Achieving the Benefits of Accruals in a Cash Environment

1
Achieving the Benefits of Accruals in a Cash
Environment

• Justine Kilpatrick
• U.S. Office of Management and Budget
• 6th Annual OECD Public Sector
• Accrual Symposium

2
Separation of Powers

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

3
Controlled, Yet Flexible

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

4
The Principle Cost Up Front

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

5
Pulling Up Financial Transactions

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

6
Budgeting for Capital Up Front

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

7
Contentious Issues

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

8
Continuing Reforms

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

9
Seeking Results

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

10
Budgeting for Results

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

11
Matching Cost with Programs

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

12
Key Accrual Timing Differences

• Support Account
• Accrual Before Budget
• Retiree Benefits Retirement Fund
• Hazardous Substance Cleanup Fund
• Budget Before Accrual
• Inventory Acquisition Supply, Working
  Capital Fund
• Capital Acquisition CAF - Capital
  Acquisition Fund

13
Two Perspectives of Capital

• Retaining the value of cost up front
• Require budget authority for the full cost of a
  useful segment with benefits greater than cost
  without future budget authority.
• Gaining value matching cost to programs
• Get the BA as borrowing authority from Treasury,
  and require each program to pay its share of the
  mortgage during the assets useful life.

14
A Capital Acquisition Fund
Purchase 10 million park facility in year 1
(BA/OL)
Agency CAF
Private Contractor
Collect rent for park facility 800 thousand
each year for 30 years (-BA/-OL)
Borrow 10 million in year 1
Repay principal interest 800 thousand each
year for 30 years
Pay rent for park facility 800 thousand each
year for 30 years (BA/OL)
Operation of Program
Treasury
BA Budget Authority OL Outlays CAF Capital
Acquisition Fund
15
Issues in Implementation

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

16
The Budget Drives Decisions

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