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Washington, DC 20548:

United States General Accounting Office:

July 2, 2004:

The Honorable Richard C. Shelby:

Chairman:

The Honorable Patty Murray:

Ranking Minority Member:

Subcommittee on Transportation/Treasury and General Government:

Committee on Appropriations:

United States Senate:

The Honorable Ernest J. Istook:

Chairman:

The Honorable John W. Olver:

Ranking Minority Member:

Subcommittee on Transportation and Treasury, and Independent Agencies:

Committee on Appropriations:

House of Representatives:

Subject: FAA Budget Policies and Practices:

In recent years, Congress has raised concerns about cost growth in the 
Federal Aviation Administration's (FAA) operating budget. 
Appropriators noted several expenses in FAA's fiscal year 2004 
facilities and equipment (F&E) account--the account used by FAA for 
much of its capital purchases--budget submission that appeared to be 
ongoing operating expenses. The House and Senate appropriations 
subcommittee reports on FAA's fiscal year 2004 budget submission 
highlighted 17 such budget items and recommended that the expenses for 
these items either be transferred to the operations budget or not 
receive funding. As a result of these concerns, Congress directed us to 
conduct an audit of FAA's policies and practices for determining 
whether an expense should be budgeted in its operating accounts or in 
the capital account.

Specifically, this report addresses the following questions: (1) What 
are FAA's policies for determining whether an expense--including 
personnel compensation, benefits, travel, and related expenses--
belongs in its capital (F&E) or Operations accounts? (2) How did FAA 
implement its policies for determining whether 17 specific budget line 
items identified by appropriators belong in its F&E or Operations 
accounts, including personnel compensation, benefits, travel, and 
related expenses? (3) How do FAA's budget policies compare with those 
of other civilian agencies with large acquisition budgets, such as the 
National Aeronautics and Space Administration (NASA) and the Department 
of Defense (DOD)?

To identify FAA's policies for deciding whether an expense belongs in 
its capital[Footnote 1] (F&E) or operations accounts, we reviewed FAA 
Order 2500.8A, [Footnote 2] which contains the agency's policies for 
making these decisions. We also interviewed FAA officials responsible 
for preparing FAA's budget submission. To determine how FAA implemented 
its policies for the 17 budget line items at issue for the 
appropriators, we compared FAA's policies for assigning budget line 
items to the F&E and Operations accounts with FAA's implementation of 
those policies in its fiscal year 2004 budget submission. We also 
interviewed the FAA officials responsible for preparing each of the 17 
budget line items and reviewed the supplemental documentation they 
provided to explain FAA's placement of the 17 line items in the F&E 
account. To compare FAA's policies for categorizing budget line items 
with those of NASA and DOD, we obtained comparable policy documents 
from NASA and DOD and met with officials of both agencies responsible 
for preparing budget submissions to clarify their agencies' policies 
and obtain the information needed to draw accurate comparisons. We then 
compared the three agencies' policies. We also compared FAA's, NASA's, 
and DOD's processes for preparing budget estimates and their 
communication with appropriations committee staff. Our review did not 
assess any FAA budget line items other than the 17 identified above, 
nor did it address cost growth issues, the purpose of or funding for 
any of the 17 budget line items or their subcomponents, the accuracy of 
FAA's budget estimates, or NASA's and DOD's approach to developing 
performance-based budgets. We determined that the budget data we 
reviewed were sufficiently reliable for our purposes. We performed our 
work from February through June 2004 in accordance with generally 
accepted government auditing standards. This report summarizes the 
information we provided to your staff on May 14, 2004. The briefing 
slides, which provide more details about our analysis, are attached as 
enclosure I.

Background:

For fiscal year 2004, FAA submitted budget requests for four 
appropriations accounts: F&E; Operations; Research, Engineering, and 
Development (RE&D); and the Airport Improvement Program (AIP). FAA's 
budget authority for fiscal year 2004 was $13.9 billion. In preparing 
this budget submission, FAA officials used FAA Order 2500.8A (Apr. 9, 
1993), which defines three of the appropriations accounts, including 
the F&E (capital) account, and identifies the costs that are to be 
budgeted in each. House and Senate appropriations committee staff 
approved the order before it was implemented.

Summary:

In summary, we found the following:

FAA Order 2500.8A contains the agency's policies for assigning budget 
expenditures to the F&E, Operations, and RE&D accounts. In reviewing 
this order, we found that it is outdated and unclear and that the 
linkages between FAA's policies and the assignment of budget line items 
to the F&E and Operations accounts are very general. For example, it 
was not always possible to use this order to distinguish between F&E 
programs that allow FAA to modernize or add new capabilities and 
maintenance programs (Operations) that allow FAA to maintain current 
capabilities (e.g., when a system designed to modernize the national 
airspace system is deployed at specific locations and the cost for 
operating systems at these locations is "handed off," or moved, to the 
Operations account). In addition, the order is not structured by 
organizational objectives (performance goals), as is part of FAA's 
fiscal year 2004 budget estimate for F&E. This structural difference 
makes it difficult to compare the F&E portion of the budget submission 
with FAA's policies. Additionally, the order lacks the level of detail 
needed for both FAA officials and appropriators to easily distinguish 
between F&E (capital) and Operations expenditures. The order also does 
not reflect FAA's current process for acquiring goods and services 
(acquisition management), which influences whether an expenditure for a 
project is categorized as an F&E or an Operations expense. Because FAA 
contended that some of its problems with modernizing the air traffic 
control system were caused by federal acquisition regulations, Congress 
exempted FAA in November 1995 from most federal procurement laws and 
regulations and directed FAA to develop a new acquisition management 
system. FAA Order 2500.8A includes an outdated appendix on the agency's 
process for acquiring major systems, which reflects the process FAA 
used before implementing its new acquisition management system in 1996.

According to our analysis, while FAA's policies for categorizing 
expenses are very broad and give the agency wide latitude, FAA followed 
the policies outlined in its 1993 order for the majority of the 17 
budget line items identified by the appropriators in FAA's fiscal year 
2004 budget submission. FAA concurred with the appropriators that 5 of 
these budget line items should have been categorized as Operations 
expenses and said that it would restructure the items in its next 
budget submission; however, the agency maintained that the remaining 12 
items were appropriately categorized as F&E expenses and cited specific 
agency policies to support the items' placement there. Although FAA's 
policies for assigning budget line items to the F&E and Operations 
accounts are very general, our analysis generally supported FAA's 
categorizations.

For four of the five budget line items that FAA concurred with 
appropriators should have been categorized as Operations expenses and 
would be restructured in its next budget submission, we found that 
their placement in the F&E account in the 2004 budget submission was 
generally consistent with the budget policies set forth in Order 
2500.8A. However, we found that FAA's policies were particularly 
unclear for 1 of these items and determined that this item could be 
budgeted out of either the F&E or the Operations account.

FAA's placement of the remaining 12 budget line items in the F&E 
account appears to be consistent with Order 2500.8A. FAA's budget 
submission alone did not adequately explain why these line items, which 
were relatively new requests for funding, should be categorized as F&E 
rather than Operations expenses. However, after examining additional 
FAA documents and receiving explanations from agency officials, we 
found that the placement of these items in the F&E budget account 
follows FAA's policies. FAA has not requested funding for (has "zeroed 
out") these 12 budget line items in its fiscal year 2005 budget 
estimates, pending clarification from appropriations committee staff.

FAA's budget policies cannot readily be compared with those of NASA and 
DOD. While the policies of all three agencies use similar budgetary 
language, the policies cannot be compared in detail because the 
agencies use different budgetary approaches. Each agency independently 
developed its own budget format in response to the current 
administration's direction that federal agencies develop performance-
based budgets. NASA adopted a new budget format and revised its budget 
policies accordingly. While NASA officials noted value in this approach 
for management purposes, we have found that for some decision-making, 
it could be useful for federal agencies to make meaningful distinctions 
between capital investments and operating expenses in their budgets. 
However, under some approaches to performance-based budgeting, this 
distinction may be lost.

Before fiscal year 2003, FAA's F&E budget justification was generally 
aligned with FAA Order 2500.8A and included activities such as 
"Procurement and Modernization of Air Traffic Control Facilities and 
Equipment." In fiscal year 2003, FAA revised its F&E budget 
justification largely to reflect organizational objectives 
(performance goals) such as "Improve Efficiency of the Air Traffic 
Control System." However, FAA did not revise its budget policies to 
link them to the new objectives. This makes it difficult to determine 
whether the placement of items in the F&E account is consistent with 
the budget policies. FAA officials did not discuss this revision with 
appropriations committee staff before or during their move toward a 
performance-based budget; however, according to a senior Department of 
Transportation official, the department has conducted outreach with 
appropriations staff to gain their acceptance of the principles of 
performance-based budgeting.

NASA submitted a budget request for three appropriations accounts: 
Science Aeronautics and Exploration, Space Flight Capabilities, and 
Inspector General, and NASA's budget authority for fiscal year 2004 was 
$15.4 billion. NASA relies on a "full-cost"[Footnote 3] budgeting 
methodology to identify costs associated with programs and developed 
its first "full-cost" budget for fiscal year 2004. "Full-cost" 
budgeting led to changes in both NASA's budget policies and 
presentation of capital costs in its budget justification. This 
approach does not identify capital costs as a separate or distinct 
category of costs to be reported within a program area in the budget. 
NASA rolls up all of its capital costs with other costs to illustrate 
to appropriators how much it intends to spend in its program areas. 
NASA integrates its strategic plan and performance information into its 
budget justifications to illustrate how much it intends to spend to 
achieve its objectives. Before transitioning to "full-cost" budgeting, 
NASA met with appropriations committee staff to discuss how "full-cost" 
budgeting would change its budget justifications. As a result of these 
discussions, a senior NASA official told us that the agency continues 
to provide certain kinds of information that appropriations committee 
staff said they did not want to lose in the transition to "full-cost" 
budgeting.

DOD has many appropriations accounts, and its budget authority for 
fiscal year 2004 was $441.4 billion. Each service has accounts for 
personnel; operations and maintenance; research, development, test, and 
evaluation (RDT&E); procurement; military construction, and family 
housing; and base realignments and closures (BRAC). Certain 
appropriations accounts report only investments[Footnote 4] ("capital 
expenses"), and others report a mix of both operating and capital 
investment costs. For example, the procurement and military 
construction appropriations accounts are used solely for investments 
("capital" expenses). The RDT&E and BRAC appropriations accounts are 
used both for investments ("capital" expenses) and operating expenses. 
DOD also uses a unit cost dollar threshold of $250,000 to define 
operating and capital investment costs. Costs up to $250,000 are 
operating expenses, and costs equal to or greater than a unit cost of 
$250,000 are investment ("capital") expenses. DOD's effort to link 
performance with budget resources is ongoing, and DOD is implementing a 
framework for establishing department-level performance goals and 
measures and tracking results. DOD has also linked some resources with 
metrics for tracking results in broad program areas (e.g., air combat, 
airlift, and basic research) in the fiscal year 2004 budget and plans 
to expand such linkages over the next few budget cycles. DOD's approach 
has not affected either its investment ("capital") budget policies or 
its presentation of investment costs or operating expenses in its 
budget justification.

Conclusions:

The budget policies reflected in FAA's 1993 order have not kept pace 
with FAA's recent move to a performance-based budget for its F&E 
account and do not reflect the agency's current (1996) acquisition 
management system. As a result, the F&E portion of FAA's budget 
submission is hard to follow because its performance-based format does 
not track with the agency's budget policies, some of which are 
ambiguous. Without any communication from FAA officials to explain the 
changes they have made as part of their move toward performance-based 
budgeting, committee appropriations staff have had difficulty (1) 
distinguishing clearly between F&E and Operations expenses, (2) 
determining when a program in a budget line item is intended to 
modernize an existing capability or maintain it, and (3) tracking 
budget line items when they are moved from the F&E to the Operations 
account (e.g., when a system designed to modernize the national 
airspace system is deployed at specific locations and the cost for 
operating systems at these locations is "handed off," or moved, to the 
Operations account). Communicating with appropriations committee 
staff, as NASA officials did when they shifted to performance-based 
budgeting, would allow FAA officials to clarify their actions, 
determine the types of information the committees need to make funding 
decisions, and help ensure that this information is not lost in the 
transition to this new budget format.

Recommendations:

We recommend that the Secretary of Transportation direct the FAA 
Administrator to take the following three actions to clarify FAA's 
rationale for allocating budget expenditures between its F&E and 
Operations budget accounts:

Update FAA Order 2500.8A in consultation with appropriations committee 
staff.

* Clearly distinguish in the revised order between maintenance programs 
(Operations) that allow FAA to maintain current capabilities and F&E 
programs that allow FAA to modernize or add new capabilities.

* Revise FAA's budget practices to make it easier for appropriators to 
track funding when the agency moves funds for individual budget line 
items from one budget account to another.

Agency Comments:

We provided a draft of this report to the Department of Transportation 
(DOT), FAA, NASA, and DOD for their review and comment. DOT, FAA, and 
DOD provided oral comments, stating that they had no comments on the 
report. NASA provided technical comments, which can be found in 
Enclosure III.

NASA had three comments. First, NASA stated that while the GAO report 
accurately states that, "NASA relies on a 'full-cost' budgeting 
methodology to identify costs associated with programs and developed 
its first 'full-cost' budget for fiscal year 2004," the statement that 
"'Full-cost' budgeting led to changes in both NASA's capital budget 
policies and presentation of capital costs," is potentially misleading 
and should be changed. NASA has not had a distinct set of separate 
capital budgeting procedures, therefore, the word 'capital" should be 
removed when referring to NASA's budget policies. At one time, NASA did 
have a separate 'mission support' appropriation that covered such 
institutional infrastructure items as civil service personnel salaries, 
construction of facilities, and research operation support. However, 
the mission support appropriation still included a mix of institutional 
resources, some of which supported development efforts and are included 
presently in the full cost of development programs." As requested, we 
deleted the term "capital" in reference to NASA's budgeting policies in 
the final report and placed a note on the corresponding briefing slide 
in Enclosure I. For the second comment regarding NASA's use of 
performance-based ("full-cost") budgeting, we acknowledge that NASA has 
found value in using this approach for management purposes; however, it 
is GAO's position that it could be useful for federal agencies to make 
meaningful distinctions between capital investments and operating 
expenses in their budgets because under some approaches to performance 
budgeting, this distinction may be lost. We incorporated NASA's 
position into our letter and placed a note on the corresponding 
briefing slide in Enclosure I. Finally, we added a note to the 
appropriate briefing slide in Enclosure I to reflect NASA's third 
comment that it reviewed its "full-cost" practices and its overall 
budget formulation process in 2003.

We are sending copies of this report to the House Committee on 
Appropriations, Subcommittee on Transportation, Treasury, and 
Independent Agencies; the Senate Committee on Appropriations, 
Subcommittee on Transportation/Treasury and General Government; the 
Secretary of Transportation; and the FAA Administrator. We will also 
make copies available to others upon request. In addition, the report 
will be available at no charge on GAO's Web site at http://www.gao.gov.

If you or your staff have any questions about this report, please call 
me at heckerj@gao.gov or at (202) 512-2834. Individuals making key 
contributions to this report are listed in enclosure IV.

Sincerely yours,

Signed by: 

JayEtta Z. Hecker:

Director, Physical Infrastructure Team:

Enclosures - 4:

Enclosure I: FAA Budget Policies and Practices:

[See PDF for image]

[End of slide presentation]

[End of section]

Enclosure II: 

Briefing Appendix II: FAA Budget Mandate Matrix:

[See PDF for image]

Note: Items # 1-6 are from the House of Representatives 108-243: 
Departments of Transportation and Treasury and Independent Agencies 
Appropriations Bill, 2004 Items #7 - 18[Footnote 5] are from the Senate 
108-146: Transportation, Treasury and General Government 
Appropriations Bill, 2004 [FAA contact: Carol Burrus, Manager, Capital 
Division, ABU-300 (202) 267-9025]

[End of table]

[End of section]

Enclosure III: Comments from the National Aeronautics and Space 
Administration:

National Aeronautics and Space Administration:
Office of the Administrator 
Washington, DC 20546-0001:

June 24, 2004:

Ms. JayEtta Hecker 
Director:
Physical Infrastructure Issues:
United States General Accounting Office:
Washington, DC 20548:

Dear Ms. Hecker:

Thank you for the opportunity to comment on the draft General 
Accounting Office (GAO) report entitled, Federal Aviation 
Administration (FAA) Budget Policies and Practices (Report Number GAO-
04-841R). While the focus of the GAO report is on FAA, there is still 
some information in the report regarding NASA that could be misleading, 
and I request that it be clarified. The details of those clarifications 
are provided in the enclosure.

Questions may be forwarded to Dr. Richard Beck, Director, Resources 
Management Division, Office of the Chief Financial Officer, at (202) 
358-2240.

Cordially,

Signed by: 

Frederick D. Gregory:
Deputy Administrator:

Enclosure:

cc: ADI/Mr. Jennings: 
G/Mr. Pastorek: 
L/Mr. Forsgren: 
O/Mr. Sutton: 
O/Mr. Roberts:

NASA comments on draft report entitled "FAA Budget Policies and 
Practices" (GAO Code 540091, Report Number GAO-04-841R):

While the GAO report accurately states that, "NASA relies on a 'full-
cost' budgeting methodology to identify costs associated with programs 
and developed its first 'full-cost' budget for fiscal year 2004," the 
statement that, "'Full-cost' budgeting led to changes in both NASA's 
capital budget policies and presentation of capital costs," is 
potentially misleading and should be changed. NASA has not had a 
distinct set of separate capital budgeting procedures, therefore, the 
word "capital" should be removed when referring to NASA's budget 
policies. At one time, NASA did have a separate "mission support" 
appropriation that covered such institutional infrastructure items as 
civil service personnel salaries, construction of facilities, and 
research operation support. However, the mission support appropriation 
still included a mix of institutional resources, some of which 
supported development efforts and are included presently in the full 
cost of development programs. Therefore, references to NASA having 
previous separate capital budgeting procedures should be deleted from 
page 4 in the draft and page 31 in enclosure 1.

In adopting its full-cost budgeting practices, NASA focuses on trying 
to ensure that the appropriate levels of institutional infrastructure 
relate directly to the need of each program activity. In this manner, 
the institutional infrastructure can be planned in direct context of 
the needs of each program that contributes to achieving the Agency's 
strategic plan objectives. Budgeting for NASA programs through separate 
capital and operating accounts would not be compatible with the conduct 
of NASA's type of program activities and could lead to possible 
disconnects and/or suboptimized planning for a program when its funds 
are separated across two appropriation accounts that are treated almost 
as two distinct entities. Since there are particular benefits to 
budgeting in this manner for NASA, it would be appreciated if the GAO 
report recognized the potential value of this full-cost approach in 
NASA's case instead of implying that NASA's budgeting is simply 
different and could possibly be benefited by having separate capital 
and operations appropriations accounts on page 4 and page 27 in 
enclosure 1.

I would also ask that the reference to NASA's budget policies being 5 
years old, on page 25 in enclosure 1, be updated to include the review 
that we had in 2003 of the Agency's full-cost practices and its overall 
budget formulation process in 2003.

Enclosure: 

[End of section]

GAO Contacts and Staff Acknowledgements:

GAO Contacts: JayEtta Z. Hecker (202) 512-2834:

Beverly Norwood (202) 512-2834:

Acknowledgments: In addition to the individuals named above, Christine 
Bonham, Donna Byers, Carol Campbell, Carlos Diz, Elizabeth Eisenstadt, 
Tom Gordon, David Hooper, Laura Durland, Edda Emmanuelli-Perez, 
Samantha Goodman, Thomas Hopp, Jerry Herley, Eric Mader, Maren McAvoy, 
and John Warren made key contributions to this report.

(544090):

FOOTNOTES

[1] While there are accounting definitions for capital expenses, these 
definitions are used for entirely different purposes than the 
definitions of capital expenses used by federal agencies in preparing 
their annual budgets. Specifically, federal accounting standards 
promulgated by the Federal Accounting Standards Advisory Board define 
property, plant, and equipment and establish their accounting, 
including capitalization. For budgeting purposes, capital assets are 
defined in OMB Circular A-11 and may differ from accounting. For 
example, capital assets as defined in A-11 may or may not be 
capitalized (recorded in an entity's balance sheet) under federal 
accounting standards.



[2] Federal Aviation Administration, Funding Criteria for Operations, 
Facilities and Equipment (F&E), and Research, Engineering and 
Development (R,E&D) Accounts, 2500.8A (April 9, 1993).

[3] NASA's "full-cost" definition does not include costs that the 
federal government does not currently include in the budget, such as 
accruing retiree health benefits.

[4] DOD's capital costs are referred to as investments and are roughly 
comparable to FAA's F&E expenses.

[5] "Controlling FAA's Operating Costs" (#6) was originally pulled from 
the committee report but is not within the scope of this review. 
However, we did not want to complicate the numbering system by 
withdrawing it.