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crs_RS22398

crs_RS22398_0

During the 112 th Congress, Members faced the issue of whether to extend permanent normal trade relations (PNTR) status to Russia and Moldova. On November 16, 2012, the House passed (365-43), and on December 6, 2012, the Senate passed (92-4) H.R. 6156 , which did just that, among other things. President Obama signed the legislation into law ( P.L. 112-208 ) on December 14, 2012. The 113 th Congress may face the issue of authorizing PNTR for at least two other countries—Tajikistan and Kazakhstan. MFN/NTR and the GATT/WTO Most-favored-nation (MFN) treatment is a fundamental principle of the General Agreement on Tariffs and Trade (GATT 1994), which governs trade in goods; of the General Agreement on Trade in Services (GATS); and of the agreement on Trade-Related Aspects of Intellectual Property Rights (TRIPs). In essence, the principle requires that each WTO member treat the product of another member no less favorably than it treats a like product from any other member. If a member country lowers a tariff or nontariff barrier in its trade with another member that "concession" must apply to its trade with all other member countries. The United States grants all but a few countries, namely Cuba and North Korea, normal trade relations (NTR), or MFN, status. In practice, duties on the imports from a country that has not been granted NTR status are set at much higher levels—rates that are several times higher than those from countries that receive such treatment. Thus, imports from a non-NTR country can be at a significant price disadvantage compared with imports from NTR-status countries. The WTO agreements also require that MFN treatment be applied "unconditionally." However, when a WTO member determines that it cannot, for political or other reasons, accede to this or any other GATT/WTO principle toward a newly acceding member, it can "opt-out" of its obligations toward that member by invoking the non-application provision (Article XIII of the WTO or Article XXXV of the GATT). In so doing, the WTO member is declaring that the WTO obligations and mechanisms (e.g., the dispute settlement mechanism) are not applicable in its trade with the new member in question. Invoking the non-application clause is a double-edged sword. Although it relieves the member invoking the provision of applying MFN or any other obligations toward the new member, it also denies the benefits and protections that the WTO would provide to the former in its trade with the latter. Jackson-Vanik Amendment and Communist and Former Communist Country GATT/WTO Members In 1951, the United States suspended MFN status to all communist countries (except Yugoslavia) under Section 5 of the Trade Agreements Extension Act. That provision was superseded by Title IV of the Trade Act of 1974. Section 401 of Title IV requires the President to continue to deny nondiscriminatory status to any country that was not receiving such treatment at the time of the law's enactment on January 3, 1975. In effect, this meant all communist countries, except Poland and Yugoslavia. Section 402 of Title IV, the so-called Jackson-Vanik amendment, denies the countries eligibility for NTR status as long as the country denies its citizens the right of freedom of emigration. These restrictions can be removed if the President determines that the country is in full compliance with the freedom-of-emigration conditions set out under the Jackson-Vanik amendment. The Jackson-Vanik amendment also permits the President to waive full compliance with the freedom-of-emigration requirements if he determines that such a waiver would promote the objectives of the amendment, that is, encourage freedom of emigration. While Title IV addresses only freedom of emigration, Congress has used the law to press the subject countries on a number of economic and political issues. Removal of a country from Jackson-Vanik restrictions requires Congress to pass legislation. Czechoslovakia was an original signatory to the GATT in 1947. In 1951, the United States suspended MFN treatment because it had become communist. Because Czechoslovakia was an original signatory to the GATT and not a newly acceding member, the non-application provision did not apply. Instead, the United States sought and obtained from the other GATT signatories approval for the suspension of MFN treatment. The United States invoked the non-application provision when Romania and Hungary became GATT signatories in 1971 and 1973, respectively. These restrictions no longer applied after the United States, through legislation, extended unconditional MFN, or permanent normal trade relations (PNTR), status to Czechoslovakia (later the Czech Republic and Slovakia), Hungary, and Romania after the fall of the communist governments in those countries. The United States granted PNTR to Albania, Bulgaria, and Cambodia before these countries acceded to the WTO, making it unnecessary to invoke the non-application provision. This was also the case for the former Soviet republics of Estonia, Latvia, and Lithuania. Mongolia joined the WTO on January 29, 1997, more than two years before the United States granted it PNTR. During that time, the United States invoked the non-application provision. It also invoked the provision with Armenia when it joined the WTO on February 5, 2003, and received PNTR on January 7, 2005, and with Kyrgyzstan when it joined the WTO on December 20, 1998, before receiving PNTR on June 29, 2000. Each bill authorizing PNTR for Mongolia, Armenia, Kyrgyzstan, and Georgia contained a "finding" that extending PNTR would enable the United States to avail itself of all rights within the WTO regarding that country. The United States invoked Article XIII also in its trade relations with Vietnam on November 7, 2006, before PNTR for Vietnam went into effect, but had granted Ukraine PNTR status in 2006 prior to that country's accession to the WTO. It invoked non-application regarding Moldova and Russia prior to thsoe countries receiving PNTR status. The Case of China As with the other communist countries, China was subject to the provisions of the Jackson-Vanik amendment. The United States denied China MFN status until October 1979, when it was granted conditional MFN under the statute's presidential waiver authority. China acceded to the WTO on December 11, 2001. Congress passed legislation ( P.L. 106-286 ) removing the Jackson-Vanik requirement from U.S. trade with China and authorizing the President to grant PNTR to China, which he did on January 1, 2002. However, in the legislation, Congress linked the granting of PNTR to U.S. acceptance of conditions for accession to the WTO. It states that prior to making a determination on granting PNTR, "the President shall transmit to Congress a report certifying that the terms and conditions for the accession" of China to the WTO "are at least equivalent to those agreed to" in the bilateral agreement the United States and China reached as part of the accession process. China's bilateral agreement with the United States, which is contained in the final accession agreement, contains provisions for special safeguard procedures (codified in U.S. law as Sections 421-423 of the Trade Act of 1974) to be used when imports cause or threaten to cause market disruption in the United States. It also provides for a separate safeguard procedure in the case of surges in imports of textiles and wearing apparel from China, as well as special antidumping and countervailing duty procedures. All of these provisions have time limits. The legislation authorizing PNTR for China also provided for the establishment of a congressional-executive commission to monitor human rights protection in China to replace Congress's focus on this issue that occurred during the annual NTR renewal debate. Prospective WTO Accessions Countries that are still subject to the restrictions have also applied for membership to the WTO and are at various stages of the accession process: Azerbaijan, Belarus, Kazakhstan, Tajikistan, and Uzbekistan. Congress usually has no legislative role in the accession of countries to the WTO. However, the legislative requirement for repeal of Title IV provides a role, albeit indirectly, in the cases of the above-mentioned affected countries by giving Congress leverage on the negotiation of conditions for WTO accession. Congress has several options. It could repeal the restrictions before the country(ies) actually enter(s) the WTO, completely separating the issues of Title IV repeal and WTO accession. This is the course that Congress has followed in most cases to date and would allow the United States to fulfill the unconditional MFN requirement prior to the country acceding to the WTO. Many of the countries in question, view the Jackson-Vanik requirements and the rest of the Title IV restrictions as Cold War relics that have no applicability to their current emigration policies and, more generally, to the types of governments they now have. They assert that their countries should be treated as normal trade partners and, therefore, that the restrictions should be removed unconditionally. A second option would be for Congress to link the granting of PNTR with the country's accession to the WTO. For example, Congress could follow the model established with PNTR for China by requiring the President to certify that the conditions under which the country is entering the WTO are at least equivalent to the conditions that the United States agreed to under its bilateral accession agreement with the country. It can be argued that in this way, Congress helped define, at least indirectly, the conditions under which China entered the WTO. However, the candidate countries would probably bridle at such treatment, asserting that they would be asked to overcome hurdles that are not applied to most of the other acceding countries, especially countries not subject to Jackson-Vanik. During the debate on PNTR for Russia, some Members of Congress raised concerns about Russia's fulfillment of commitments in certain areas and wanted some assurances. H.R. 6156 , which authorized PNTR for Russia, contained provisions that required the USTR report annually to the Senate Finance Committee and the House Ways and Means Committee on Russia's implementation of its WTO commitments, including sanitary and phytosanitary (SPS) standards and IPR protection and on acceding to the WTO plurilateral agreements on government procurement and information technology; the USTR report to the two committees within 180 days and annually thereafter on USTR actions to enforce Russia's compliance with its WTO commitments; the USTR and the Secretary of State report annually on measures that they have taken and results they have achieved to promote the rule of law in Russia and to support U.S. trade and investment by strengthening investor protections in Russia; the Secretary of Commerce to take specific measures against bribery and corruption in Russia, including establishing a hotline and website for U.S. investors to report instances of bribery and corruption; a description of Russian government policies, practices, and laws that adversely affect U.S. digital trade be included in the USTR's annual trade barriers report (required under section 181 of the Trade Act of 1974); and the negotiation of a bilateral agreement with Russia on equivalency of SPS measures. A third option would be for Congress to not repeal Title IV at all. This option would send a strong message to the partner country of congressional concerns or discontent with its policies or practices without preventing the country's entrance into the WTO. At the same time, the United States would have to invoke the non-applicability provision (Article XIII) in its trade relations with that country. The United States would not benefit from the concessions that the partner country made in order to accede to the WTO. The United States would not be bound by WTO rules in its trade relations with the country, nor would that country be so bound in its trade with the United States. For example, the WTO dispute settlement body mechanism would not be available to the two countries in their bilateral trade relationship. In determining which option to exercise, Congress faces the balance of costs and benefits of each. In addition, how Congress treats each of the countries relative to the others could have implications for U.S. relations with them. The 113 th Congress may face the issue of extending PNTR to at least two r countries. On December 10, 2012, WTO members invited Tajikistan to join, subject to that country's ratification of its accession package. In addition, Kazakhstan may accede to the WTO in 2013. Both countries are currently subject to Title IV of the Trade Act of 1974.

Unconditional most-favored-nation (MFN) status, or in U.S. statutory parlance, normal trade relations (NTR) status, is a fundamental principle of the World Trade Organization (WTO). Under this principle, WTO members are required unconditionally to treat imports of goods and services from any WTO member no less favorably than they treat the imports of like goods and services from any other WTO member country. Under Title IV of the Trade Act of 1974, as amended, most communist or nonmarket-economy countries were denied MFN status unless they fulfilled freedom-of-emigration conditions as contained in Section 402, the so-called Jackson-Vanik amendment, or were granted a presidential waiver of the conditions, subject to congressional disapproval. The statute still applies to some of these countries, even though most have replaced their communist governments. The majority of these countries have joined the WTO or are candidates for accession. Several countries are close to completing the accession process, and Congress could soon face the issue of what to do about their NTR status to ensure that the United States benefits from those accession agreements. During the 112th Congress, Members faced the issue of whether to extend permanent normal trade relations (PNTR) status to Russia and Moldova. On November 16, 2012, the House passed (365-43), and on December 6, 2012, the Senate passed (92-4) H.R. 6156, which did just that, among other things. The legislation also included provisions—the Magnitsky Rule of Law Accountability Act of 2012—that impose sanctions on individuals linked to the incarceration and death of Russian lawyer Sergei Magnitsky. President Obama signed the legislation into law (P.L. 112-208) on December 14, 2012. The 113th Congress may face the issue of extending PNTR to at least two other countries. On December 10, 2012, WTO members invited Tajikistan to join, subject to that country's ratification of its accession package. In addition, Kazakhstan may accede to the WTO in 2013. Both countries are currently subject to Title IV of the Trade Act of 1974.

gao_GAO-05-249

gao_GAO-05-249_0

Background The federal government acquires a wide variety of capital assets for its own use including land, structures, equipment, vehicles, and information technology. Large sums of taxpayer funds are spent on these assets, and their performance affects how well agencies achieve their missions. To directly acquire an asset, agencies generally are required to have full up- front BA for the total asset cost—usually a sizable amount. This requirement allows Congress to recognize the full budgetary impact of capital spending at the time a commitment is made; however, it also means that the full cost of an asset must be absorbed in the annual budget of an agency or program, despite the fact that benefits may accrue over many years. This up-front funding requirement has presented two challenges for capital planning and budgeting at the federal level. One challenge is how to permit “full cost” analysis and to promote more effective capital planning and budgeting by allocating capital costs on an annual basis to programs that use capital. Allocating capital costs over the assets’ useful lives ensures that the full annual cost of resources a program uses is considered when evaluating the program’s effectiveness. It can make program managers more aware of on-going capital costs, thus promoting more effective decision making for capital. It may also contribute to equalizing comparisons across different programs or different approaches to achieving similar goals. A second challenge is how to address the possible bias against the acquisition of necessary capital assets that may be created by spikes (large, temporary, year-to-year increases in BA), which can make capital assets seem prohibitively expensive in an era of resource constraints. GAO has reported in the past that agencies view up-front funding as an impediment to capital acquisition because of the resulting spike in BA. CAFs have been suggested as a capital asset financing approach that would benefit federal departments and their subunits by addressing both of these challenges. CAFs would be department-level funds that use annually appropriated authority to borrow from the Treasury to purchase federally- owned assets needed by subunits of the department. These subunits would then pay the CAF a mortgage payment sufficient to cover the principal and interest payment on the Treasury loan. The CAF would use those receipts only to repay Treasury and not to finance new assets. The CAF concept was formally proposed in the February 1999 Report of the President’s Commission to Study Capital Budgeting as a mechanism that would help improve the process by which annual budget decisions are made by promoting better planning and budgeting of capital expenditures for federally owned facilities. The report states that by ensuring that individual programs are charged the true cost of using capital assets, the CAF encourages managers to make more efficient use of those assets. The Commission report also argues that CAFs could help smooth out the spikes in BA experienced by subunits with capital project requests. By aggregating all up-front BA for capital requests at the department level, subunit budgets would reflect only an annual payment for capital. Since the Commission report, CBO, GAO, and the National Research Council (NRC) have all agreed that CAFs should be explored as a capital financing mechanism. CAFs were also discussed in the President’s Fiscal Year 2004 Budget issued in February 2003. The section on “Budget and Performance Integration” briefly described the concept and reports that draft legislation creating CAFs has been developed, discussed with agencies, and improved. It said that CAFs would be one way to show the uniform annual cost for the use of capital without changing the requirement for up-front appropriations. At this time, OMB’s interest in CAFs appears to have waned. CAFs were not mentioned in the President’s Budget in either fiscal year 2005 or 2006 and the CAF legislation described has not been introduced. Scope and Methodology To address our objectives, we reviewed the available literature describing the CAF concept. We also interviewed budget experts at OMB and CBO to gain a more thorough understanding of how CAFs would operate and discuss issues involved with their implementation. This permitted us to describe a theoretical CAF with some operational detail. Additionally, we sought the views of the many parties that would be affected if CAFs were established. Since agency and congressional officials were generally unaware of the CAF concept, we developed a brief summary describing the general mechanics of a CAF and shared that summary prior to interviews in order to generate discussion. To get the department perspective, we chose USDA and DOI as case studies. Both of these departments have substantial and varied capital needs. Capital assets acquired by USDA and DOI include land, buildings, research equipment, laboratories, quarantine facilities, dams, bridges, parklands, roads, trails, vehicles, aircraft, and information technology (hardware and software). In addition, each department has multiple subunits that use capital assets to achieve their missions—important for examining the question of subunit spikes. We interviewed officials at the department and subunit levels to gather their opinions and insights on the operation, benefits, and difficulties of CAFs. Specifically within USDA we spoke with officials in the Animal and Plant Health Inspection Service (APHIS), the Agricultural Research Service (ARS), and the Forest Service (FS). Within DOI, we spoke with officials in the National Park Service (NPS) and the Bureau of Land Management (BLM). During these discussions, agency officials also compared CAFs (as described in our summary) with current practices used for planning, budgeting, and acquisition of capital assets. Since congressional approval would be necessary for the creation and operation of CAFs, we spoke with staff on the House and Senate Budget Committees, the House and Senate Appropriations Subcommittees on the Interior, and the House Appropriations Subcommittee on Agriculture to get their opinions on the proposed CAF mechanism. We also interviewed officials at Treasury, which would be responsible for managing the borrowing authority. In addition, we spoke with officials at GSA to discuss how a CAF might affect the FBF, used by some federal agencies to acquire federal office space and the FTS, used by some federal agencies to acquire IT. Finally, we reviewed agency documents including asset management plans, accounting system descriptions, capitalization policies, and working capital fund information. We also examined our prior work, financial accounting standards, and various legal and budgetary sources specifically related to federal property management. We recognize that our findings on agency perspective, which are based on interviews with five subunits within two departments, may not be applicable to all agencies within the federal government. However, we were struck by the consistency in department and subunit reaction to the concept, especially when followed by comparable reactions from congressional officials. Our work was conducted in Washington, D.C., from May 2004 through January 2005 in accordance with generally accepted government auditing standards. CAF Operations Would Create a New Financing System and New Oversight Responsibilities Implementing CAFs would change the current process for financing new federal capital projects. In addition, if all existing capital assets of a department and its subunits were transferred to the CAF, the CAF would impute an annual capital usage charge on those assets to using agencies. This additional complication could be avoided if CAFs were limited to new assets. However, this would mean it would be decades before all programs showed the full annual cost of capital in their budgets. Although in many respects CAFs are accounting devices to record financial transactions, their creation would create new management and oversight responsibilities for many federal entities. Treasury would have primary responsibility for administering the borrowing authority. Both Treasury and those departments with CAFs would be required to keep track of the many CAF transactions. The management and oversight responsibilities of the departments would need to be clearly spelled out in order for CAFs to operate effectively. OMB would likely have to issue guidelines on operation specifics and OMB and the congressional appropriations committee staff would have to review the CAFs to ensure they were operating properly. OMB and CBO would score (estimate) the CAFs’ and subunits’ BA—both the initial authority to borrow and the subsequent appropriations used for repayment. The scoring of the annual capital usage charges, if CAFs were applied to existing capital, has not yet been developed. CAFs Would Be Positioned at the Department Level and Create a More Complex Process for Financing Capital Although CAFs do not currently exist, we can describe how they would likely operate based on written proposals and our discussions with budget experts. CAFs would be established at the department level as separate accounts that would receive up-front authority to borrow (provided in appropriation acts) on a project-by-project basis, for the construction and acquisition of large capital projects for all of the subunits within a department. For those departments with subunits split between two appropriation subcommittees, it is likely that two CAFs would be necessary. For example, DOI receives appropriations through two subcommittees: the Energy and Water Development Subcommittee, which is responsible for Bureau of Reclamation (Reclamation) programs; and the Interior and Related Agencies Subcommittee, which is responsible for all other Interior programs. CBO, OMB, and agency officials we spoke with generally believed that having a CAF that crossed subcommittee jurisdictions would create many problems, thus it would likely be necessary for departments to have a separate CAF for each subcommittee with which they work. Using the example above, DOI would have one CAF for Reclamation and a second for the remaining subunits within DOI. Alternatively, CAFs could be situated at the appropriation subcommittee level rather than the department level, with each of the 13 subcommittees appropriating to their respective CAF for the agencies under their jurisdiction. Some congressional officials did not seem to think that this would be the most effective arrangement and raised the point that increased resources might be needed at the subcommittee level to manage CAF transactions. In addition, OMB argued that CAFs should be located at the department level because the department is the focus of accountability for planning and managing programs and capital assets, as well as for budget execution and financial reporting. The CAF would receive appropriations for the full cost of an asset (or useful segment of an asset) in the form of borrowing authority. Like all BA, the borrowing authority for each CAF-financed project would specify the purpose, amount, and duration of the authority. Unless the asset is to be available for use in the same fiscal year, the subunit itself would receive no appropriations. The CAF would use its authority to borrow from the Treasury’s general fund to acquire the asset for the subunit. When the asset became usable, the subunit would begin to pay the CAF an amount equal to a mortgage payment consisting of interest and principle. These equal annual payments would consist of the principal amortized over the useful life of the asset and include interest charges at a rate determined by Treasury (based on the average interest rate on marketable Treasury securities of comparable maturity). The CAF would use these mortgage payments to repay Treasury for the funds borrowed plus interest. Unlike a revolving fund, the mortgage payments collected by the CAF would be used only to repay Treasury and could not be used to finance new assets. For each project funded through the CAF, the subunit’s annual budget request would need to include the annual mortgage payment in each year, for the useful life of the asset (or until the asset was sold or transferred). The subunit would need annual appropriations for these payments, along with its other operating expenses. On the basis of our discussions, we conclude that the appropriations from which the payments are made would be discretionary as opposed to mandatory. They would not be provided as a line item for mortgage payments to the CAF, but would be part of the subunit’s total appropriation. While the subunit would be required to make the annual payment, there would be no guarantee that Congress would include the additional amounts to cover the payment in the subunit’s appropriation. At some point, the mortgage on an asset would be “paid off.” However, if annual capital usage charges on existing capital were established, payments would continue, although the amount of the payments would depend on the method used to calculate the charges for existing capital. Any imputed charges collected by the CAF would be transferred to the general fund of Treasury and not be available to finance new assets. Later in this report we discuss in more detail the idea of imputing a capital usage charge on existing capital. Treasury Would Oversee Borrowing Authority Used to Acquire Capital Assets Treasury is responsible for administering and managing borrowing authority. Treasury officials explained that within the department, the Financial Management Service (FMS) would have responsibility for setting up the accounts to correspond with each CAF created. Before a CAF could actually borrow from Treasury, an agreement would have to be signed establishing the interest rate and repayment schedule. Treasury officials recommended that OMB establish guidelines to specify the useful life of capital assets so departments would abide by an appropriate amortization schedule and not attempt to lower payments by lengthening the asset’s useful life. The standards issued by the Federal Accounting Standards Advisory Board (FASAB) on how to account for property, equipment, and internal-use software could be useful in developing these guidelines. According to Treasury officials, FMS would also be responsible for preparing the warrants, an official document that establishes the amount of monies authorized to be withdrawn from the central accounts maintained by Treasury, and would report annually on account activity. The Bureau of Public Debt would have the most day-to-day interaction with the CAF. It would be responsible for transferring the borrowed funds to the department and for receiving payments. Although Treasury officials did not think it would be an unmanageable task, they said that tracking individual transactions could become complicated, depending on the level of detailed reporting required, and would certainly require additional staff time. To cover these costs, they would want to charge an administrative fee, as they do for trust funds. CAFs Would Add Complications to Oversight and Scoring A CAF is an additional layer of administration that could complicate program management rather than streamline it. At the department level, the chief financial officer would likely be responsible for the financial operation of the CAF. Department heads would need to specify duties for those with capital asset management and oversight responsibilities according to the unique needs of the department. Oversight functions would include accounting for all the transactions between the CAF and Treasury as well as between the CAF and the subunits. In addition, the managerial relationship between the CAF and individual subunits would have to be worked out. OMB would also likely have new responsibilities. For example, OMB would probably have to develop guidelines on issues such as (1) the types of assets to include in the CAF, (2) the amortization schedule for various types of assets, (3) the method for calculating a capital usage charge on existing capital (along with CBO and Congress), and (4) the relationship between a CAF and FBF. Indeed, the NRC report argued that oversight and management of CAFs should actually reside at OMB. Although OMB officials provided no details, they agreed that they would have some responsibility for reviewing CAFs, as would congressional committees. As they do for all appropriation actions, CBO and OMB would score the CAF and subunit BA—both the initial authority to borrow and the subsequent appropriations used for repayment. Although the net amounts of BA and outlays for capital acquisitions would not change, the type of BA would. Currently, annual appropriations, which allow program managers to incur obligations and make outlays with no additional steps, are provided for most capital acquisitions. A CAF, however, would be appropriated up-front borrowing authority. On a gross basis, the BA would have to be appropriated twice, once as up-front borrowing authority and incrementally over time through appropriations for the annual mortgage payment. Since the annual mortgage payment is purely intragovernmental, the subunit’s BA and outlays are offset by receipts in the CAF, so the total BA and outlays are not double-counted. Therefore, appropriation subcommittee allocations would not need to be adjusted if a CAF were used for new assets. The initial borrowing authority would be equal to the asset cost and would be scored up front in the CAF budget. When the annual mortgage payments begin, the amount provided in the subunit’s budget would equal the mortgage payment and would be scored as discretionary BA. The mortgage payment would then be transferred to the CAF and, as a receipt, be considered mandatory BA. However, according to OMB, it would be treated as a discretionary offset for scoring purposes. The payment and receipt would completely offset each other within the appropriation subcommittees’ totals and in the BA and outlay totals for the federal budget as a whole. When the CAF repays Treasury using the mortgage receipts, scoring would follow the current guidelines for debt repayment transactions. The mortgage receipt would be considered mandatory BA and be used to repay Treasury; however, the portion of the mortgage payment that corresponds to the amortization of the asset cost would be deducted from the BA (and outlay) totals. When collections are used for debt repayment, they are unavailable for new obligations, and therefore are not BA. If they were counted, the BA and outlay totals would be overstated over the life of the loan. According to OMB, the remaining mandatory BA would be obligated and outlayed for interest payments to an intragovernmental receipt account in Treasury, but would not be scored. At this time, the scoring of annual capital usage charges on existing capital assets has not been determined. CAF Benefits Can Be Achieved through Alternative Means Without the Added Budget Complexity CAFs have been proposed as a way to address two challenges that arise from the full up-front funding requirement for capital projects. The first challenge is to facilitate program performance evaluation and promote more effective capital planning and budgeting by allocating capital costs on an annual basis to those programs using the capital. By having annual cost information, managers can better plan and budget for future asset maintenance and replacement. During our interviews, we learned that asset management and cost accounting systems are currently being implemented that could be used to address this problem. These systems are designed to provide the information necessary for improved priority setting and better decision making, although we found that many agencies are still working to fully implement and use these systems. The second challenge—managing periodic spikes in BA caused by capital asset needs—if considered a problem at all, is managed by our case study agencies through existing entities and practices, such as the use of WCFs. Consequently, CAFs appear to offer few benefits over and above those provided by other mechanisms being put into place or in use. In addition, officials at the department and subunit level and key congressional staff we spoke with have a number of concerns about adopting CAFs as an alternative financing method. Most of those we spoke with said CAFs sounded like a complicated mechanism to achieve benefits that can be achieved in simpler ways and some worried that implementation of CAFs could distract from current efforts to improve capital decision making. Allocating Annual Capital Costs and Improving Decision Making for Capital Assets May Be Achieved through Existing Initiatives Officials we interviewed reacted to our presentation of the CAF mechanism by describing current agency initiatives and existing mechanisms that they believe can better achieve the ultimate goal of improving budgeting and decision making for capital. We found that some agencies currently make use of asset management plans to collect, track, and analyze cost information and to assist management in budget decisions and priority setting. Accounting systems that report full costs are also being developed that will include the cost of capital assets in total program costs and will provide a tool for agency managers to make better decisions and use capital more efficiently. Once fully implemented, these methods will provide agencies with the ability to assign costs at the program level and link those costs to a desired result. The information provided should lead agencies to consider whether they will continue to need the current quantities and types of fixed assets they own to meet future program needs. The Departments of the Interior and Agriculture Are Implementing Asset Management Systems to Make Informed Decisions on Capital Investment As we have reported in previous work, leading organizations gather and track information that helps them identify the gap between what they have and what they need to fulfill their goals and objectives. Routinely assessing the condition of assets and facilities allows managers and their decision makers to evaluate the capabilities of current assets, plan for future asset replacements, and calculate the cost of deferred maintenance. We found that asset management systems are being developed and implemented at some agencies as a mechanism to aid in the identification of asset holdings and prioritization of maintenance and improvements. For example, we reported in 2004 that NPS, within DOI, is currently implementing an asset management process. If it operates as planned, the agency will, for the first time, have a reliable inventory of its assets, a process for reporting on the condition of those assets, and a systemwide methodology for estimating deferred maintenance costs. The system requires each park to enter all of its assets and information on its condition into a centralized database for the entire park system and to conduct annual condition assessments and regular comprehensive assessments. This new process will not be fully implemented until fiscal year 2006 or 2007, and will require years of sustained commitment by NPS and other stakeholders. According to NPS documents, this approach and the information captured in the asset management plan provides Grand Canyon National Park managers with the knowledge and specifics to make informed capital investment decisions and to develop sound business cases for funding requests. The appropriators for NPS that we spoke with agreed that the additional funding they have provided for condition assessments and asset management has improved planning and decision making at NPS. Department officials told us that these types of asset management plans would eventually be completed for all capital-holding subunits within DOI. The completion of this management system is especially important for DOI because much of its mission is the upkeep and improvement of its capital for use by the public. FS, whose capital includes numerous trails, roads, and recreation facilities, has implemented and is continuing to enhance its asset management system referred to as Infrastructure (INFRA). INFRA has been in production since 1998 and served as the agency’s primary inventory reporting and portfolio management tool for all owned real property until May 2004. FS officials said that they have used INFRA to assist management in prioritizing backlogs of maintenance and renovations. According to these officials, INFRA allows for the transfer of FS asset inventory data directly into USDA’s asset inventory system known as the Corporate Property Automated Information System (CPAIS). CPAIS, which agency officials said was modeled after INFRA and further enhanced to include leased property and GSA assignments, was implemented in May 2004 and maintains data elements necessary to track and manage owned property, leased property, GSA assignments, and interagency agreements. The system will provide the department and its subunits with the capability to increase asset utilization and cost management and to analyze and reduce maintenance expenses. The primary users of the system are those subunits with considerable capital needs, according to agency officials. ARS’s capital is mostly high-priced laboratories, specific scientific equipment, and research facilities, and officials are confident that CPAIS will provide the information needed to ensure accountability over its real property. ARS also has its own facilities division made up of contractors and engineers that are equipped with the experience and expertise to manage and oversee their specialized capital projects. APHIS officials said they are in the process of doing facility condition assessments and hope to use the information in order to better align its mission with its strategic plan. The need for asset management systems to aid agency officials in making informed decisions was underscored in our report designating federal real property as a new high-risk area in 2003. The report highlighted the fact that in general, key decision makers lack reliable and useful data on real property assets. In February 2004, the President issued an Executive Order for Federal Real Property Asset Management. The order requires designated agencies to have a real property officer and to implement an asset management planning process. Its purpose is to promote the efficient and economical use of America’s real property assets and to assure management accountability for implementing federal real property management reforms. Some Agencies Are Beginning to Use Full Cost Information to Make Budget Decisions, Although Much Work Needs to Be Done We found that some agencies are currently implementing cost accounting methods, such as activity-based costing (ABC), to help determine the full cost of a product or service, including the annual cost of capital, and using that information to make budgeting decisions. For example, BLM has implemented a management framework that integrates ABC and performance information. We have previously reported that BLM’s model fully distributes costs and can readily identify, among other things, (1) the full costs of each of its activities and (2) what it costs to pursue each of its strategic goals. The system provides detailed information that facilitates external reporting and can be used for internal purposes, such as developing budgets and analyzing the unit costs of activities and outputs. Integrating cost and performance information into one system helped BLM become a finalist for the President’s Quality Award in 2002 in the “performance and budget integration” category. The bureau was recognized for implementing a disciplined approach that allows it to align resources, outputs, and organizational goals, and can lead to insights to reengineer work processes as necessary. Among the results of its ABC efforts, BLM has reported increased efficiency and success in completing deferred maintenance and infrastructure improvement projects. BLM was at the forefront of this cost management effort, which began in 1997 and has now been adopted departmentwide as part of DOI’s vision of effective program management. In another report, we described how the National Aeronautics and Space Administration (NASA) is beginning to use accounting information to help make decisions about capital assets. NASA’s “Full Cost” Initiative involves changes to accounting, budgeting, and management to enhance cost-effective mission performance by providing complete cost information for more fully informed decision making and management. The accounting changes allow NASA to show the full cost of related projects and supporting activities while the “full cost” budgeting uses budget restructuring to better align resources with its strategic plan. The accounting and budgeting portions of the initiative support the management decision-making process by providing not only better information, but also incentives to make decisions on the most efficient use of resources. For example, NASA officials credited “full cost” budgeting with helping to identify underutilized facilities, such as service pools—the infrastructure capabilities that support multiple programs and projects. NASA’s service pools include wind tunnels, information technology, and fabrication services. If programs do not cover a service pool’s costs, NASA officials said that it raises questions about whether that capability is needed. NASA officials also explained that when program managers are responsible for paying service pool costs associated with their program, program managers have an incentive to consider their use and whether lower cost alternatives exist. As a result, NASA officials said “full cost” budgeting provides officials and program managers a greater incentive to improve the management of these institutional assets. Although accounting changes alone are not sufficient to improve decision making and management, it is clear from discussions with NASA officials and agency documentation that the move to full costing is a critical piece of the initiative. Some agencies still need to make more progress before their cost accounting can more fully inform their decision making, including decisions on capital planning and budgeting. In a 2003 report looking at the financial management systems of 19 federal departments, we found that although departments are required to produce information on the full cost of programs and projects, some of the information is not detailed enough to allow them to evaluate programs and activities on their full costs and merits. For example, the Department of Defense (DOD) does not have the systems and processes in place to capture the required cost information from the hundreds of millions of transactions it processes each year. Lacking complete and accurate overall life-cycle cost information for weapons systems impairs DOD’s and congressional decision makers’ ability to make fully informed decisions about which weapons, or how many, to buy. DOD has acknowledged that the lack of a cost accounting system is its largest impediment to controlling and managing weapon systems costs. Our report states that departments are experimenting with methods of accumulating and assigning costs to obtain the managerial cost information needed to enhance programs, improve processes, establish fees, develop budgets, prepare financial reports, make competitive sourcing decisions, and report on performance. As departments implement and upgrade their financial management systems, opportunities exist for developing cost management information as an integral part of the systems to provide important information that is timely, reliable, and useful. CAFs Might Smooth Budget Spikes, but Benefit May Be Minor The President’s Commission to Study Capital Budgeting and NRC have suggested that a CAF might help ameliorate the spikes in agency budgets that often result from large periodic capital requests by smoothing capital costs over time and across subunits. Our analysis of recent trends in BA for capital acquisitions clearly shows the presence of spikes at the subunit level. See figure 3 for an illustration of budget spikes and potential smoothing effects of a CAF at ARS. However, these spikes did not appear to be a major concern to the case study subunits we spoke with nor did they consider them a barrier in meeting capital needs. Given current practices for financing capital assets, it seems that some program managers and Congress have found ways to cope with spikes in the absence of CAFs. As a result, the benefit of smoothing costs with a CAF would be minimal. Some Spikes May Be Created by Congressional Funding Decisions Our prior work indicates that some agencies have complained that large spikes in their budget hinder their ability to acquire the needed funding to complete capital projects and reveals that some agencies have turned to alternative financing mechanisms, such as incremental funding, operating leases, and public-private partnerships, that allow them to obtain assets without full, up-front BA. A few agency officials we spoke with said that because of the up-front funding requirement, they have sometimes opted for operating leases instead of capital leases or constructing buildings. Operating leases are generally more expensive than construction, purchase, or capital leases for long-term needs but do not have to be funded up front. Nevertheless, the agencies we spoke with reported that spikes are often created by the changing priorities of Congress and its willingness to provide up-front funding for favored capital projects. For example, ARS officials reported that appropriators have increased the agency’s budget in a given year to fund a new or expanded facility that the subcommittee considered a priority. Historically, the appropriations subcommittee for ARS (and all USDA agencies except FS) has been active in initiating capital projects and following through with the up-front funding necessary to build or acquire assets. From ARS’s perspective, budget spikes are not problematic because of the perceived ease in obtaining needed funds. DOI also reported that some of its subunits have received “waves” of funding for capital projects largely dependent upon the priorities of Congress and the President. Within DOI, BLM officials agreed that budget spikes were mostly a result of congressional add-ons. On the other hand, NPS reported that most of its capital projects are just not large enough to cause a noticeable budget spike. Staff from the congressional budget committee suggested that deliberations during the appropriations process result in some smoothing at the subcommittee level. The smoothing effects may not be apparent to agencies when they review their individual budgets, but they are evident from a governmentwide perspective. Historical analysis shows that federal nondefense capital spending has remained relatively constant over the past 30 years. Spikes Are Being Managed by Funding Useful Segments or Using No-Year Authority When spikes might be a problem, the departments and subunits we spoke with have been able to manage them by dividing projects into useful segments and accumulating funds with no-year authority. USDA and FS reported that they have broken capital projects into useful segments and requested the funding accordingly to minimize dramatic fluctuations in capital costs. For example, USDA is currently renovating its headquarters in Washington, D.C., and is using funds the department receives every other year to finance the overhaul of one discrete section of the building at a time. APHIS and BLM have also broken up large projects by funding the survey and design phases in the first year and requesting funds for construction in subsequent years. In addition, ARS and APHIS have authorities that allow them to accumulate a specified amount or percentage of unobligated funds until the amount is sufficient to cover the full up-front costs of the desired asset. For example, ARS is building an animal health center in Iowa, which costs an estimated $460 million. ARS received $124 million in fiscal year 2004 towards the project and can accumulate that money in its no-year account until the total amount to cover the costs is collected. In its efforts to consolidate field offices, APHIS officials told us they were granted authority to convert $2 million in unobligated balances into no-year money each year for 3 years. The $6 million it was able to accumulate allowed it to fund the consolidation with up-front funding. The bureau hopes to expand this authority to apply to other capital, including helicopters and airplanes. WCFs and FBF Can Be Used Both to Finance Capital Assets Without Spikes and to Allocate Capital Costs WCFs, a type of revolving fund, are a mechanism that can be used both to spread the cost of capital acquisition over time and to incorporate capital costs into operating budgets. As reported previously, we found that WCFs can be effective for agencies with relatively small, ongoing capital needs because the WCFs, through user charges, spread the cost of capital over time in order to build reserves for acquiring new or replacement assets. Also, WCFs help to ensure that capital costs are allocated to programs that use capital by promoting full cost accounting. Since WCFs are designed to be self-financing, the user charges must be sufficient to recoup the full cost of operations and include charges, such as depreciation, to help fund capital replacement. Some we spoke with use WCFs to finance capital assets such as IT initiatives and equipment. For example, USDA’s WCF provided funds to the National Finance Center, one of its activity centers, to purchase and implement a financial system. Department officials explained that after the system became operational, the Finance Center charged the 28 user entities a depreciation expense to recoup the costs of purchasing the system so it could repay the WCF. In another example, the FS’s WCF purchases radio equipment, aircraft, IT, and other motor-driven equipment. The equipment is rented out to administrative entities within the agency, such as the National Forests and Research Experiment Stations, and to outside agencies for a charge that recoups the costs of operation, maintenance, and depreciation. The user charge is adjusted to include sufficient funds to replace the equipment. Agency officials would like to expand the WCF beyond just equipment and establish a facilities maintenance fund. Through this fund, they would apply a standard charge per square foot plus a replacement cost component. The charges would be used for ongoing maintenance and replacement and they believe would help influence line officers to reexamine capital needs. BLM’s WCF functions similar to that of the FS’s WCF. BLM’s WCF purchases vehicles, then charges fees to users of the vehicles and uses the revenue to buy replacement vehicles. In both of these examples, the WCF is designed to accumulate the funds to absorb the up-front costs of the capital while the user entities incur the annual costs of using the capital. This mechanism operates similarly to a CAF, but with more flexibility in the funding requirements. First, since WCFs are revolving funds, they allow agencies to purchase new capital without a specific congressional appropriation whereas a CAF would require a new appropriation to purchase new capital. Second, WCFs are not subject to fiscal year limitations (they have no-year authority) while CAFs would have project-by-project borrowing authority specified in appropriation acts. Third, WCFs reflect annual capital costs through a depreciation charge whereas CAFs would reflect this cost through an annual mortgage payment of principal and interest. Hence, both would reflect the annual cost of capital in the subunits’ budgets. To obtain federal office space, many agencies lease from and make rental payments to GSA, which deposits those funds into the FBF. Although leasing is recognized as being more expensive in the long run than ownership, some agencies lease because it does not require as much up-front funding as ownership (i.e., to avoid spikes). Although a CAF is conceptualized to reduce the amount of up-front funding needed by subunits when acquiring capital assets (while still requiring up-front funding at the department level), it is not clear that having a CAF would encourage subunits to build rather than lease office space. Two agency officials we spoke with said that they would likely continue leasing and one commented that if planning outright ownership, it would be easier to deal with obtaining the traditional up-front funding than worry about the annual mortgage payments required by a CAF. Through their charges, both WCFs and FBF spread the cost of capital over time and ensure that capital costs are properly allocated to the user programs. Agency Officials, Congressional Staff and Other Key Players Have Numerous Concerns About CAFs Agency officials, congressional staff, and other key players raised numerous concerns about CAFs. For example, department and subunit officials are concerned that there is no guarantee or assurance that the annual mortgage payments to be collected by the CAF will be adequately funded in annual subunit appropriations. In addition, some subunits and appropriators are reluctant to shift more control for capital planning and budgeting to the department level. Congressional staff also raised concerns about the feasibility of the congressional mind shift that would be required to fund capital through a mechanism such as a CAF, especially if a charge on existing capital is included, and questioned the value that a CAF would really add to agency planning and budget decision making that could not be obtained through other means. CBO and GSA were also apprehensive and cautious about the usefulness of the CAF concept when operating details were described in full. Most budget experts and agency officials we spoke with agreed that the complexities involved in operating a CAF would likely outweigh the possible benefits. A few worried that CAFs might even divert attention from the current initiatives under way to improve asset management and full costing. Concerns over Receipt of Annual Mortgage Payment Treasury, which would assume responsibility for collecting debt repayments, was concerned that there would be no guarantee that future appropriations would finance the mortgage payments, nor would there be any enforcement mechanism by which Treasury could enforce repayment. Treasury officials feared that over time other types of spending would take priority over debt repayment. They based their concerns on the record of some other programs that have struggled to repay debt or for which debt has been “forgiven” or otherwise excused. For example, the Black Lung Disability Trust Fund, which provides disability benefits and medical services to eligible workers in the coal mining industry, has growing debt and will never become solvent under current conditions. Although Black Lung Disability Fund revenues are now sufficient to cover current benefits, they do not cover either repayment of the over $8 billion owed the Treasury or interest on that debt. Another example is the Bonneville Power Administration (BPA), which is a federal electric power marketing agency in the Pacific Northwest with authority to borrow from Treasury on a permanent, indefinite basis in amounts not exceeding $4.45 billion at any time. BPA finances its operations with power revenues and the loans from Treasury, and has authority to reduce its debt using “fish credits.” This crediting mechanism, authorized by Congress in 1980, allows BPA to reduce its payments to Treasury by an amount equal to mitigation measures funded on behalf of nonpower purposes, such as fish mitigation efforts in the Columbia and Snake River systems. BPA took this credit for the first time in 1995 and has taken it every year since that time. The annual credit allowed varies, but has ranged between about $25 million and $583 million, including the use in 2001 and 2003 of about $325 million total unused “fish credits” that had accumulated since 1980. Some officials at the department and subunit level also raised concerns about the long-run feasibility of fulfilling their mortgage payments over the entire repayment period given that the payments are made from their annual appropriations, which they expect to become increasingly constrained. The mortgage payments would be relatively uncontrollable items within an agency’s budget, to the detriment of other, more controllable items, such as personnel costs. Because the mortgage costs would not change unless the asset is sold, managers would have less flexibility in making budgeting decisions within stagnant or possibly declining annual budgets that occur in times of fiscal restraint. BLM officials said this type of fixed obligation, which could consume an increasing share of its budget, could hinder its ability to address emergency needs that arise during the year. For example, they cited a case in which the agency reprogrammed resources to deal with a landslide that occurred on the Oregon coast in late 2003. BLM delayed other projects in order to redirect funds for the removal and stabilization of the landslide and to reopen Galice Creek Road, which is a major artery for public access, recreation, and commercial activity such as timbering, as well as BLM and FS administration. BLM officials questioned whether the fixed payment to the CAF would constrain their ability to make adjustments such as this. Many agency officials were skeptical of the idea that they could fulfill annual mortgage payments to a CAF without squeezing program operations and some said they would rather deal with the up-front funding requirement than have to worry about annual mortgage payments. The alternative to force-fitting a mortgage payment within agencies’ annual appropriations is to adjust agency budgets with an automatic add-on equal to agencies’ mortgage payments. While this would relieve budget pressures at the agency level, it would probably not provide incentives or influence managers to improve capital asset management and decision making. Concerns About Shifting More Control over Capital Assets to the Department Level Under the CAF concept, requests for capital projects would come from the department level and the CAF would own all capital assets. This would shift more control of capital planning and decision making from the subunit to the department level. Some agencies and one appropriation subcommittee staffer said they would not favor this shift. Several agencies feel that they have the expertise and experience to better assess their own capital needs, which are often mission specific. For example, ARS’s capital consists of mostly scientific equipment, laboratories, and research facilities designed for conducting agricultural research in various climates. In fact, the agency has its own facilities division consisting of contractors and engineers who are involved in the management and oversight of capital projects. Similarly, APHIS’s facilities are mission specific. BLM’s use of activity-based costing allows it to assign capital costs to the program level and track those costs to desired outputs. Consequently, the bureau has a more intimate understanding of its capital needs and how capital contributes to carrying out its mission. One agency raised the point that departmental management might force bureaus to share facilities or later decide to use an asset for purposes other than those originally intended. While some of these departmental decisions might be beneficial, some agencies were skeptical of departmental decision making. Concerns over Problems Not Addressed, Additional Complexity, and Limited Benefits The officials we interviewed stated that there are important problems in capital budgeting that CAFs do not address. Before the smoothing effects of a CAF can be realized in the out years, the department must still receive full up-front funding to begin new capital projects or acquire new assets. And as noted above, some agency officials stated that the annual mortgage payments may be even more of a dilemma than the up-front funding requirement. Since a CAF assumes up-front funding, some agencies may still seek to use some of the alternative financing mechanisms that they already use, such as operating leases or enhanced-use leases, to meet capital needs without first having to secure sufficient appropriations to cover the full cost of the asset. As currently envisioned, CAFs would probably not help improve capital planning concerns, such as the need for improved budgeting and management of asset life-cycle costs. According to the NRC report, operation and maintenance costs are typically 60 to 85 percent of the total life-cycle costs of a facility while design and construction typically account for only 5 to 10 percent of those costs. For example, agencies must properly determine the funds needed for increasing staff in new and expanded facilities in order to avoid staffing shortages. Almost everyone we spoke with agreed that CAFs sounded complicated and many questioned whether the challenges in budgeting for capital that CAFs were designed to address were great enough to warrant CAFs as a solution. Congressional budget committee and appropriations subcommittee staff agreed that CAFs might be beneficial in theory but were probably not worth the additional budget complexity they would create. Budget committee staff considered the proposed benefits of a CAF to be abstract and uncertain coupled with a sizeable likelihood for repayment problems in the out years. In addition, they saw no obvious dilemma prompting the need for CAFs. While this capital financing approach may be appealing in theory since it promotes strategic planning and broadened, forward-looking perspectives, budget practitioners cautioned the adoption of an approach involving such layers of complexity in the absence of a clearly stated, agreed-upon problem that the new approach is expected to address. Further, they saw a need for agencies to complete their implementation of capital asset management and cost accounting systems, which can help achieve some of the same benefits that CAFs were meant to achieve. A good asset management system including inventories and asset condition would likely be a necessary precursor to successfully implementing CAFs. All of these factors weaken the case for CAFs as an improved approach to current capital financing practices. Several Issues to Weigh When Considering Implementation of CAFs While in theory CAFs could be implemented at most agencies, there are several complex issues that Congress would need to consider before adopting such a mechanism. For example, proposals to apply CAFs to existing capital would require the development of a formula to calculate an annual capital usage charge, which is likely to be a difficult and contentious undertaking. Key players including OMB, CBO, and Congress would need to work together to develop an agreed-upon method to estimate an appropriate capital usage charge for various types of assets. And even if the full cost of programs, including the cost of existing capital, was more accurately reflected in the budget through the use of CAFs, incentives to cut capital costs may not materialize except in times of severe budget cuts. Even then, managers’ abilities to eliminate unneeded capital assets would probably be limited given mission responsibilities and legal requirements that dictate the disposal of surplus federal property. To remedy this, additional funding or agency flexibilities would be needed, as would provisions to ensure debt repayment if CAF-financed assets were transferred or sold. Additionally, it is likely that some capital projects for federal office space, IT, and land would continue to be financed outside of the CAF through mechanisms such as the FBF, WCFs, or the GSA IT Fund. Imputing an Annual Capital Charge on Existing Capital May Offer Benefits but Would Be Difficult and Contentious There are arguments that the CAF concept be applied to existing capital assets as well as new capital assets to ensure that the full costs of all programs are reflected in the budget. OMB points out that if CAFs were not applied to all capital, it would be many decades before programs reflected full annual costs and before the cost of alternative inputs could be compared. Developing an annual capital usage charge for existing assets would establish a level playing field for federal capital investment and allow for comparisons across programs. In addition, this new charge could influence agency managers to get rid of excess capital assets. Accomplishing these goals would require developing a standard method of computing an appropriate annual capital usage charge. Subunits would pay these charges to the department’s CAF using appropriated funds, which would then be transferred to Treasury’s general fund. In other words, agencies would receive appropriations to pay for the use of capital assets they already own and would not retain any of the funds to maintain or replace assets. Imputing such a charge on existing capital is likely to be difficult and very contentious given questions about how to estimate the charge and the fact that the assets were already funded. Before imputing an annual capital usage charge, key players, including OMB and Congress, would need to agree on some type of standard formula to estimate the charge. Three possible approaches to compute annual capital usage charges would be to (1) use historical cost for the asset by applying a charge as though the original cost had been financed by borrowing from Treasury, (2) use market rental rates, or (3) devise a calculation incorporating asset replacement cost, depreciation rates, and interest rates. There are arguments for and against each of these options. For example, while using historical cost would make the charge congruent with accounting data; the charge would not reflect the current cost of using capital and so might be less meaningful for evaluating costs. Although using market rates would theoretically be the right measure for comparing the cost of using resources for federal versus private purposes, the fact that many government assets fill unique purposes means there is not a measure of market value for them. For example, some agencies occupy historic buildings, such as the Old Executive Office Building, for which a comparable market-based value would be difficult to determine. The third approach might be considered an agreeable middle ground, but applying depreciation rates poses problems since they are largely arbitrary. Agreement on whether to apply Treasury or market interest rates would be necessary. Some agency officials and congressional staff suggested that any charges on existing capital should reflect the life-cycle costs of maintaining assets and, similar to a WCF, receipts collected should be made available for future maintenance and renovation costs. We have reported that repair and maintenance backlogs in federal facilities are significant and that the challenges of addressing facility deterioration are prevalent at major real property-holding agencies. However, research and discussions on CAF design indicate that CAF receipts could only go to Treasury and not for future projects. Officials were also skeptical about how to accurately charge for highly specialized capital. For example, ARS has more than 100 laboratories located in various regions of the country, as well as abroad, which are designed to carry out mission responsibilities ranging from the study of crop production to human nutrition to animal disease control. The highly technical and diverse nature of its objectives requires capital assets that are suitable for varied climates, soils, and other agricultural factors, which pose unique and difficult challenges in establishing capital usage charges that would be viewed as acceptable by agency officials. If key players were able to agree on the method for calculating usage charges on existing capital assets, they would also have to examine the budgetary effects of such charges. Budget scorekeepers—OMB, CBO, and the budget committees—would need to develop additional scoring rules to clarify how the usage charges would be treated in the budget. Unlike charges on new capital, there is no corresponding debt to repay. As a result scorekeepers would have to specify how to score the usage charges as they are transferred from the CAF to Treasury. Although these charges would not change agency or government outlays or the deficit, they could require a permanent increase in agencies’ total BA, which would require Congress to consider adjustments of appropriations subcommittee allocations. Oversight would be especially important for these transactions since CAF collections would be greater than needed to repay Treasury loans, creating a temptation to use accruing balances for other purposes. Similar questions about how to charge for and how to score capital usage charges for existing assets would eventually pertain to new capital funded through the CAF. Once an asset is fully “paid off” through the CAF, it is comparable to existing capital and would similarly incur an annual capital usage charge. Some might argue that payments should continue in the same amounts as before, while others may call for the calculation of a new capital usage charge for “paid off” assets based upon the formula used for capital that existed before the creation of CAFs. In any case, numerous decisions on capital usage charges for existing capital would need to be made prior to implementing CAFs. Aside from the specifics of how to develop appropriate capital usage charges, most agency officials and congressional staff with whom we spoke were skeptical of the need for such a charge. Many said that the cost of maintaining capital assets—which is reflected in agency budgets—and depreciation expenses—which are reflected in agency accounting systems along with asset maintenance costs—sufficiently represent the cost of existing capital assets and help inform managers. As discussed earlier, asset management systems and full cost accounting approaches are also beginning to provide the information managers need to make better decisions about the maintenance or disposal of existing assets and the need for new capital. Some congressional staff thought the mind shift required for Congress to agree to impute this new charge on existing capital assets would be even more difficult than that required for purchasing new capital using borrowing authority. In the countries of New Zealand, Australia, and the United Kingdom, charges on existing capital are being used to encourage the efficient use of assets. These charges, similar to interest charges, are generally used to reflect the opportunity cost of capital invested. In New Zealand, departments are appropriated a capital charge based on their asset base at the beginning of the year; at the end of the year they must pay the government a capital charge based on their year-end asset base. If a department has a smaller asset base at the end of the year than the asset base for which the appropriation was made, the department is permitted to keep part of the appropriation made for the capital charge. This spurred the New Zealand Department of Education to sell a number of vacant sites that it had acquired in the 1960s but that were no longer needed. However, officials in New Zealand’s Office of Controller and Auditor General were uncertain about the effectiveness of having a charge for capital in changing behavior significantly. In addition, some analysts in New Zealand expressed concern that capital charging could drive department executives to decisions that are rational in the short term but damaging in the long term. For example, an audit official suggested that a department might have an incentive to try to operate with obsolete and fully depreciated assets in order to avoid a higher capital charge. Cost Allocation Efforts May Have Limited Effect on Agency Decision Making Although one goal of CAFs is to ensure the allocation of full costs to programs in the budget and thereby encourage managers to make more informed decisions about capital assets, additional incentives to evaluate new or existing asset needs are unlikely to be created except during times of severe budget cuts or downsizing. For new assets funded through the CAF, the mortgage payments made out of the subunits appropriations would be equal to those received by the CAF and thus the payments would offset each other within the department budget and at the appropriations subcommittee level and would not affect the deficit. Although the information on total program costs might be made more transparent, it is not clear that this would create stronger incentives for more careful deliberation on future asset needs than having these costs shown through available methods such as cost accounting systems or the use of working capital funds. A charge on existing assets might also have limited impact. If appropriation subcommittee allocations were simply raised to accommodate new capital usage charges, programs would appear more expensive but perhaps not differentially so. As with new assets, the capital charge on existing assets would not affect the deficit. As a result, incentives for rationalizing existing capital would not necessarily be created. Even during tight budget years, when mandatory CAF payments would squeeze operating budgets and be most likely to force trade-offs among capital assets, managers may be constrained by mission responsibilities, legal requirements, or the cost of disposing of assets. Consequently, agencies might have to argue for increased funding or case-by-case exemptions, which Congress has granted in the past. Some agencies questioned the effectiveness of applying a charge to influence managers’ decision making given the unique locations or types of assets required to accomplish mission goals. BLM officials said an annual capital usage charge would have a limited impact on their ability to dispose of capital assets because of its stewardship role over the nation’s public lands. Similarly, ARS officials justified having locations dispersed all over the country because its research activities are diverse and require facilities in various climates and environments. As discussed, Congress also plays a role in determining where ARS will conduct its research. Likewise, many of APHIS’s capital assets are mission specific, including animal quarantine stations, sterile insect-rearing facilities, and laboratories, and typically do not have a comparable counterpart in the commercial sector. APHIS officials said this limits managers’ abilities to sell or transfer assets because the land often must be converted to original condition, a costly undertaking. For some subunits we spoke with, destruction of certain assets, which also has an up-front cost, is the only viable option for eliminating unneeded assets. For example, NPS and FS have many facilities located on public land. If no longer needed, some of these facilities cannot be sold or transferred and would have to be demolished. According to FS officials, when they determine that an asset has exhausted its useful life and needs to be disposed of, the agency will incur the cost for removal and recover the salvage value. Many agencies are subject to certain legal requirements that create disincentives for disposing of surplus property. In these cases, agencies would need additional funding or more flexibility to modify asset holdings if improved decision making were to be realized. For example, under the National Environmental Policy Act, agencies may need to assess the environmental impact of their decisions to dispose of property. In general, agencies are responsible for environmental cleanup of properties contaminated with hazardous substances prior to disposal, which can involve years of study and amount to considerable costs. Agencies that own properties with historic designations—which is common in the federal portfolio and certainly within the inventories of USDA and DOI—are required under the National Historic Preservation Act to ensure that historic preservation is factored into how the property is eventually used. The Stewart B. McKinney Homeless Assistance Act, as amended, sets forth a requirement that consideration be given to making surplus federal property, including buildings and land, available for use by states, local governments, and nonprofit agencies to assist homeless people. If none of these restrictions apply and an agency is able to sell an asset, most cannot retain the proceeds from the sale of unneeded property even up to the cost of disposal. However, Congress has granted special authorities in some cases. For example, FS officials told us it owned a number of trails and roads on public lands that ran through the city of Los Angeles, California. When the city expanded, it was no longer feasible to maintain the roads and trails. As a result, the agency was granted authority to sell the land and use the proceeds to build a new ranger station. We have said that agencies be allowed to retain enough of the proceeds from an asset sale to recoup the cost of disposal, and that in some cases it may make sense to permit agencies to retain additional proceeds for reinvestment in real property where a need exists. Issues Regarding Property Sales Would Further Complicate CAF Implementation Provisions would also need to be established to ensure the full repayment of CAF debts in the event that an agency sells or transfers a capital asset before it reaches the end of its useful life (the repayment period). Two possible options would be to (1) transfer the outstanding debt to a new “owner” agency of the asset or (2) allow the “seller” agency to sell the asset and use the proceeds from the sale to repay the outstanding CAF debt. Both of these options would produce complications and issues to resolve. For example, transferring the asset would require all parties involved, including Treasury, to record adjustments to their CAF accounting systems and oblige subunits to adjust their budget requests accordingly. After the transfer, it is not clear whether the “seller” agency’s budget would be reduced by an amount equal to the asset’s mortgage payment. However, if that was done, it would lessen or eliminate the incentive for the “seller” agency to sell or transfer the asset. If the asset was sold instead of transferred, an appropriate “sale price” would need to be determined as well as the appropriate disposition of the sale proceeds. For example, if the asset was sold for an amount that is greater than the outstanding CAF debt, the Treasury general fund would receive full repayment on the asset plus excess revenue. On the other hand, if an asset was sold for an amount less than the outstanding debt, the CAF would default on the loan unless additional receipts for debt repayment were appropriated. Finally, some subunits may argue to refinance their mortgage if a lower Treasury interest rate became available and lower payments would result. Again, before CAFs are implemented, proposals on how to handle such circumstances would need to be addressed. Some Capital Would Likely Continue to Be Obtained through Existing Means The CAF’s scope of coverage would need to be addressed by any CAF proposal. Capital assets are generally defined as land, structures, equipment and intellectual property (such as software) that are used by the federal government and have estimated useful lives of 2 years or more. However, departments have some discretion in defining capital. The Commission report suggested that OMB issue guidance on which capital items belong in the CAF to ensure uniform implementation of the CAF proposal. Alternatively, each department could use its current department guidelines and definitions to determine which capital to fund through the CAF. Whatever parameters are put in place, some capital assets would likely continue to be funded outside the CAF through existing mechanisms. For example, for federal office space, the Commission and NRC reports state that agencies would generally continue to lease space from GSA and pay rent to FBF. FBF, a governmentwide revolving fund, is used to acquire office buildings and the space is then rented out to federal agencies. Most agencies are not allowed to lease their own office space unless GSA delegates its authority to do so to that agency, which GSA has done in the past. Under the CAF mechanism, if GSA were to delegate this authority, the CAF would lease the office space. The NRC report recommends that agencies should use their CAF for office space acquisition only if it could be done more effectively and efficiently than through GSA. GSA would negotiate the acquisition of space for multiple agencies that seek to collocate in a single facility. Agencies also have the option to purchase IT through FTS and its IT Fund. For a fee, FTS provides expertise and assistance in acquiring and managing IT products. Those agencies that chose to use this service may argue for continuing to finance these projects outside of the CAF so that they are not paying a fee to FTS as well as interest on the borrowed funds. Some officials also questioned the effectiveness of using borrowing authority to finance IT purchases when their useful life is typically no more than 10 years and is often 5 years or less, thus indicating that officials may argue to fund some IT projects outside the CAF. Departments and subunits would also likely continue to rent certain capital assets from WCFs or to use their WCFs to purchase some capital. As discussed, WCFs rely on user charges to fund ongoing maintenance and replacement of capital assets and the collections are used by some departments and subunits to finance capital assets, such as vehicles and IT. Land, such as wilderness areas, is also likely to remain outside the CAF. Land retains its value so concepts such as depreciation and amortization do not apply to it. However, one subunit official stated that using borrowing authority to buy land might be beneficial if it meant that land could be purchased at a faster rate to obtain environmentally sensitive land before it is damaged. Conclusion There is little doubt that in the mechanical sense CAFs could work as a new system for financing capital assets. However, the implementation and operation of the CAF concept would be complicated. Managing the extra layer of responsibilities for CAF administration and oversight would require the devotion of resources within departments, subunits, and Treasury and to a lesser extent, OMB, CBO, and Congress. Accounting for CAF transactions would be complex and burdensome. The annual debt repayment would be a source of concern for Treasury and agency officials, especially as more assets were financed through the CAF and mortgage payments became a larger percentage of agency appropriations. Beyond the complexities inherent in financing capital assets using borrowing authority is a list of difficult issues that would have to be resolved before benefits could be realized. The most difficult of these issues, applying a capital usage charge to existing capital, would also be the most important to address if annual capital costs were to be allocated to program budgets. If CAFs were applied only to new assets going forward, programs would not reflect the full annual cost of capital for decades and programs purchasing new capital would appear more expensive than those using existing capital. Even if this and other issues were tackled and improved information about capital costs was provided to managers, there is little assurance that CAFs alone would create incentives for programs to reassess their use of capital. Even in times of severe budget constraints, it is probable that managerial flexibility to adjust the amount of assets used by a program would continue to be limited by agency missions, legal restrictions, and limited funds for asset disposal. Given the execution complexities and implementation concerns, the ensuing question seems to be whether there are simpler methods that can be used to achieve the same benefits as CAFs. We believe there is strong evidence that both benefits attributed to CAFs could be more easily obtained through existing mechanisms. Asset management and cost accounting systems, when fully implemented, will be important tools for promoting more effective planning and budgeting for capital. Cost accounting systems can provide the same information on capital costs as CAFs are intended to provide, while the information provided by asset management systems could be even more crucial for helping managers with limited budgets prioritize capital asset maintenance and replacement. For existing capital, incentives to rationalize assets might be created if agencies were allowed to retain proceeds to recoup the cost of disposal, or in some cases, for reinvestment in real property. While some of our case study agencies did not view spikes as a problem, those that did felt they were managing them well through the use of WCFs, no-year authority, and acquiring assets through useful segments. In any case, spikes in spending for capital assets are likely to continue as congressional and presidential priorities change over time. When described in detail to executive branch and congressional officials, we learned that the CAF proposal would likely have few proponents. Almost everyone we consulted concluded that implementation issues would overwhelm the potential benefits of a CAF. More importantly, current efforts under way in agencies would achieve the same goals as a CAF without introducing the difficulties. Given this, as long as alternative efforts uphold the principle of up-front funding, then a CAF mechanism does not seem to be worth the complexity and implementation challenges that it would create. Agency Comments and Our Response We obtained comments on a draft of this report from OMB, Treasury, GSA and our case study agencies—USDA and DOI. Treasury, GSA, USDA and DOI generally agreed with the report. Treasury, USDA, DOI and OMB provided technical comments, which have been incorporated as appropriate. OMB agreed with our description of the mechanics of CAFs and concurred that spikes in BA for capital assets could be alleviated through other means. OMB also acknowledged the problems with CAFs that are highlighted in this report, including those related to existing capital, and agreed that the complications of designing and operating CAFs might outweigh the benefits. However, they disagreed with our description of the primary goal of CAFs and therefore do not believe alternative mechanisms achieve the same goal. OMB supports having program budgets reflect full annual budgetary costs in order to change incentives for decision makers. In addition to proposing to budget for accruing retirement benefit costs, OMB has suggested budgeting for accruing hazardous waste clean-up costs and budgeting for capital through CAFs. Budgeting for full annual budgetary costs should facilitate decision makers’ ability to compare total resources used with results achieved across government programs. For capital, OMB has suggested CAFs as a possible method to allocate and embed the cost of capital assets at the program budget level. OMB recognizes the usefulness of asset management and cost accounting systems regardless of whether CAFs are adopted. It is OMB’s opinion that these tools do not ensure that the costs of capital are captured in individual program budgets and therefore do not affect incentives for decision makers in allocating resources among and within programs. We disagree on several points. We recognize that if the sole or primary purpose of a CAF is to embed costs in the program budgets, then the alternatives discussed in this report do not achieve that purpose. However we believe, as highlighted in the Report of the President’s Commission to Study Capital Budgeting, that the primary goal of CAFs is to improve decision making for capital. We are not convinced that CAFs and the annual mortgage payments they would require would achieve this more effectively than other mechanisms. We argue instead that the information provided by asset management and cost accounting systems, when fully implemented, could assist decision makers in efficiently allocating budgetary resources. While this information may not necessarily be reflected in program budgets, it is available to aid in budget and program decision making. The fact that many of these systems are in relatively early stages of development also increases our concern about CAFs. In a recent report, we noted the belief among some agency officials, congressional appropriations committee staff, and budget experts that improving underlying financial and performance information should be a prerequisite to efforts to restructure program budgets. We argue this would also be true for CAFs, since without adequate measures of program costs and an ability to identify capital priorities, a new financing mechanism would do nothing to address the basic challenges of determining how much and what types of capital are needed. It is also unclear that CAFs would create new incentives as OMB argues. As we describe in the section titled “Cost Allocation Efforts May Have Limited Effect on Agency Decision Making,” if the annual mortgage payments offset each other within the department budget and at the appropriations subcommittee level, the deficit would not be affected, and it is unlikely incentives would be changed. Even during tight budget years, when CAF payments would squeeze operating budgets, managers may be unable to change the amount of capital assets they use because of mission responsibilities, legal requirements, or the cost of disposing of assets. We also recognize the value of linking resources to results in comparing programs; however, it is unclear that CAFs are necessary or would even work to accomplish this. Institutionalizing CAFs could permit program comparison, but fair evaluations would only be possible if existing capital were included. Therefore, the difficult issue of including existing capital would have to be addressed. Alternatively, we believe that cost accounting systems, when well developed within and across agencies, provide a similar opportunity for comparing programs. In conclusion, we remain of the view that the operational challenges of CAFs outweigh the benefits and that alternative mechanisms described in this report can more simply accomplish the goals of CAFs. As we agreed with your office, unless you publicly announce the contents of this report earlier, we plan no further distribution of it until 30 days from its issuance date. At that time we will send copies of this report to the Director of the Office of Management and Budget, the Administrator of the General Services Administration, the Secretary of the Department of the Interior, the Secretary of the Department of Agriculture, and the Secretary of the Department of the Treasury. We will also make copies available to others upon request. This report will also be available at no charge on the GAO Web site at http://www.gao.gov. If you or your staff have any questions regarding the information in this report, please contact me at (202) 512-9142 or Christine Bonham at (202) 512-9576. Key contributors to this report were Jennifer A. Ashford, Leah Q. Nash, and Seema V. Dargar. Comments from the Department of the Treasury GAO’s Comments We believe that the discussion of BPA’s use of “fish credits” is an appropriate example for the section on agencies’ repayment of their borrowing from Treasury. Although these credits were provided by Congress, their use for offsetting payments on Treasury debt has been controversial and opposed by some members of Congress and other interested parties. However, we have made technical changes to the section based on Treasury’s comments. Comments from the Department of the Interior GAO’s Mission The Government Accountability Office, the audit, evaluation and investigative arm of Congress, exists to support Congress in meeting its constitutional responsibilities and to help improve the performance and accountability of the federal government for the American people. GAO examines the use of public funds; evaluates federal programs and policies; and provides analyses, recommendations, and other assistance to help Congress make informed oversight, policy, and funding decisions. GAO’s commitment to good government is reflected in its core values of accountability, integrity, and reliability. Obtaining Copies of GAO Reports and Testimony The fastest and easiest way to obtain copies of GAO documents at no cost is through GAO’s Web site (www.gao.gov). Each weekday, GAO posts newly released reports, testimony, and correspondence on its Web site. To have GAO e-mail you a list of newly posted products every afternoon, go to www.gao.gov and select “Subscribe to Updates.” Order by Mail or Phone To Report Fraud, Waste, and Abuse in Federal Programs Congressional Relations Public Affairs

Why GAO Did This Study CAFs have been discussed as a new mechanism for financing federal capital assets. As envisioned, CAFs would have two goals. First, CAFs would potentially improve decision making by reflecting the annual cost for the use of capital in program budgets. Second, they would help ameliorate at the subunit level the effect of large increases in budget authority for capital projects (i.e., spikes), without forfeiting congressional controls requiring the full cost of capital assets to be provided up-front. Through discussions with budget experts and by working with two case studies, the Departments of Agriculture and of the Interior, we are able to describe in this report (1) how CAFs would likely operate, (2) the potential benefits and difficulties of CAFs, including alternative mechanisms for obtaining the benefits, and (3) several issues to weigh when considering implementation of CAFs. What GAO Found Capital acquisition funds (CAF) have been suggested as department-level funds that would use appropriated up-front borrowing authority to buy new departmental subunit assets. These subunits would then pay the CAF a mortgage payment sufficient to cover the principal and interest payment on the Treasury loan. The CAF would use those receipts only to repay Treasury and not to finance new assets. If existing capital assets were transferred to the CAF, subunits would pay an annual capital usage charge to the CAF. CAFs might achieve the goals intended, but these goals can be achieved through simpler means. Alternative mechanisms, such as asset management systems, cost accounting systems, and working capital funds may achieve the goal of allocating annual capital costs and improving decision making for capital assets. Our case study agencies generally did not indicate problems with budget authority spikes. They budget in useful segments, use accumulated no-year authority, or finance capital assets using working capital funds. Many concerns about CAFs were raised, including the long-term feasibility of making fixed annual mortgage payments and the added complexity CAFs would create. Implementation would raise a number of issues. If CAFs were applied only to new assets going forward, all programs would not reflect the full annual cost of capital for decades. Yet the difficulties of including existing capital are numerous. Even if these issues were tackled, there is little assurance that CAFs alone would create new incentives for programs to reassess their use of capital since CAF payments would not affect the deficit. Implementation issues could overwhelm the potential benefits of a CAF. More importantly, current efforts under way in agencies would reflect asset costs as part of program costs without introducing the difficulties of a CAF. As long as alternative efforts uphold the principle of up-front funding, CAFs do not seem to be worth the implementation challenges they would create. Except for OMB, agencies generally agreed with our conclusions.

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Introduction This report examines several legislative options to help finance water infrastructure that have recently received attention in Congress. The options discussed here are intended to address capital needs for building and upgrading wastewater and drinking water treatment systems and improving water quality in order to meet requirements under federal law. At issue for Congress is whether the federal government should assist water infrastructure projects and, if so, what form or forms of assistance should be provided. Localities are primarily responsible for providing water infrastructure services. According to the most recent estimates by states and the Environmental Protection Agency (EPA), funding needs for such facilities total $655 billion over a 20-year period. Some analysts and stakeholders take issue with such estimates. Some say that EPA's needs estimates are too low because they do not fully reflect types of projects not currently eligible for federal assistance, such as repair and replacement of aging systems, or needs that currently are not well met by existing programs, such as security-related projects; on-site treatment systems in small, dispersed communities; and projects that include mixed elements such as developing and treating new water supply, especially in rural areas. Other estimates much larger than EPA's have been made by a number of groups. For example, the American Water Works Association estimated that investment needs for "buried drinking water infrastructure" total more than $1 trillion over the next 25 years. However, assessing "need" is complicated by differences in purpose, criteria, and timing, among other issues. One of the major difficulties is defining what constitutes a "need," a relative concept that is likely to generate a good deal of disagreement. In the infrastructure context, funding needs estimates try to identify the level of investment that is required to meet a defined level of quality or service, but this depiction of need is essentially an engineering concept. It differs from economists' conception that the appropriate level of new infrastructure investment, or the optimal stock of public capital (infrastructure) for society, is determined by calculating the amount of infrastructure for which social marginal benefits just equal marginal costs. Whether the estimates made by states and EPA understate or overstate capital needs, communities face formidable challenges in providing adequate and reliable water infrastructure services. Congress has considered ways to help meet those challenges. Capital investments in water infrastructure are necessary to maintain high-quality service that protects public health and the environment. Capital facilities are a major investment for water and wastewater utilities. Almost all capital projects are debt-financed (i.e., they are not financed on a pay-as-you-go basis from ongoing revenues to the utility). The principal financing tool that local governments use is issuance of tax-exempt municipal bonds—at least 70% of U.S. water utilities rely on municipal bonds and other debt to some degree to finance capital investments. In 2014, bonds issued for water, sewer, and sanitation projects totaled $34 billion, 10.2% higher than the 2013 volume. Beyond municipal bonds, federal assistance through grants and loans is available for some projects, but is insufficient to meet all needs. Finally, public-private partnerships, or P3s, which are long-term contractual arrangements between a public utility and a private company, provide limited capital financing. While they are increasingly used in transportation and some other infrastructure sectors, P3s are uncommon in the water sector, especially P3s that involve private-sector debt or equity investment in a project. Most P3s for water infrastructure involve contract operations for operation and maintenance. Six Policy Options This report addresses several financing options intended to address overall needs and decrease or close the funding gap. Some of the options exist and are well established, but they are under discussion for extension or modification. Other innovative policy options have been proposed in connection with water infrastructure, especially to supplement or complement existing financing tools. Some are intended to encourage private participation in financing of drinking water and wastewater projects. Some are intended to provide robust, long-term revenue to support existing financing programs and mechanisms. This report analyzes six policy options, including their federal budgetary implications, related to financing water infrastructure that were reflected in legislation in the 114 th Congress. Increase funding for the State Revolving Fund (SRF) programs in the Clean Water Act (CWA) and the Safe Drinking Water Act (SDWA). Some propose increasing federal appropriations for these existing programs, under which federal capitalization grants are provided to states for the purpose of making loans to communities for water infrastructure and other eligible projects. Create a "Water Infrastructure Finance and Innovation Act" Program (WIFIA). Modeled after the existing Transportation Infrastructure Finance and Innovation Act (TIFIA) program, a WIFIA program is intended to provide federal credit assistance in the form of direct loans and loan guarantees to finance water infrastructure projects. Create a federal water infrastructure trust fund. Establishing such a fund could help to provide a dedicated source of federal funding for water infrastructure. Create a national infrastructure bank. This federal entity would provide low-interest loans, loan guarantees, and other types of credit assistance to stimulate investments by states, localities, and the private sector in a variety of infrastructure projects. Lift restrictions on private activity bonds for water infrastructure projects. This proposal would eliminate the limit on the amount of tax-exempt private activity bonds issued by states and localities to provide financing for privately owned water infrastructure facilities. Reinstate authority for the issuance of Build America Bonds (BABs). BABs are taxable bonds for which the U.S. Treasury pays a direct subsidy of the interest costs to the issuer (a state or local government), thus helping finance capital projects with lower borrowing costs. Since the 112 th Congress, a number of these options have been examined by congressional committees, including the House Transportation and Infrastructure Committee and the Senate Environment and Public Works Committee. A pilot program for one of them—WIFIA—was enacted during the 113 th Congress and is discussed below. Nevertheless, interest in other financing options continues, in part due to long-standing concerns with the costs to repair aging and deteriorated U.S. infrastructure generally, and also in response to events in individual regions and cities, such as Flint, MI, where problems of elevated lead levels in its drinking water distribution system have recently drawn public attention. Increase Funding for the SRF Programs The most prominent source of federal financial assistance for municipal water infrastructure projects is the SRF programs, which can assist a variety of types of projects, including building new and improving existing wastewater treatment and drinking water treatment facilities needed to comply with standards and requirements of the CWA and SDWA. Clean water and drinking water SRFs have been set up in all 50 states, and the programs are widely supported. The programs' principal strengths are that they are well established; project selection criteria are well known; states have considerable flexibility in selecting which projects to assist; and operations and procedures are familiar to stakeholders. Established by Congress in the 1987 CWA amendments ( P.L. 100-4 ), the clean water SRF program provides seed money to states in the form of capitalization grants, which are matched by states at least by 20%. A state, in turn, uses the combined federal-state monies to provide various types of assistance, including making low- or no-interest loans, refinancing, purchasing or guaranteeing local debt, and purchasing bond insurance. Loan recipients repay assistance to the state, under terms set by the state. In 1996, Congress enacted a similar drinking water SRF program in the SDWA ( P.L. 104-182 ). At the federal level, the SRF programs are administered by EPA, but actual implementation is done by states. Both programs allow federal, state, and local agencies to leverage limited dollars. According to EPA, because of the funds' revolving nature, the federal investment can result in the construction of up to four times as many projects over a 20-year period as a one-time grant. Further, to the extent that a state uses monies in its SRF to secure bonds and then lends proceeds from the bonds for SRF-eligible activities, loan funding is increased. This financing technique, called leveraging, is used by 28 states and provides funding that exceeds the contribution from federal capitalization grants. In total, leveraged bonds and state contributions have comprised 52% of total SRF investment, while federal capitalization grants have comprised 48%. From the federal budgetary perspective, the SRF programs are grants , and federal appropriations are fully scored against the budget; none of the funds provided to states as capitalization grants are returned to the U.S. Treasury. However, from the local government or utility's perspective, SRFs are loans , which are repaid to states and are intended to be sources of long-term assistance for water infrastructure projects. Although the SRF programs are considered to be highly successful in addressing water quality problems, several concerns and criticisms of them have been raised. First, although the SRF is a loan program, some communities have long favored grants, which the CWA (but not the SDWA) previously provided. The cost burden per customer of capital projects tends to be greater in small communities, and rural and disadvantaged communities prefer grants because many of them lack the tax base needed to repay a loan. Congress has responded to this concern in several ways, including providing earmarked grants in appropriations acts until recently and authorizing a separate CWA grant program for "wet weather" projects to address sewer overflow problems (although it never received appropriations). Further, Congress specified in recent appropriations acts (such as EPA's FY2016 appropriation, P.L. 114-113 ) that states shall use a portion of both programs' capitalization grants to provide subsidy in the form of principal forgiveness, negative interest loans, or grants. Critics of the latter point out that, to the extent SRF assistance is partially subsidized and not fully repaid, the corpus of the state's loan fund is diminished, along with its capacity to make future loans. Second, the potential for leveraging to increase overall funding is limited, because nearly half of the states do not use that financing technique. Third, some stakeholders—especially large cities—contend that the SRF programs favor small and medium communities. According to this view, the programs do not benefit large projects, because in many cases assistance to individual projects is limited to $20 million. However, the general validity of that concern is unclear, because where limits are imposed, this results from state policies, not federal. Neither the CWA nor the SDWA requires a state to limit SRF assistance, and states establish their own criteria for selecting projects, which are identified annually in Intended Use Plans (IUPs). In order to extend aid to more communities, some states may adopt dollar limits by rule or practice, but this is not universally the case. Fourth, the CWA restricts most SRF assistance to municipal, intermunicipal, interstate, and state agencies, thus generally barring private utilities from the program. Some in the private sector contend that this restriction provides an advantage to publicly owned utilities. Modifying the CWA in that manner would conform the clean water program to its counterpart in the Safe Drinking Water Act. However, critics of providing federal assistance to private utilities contend that the credit subsidies have the potential of offering windfalls to those companies. Bills to allow clean water SRFs to assist nonpublic entities have been proposed. In 2014, Congress enacted amendments to the SRF provisions of the CWA to allow privately owned projects to be eligible for SRF assistance for certain types of projects, but not all (Section 5003 of P.L. 113-121 ). Fifth, some are critical that Congress imposes restrictions on states' use of SRF capitalization grants in order to achieve broad policy objectives beyond clean and safe water. Examples include Buy America or Davis-Bacon prevailing wage requirements. According to this view, by mandating that all funded projects meet certain nonwater quality requirements, or that states use a percentage of funds for "green" infrastructure such as energy efficiency projects (a requirement in recent appropriations acts), Congress adds to project costs and limits state flexibility. Perhaps the most critical concern is the fact that federal capitalization grants are entirely subject to appropriations, which generally have been flat or declining for more than a decade, as shown in Figure 1 . The FY2009 exception to this trend reflects temporary funding under the American Recovery and Reinvestment Act of 2009 (ARRA; P.L. 111-5 ). The President's FY2016 budget request for capitalization grants for the two SRF programs was 2.3% below the $2.36 billion total appropriated in FY2015. Similarly, the FY2017 request for the two programs totaled $2.0 billion and was nearly 13% below the FY2016-appropriated amount. Securing SRF appropriations has become more difficult in recent years, under general deficit reduction pressures and specific discretionary spending caps imposed by the debt agreement embodied in the Budget Control Act of 2011 (BCA; P.L. 112-25 ), as amended by the American Taxpayer Relief Act of 2012 (ATRA; P.L. 112-240 ), the Bipartisan Budget Act of 2013 (BBA 2013; P.L. 113-67 ), and the Bipartisan Budget Act of 2015 (BBA 2015; P.L. 114-74 ). In a multistep process, the BCA, as amended, set caps on discretionary budget authority (appropriations) that began in FY2012 and an automatic spending reduction process that began in FY2013, which together will reduce the deficit by roughly $2 trillion over the FY2012-FY2021 period. The spending caps essentially limit the amount of spending through the annual appropriations process and affect decisions by Congress and the President concerning spending on clean water and drinking water SRF capitalization grants (and most other discretionary programs in the budget, as well). Cap levels are enforced through a process called sequestration, spending cuts that are automatically triggered if discretionary cap levels are breached. This sequestration process has not been used to date, as Congress has enacted budgets with spending amounts consistent with the cap levels. Further, the BCA requires that if the appropriations process does not result in spending levels that adhere to the BCA cap levels and the cap levels are breached, a specified enforcement process—also called sequestration—follows. That is, in addition to the deficit reduction achieved through the statutory caps on discretionary spending, the BCA put in place an automatic process in the event a special joint committee failed to reach an agreement on spending reductions. The BCA "Super Committee" announced in November 2011 that it had failed to reach such an agreement. As a result, a $1.2 trillion automatic spending reduction process was triggered, beginning in January 2013, to continue through FY2021. ATRA, BBA 2013, and BBA 2015 modified this process, easing the required reductions in defense and nondefense spending from FY2013 through FY2017 (i.e., raising the discretionary spending caps for those years), but extending the mandatory sequestration process through FY2025. Although some discretionary programs are exempt from this sequester process, the SRF programs are not. While the BCA caps represent the upper limit of spending that will meet the act's deficit reduction targets, some Members of Congress favor even lower levels of spending than the BCA allows. Some would like to redistribute reductions in order to protect some accounts, especially defense. Congress has debated whether to maintain scheduled spending cuts in future years. As noted above, Congress has increased the discretionary spending caps on three occasions and could debate whether to modify the caps again—by increasing or reducing them. Overall, no matter how much support there may be for more SRF spending, Congress faces many competing needs, priorities, and difficult choices. Authorization of appropriations for clean water SRF capitalization grants expired in FY1994 and for drinking water SRF capitalization grants in FY2003. Congress has considered water infrastructure funding issues several times since the 107 th Congress, including provisions for more robustly funded SRFs, but until recently, no legislation other than appropriations had been enacted. In 2014, Congress enacted a number of amendments to Title VI of the CWA, the SRF provisions, as part of P.L. 113-121 . The 2014 amendments, for example, expanded the types of projects that are eligible for SRF assistance and imposed "Buy America" requirements on SRF recipients. However, the amendments did not reauthorize appropriations for clean water SRF capitalization grants, nor have appropriations for drinking water SRF capitalization grants been reauthorized. In the 114 th Congress, legislation was introduced to reauthorize capitalization grants for both the CWA and SDWA SRF programs. S. 2532 and S. 2583 would have authorized $34.9 billion over a five-year period for the CWA program (increasing from $5.2 billion in FY2016 to $9.1 billion in FY2020) and $21.2 billion over a five-year period for the SDWA program (increasing from $3.1 billion in FY2016 to $5.5 billion in FY2020). Reportedly, the intention of the legislation was to restore SRF funding to 2009 spending levels, with adjustment for inflation. A bill introduced in the House, H.R. 4954 , would have authorized $20 billion for the CWA SRF program over a five-year period (increasing from $2 billion to $6 billion). Another House bill, H.R. 2653 , would have reauthorized the SDWA SRF program at the same levels included in S. 2532 and S. 2583 . Legislation reported by congressional committees typically is "scored" by the Congressional Budget Office (CBO) for the effects on discretionary and mandatory, or direct, spending and by the Joint Committee on Taxation (JCT) for effects on revenues. Discretionary spending is the part of federal spending that lawmakers generally control through annual appropriation acts. In general, legislation that authorizes future appropriations for discretionary programs, by itself, does not increase federal deficits or decrease surpluses. Any subsequent discretionary appropriation to fund the authorized activity would affect the federal budget and would be subject to spending limits under a budget resolution or the BCA. Enacting legislation that only authorizes future discretionary appropriations would not result in an increase in CBO's projection of the federal deficit under its baseline assumptions and would not implicate pay-as-you-go rules or the Statutory Pay-As-You-Go Act ( P.L. 111-139 ), or PAYGO, which generally require that direct spending and revenue legislation not increase the federal deficit or that the spending be offset. However, authorizing legislation that affects direct spending or federal revenues is subject to budgetary rules. Direct spending is provided in or controlled by authorizing laws, generally continues without any annual legislative action, and includes spending authority provided for in such programs as Medicare and unemployment compensation. Direct spending also includes many offsetting collections, such as Medicare premiums, which are treated as negative spending instead of as revenues. Perspective on how legislative proposals to reauthorize SRF capitalization grants likely would be scored is provided by CBO's report on H.R. 1262 in the 111 th Congress, a bill that would have authorized appropriations totaling $13.8 billion for clean water SRF capitalization grants. The CBO report stated that certain provisions of the bill would affect direct spending and revenues, and it cited the JCT's estimates that by increasing funds available under the clean water SRF, H.R. 1262 would result in some states leveraging SRF grants by issuing additional tax-exempt bonds to finance water infrastructure projects. The JCT estimated that those additional bonds would result in reductions in federal revenue totaling $700 million over 10 years. To offset the reduced revenue, H.R. 1262 included offsetting receipts resulting from an increase in per-ton duties imposed on vessels arriving at U.S. ports from foreign ports. These receipts were intended to offset direct spending in the bill. The significance of needing to include the offsetting receipts in the legislation was that, if states were to increase leveraging and issue more tax-exempt bonds—such as might also occur if the state volume cap on private activity bonds were lifted (see below)—additional offsetting receipts likely would be required in SRF reauthorization legislation. Create a "Water Infrastructure Finance and Innovation Act" Program (WIFIA) One option for supporting investment in water infrastructure is the creation of a program modeled on the Transportation Infrastructure Finance and Innovation Act (TIFIA) Program. As the name suggests, only transportation projects are eligible for TIFIA assistance, but operation of the TIFIA program has generated interest in creating a similar program for water infrastructure, a so-called Water Infrastructure Finance and Innovation Act (WIFIA) Program. The 113 th Congress enacted legislation to create a pilot WIFIA program ( P.L. 113-121 ), as described in this section. TIFIA, enacted in 1998 as part of the Transportation Equity Act for the 21 st Century (TEA-21; P.L. 105-178 ), was reauthorized in 2012 in the Moving Ahead for Progress in the 21 st Century Act (MAP-21; P.L. 112-141 ). TIFIA provides federal credit assistance up to a maximum of 49% of project costs in the form of secured loans, loan guarantees, and lines of credit (23 U.S.C. 601 et seq.). Transportation projects costing at least $50 million (or at least $25 million in rural areas) are eligible for TIFIA financing. Projects must also have a dedicated revenue stream to be eligible for credit assistance. TIFIA can provide senior or subordinated debt. With the enactment of MAP-21, funding authorized for the TIFIA program increased from $122 million annually to $750 million in FY2013 and $1 billion in FY2014. However, the Fixing America's Surface Transportation Act (FAST Act; P.L. 114-94 ), enacted in 2015, reduced the amount available to support loans and other credit assistance under TIFIA. Under the FAST Act, the annual amount is $275 million each of FY2016 and FY2017, $285 million in FY2018, and $300 million in each of FY2019 and FY2020. TIFIA assistance is provided based on a project's eligibility. One of the key eligibility criteria is the creditworthiness of the project. To be eligible, a project's senior debt obligations and the federal credit instrument must receive an investment-grade rating from at least one nationally recognized credit agency. The TIFIA assistance must also be determined to have several beneficial effects: fostering a public-private partnership, if appropriate; enabling the project to proceed more quickly; and reducing the contribution of federal grant funding. Other eligibility criteria include satisfying planning and environmental review requirements and being ready to contract out construction within 90 days after the obligation of assistance. Since TIFIA's beginning in 1998, it has provided assistance to 65 projects, mostly in the form of direct loans. Loan amounts ranged from $42 million to $1.9 billion. Total credit assistance provided over the life of the program amounts to $25.7 billion, as of December 2016. The amount of credit assistance is much larger than the appropriated amount over this period because the appropriated funds need only cover the subsidy cost of the program (this point is discussed further below). Projects involving TIFIA financing amount to $92.5 billion in total costs. TIFIA typically provides financing to fill a gap in a much larger financial package that sometimes involves private equity and private debt. The 113 th Congress agreed to include a WIFIA pilot program as part of H.R. 3080 , the Water Resources Reform and Development Act of 2014 (WRRDA). Title X of Senate-passed S. 601 included a five-year pilot program, while House-passed H.R. 3080 included no similar provisions. Under the legislation as enacted ( P.L. 113-121 ), Title V, Subtitle C, authorized a five-year WIFIA pilot program. EPA was authorized to provide credit assistance (secured loans or loan guarantees) for drinking water and wastewater projects, and the U.S. Army Corps of Engineers was authorized to provide similar assistance for water resource projects, such as flood control or hurricane and storm damage reduction. EPA and the Corps each were authorized a total of $175 million over five years (beginning with $20 million for each agency in FY2015 and increasing to $50 million in FY2019) to provide assistance. Projects must be $20 million or larger in costs to be eligible for credit assistance, except that projects in rural areas (population 25,000 or less) must have eligible projects costs of $5 million or more. Activities eligible for assistance under the legislation include project development and planning, construction, acquisition of real property, and carrying costs during construction. Categories eligible for assistance by EPA include projects at wastewater treatment and community drinking water facilities, projects for enhanced energy efficiency of a public water system or wastewater treatment works, repair or rehabilitation of aging wastewater and drinking water systems, desalination or water recycling projects, or a combination of eligible projects. The Secretary of the Army or EPA Administrator, as appropriate, is to determine eligibility based on a project's creditworthiness and dedicated revenue sources for repayment. Selection criteria include the national or regional significance of the project, extent of public or private financing in addition to WIFIA assistance, use of new or innovative approaches, the amount of budget authority required to fund the WIFIA assistance, the extent to which a project serves regions with significant energy development or production areas, and the extent to which a project serves regions with significant water resources challenges. From the federal perspective, an advantage of TIFIA is that it can provide a large amount of credit assistance relative to the amount of budget authority provided. The volume of loans and other types of credit assistance that TIFIA can provide is determined by the size of congressional appropriations and calculation of the subsidy cost. The subsidy cost largely determines the amount of money that can be made available to project sponsors. Currently in the TIFIA program, the average project subsidy cost is approximately 10%. Proponents of a WIFIA argued that loans for water projects could be even less risky than transportation projects, because water rates are an established repayment mechanism, thus the subsidy cost would be lower and the amount of credit assistance higher (per dollar of budget authority). The Office of Management and Budget will establish a subsidy rate for the entire WIFIA program, but individual subsidy rates also will be determined for each project that is approved to receive credit assistance. Some analysts note that, even with stable rate mechanisms, a few communities and water utilities have recently experienced problems with borrowing and bond repayments, so repayment of a WIFIA loan is not a certainty. One of the main perceived benefits of the TIFIA program is that it provides capital at a low cost to the borrower. Moreover, TIFIA financing is often characterized as patient capital because loan repayment does not need to begin until five years after substantial completion of a project, the loan can be for up to 35 years from substantial completion, and the amortization schedule can be flexible. The WIFIA legislation likewise is intended to provide these benefits. As total TIFIA assistance cannot exceed 49% of project costs, it is intended to encourage nonfederal and private sector financing. WIFIA, with a similar 49% cap on assistance (and an overall cap on all federal assistance of 80% of a project's cost), would likely encourage some nonfederal financing, including from the private sector, but how much is unclear. A major source of debate among opponents and proponents has been and continues to be potential adverse impacts of WIFIA on funds for the Clean Water Act and Safe Drinking Water Act SRF programs. Several groups representing state environmental officials opposed the WIFIA provisions in the 113 th Congress because, they contended, it could result in reduced spending on the SRF programs, which are capitalized by federal appropriations. States are concerned that WIFIA would likely be funded through congressional appropriations to the detriment of the SRF programs. On the other hand, water utility groups argued that WIFIA would complement, not harm, existing SRF programs. In their view, WIFIA will provide a new funding opportunity for large water infrastructure projects that are unlikely to receive SRF assistance. In part to address concerns about impacts of WIFIA on the SRF programs, P.L. 113-121 gave state infrastructure financing authorities a "right of first refusal" to provide SRF funds for a project when EPA receives an application for WIFIA assistance. Another perceived benefit of the TIFIA program from the federal perspective is that it potentially limits the federal government's exposure to default by relying on market discipline through creditworthiness standards and the encouragement of private capital investment. WIFIA supporters see the same benefits for it. On the other hand, the Congressional Budget Office argues that the federal government underestimates the cost of providing credit assistance under programs like TIFIA. This is because it excludes "the cost of market risk"—the compensation that investors require for the uncertainty of expected but risky cash flows. The reason is that the FCRA (Federal Credit Reform Act) requires analysts to calculate present values by discounting expected cash flows at the interest rate on risk-free Treasury securities (the rate at which the government borrows money). In contrast, private financial institutions use risk-adjusted discount rates to calculate present values." Enacting a WIFIA program raised another federal budgetary and revenue issue. The initial CBO cost estimate for S. 601 concluded that the WIFIA provisions would cost $260 million over five years. In addition, it would result in certain revenue loss to the U.S. Treasury—thus, pay-as-you-go procedures would apply to the bill. CBO cited the Joint Committee on Taxation's (JCT's) estimate that enactment of the bill would reduce revenues by $135 million over 10 years, because states would be expected to issue tax-exempt bonds in order to acquire additional funds not covered by WIFIA assistance. To avoid the pay-as-you-go problem in the bill, the Senate committee added a provision to S. 601 to prohibit recipients of WIFIA assistance from issuing tax-exempt bonds for the non-WIFIA portions of project costs. CBO reestimated the bill and concluded that, because the change would make the WIFIA program less attractive to entities, most of whom rely on tax-exempt bonds for project financing, the cost of the bill would be $200 million less over five years but would have no impact on revenues, because the demand for federal credit would be lower without the option of using tax-exempt financing. P.L. 113-121 retained the bar on tax-exempt financing for WIFIA-assisted projects. Thus, the apparent solution to one problem in the legislation—potential revenue loss—raised a different kind of problem for entities seeking WIFIA credit assistance. After enactment, the restriction was widely criticized by potential users of WIFIA assistance. In their view, the bond financing restriction, together with the 49% cap on WIFIA assistance in the law, make it very difficult to finance needed projects, which rely heavily on tax-exempt financing for costs not covered by WIFIA or other funds. Congress responded to this concern with a provision in the 2015 surface transportation legislation, the FAST Act ( P.L. 114-94 ), that repealed the tax-exempt bond financing restriction on WIFIA assistance. Implementation of WIFIA—i.e., making project loans—was delayed for more than two years but can now occur following enactment of the Further Continuing and Security Assistance Appropriations Act, 2017 ( P.L. 114-254 ) in December 2016, providing the first appropriation of funds to cover the subsidy cost of the program. P.L. 114-254 appropriates $20 million to EPA to begin making loans and allows the agency to use up to $3 million of the total for administrative purposes. Under the legislation, these funds are available to subsidize not to exceed $2.1 billion in WIFIA assistance. EPA now expects to make the first WIFIA loans in 2017. Congress has not yet appropriated funds that would allow the Army Corps to begin preparations or begin making WIFIA loans under the authority in the 2014 statute. Although implementation of the WIFIA program was delayed until appropriations were provided, interest in using WIFIA as a model for other infrastructure financing programs is apparent. For example, several legislative proposals in the 114 th Congress would have established a similar program for water reclamation and reuse projects in western states. These proposals, referred to as "Reclamation for WIFIA," or RIFIA, were included in H.R. 291 / S. 176 (the Water in the 21 st Century Act), S. 1837 (the Drought Resiliency and Recovery Act of 2015), S. 1894 (the California Emergency Drought Relief Act of 2015), and S. 2533 / H.R. 5247 (California Long-Term Provisions for Water Supply and Short-Term Provisions for Emergency Drought Relief Act). None of these bills was enacted. Create a Federal Water Infrastructure Trust Fund One of the most common criticisms of the SRF programs, that capitalization grants are subject to annual appropriations, is the focus of proposals to create a federal water infrastructure trust fund modeled after existing mechanisms for other types of infrastructure such as the Airport and Airway Trust Fund and the Highway Trust Fund. A trust fund supported by dedicated revenues would be intended to provide sustainable and reliable long-term financing of water infrastructure projects. Proponents contend that trust fund expenditures would not impact the federal deficit (assuming that revenues are at least as large as program spending), because they would be drawn from collections that are dedicated by law for specified purposes. Whether the mechanism is created as a trust fund per se is not the critical issue; rather, the critical issue is creation of a dedicated revenue stream and how it is recorded in the budget. This idea is not new: legislation was introduced in the House in 1993 to support clean water infrastructure by creating a fund that would accrue $6 billion annually in revenues through a combination of user fees and excise taxes. In 1996, EPA issued a report, requested by Congress, on alternative financing options for water infrastructure, including a trust fund, and a 2009 Government Accountability Office (GAO) report, also requested by Congress, similarly assessed options to generate revenue for a clean water trust fund. Legislation has been introduced in several Congresses, including H.R. 4468 , H.R. 5313 , and S. 2848 in the 114 th Congress. Issues associated with alternative financing options have been explored by the House Transportation and Infrastructure Water Resources and Environment Subcommittee in several hearings since 2005. The legislative intent is to create a dedicated revenue source that would be counted as an offsetting receipt or collection and would be recorded in the budget as reducing or netting out outlays for water infrastructure projects. Proponents contend that such proposals would be deficit-neutral (again assuming that new revenue sources match or exceed program outlays) and would be a consistent and protected source of revenue to help states replace, repair, and rehabilitate critical water infrastructure facilities. Both the 1996 EPA and 2009 GAO reports identified a number of issues that would need to be addressed in establishing a clean water trust fund, including how it should be administered, whether it would be used to fund the clean water SRF or a separate program, what type(s) of financial assistance should be provided for projects (grants or loans), and what activities should be eligible for funding. These design issues are necessary, but they are relatively straightforward to resolve legislatively. The most difficult issues conceptually and politically concern how to generate the revenues. Clean water lacks as clear a basis for charging or taxing a set of users as exists for either the highway or aviation trust funds. As GAO observed, "[E]ach funding option poses various implementation challenges, including defining the products or activities to be taxed, establishing a collection and enforcement framework, and obtaining stakeholder support." Consensus on these issues has been elusive. Revenue options proposed in the past include excise taxes on water-based beverages, pharmaceutical products, and items disposed in wastewater (such as cosmetics and toilet paper); fees on industrial discharge of toxic pollutants; or an excise tax on the active ingredients of pesticides and fertilizers. In the 114 th Congress, H.R. 4468 and S. 2848 would have supported a trust fund through revenue from voluntary labeling of consumer products. Under the proposal, businesses could choose to place a label on their products indicating support for clean water, contributing $0.03 for each unit bearing the label to the trust fund. In turn, the trust fund would be used to fund CWA and SDWA SRF capitalization grants. It is unclear how much revenue could be realized from such an approach. A third bill in the 114 th Congress, H.R. 5313 , also would have established a water infrastructure trust fund to provide dedicated funding for the CWA and SDWA SRF programs. It also would have provided funding for projects in Native American communities, technical assistance for rural and tribal communities, and grants for residential onsite disposal systems. Funding for this bill would have come from ending deferral on income taxes on offshore corporate profits. According to sponsors, this change to the Internal Revenue Code would generate more than $60 billion per year, nearly $35 billion of which would be dedicated to public water and sewer infrastructure systems. From a budgetary perspective, there are no hurdles to enacting legislation to collect revenues for a water infrastructure trust fund. That is, assuming that the policy issues of who pays and at what levels are resolved, budget rules do not prohibit enacting a measure to collect new revenues. However, most programs with dedicated revenues, including most trust funds, are not set up to be spent without authorization or appropriation by Congress, making it difficult to assure that all revenues and interest will be spent each year for water infrastructure purposes. Accomplishing the objectives laid out by proponents of the clean water trust fund would involve complicated steps: creating dedicated revenue that is classified in the budget so that it will net out the outlays, preventing spending on the program from being reduced by the congressional authorization and appropriation process, and setting up the program to ensure that it does not count against congressional budget rules such as PAYGO and discretionary spending caps. In the past, Congress has sought to create a mechanism to guarantee spending for some existing infrastructure trust funds. For example, since 2000, legislation authorizing appropriations from the Airport and Airway Trust Fund included a provision making it out of order in the House or Senate to consider legislation that fails to use all aviation trust fund receipts and interest annually. The 2012 FAA reauthorization act, P.L. 112-95 , modified this guarantee to restrict the amount made available for each fiscal year to 90% of the receipts of the aviation trust fund plus interest credited for the respective year as estimated by the Secretary of the Treasury. Further, since 1998, House rules effectively created funding guarantees for transportation activities within the highway and mass transit categories by making any legislation that would cause spending to be less than the amount authorized subject to a point of order. This rule, in clause 3 of Rule XXI, was amended at the beginning of the 112 th Congress to allow an appropriations measure to reduce spending for highway and mass transit activities below the authorized level, as long as those funds were not made available for a purpose not authorized in the surface transportation act. These two examples illustrate the difficulty of assuring that trust fund revenues that are subject to appropriations are spent fully. Moreover, spending guarantees can still be trumped by broader budget policy goals (such as deficit reduction) or by the spending priorities of appropriators—that is, points of order can be waived. Conceptually, creating a mechanism to protect spending could be done by amending the Balanced Budget and Emergency Deficit Control Act of 1985 to create a separate budget category for water infrastructure programs. Funding from within this category could not be used to, in effect, offset increased spending elsewhere in the budget, thereby removing any incentive for restraining the spending of available trust fund revenues. However, this option reduces the appropriations committees' influence on spending, which they could be expected to vigorously resist, and also would involve amending the Budget Act, thus requiring the acquiescence of the House and Senate budget committees. Create a National Infrastructure Bank Another idea for improving the nation's investment in infrastructure is the creation of a national infrastructure bank. An infrastructure bank is a government-established entity that provides credit assistance to sponsors of infrastructure projects. An infrastructure bank can take many different forms, such as an independent federal agency, a federal corporation, a government-sponsored enterprise, or a private-sector, nonprofit corporation. Under most infrastructure bank proposals, the bank would be authorized to help finance the construction or reconstruction of infrastructure in several areas including energy, water and wastewater, telecommunications, and transportation. According to proponents, a national infrastructure bank would provide several major benefits for infrastructure projects, including water and wastewater capital projects. An infrastructure bank might help facilitate water infrastructure projects by providing large amounts of financing on advantageous terms, including low interest rates and long maturities. This might encourage investment that would otherwise not take place, particularly in large, expensive projects whose costs are borne locally but whose benefits are regional or national in scope. On the other hand, an infrastructure bank may not be the lowest-cost means of achieving that goal. The Congressional Budget Office has pointed out that a special entity that issues its own debt would not be able to match the lower interest and issuance costs of the U.S. Treasury. Whether providing financing on advantageous terms by a national infrastructure bank would lead to an increase in the total amount of capital devoted to infrastructure investment, as some believe, is unclear. Another purported advantage of certain types of infrastructure banks is access to private capital, such as pension funds and international investors. These entities, which are generally not subject to U.S. taxes, may be uninterested in purchasing the tax-exempt bonds that are traditionally a major source of project finance, but might be willing to make equity or debt investments in infrastructure in cooperation with a national infrastructure bank. If this shift were to occur, however, it could be to the detriment of existing investment, as the additional investment in infrastructure may be drawn from a relatively fixed amount of available investment funds. Another putative benefit of a national infrastructure bank is that it might improve project selection. A frequent criticism of current public infrastructure project selection is that it is often based on factors such as geographic equity and political favoritism instead of the demonstrable merits of the projects themselves. In many cases, funding goes to projects that are presumed to be the most important, without a rigorous study of the costs and benefits. Proponents of an infrastructure bank assert that it would select projects based on economic analyses of all costs and benefits. Selecting projects through an infrastructure bank has possible disadvantages, as well as advantages. First, some assert that it would likely direct financing to projects that are the most viable financially rather than those with the greatest social benefits. Unless there were set-asides for particular types of projects, water and wastewater projects would be in competition with infrastructure projects across a wide spectrum of sectors. Second, financing projects through an infrastructure bank might serve to exclude small urban and rural areas because infrastructure banks would likely focus on large, expensive projects that tend to be located in major urban centers. This may be true even without a minimum project cost threshold set in law. A third possible disadvantage is that a national infrastructure bank may shift some decisionmaking from the state and local level to the federal level. Once established, a national infrastructure bank might help accelerate worthwhile infrastructure projects by bearing more of the financial risk. Large projects are often slowed by funding and financing problems given the degree of risk. These large projects might also be too large for financing from a state infrastructure bank or from a state revolving loan fund. Moreover, even with a combination of grants, municipal bonds, and private equity, mega-projects often need another source of funding to complete a financial package. Financing is also sometimes needed to bridge the gap between construction and when the project generates revenues. Although a national infrastructure bank might help accelerate projects over the long term, it will likely take several years for a bank to be fully functioning after enactment. One attraction of national infrastructure bank proposals is the potential to encourage significant nonfederal infrastructure investment over the long term for a relatively small amount of federal budget authority. Ignoring administrative costs, an appropriation of $10 billion for the infrastructure bank could provide $100 billion of credit assistance if the subsidy cost were similar to that of the TIFIA program (see above). The federal government already has a number of programs to support water and wastewater infrastructure projects. But a national infrastructure bank could provide assistance to infrastructure projects that currently are too large to be financed using existing mechanisms. The creation of an infrastructure bank might provide another mechanism for financing drinking water and wastewater projects, but would set those projects in competition with projects in energy, transportation, and telecommunications. A national infrastructure bank is probably most like the existing TIFIA program. Hence, the creation of both a national infrastructure bank in addition to the WIFIA pilot program that Congress created in 2014 would likely be duplicative. Bills to establish a national infrastructure bank or a bank-like entity have been introduced in several recent Congresses. All include water and wastewater facilities as eligible projects. Bills in the 114 th Congress included the Partnership to Build America Act ( H.R. 413 ); the Infrastructure 2.0 Act ( H.R. 625 ); the Building and Renewing Infrastructure for Development and Growth in Employment Act (the BRIDGE Act, S. 1589 ); the National Infrastructure Development Bank Act of 2015 ( H.R. 3337 and S. 268 ); and the Jobs! Jobs! Jobs! Act of 2015 (subtitle E of H.R. 3555 ). An infrastructure bank proposal also was included in the Obama Administration's FY2017 budget. H.R. 413 and H.R. 625 would have created a wholly owned government corporation called the American Infrastructure Fund (AIF). It would be headed by a board of trustees whose mission would be to operate the AIF to be a low-cost provider of bond guarantees, loans, and equity investments for projects sponsored or owned by state or local governments or submitted by state or local governments on behalf of nonprofit infrastructure projects provided by private parties. Eligible projects would include transportation, energy, water, communications, or educational facilities. At least 35% of its assistance was to be provided to projects for which at least 10% of the project financing comes from private debt or equity. The bank would initially be capitalized with proceeds from $50 billion in American Infrastructure Bonds to be issued by the U.S. Treasury. Proponents estimated that the AIF would leverage the $50 billion at a 15:1 ratio to provide up to $750 billion in assistance. The proposed BRIDGE Act, S. 1589 , would have established a government-owned Infrastructure Financing Authority (IFA) to facilitate investments in transportation, water, and energy infrastructure projects that are economically viable, in the public interest, and of regional or national significance. Funded projects were to be at least $50 million in size, or $10 million in size in rural areas. The authority would provide loans and loan guarantees and would receive initial seed funding of up to $10 billion, which supporters say could incentivize private-sector investment and make possible up to $300 billion in total project investment. IFA funding would be limited to 49% of a project's costs. A bill similar to the BRIDGE Act was H.R. 3555 . The wholly owned government corporation created by the infrastructure bank provisions of this bill would be called the American Infrastructure Financing Authority (AIFA). AIFA would be governed by seven presidentially appointed board members. AIFA would be authorized to provide loans and loan guarantees to eligible transportation, water, and energy infrastructure projects. To be eligible for assistance, a project would have to cost at least $100 million, or at least $25 million in rural areas. Loans from the bank may not exceed 50% of eligible costs. The bank would be capitalized with a $10 billion appropriation. H.R. 3337 and S. 268 would have created a National Infrastructure Development Bank (NIDB), governed by seven presidentially appointed directors. The NIDB would be able to issue public benefit bonds (PBBs) to help finance infrastructure, as well as make loans and loan guarantees. Funded projects could include transportation, telecommunications, energy, and environmental infrastructure. The bank would be capitalized by Congress with $5 billion annually for five years. Among the criteria for evaluating projects for assistance from the NIDB would be the extent to which assistance will maximize private investment in the project while providing a public benefit. In addition, the FY2017 budget renewed a request made in previous Obama Administration budgets to create an independent National Infrastructure Bank (NIB). According to budget documents, the NIB would provide direct and guaranteed loans for transportation, water, and energy infrastructure projects. Interest rates on loans would be indexed to U.S. Treasury rates, with maturity up to 35 years. The NIB would finance no more than 50% of total costs of any project. Funding for the bank would initially require $167 million to cover subsidy cost and administrative expenses, which the Administration estimates would support $1.2 billion in loan activity. It also projected that the NIB would increase the federal deficit by $1.98 billion over the initial five years of activity and $7.7 billion over 10 years. Separate from its proposal for a NIB, the Administration's FY2017 budget proposed to establish a new federal credit program within the Treasury Department to provide direct loans to infrastructure projects developed through a public-private partnership (P3). Eligible projects were to include water, transportation, energy, and broadband sectors, as well as certain social infrastructure (e.g., educational facilities). The program was estimated to provide $15 billion in direct loans over 10 years with no subsidy, or cost, to taxpayers. It was intended to reduce the financing cost gap between P3s and traditional project procurement, thus encouraging the public sector to evaluate potential P3 arrangements. Lift Private Activity Bond Restrictions on Water Infrastructure Projects Water infrastructure can be owned and operated by the private sector, a governmental entity, or through a so-called partnership between a government and a private entity. A partnership could involve a private entity investing in water infrastructure and receiving a market rate of return on that investment. This investment could be an equity share (part ownership) or some other agreement that provides a stream of revenue generated by the facility. Or, the partnership could be the government issuing tax-exempt debt on behalf of the private entity with so-called "private activity bonds" (PABs). Through PABs, tax-exempt financing is granted to the private sector for public-purposes projects, such as water infrastructure. Among the options to modify the existing framework for federal assistance for investment in water infrastructure, one option for greater federal involvement includes expanding the availability of tax-exempt financing to private entities, for example, through PABs. Generally, under current law, privately owned water furnishing and water treatment facilities are not eligible for tax-exempt financing. The tax code, however, does provide that privately owned water furnishing facilities that (1) are operated by a governmental unit or (2) charge rates that are approved by a political subdivision of the host community, can issue qualified PABs that are tax-exempt. Most qualified PABs, including bonds for water furnishing and water treatment facilities, are subject to a state volume limit. In 2016, the volume cap was either the greater of $100 multiplied by the state's population, or $302.88 million. As determined by the Internal Revenue Service, the total volume cap for the 50 states, the District of Columbia, and Puerto Rico was $32.5 billion. Traditional tax-exempt bonds provide for lower borrowing costs for state and local governments indirectly through a federal tax exemption to investors for the interest income received on the bonds. The opportunity to use bonds whose interest payments are exempt from federal income taxation confers a considerable subsidy to bond issuers and to investors who buy the bonds. The FY2017 federal budget estimated that the federal tax expenditure for "water, sewage, and hazardous waste disposal facilities" would be $3.1 billion over the 2016 to 2020 budget window and $7.7 billion between 2016 and 2025. The private activity bond volume limit noted above originated in the Deficit Reduction Act of 1984 ( P.L. 98-369 ). The limit was implemented because "Congress was extremely concerned with the volume of tax-exempt bonds used to finance private activities." The limit and the list of qualified activities were both modified again under the Tax Reform Act of 1986 (TRA 1986; P.L. 99-514 ). At the time of the TRA 1986 modifications, the Joint Committee on Taxation identified the following specific concerns about tax-exempt bonds issued for private activities: the bonds represent "an inefficient allocation of capital"; the bonds "increase the cost of financing traditional governmental activities"; the bonds allow "higher-income persons to avoid taxes by means of tax-exempt investments"; and the bonds contribute to "mounting [federal] revenue losses." The inefficient allocation of capital arises from the economic fact that additional investment in tax-favored private activities will necessarily come from investment in other public projects. For example, if bonds issued for water infrastructure did not receive special tax treatment, some portion of the bond funds could be used for other government projects such as schools or other public infrastructure. The greater volume of tax-exempt private activity bonds then leads to the second Joint Committee on Taxation concern listed above: higher cost of financing traditional government activities. Investors have limited resources; thus, when the supply of tax-exempt bond investments increases, issuers must raise interest rates to lure them into investing in existing government activities. In economic terms, issuers raising interest rates to attract investors is analogous to a retailer lowering prices to attract customers. The higher interest rates make borrowing more expensive for issuers. The final two points are less important from an economic efficiency perspective but do cause some to question the efficacy of using tax-exempt bonds to deliver a federal subsidy. Tax-exempt interest is worth more to taxpayers in higher brackets; thus, the tax benefit flows to higher-income taxpayers, which leads to a less progressive income tax regime. The revenue loss generated by tax-exempt bonds also expands the deficit. A persistent budget deficit ultimately leads to generally higher interest rates as the government competes with private entities for scarce investment dollars. Higher interest rates further increase the cost of all debt-financed state and local government projects. The implicit assumption of several recent proposals has been that the current cap is binding, preventing the investment in needed water infrastructure projects. Proponents have argued that the opportunity for more private entities to meet the requirements for tax-exempt bond financing could induce additional infrastructure investment. What is unclear is how much new investment will be undertaken with PABs if these restrictions were relaxed. Underlying the estimates of potential new investment is demand for new water infrastructure. Demand for the use of PAB capacity for water infrastructure has been relatively low. The Internal Revenue Service (IRS) reports that for the 2011 tax year, new money bonds (in contrast to refunding bonds) were issued for 22 private water furnishing, sewage, and solid waste disposal facilities projects accounting for $453 million of the $40.5 billion of new money long-term, tax-exempt PABs issued that year (about 1% of total new money PABs). An additional $1.7 billion in PABs were spent refunding 29 prior bond issues for water, sewage, and solid waste disposal facilities. The IRS data also provide information on the issuance by state. In 2010, 30 states did not commit any volume capacity to water, sewage, and solid waste disposal facilities. Two states, California (13 projects) and Texas (six projects), combined for $792 million of the $2.7 billion in new money issuance in that year. The limited number of states using PABs may reflect lack of demand for privately owned water infrastructure or may reflect the relative size of water projects limiting the use of PABs. The average PAB new money amount issued for water, sewer, and solid waste was $57.8 million in 2010, whereas the average PAB new money issuance for all types of eligible bond purposes was smaller, at $25.2 million. The remainder in 2010 included qualified mortgage revenue bonds, which typically have a smaller average issue size. In 2011, nearly one-half of the states did not commit any volume capacity to water, sewage, or solid waste disposal facilities. Private entities also invest in water infrastructure beyond partnerships with governments through PABs. For example, the largest investor-owned U.S. water and wastewater utility company, American Water, reported investing $1 billion in water infrastructure capital in 2014 and projected that it will make $6.0 billion in capital investment through 2019. Private entities like American Water use a mix of current revenue and debt, including PABs, corporate debt, and equity investment, to finance this capital spending. The President's FY2017 budget request (like several previous budgets) supported eliminating the volume cap for PABs for water infrastructure. This proposal would have created a new category of tax-exempt qualified PABs called "Qualified Public Infrastructure bonds" (QPIBs) that would be eligible to finance categories of infrastructure projects that now are subject to bond volume cap, including water, sewage, and solid waste disposal facilities. The proposal would have made the bond volume cap requirement inapplicable to QPIBs. Treasury estimated that this proposal would increase the federal deficit by $4.9 billion between 2017 and 2026. Three bills in the 114 th Congress proposed to permanently exclude water infrastructure from the volume cap ( H.R. 499 , S. 2606 , and S. 2821 ). As the data above suggest, excluding PABs for water infrastructure from state volume caps would likely generate marginally more investment in water infrastructure. The private entities that already have used PABs in conjunction with other financial tools would likely increase the use of PABs. What is unclear, however, is if the expanded use of PABs would necessarily reflect substantially new infrastructure investment or just change the mix of financing tools employed for already planned projects. If the latter, then the potential revenue loss may not achieve the intended policy objective of increasing investment in water infrastructure. The proposed PAB expansion may also be a limited success, as many communities have chosen government provision of water infrastructure. In 2011, long-term tax-exempt PAB issuance for water, sewage, and solid waste disposal facilities totaled $2.2 billion. By comparison, approximately $28 billion in governmental bonds (i.e., non-PAB tax-exempt bonds) were issued for 1,244 water, sewer, and sanitation projects in 2011. The reliance on government provision may reflect market conditions that make private provision infeasible or public preference for government owned and operated water infrastructure. Reinstate Authority for Issuance of Build America Bonds (BABs) Another option that has been under discussion to modify the existing framework for federal assistance for water infrastructure investment is expansion or extension of the use of Build America Bonds (BABs). BABs were created by the American Recovery and Reinvestment Act of 2009 (ARRA). The volume of BABs was not limited (unlike qualified Private Activity Bonds), and the purpose was constrained only by the requirement that "the interest on such obligation would (but for this section) be excludible from gross income under section 103." Thus, BABs could have been issued for any purpose that would have been eligible for traditional tax-exempt bond financing other than private activity bonds ; thus, they did not allow for private-sector participation (unlike PABs). The authority under ARRA to issue BABs expired on December 31, 2010. BABs were modeled after the "taxable bond option," which was first considered in the late 1960s. In 1976, the following was posited by the then-president of the Federal Reserve Bank in Boston, Frank E. Morris: The taxable bond option is a tool to improve the efficiency of our financial markets and, at the same time, to reduce substantially the element of inequity in our income tax system which stems from tax exemption [on municipal bonds]. It will reduce the interest costs on municipal borrowings, but the benefits will accrue proportionally as much to cities with strong credit ratings as to those with serious financial problems. One benefit of the BAB program was that it tapped into a broader market for investors without regard to tax liability (such as pension funds, which typically do not invest in tax-exempt bonds). Traditional tax-exempt bonds have a narrow class of investors, generally consisting of individuals and mutual funds. BABs offered an issuer a credit equal to 35% of the interest rate established between the buyer and issuer of the bond. The Treasury Department estimated that the $181 billion in BABs issued from April 2009 through December 2010 will allow state and local governments to save an estimated $20 billion in borrowing costs, in present value savings, as compared to issuing traditional tax-exempt bonds. One option would be to extend BABs to investment in privately owned water infrastructure. Many of the disadvantages cited for PABs identified earlier could be avoided, such as the windfall gain for high-income investors and the economic inefficiency of using a third party to deliver a federal subsidy. The President's FY2017 budget suggested that the BAB program "has a potentially more streamlined tax compliance framework focusing directly on governmental issuers who benefit from the subsidy, as compared with tax-exempt bonds and tax credit bonds, which involve investors as tax intermediaries." The partner government or water authority would "issue" bonds at the low rate and pass through the value of the subsidy to the private entity. The private entity would own and operate the water infrastructure. In the 114 th Congress, H.R. 2676 was introduced to extend and expand a modified version of BABs. The President's FY2017 budget (like requests since FY2012) proposed to reinstate BABs—now to be called America Fast Forward Bonds—as an alternative to traditional tax-exempt bonds at a 28% credit rate. The Administration's proposal would have allowed eligible use of America Fast Forward Bonds to include financing of all qualified PAB program categories. Treasury estimated that the proposal would increase the federal deficit by $71 billion over 10 years, but the 28% federal subsidy level was intended to be approximately revenue neutral, relative to the estimated future federal tax expenditures for tax-exempt bonds. According to CBO, the interest subsidy of BABs would be recorded in the federal budget as outlays, like other payments to state and local governments. At the same time, by substituting taxable for tax-exempt bonds, the program would increase taxable interest income. CBO analyzed a similar proposal in the FY2013 budget and estimated that it would increase subsidy payments to state and local governments, thus boosting federal outlays by $70 billion over 10 years and would raise revenues by $63 billion, with a net effect of increasing the cumulative deficit by $7 billion. Conclusion Consensus exists among many stakeholders—state and local governments; equipment manufacturers, construction companies, and engineers; and environmental advocates—on the need for more investment in water infrastructure. Many in these varied groups support one or more options for doing so. There is no consensus supporting a preferred option or policy, and many advocate a combination that will expand the financing "toolbox" for projects. Some of the options discussed in this report may be helpful in addressing financing problems, but there is no single method or "silver bullet" that will address needs fully or close the financing gap completely. For example, some, such as a WIFIA or a national infrastructure bank, may be helpful to projects in large urban or multijurisdictional areas, while others, such as expanded SRF programs, may be more beneficial in smaller communities. Even with enactment of the WIFIA pilot program in P.L. 113-121 , at least for the near term, most communities will continue to rely on the existing SRF programs, tax-exempt governmental bonds, and available tax-exempt private activity bonds to finance their water infrastructure needs. Through its budget requests, the Obama Administration expressed support for the SRF programs and the new WIFIA program, and it endorsed excluding water infrastructure PABs from the state volume cap and reinstating Build America Bonds.

This report addresses several options considered by Congress to address the financing needs of local communities for wastewater and drinking water infrastructure projects and to decrease or close the gap between available funds and projected needs. Some of the options exist and are well established, but they have been under discussion for expansion or modification. Other innovative policy options for water infrastructure have been proposed, especially to supplement or complement existing financing tools. Some are intended to provide robust, long-term revenue to support existing financing programs and mechanisms. Some are intended to encourage private participation in financing of drinking water and wastewater projects. Six options reflected in legislative proposals in the 114th Congress, including their federal budgetary implications, are discussed. Increase funding for the State Revolving Fund (SRF) programs in the Clean Water Act and the Safe Drinking Water Act (S. 2532/S. 2583, H.R. 4653, and H.R. 4954). Create a "Water Infrastructure Finance and Innovation Act" Program, or WIFIA (P.L. 113-121 in the 113th Congress; several bills in the 114th Congress that proposed to establish a similar program for water reclamation and reuse projects in western states are H.R. 291/S. 176, S. 1837, S. 1894, and S. 2533/H.R. 5247). Create a federal water infrastructure trust fund (H.R. 4468, H.R. 5313, and S. 2848). Create a national infrastructure bank (included in the Administration's FY2017 budget request and H.R. 413, H.R. 625, H.R. 3337, H.R. 3555, S. 268, and S. 1589). Lift restrictions on private activity bonds for water infrastructure projects (included in the Administration's FY2017 budget request and H.R. 499, S. 2606, and S. 2821). Reinstate authority for the issuance of Build America Bonds (included in the Administration's FY2017 budget request and H.R. 2676). A number of these options have been examined by congressional committees since the 112th Congress. A pilot program for one of them—WIFIA—was enacted in 2014. Nevertheless, interest in other financing options continues, in part due to long-standing concerns regarding the costs to repair aging and deteriorated U.S. infrastructure generally, and also in response to events in individual regions and cities, such as Flint, MI, where problems of elevated lead levels in its drinking water distribution system have recently drawn public attention. Consensus exists among many stakeholders—state and local governments, equipment manufacturers and construction companies, and environmental advocates—on the need for more investment in water infrastructure. There is no consensus supporting a preferred option or policy, and many advocate a combination that will expand the financing "toolbox" for projects. Some of the options discussed in this report may be helpful, but there is no single method that will address needs fully or close the financing gap completely. For example, some may be helpful to projects in large urban or multijurisdictional areas, while others may be more beneficial in smaller communities. At least for the near term, communities will continue to rely on the existing SRF programs, tax-exempt governmental bonds, and tax-exempt private activity bonds to finance their water infrastructure needs.

gao_GAO-11-596

gao_GAO-11-596_0

"\tBackground\n\n\t\tOverview of DHS Acquisition Process\n\nDHS acquisitions support a wide range of(...TRUNCATED)

"Why GAO Did This Study\n\nIn recent years, GAO has reported on challenges the Department of Homelan(...TRUNCATED)

gao_GAO-17-36

gao_GAO-17-36_0

"\tBackground\n\nThe National Flood Insurance Act of 1968 created NFIP. According to FEMA, NFIP was(...TRUNCATED)

"Why GAO Did This Study\n\nPrivate insurers (WYO companies) sell and service flood policies and adju(...TRUNCATED)

gao_GAO-16-151

gao_GAO-16-151_0

"\tBackground\n\n\t\tTaxpayer Services and Tax Return Process\n\nIRS uses multiple channels to provi(...TRUNCATED)

"Why GAO Did This Study\n\nDuring tax filing season, IRS processes tax returns, issues refunds, and (...TRUNCATED)

crs_R44557

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"\tIntroduction\n\nThe Fair Housing Act was enacted as Title VIII of the Civil Rights Act of 1968 (P(...TRUNCATED)

"The federal Fair Housing Act, enacted in 1968 as Title VIII of the Civil Rights Act (P.L. 90-284), (...TRUNCATED)

gao_GAO-16-545

gao_GAO-16-545_0

"\tBackground\n\nThe mission of IRS, a bureau within the Department of the Treasury, is to provide (...TRUNCATED)

"Why GAO Did This Study\n\nIRS relies extensively on IT systems to annually collect more than $2 tri(...TRUNCATED)

gao_GAO-14-801

gao_GAO-14-801_0

"\tBackground\n\n\t\tFuture Operational Environment Includes Increasing A2/AD Challenges\n\nFuture A(...TRUNCATED)

"Why GAO Did This Study\n\nAccording to DOD, its ability to deploy military forces from the United S(...TRUNCATED)

gao_GAO-03-320

gao_GAO-03-320_0

"\tBackground\n\nOur work has repeatedly shown that mission fragmentation and program overlap are w(...TRUNCATED)

"Why GAO Did This Study\n\nGAO's work has repeatedly shown that mission fragmentation and program ov(...TRUNCATED)