do the following:

--For credit extension, follow central guidance for tools that are applicable governmentwide. OMB should approve exemptions when justified.

--For servicing and collecting debt, adopt the most effective approach for each loan program by developing meaningful loss mitigation procedures and by using available debt collection tools in a timely and efficient manner. Agencies should also look for opportunities to consolidate, cross-service, or contract out activities.

--For uncollectible debt, implement write-off policies that provide for determining in a timely, cost-effective manner whether delinquent debt is uncollectible and for writing off the uncollectible debt as quickly as possible.

Agencies that attain their established goals and can show productivity improvements that result in cost savings by reducing losses or increasing collections should be eligible for "gainsharing," that is, retaining some portion of their collections.


  1. Enact legislation to allow (a) debt collection activities to be funded by the revenues generated from collections and (b) the agencies to keep a certain percentage of any increased collection amounts, primarily for improvements in debt collection as well as other agency priorities. (3)
  2. Enact legislation to increase agencies' access to private collection contractors by eliminating any restrictions. (3)
  3. Expand agency litigation for debt collection through the special assistant U.S. attorney process. (1)

The Attorney General should appoint special assistant U.S. attorneys in other federal agencies based on debt collection workload.

4. Establish a credit management function. (1)

Agency heads should separate the debt collection function from the loan making function by establishing a credit manager in the Chief Financial Officer organization. This action should ensure that greater attention is given to the debt collection function and should provide stronger internal controls for the program. The credit manager should be certified by an approved federal or private accreditation program. This function could also be a candidate for franchising (cross-servicing among agencies).

5. Expand the Credit Alert Interactive Voice Response System. (2)

The Director of OMB should ensure that CAIVRS is expanded and used by federal agencies to ensure that potential borrowers under federal direct and guaranteed loan programs have resolved tax and non-tax debt before receiving additional federal credit. Legislation should be enacted to overcome regulatory and statutory limitations on participation in CAIVRS, including use of delinquent tax and non-tax debt.

6. Improve estimates for the allowance for doubtful accounts. (1)

Agency chief financial officers should improve their allowance for doubtful accounts estimates to provide accurate and timely data for audited financial statements as required by the Chief Financial Officers Act of 1990 and for quarterly reports to the Treasury.

7. Establish performance agreements on each major loan and debt collection program. (2)

The key element in the new approach to federal credit management and debt collection should be the negotiation, between each agency and OMB, of performance agreements for each major loan and debt collection program. Basic agreements should be established and then updated annually. Agreements should include a description of the agency's strategies for using debt collection tools for each of its major programs.

The negotiated performance agreements should identify quantifiable program results and financial management performance indicators to which program managers would be held accountable. Goals established in the performance agreements should be specific to each loan and debt collection program, in recognition of the differences in risk for each program. The accuracy of the reported results should be attested to by auditors as part of the audits of financial statements of these programs.

Cross-references to Other NPR Accompanying Reports Department of Justice, DOJ04: Improve Department of Justice Debt Collection Efforts.


  1. U.S. Office of Management and Budget, "Status Report on Credit Management and Debt Collection," Washington, D.C., August 1993, p. 1.
  2. U.S. Office of Management and Budget, "Options to Improve Performance for Federal Debt Collection," June 1, 1993. (Draft paper.)
  3. Ibid., page 6.
  4. U.S. Department of Veterans Affairs, "Medical Care Cost Recovery," Department of Veterans Affairs Annual Report (Washington, D.C., 1992).
  5. U.S. Office of Management and Budget, "Chief Financial Officer Annual Report," Fiscal Year 1992, Note 2, Federal Tax Receivables, Washington, D.C. 1993.
  6. U.S. General Accounting Office, Financial Audit: Examination of IRS' Fiscal Year 1992 Financial Statements (Washington, D.C.: U.S. General Accounting Office, June 1993).


Manage Fixed Asset Investments for the Long Term

Fixed, or capital, assets are tangible assets that are intended for long-term use or possession, are relatively permanent in nature, and are not intended for resale in the normal course of operations but may be sold at the end of the asset's usefulness to the organization [Endnote 1]. Fixed assets enable, and often expand, the capacity of an organization to perform its mission and improve the effectiveness and quality of the services performed.

The federal government purchases and uses a tremendous volume of fixed assets. The government's investment in such fixed assets as buildings, vehicles, airplanes, computer systems, and other equipment amounts to hundreds of billions of dollars, making the acquisition and management of fixed assets an important financial management issue. Although the federal government may be the world's largest investor in fixed assets, it has no overall investment policy or strategy for fixed asset management. Therefore, agency decisions and actions regarding the various aspects of fixed asset management-- prioritization of projects, selecting alternatives, funding sources, repairs and maintenance, and disposal policies--are not guided by any overall federal goals and are not subjected to a governmentwide analysis. Furthermore, the government lacks asset management planning tools (such as capital budgeting); and evaluation and measurement tools (such as payback concepts, return on investment standards and measurements, asset turnover, depreciation concepts, and residual value assessments).

For purposes of this paper, fixed assets are here defined as those common commercial-type products used to support the delivery of federal services. These products include office buildings, hospitals, laboratories, automobiles, and computers. Excluded from this definition are military weapons systems, public infrastructure projects, and research projects.

Fixed assets are acquired for use by either purchase or lease; leases are either operating or capital. Operating leases tend to be for shorter periods of time. Capital leases can resemble purchases in that they may have a bargain purchase option at the end of the lease, or they may extend over a majority of the useful life of the asset. A lease-purchase is a type of capital lease, containing an agreement to buy the asset at the end of the lease [Endnote 2].

Federal fixed asset acquisitions are affected by the budget process. The Budget Enforcement Act (BEA) of 1990 constrained spending by setting limits on discretionary spending and by requiring that new mandatory spending be paid for through tax increases or reductions in other mandatory spending [Endnote 3]. Compliance with BEA constraints is measured by a set of rules that describe how items will be "scored" for budget purposes [Endnote 4]. These rules were supplemented by a set of scoring rules outlined in the conference report on the BEA. Scoring rules are intended to portray the full costs of a proposed activity consistently and accurately for informed decisionmaking on allocating resources. Scoring also is intended to ensure that the government provides budget authority for all contractual obligations.

One of the major changes in the 1990 BEA was the scoring of capital leases (including lease-purchases). Previously, the costs of capital leases were recorded over time as cash payments were made. Under the BEA, budget authority equal to the discounted present value of the capital lease payments must be scored in the first year of the capital lease. The intent of this change was to ensure consistency with the scoring of purchases and allow decisionmakers to compare the costs of these two alternatives on a more equivalent basis. In contrast, operating leases are scored over time as rental payments are made.

Need for Change
The demands on the federal budget are great, but the resources are extremely limited in comparison to those demands. Careful planning is needed to ensure that the government is in the best possible position to meet the needs of its citizens. Plans must be made for both shortterm and long-term aspects of governing. Investments in fixed assets clearly fall under the category of long-term planning. Changes are needed in five areas to improve the management of the federal government's fixed assets: fixed asset acquisition analysis, longterm planning, fixed asset funding mechanisms, fixed asset budgeting, and budget scoring.

Fixed Asset Acquisition Analysis: Long-term planning for fixed assets requires information on the long-term strategy of an organization, its mission, and its goals. Fixed asset acquisitions require decisions based upon analysis of alternative methods of achieving the long-term goals of the organization. Fixed asset acquisition analysis for the federal government can be divided into three basic parts.

--Analysis of needs. The needs analysis should include asset type, time period needed, consequences of unmet need, ranking of need in relation to the organization's other fixed asset needs, cost effectiveness of this asset in meeting the agency's mission, and ranking of this need into a cross-cutting analysis comparing needs of other agencies.

--Analysis of asset characteristics. The analysis of characteristics should include location or acquisition site of asset, required special features, optional features desired, availability of the asset, specialized nature, disposability of the asset, and alternative configurations of acquisition that could be developed for improved efficiency or cost savings.

--Analysis of acquisition alternatives. For each acquisition alternative, the agency should perform a cost-benefit analysis of the full life-cycle cost, an analysis of risk, and other appropriate analysis such as recognition of offsetting revenue streams from the services of the asset and a quantification of the value of owning versus leasing the asset. Finally, the best acquisition alternative should be determined from among those being considered.

Currently, those three analytic aspects are not applied consistently by asset type, by agency, or across agencies. Several Office of Management and Budget (OMB) circulars require long-term planning; however, the circulars are specific to particular types of fixed asset investments[Endnote 5]. The three aspects of fixed asset acquisition analysis are not consistently performed within agencies and are not currently compared across agencies for the purposes of national priority-setting of planning. If such cross-cutting analyses were consistently performed, it would facilitate long-term planning for fixed assets on a governmentwide basis and would help ensure that the most economical acquisition alternatives are selected.

Long-term Planning: Formalized long-term planning processes would serve to reduce the inherent short-term focus on high-level policymakers whose tenures are brief by the nature of their office. It would also help to counter the short-term focus of the annual budget process and the effects of the two-year terms of Congress. A long-term fixed asset investment plan that informed Congress of the needs and priorities of the government could be even more effective if it were incorporated into the budget process. For example, if the plans were presented to Congress as part of the President's budget request to cover a five-year period, the acquisitions requested could be detailed for each of the five years. Each year, the executive branch could produce a five-year plan on a rolling basis.

Fixed Asset Funding Mechanisms: Market conditions sometimes give rise to opportunities to purchase fixed assets--e.g., a foreclosed office building for sale by the Resolution Trust Corporation. Exploiting such opportunities could, for example, save millions of dollars in rent. Agencies should have funds and funding mechanisms available to take advantage of these unique opportunities to buy fixed assets.

Several funding alternatives could provide the flexibility needed to better accommodate the complex and time-consuming nature of fixed asset acquisitions:

--Multi-year appropriations. Most money appropriated by Congress is designated for one specific year, and must be returned to the Treasury if it is unused. Multi-year appropriations would allow the funds to be available for a longer, though specified, period of time that matches the time period needed to acquire the asset.

--Revolving funds. A revolving fund uses the proceeds of the sales of the fund's goods or services to finance the purchase of more goods and services [Endnote 6]. For instance, General Services Administration's (GSA) leased vehicle program collects fees that may be retained by the GSA for use at a later time. Also, GSA collects rent payments that go toward building a reserve for building maintenance.

In small agencies or programs, fixed asset acquisition may be large relative to a more or less even stream of operating expenditures and as a result may currently be discriminated against under incremental budgeting or budgeting by formula. Using revolving funds to buy fixed assets and rent them to small agencies or programs might reduce the problem of such "lumpiness."

Although revolving funds may be a useful mechanism in certain cases, they do have their weaknesses. An organization with a captive market could "allocate" its cost to another in the form of a "price" that the agency charged cannot control.

--Sinking and reserve funds. The concept of sinking and reserve funds originated in the private sector, where they are used to set aside funds for a specific future use, such as repair or replacement of fixed assets. This concept could be adapted in the federal government to provide a mechanism for funding fixed asset investments, repairs, and maintenance. Funding could be obtained from appropriations, fees, and any other manner deemed appropriate.

--Opportunity funds. Agencies could be allowed to set aside funds to take advantage of special opportunities to purchase fixed assets at prices that could not have been expected when the budget was formulated.

Fixed Asset Budgeting: The government should ensure that there is no budget bias against long-term investments. The budget should recognize the special nature and long-term benefits of investments in fixed assets through a separate capital budget, operating budget, and cash budget. The separate capital budget will explicitly show expenditures on fixed assets, and will help to steer our scarce resources toward the most economical means of acquisition of the most needed assets. Capital budgeting is a concept commonly used in the private sector; it is also used by a majority of the states [Endnote 7]. Poor choices of capital investments and the acquisition methods are currently costing the taxpayer millions of dollars each year. Another major benefit of a move toward capital budgeting would be the very clear distinction between capital budget proposals and operating expenses. This change would also budget for fixed assets more consistently with regard to the way they are treated financially, facilitating the integration of budget and financial information.

An appropriate, conservative definition of capital would allow for only tangible fixed assets owned or leased by the federal government to be capitalized (excluding military weapon systems, public infrastructure projects, and research projects). There could be a tendency to stretch the definition of "capital" expenditures to include inappropriate items. The definition of capital should not be able to be manipulated to provide a relative advantage for some forms of assets versus others, nor should it be broadened to encompass assets that do not yield genuine returns over periods of more than one year. The definition will always be controversial and subjective, and the design of a capital budget must take this into account.

Another part of the budgeting process is the recognition of the actual cash received and expended by the federal government-- information that is not provided by either the operating or the capital budget. This type of information is provided by cash flow budgets. The cash budget most closely measures the effect of the government's operations on the economy, reflecting the effect of both the capital budget and the operating budget. Therefore, the discipline of the cash outlay caps in the Budget Enforcement Act must be maintained. A capital budget is not a license to borrow to purchase fixed assets.

Budget Scoring: The changes made to budget scoring by the 1990 BEA were designed to prevent hiding the cost of large fixed asset contractual obligations by the federal government. The intent was correct; however, the prescriptive rules have had unintended effects that have led to poor economic decisions. Instead of forcing the full aspect of a large capital expenditure to be allocated to the current year appropriation, alternative acquisition methods were used, in some instances, that lowered the initial impact on those appropriations, but have had higher long-term costs.

The full cost of a fixed asset acquisition is scored up front in cases of purchases and capital leases. However, front-end scoring is not required of the sum of the operating lease expenses that will likely exist over the term a fixed asset is needed. This is particularly evident in real estate transactions where some more expensive annual leases were executed versus less costly leasepurchases or "best-buy" outright purchase alternatives. Examples are also found in the information technology area. Before BEA, capital leases were the standard business practice; after BEA, agencies were sometimes tempted by annual budget constraints to use more expensive operating leases. The practical effect of "scoring" has sometimes led to the wrong economic decisions.

Estimated full life-cycle costs of various acquisition alternatives for fixed assets need to be compared so managers can make informed decisions. The alternative selected should be chosen based upon its economic merits, rather than its scoring merits. Budget processes could be adjusted to allow managers to make good economic decisions to buy or lease. Those changes could include procedures to allow for "spikes" in agency spending whenever fixed asset acquisitions have been justified and purchase is the most economical method. These procedures could include the creation of a special fund to which such purchases could be charged and "rented" to the agency.

In the long term, shifting to a capital budget (as described above), would serve to highlight these large capital investments and obligations and facilitate more informed decisions about capital investments. Capital projects will be surfaced--justified on their own merits--with full financial impact clearly visible. This shift will be complex and will take considerable time to implement. In the interim, budget scoring rules should be reevaluated as described above, to avoid hindering management from making good economic decisions.

In summary, the federal government should move to a comprehensive, long-term, economically sound approach toward managing fixed assets. This approach should include the following.

--Agencies should develop and justify their acquisition requirements.

--As asset managers, agencies should analyze the economic and market alternatives for each requirement through budget formulation, appropriation, and a long-range planning process.

--Agencies should propose the method of asset acquisition that represents the lowest long-term cost to the taxpayer and satisfies requirements.

--Agencies should continually review their current owned and leased portfolio to determine if previous decisions are in the best interest of the taxpayer in light of current market conditions.

--Based on this review, agencies should propose the optimal acquisition strategy to OMB as a budget request. The optimal acquisition strategy may result in higher short-run appropriations to purchase, rather than lease, capital assets.

--Budget decisions should reflect sound management to ensure no bias against long-term investment of fixed assets. Additionally, the best decision among available acquisition alternatives should be available within budget resources.


  1. Establish a long-term fixed asset planning and analysis process. (2)

OMB, in consultation with the Chief Financial Officers (CFO) Council, should establish a long-term planning and analysis process for fixed assets acquisitions, maintenance, and disposal by October 1994. OMB should review any related circulars to incorporate this governmentwide planning process and seek to minimize duplication of effort that might arise in establishing new procedures. This guidance should set dollar threshold levels below which less extensive analysis will be permitted. The planning process should establish goals and objectives and result in an overall investment policy or strategy for prioritizing federal investment in fixed assets.

2. Incorporate fixed asset long-term planning into the federal budget process. (2)

OMB should revise appropriate circulars to change the budget process to incorporate fixed asset long-term planning, including governmentwide analysis to ensure prioritization of fixed asset acquisitions and optimization of resources allocated to long-term investments. This should be completed by March 1994 and included in the fiscal year 1996 budget request. The revised process should call for a prominent display of a division of budget outlays between operating expenditures and long-term investments in fixed assets.

The definition of long-term investments should be limited to tangible, long-term assets that are owned by, or leased on a longterm basis to, the federal government.

3. Ensure that there is no budget bias against long-term investments. (2)

OMB, in consultation with the Congress and the CFO Council, should develop a plan for budgeting that recognizes the special nature and long-term benefits of investments in fixed assets through a separate capital budget, operating budget, and cash budget. The plan should be completed by June 1994. The discipline of the cash outlay caps in the Budget Enforcement Act must be maintained, capital budgeting should not be a license to borrow to purchase fixed assets, and capital should be defined narrowly as discussed in this paper.

4. Provide more flexible funding mechanisms for the acquisition of fixed assets. (2)

Agencies, working with OMB, should develop and present budget requests for fixed assets for the fiscal year 1995 budget using more flexible funding mechanisms. These mechanisms should include multiyear appropriations, revolving funds, sinking/reserve funds, and opportunity funds.

5. Consider revisions to budget scoring. (2)

The President's Management Council should lead a review of the impact of current budget scoring rules to make sure that they accomplish their goal of acquiring fixed assets at the lowest possible cost to the taxpayer. The review team should consult with the legislative as well as the executive branch. Results of the review, with any recommended legislative changes or changes to OMB guidance, should be recommended to OMB by November 1994.


  1. Adapted from testimony of Paul L. Posner, Director of Budget Issues for the General Accounting Office, before the Subcommittee on Economic Development, Committee on Public Works and Transportation, House of Representatives, May 26, 1993.
  2. Capital leases under private sector generally accepted accounting principles are "capitalized" on an entity's balance sheet to recognize what is effectively an ownership of an asset. In other words, the value of the asset is recorded as an asset and is depreciated over the life of the asset. Similarly, the contractual debt associated with the asset is recorded as a liability, with both a current (due within 1 year) and a long-term portion. The concept of operating and capital leases has been very beneficial in recognizing "substance over form" in certain financial transactions for presentation in balance sheets and income statements.
  3. Budget Enforcement Act of 1990, P.L. 101-508.
  4. See OMB Circular A-11,"Preparation and Submission of Budget Estimates," on budget scoring.
  5. See, e.g., OMB Circulars A-130, "Management of Federal Information Resources," and A-94, "Guidelines and Discount Rates for Benefit-Cost Analysis of Federal Programs."
  6. Meyer, Annette E., Evolution of United States Budgeting: Changing Fiscal and Financial Concepts (New York: Greenwood Press, 1989), p. 116.
  7. See National Association of State Budget Officers, "Capital Budgeting in the States: Paths to Success," February 1992. The majority of the states have adopted a form of capital budgeting, which differentiates spending that benefits current years versus future years. The portion of the budget dedicated to future years' benefits is financed over time, but the portion dedicated to current years' expenses is usually required to be balanced. This report lists good practices in state capital budgeting, almost all of which could be applied in capital planning by the federal government:

--Establish a clear definition of expenditures within the capital budget.

--Define maintenance expenditures and provide for adequate funding of maintenance in statute.

--Include specific operating costs for each capital project.

--Ensure that effective legislative involvement occurs throughout the capital budgeting process.

--Strengthen the review of the years beyond the budget year in longrange capital plans.

--Identify criteria used in selecting capital projects.

--Define all program outcomes for capital investments.

--Evaluate cost estimating methods to measure their validity.

--Establish a tracking system to keep projects on schedule and within budget.

--Define the factors to consider in decisions to own or lease.

--Develop a clear debt policy.

--Review cost-benefit comparisons for private sector participation in capital projects.

--Maintain an updated inventory system of capital assets.


Charge Agencies for the Full Cost of Employee Benefits

Federal agencies should be required to pay for the total costs of employee compensation, including a charge for future pension payments and retiree health benefits. Agencies directly pay for the pension benefits of civilian personnel under the Federal Employees Retirement System (FERS), which covers federal employees first hired after 1983. Agencies with employees covered under the older retirement system, Civil Service Retirement System (CSRS), only pay about one-third of the government's share of the pension cost for their employees. Agencies pay the health benefits for all active civilian employees, but there is no charge for the future health cost of these employees after they retire. Charging full costs to the agency for employees under both FERS and CSRS and charging agencies for future health costs of their employees would improve overall budgetary management for an agency.

Need for Change
Agencies should be charged directly for retirement benefits earned by active employees to ensure that total costs are available for decisionmaking and evaluating performance results. This would improve budgetary management and the efficiency of choice between labor and other resources and assist the decision process for performing services internally, through franchising, or contracting out. It would make the government account for retiree benefits on a comparable basis to the private sector.

The CSRS pension cost averages about 25 percent of salary per employee. The agency and the employee each contribute 7 percent of salary into the trust fund. The total of 14 percent is only about half the cost to fund the pension. If agencies were required to pay full normal costs for CSRS employees, with no change in employee contributions, the agencies' contributions would have to be increased from 7 percent to 18 percent adding $5.0 billion to agencies' personnel costs [Endnote 1]. The employees would still pay the remaining 7 percent.

Agencies also pay only a portion of the health insurance premiums for their active civilian employees, with the remainder being paid by the employee. However, agencies do not pay any of the costs for future health benefits earned by active employees. The Office of Personnel Management (OPM) pays the government's portion of health premiums for civilian retirees. The annual cost of future retiree health benefits earned by current civilian employees is estimated to be $4.0 billion [Endnote 2]. The Department of Defense (DOD) does pay the government's portion of current cash expenditures for retired military personnel. However, DOD financial decisionmaking would improve if benefits that are currently earned were counted as part of current compensation. Both civilian agencies and DOD should pre-fund expected future liabilities.

As cost accounting standards are needed to ensure accurate value for the dollar reporting, agencies should be charged directly for these costs to ensure full disclosure of employee costs and to ensure that total costs are available for decision-making and evaluating performance results.

The recommendations propose an accounting change that will better reflect the full cost of employee benefits to the agencies. Their implementation would not affect the unified budget deficit. Agency discretionary funds will show larger outlays, which will be reflected in an increase in the Civil Service Retiree and Disability Trust Fund.


  1. Require all agencies to pay the full accruing cost of Civil Service Retirement System (CSRS) pensions. (3)

Legislation should be enacted to require that agencies contribute the additional amount to the Civil Service Retiree and Disability Trust Fund as a discretionary expense. The decision on implementation should be determined by the Director of OMB. The Director of OMB should be permitted to make one-time adjustments in the Budget Enforcement Act caps for discretionary accounts to reflect the accounting change as a change in a budget concept.

2. Research the possibility of charging agencies the full accruing cost for civilian and military retiree health benefits. (2)

The Director of OMB and the Director of OPM should jointly research the possibility of charging agencies for civilian retiree health benefits as part of salaries and expenses and provide a plan by January 1995.

The Director of OMB and the Secretary of Defense should research and provide a similar plan for military retiree health benefits by January 1995.


  1. U.S. Office of Management and Budget, Economic Policy Office. Internal report based on annual estimates made by OPM actuary estimates.
  2. U.S. Office of Management and Budget, Economic Policy Office. Internal report based on a 1991 OMB study, which, in turn, was based on OPM actuary estimates.


Appendix A
Summary of Actions by Implementation Category

(1) Agency heads can do themselves

FM03.1: Ensure that agency financial systems are in compliance with the revised OMB Circular A-127.

FM04.1: Issue all federal employee pay and expense reimbursement through EFT.

FM04.2: Handle all interagency payments through the On-line Payment and Collection (OPAC) system.

FM04.3: Handle all payments to state or local governments through EFT.

FM04.4: Include the EFT payment clause from the Federal Acquisition .Regulations in all contracts.

FM04.5: Issue all payments to individuals through EFT or EBT.

FM04.6: Simplify, redirect and reengineer agency financial processes to make them fully electronic and reduce the paperwork burden.

FM05.1: Ensure that all financial management personnel are fully qualified.

FM05.2: Coordinate efforts to provide low-cost, effective training for financial management personnel.

FM05.3: Ensure that the information being collected, disseminated, and reported on is useful, objective, timely, and accurate for the benefit of program managers.

FM08.1: Allow the use of commercial checking accounts.

FM08.4: Eliminate time sheets and time cards, and use technology to enter payroll data on an exception basis.

FM10.1: Provide a consolidated annual report on the finances of the federal government, including contingent liabilities.

FM11.3: Expand agency litigation for debt collection through the special assistant U.S. attorney process.

FM11.4: Establish a credit management function.

FM11.6: Improve estimates for the allowance for doubtful accounts.

(2) President, Executive Office of the President, or Office of Management and Budget can do.

FM01.1: Issue a comprehensive set of federal financial accounting standards within 18 months.

FM01.3: Dedicate staff to the Federal Accounting Standards Advisory Board (FASAB) to develop a high-level set of cost accounting standards.

FM02.1: Develop a memorandum of understanding (MOU) to clarify central agency roles and responsibilities for financial management.

FM02.2: Develop and publish a strategic plan for improving financial management.

FM02.3: Create a governmentwide budget and financial information steering group.

FM02.4: Develop and publish a definition of an integrated budget and financial system.

FM02.5: Develop an integrated budget and financial information strategic plan.

FM03.4: Establish a clearinghouse of financial systems applications, cross-servicing, and best practices.

FM03.5: Dedicate a core of financial systems personnel to develop cost accounting systems requirements.

FM05.4: The OMB Deputy Director for Management, meet periodically with departmental deputy secretaries to discuss financial management issues.

FM05.5: Identify the set of financial management functions that should report to agency CFOs.

FM06.1: Implement franchising for service functions at the agency head's discretion.

FM06.2: Establish an implementation team under the President's Management Council (PMC).

FM07.2: Establish working capital funds (WCFs) for all federal agencies.

FM07.3: Convene a working capital fund (WCF) forum.

FM08.2: Give agency heads the flexibility to determine when to do alternative pay and work out any problems with the vendor.

FM08.3: Revise Circular A-50 to incorporate an audit resolution threshold. CFOs should establish these thresholds with their inspectors general or heads of audit.

FM09.3: Ensure that any future financial management reporting requirements be addressed in either the planning or accountability reports.

FM10.2: Issue an annual financial report to the taxpayers.

FM10.3: Develop a method of identifying and budgeting for the expected costs of contingent liabilities of the federal government.

FM11.5: Expand the Credit Alert Interactive Voice Response System.

FM11.7: Establish performance agreements on each major loan and debt collection program.

FM12.1: Establish a long-term fixed asset planning and analysis process.

FM12.2: Incorporate fixed asset long-term planning into the federal budget process.

FM12.3: Ensure that there is no budget bias against long-term investments.

FM12.4: Provide more flexible funding mechanisms for the acquisition of fixed assets.

FM12.5: Consider revisions to budget scoring.

FM13.2: Research the possibility of charging agencies the full accruing cost for civilian and military retiree health benefits.

(3) Requires Legislative Action

FM01.2: Create an independent federal financial accounting standards board with the power to develop, publish, and interpret accounting principles and standards for the federal government, if a comprehensive set of accounting standards is not issued within 18 months.

FM03.2: Establish an innovation fund for financial systems development.

FM03.3: Provide interagency funding mechanisms for joint development financial systems projects.

FM07.1: Allow agencies to create innovation capital funds.

FM07.4: Allow agencies to match funds.

FM09.1: Propose legislation to permit OMB, in consultation with appropriate congressional committees, to grant OMB the flexibility to consolidate and simplify statutory reports to Congress and the President.

FM09.2: Require agency heads to provide two reports annually, a planning report and an accountability report.

FM11.1: Enact legislation to allow (a) debt collection activities to be funded by the revenues generated from collections and (b) the agencies to keep a certain percentage of any increased collection amounts, primarily for improvements in debt collection as well as other agency priorities.

FM11.2: Enact legislation to increase agencies' access to private collection contractors by eliminating any restrictions.

FM13.1: Require all agencies to pay the full accruing cost of Civil Service Retirement System (CSRS) pensions.

Appendix B:

In May, we brought together a group of approximately 54 individual stakeholders for a Future Search Conference. This two-day event examined federal financial management in the past, present, and future. The attendees consisted of chief financial officers, deputy chief financial officers, assistant inspector generals, line managers, staff members of the Senate Governmental Affairs Committee and House Government Operations Committee, along with representatives from Office of Management and Budget (OMB), General Accounting Office, state and local government, the private sector, and academia. This group helped us to begin developing our issues for the National Performance Review (NPR). Later in the NPR process, the group reconvened for follow-up sessions to review NPR draft papers and address changes needed in the federal financial community's culture.

At the direction of the Vice President, we held additional special decisionmaking sessions for two of our issues: (1) Clarify the Financial Management Roles Between OMB and Treasury and (2) Manage Fixed Assets in the Long Term. A mini-conference was held to clarify the OMB and Treasury roles for financial policies and procedures. Selected individuals from OMB, Treasury, and several other agencies were brought together to resolve this issue. The second issue was resolved by multiple working sessions, which were held with representatives from OMB, General Services Administration, and our team to address the ways in which the government budgets and accounts for fixed assets.

We sought and obtained the views of the private sector. In addition to representatives from the Private Sector Council and the American Institute of Certified Public Accountants attending our future search conference, the Financial Executives Institute (FEI) held two roundtable discussions about federal financial management. The discussions provided the NPR with the viewpoints and concerns of private sector financial managers.

Our outreach efforts also included presentations to the Association of Government Accountants, the Federal Executive Institute Alumni Association, the Federal Financial Managers Council, and meetings with many federal managers and executives. Individuals at the conferences were provided with fax sheets to report financial management problems and solutions and success and horror stories to us. We received over 85 replies.

Appendix C:

Accompanying Reports of the National Performance Review

Governmental Systems..........................Abbr.

Creating Quality Leadership and Management....QUAL

 Streamlining Management Control................SMC
 Transforming Organizational Structures.........ORG
 Improving Customer Service.....................ICS


 Mission-Driven, Results-Oriented Budgeting.....BGT
 Improving Financial Management..................FM
 Reinventing Human Resource Management..........HRM
 Reinventing Federal Procurement...............PROC
 Reinventing Support Services...................SUP

Reengineering Through Information Technology....IT Rethinking Program Design......................DES

Strengthening the Partnership in

 Intergovernmental Service Delivery.............FSL
 Reinventing Environmental Management...........ENV
 Improving Regulatory Systems...................REG


 Agency for Internatioal Development............AID
 Department of Ariculure.......................USDA
 Department of Commerce..........................DOC
 Department of Defense..........................DOD
 Department of Education.........................ED
 Department of Energy...........................DOE
 Environmental Protection Agcy..................EPA
 Executive Office of the President..............EOP
 Federal Emergncy Management Agency............FEMA
 General Services Administration................GSA
 Department of Health and Human Services........HHS
 Dpartmetof Housing and Urban Development.......HUD
 Intelligence Community.......................INTEL
 Department of the Interior.....................DOI
 Department of Justice..........................DOJ
 Depatment of Lbor..............................DOL

National Aeronautics and Space Administration.NASA National Science Foundation/Office of

 Science and Technology Policy..................NSF
 Office of Personnel Management.................OPM
 Small Business Administration..................SBA
 State/ U.S. Information Agency.................DOS
 Department of Transportation...................DOT
 Department of the Treasury/ Resolution
 Trust Corporation..............................TRE
 Veterans Affairs................................VA