Spending cuts spur feds to mull capital budgeting

Whether the White House or Congress prevails in the fight over the federal budget, funds for information technology programs will likely shrink over the next six years as cuts in discretionary programs continue. So how will agencies find the money for information systems?

According to administration officials and industry advisers, they will have to treat these investments the way businesses do, as capital assets whose costs can be justified by measurable benefits.

Capital budgeting, as this strategy is called, is not a new idea. Its basic principle—that agencies should account for the costs of, and expected returns from, their IT investments—is a feature of popular "best practices" guidelines as well as of laws such as the Paperwork Reduction Act, the Government Performance and Results Act and the new Cohen Act for reforming IT management.

But agencies, focused on an annual appropriations process that emphasizes short-term expenses, have done little to integrate their information resources management plans with their budget requests.

"Traditionally, government information technology decisions have not been made on a return-on-investment basis," said Phil Kiviat, vice president of business development with Sterling Software Inc.'s federal office.

"Information technology requires a large up-front expenditure by the federal government," said Stanley Collender, director of federal budget policy at Price Waterhouse. "Under current budget rules, it has to be paid for [under] appropriations caps, so any increase in spending has to be matched by reductions in other places. The problem here is that IT generally takes some time."

Although many agencies see longer-term appropriations as the solution to these funding difficulties, observers of the federal budget process do not expect Congress to change how it allocates money anytime soon. If agencies can prove to Congress that they are making sound investment decisions, however, many think lawmakers are more likely to back multimillion-dollar IT expenditures year after year.

Soon agencies will get the most specific guidance to date about how to incorporate systems life-cycle costs into their budget requests. Regulations to be proposed later this month carrying out the Cohen Act are expected to outline what agencies must do to account for their IT expenditures.

"At this point, we're not trying to do any comprehensive budget reform," said Bruce McConnell, who heads the Office of Management and Budget's IT policy branch. But, he said, providing more data to Congress about the long-term impact that information systems will have on agency operations might prompt legislators to consider agencies' future, as well as current, needs.

Morgan Kinghorn, a director with Coopers & Lybrand, agreed. "One of the real problems with getting money for these investments over a long period of time is the lack of clarity in people's expectations of what IT can deliver," said the former Internal Revenue Service chief financial officer (CFO). "Getting some fundamental agreed-upon objectives...will clarify to all stakeholders what's really expected."

Kinghorn said agency chief information officers who will be appointed under the Cohen Act will have to work closely with the CFOs to develop "baseline data describing what current systems provide for the money—something most agencies have not done."

In the current budget cycle for fiscal 1997, there is little evidence of this approach. "This year we only partially scratched the surface," said John Koskinen, OMB's deputy director for management. New budgeting techniques would mainly be applied to new systems, he said, beginning with the budget for fiscal 1998.

With projects already under way, he said, "one of the issues is whether there is a real understanding of what we'll get from the systems."

One question OMB wants agencies to consider is whether to break up major systems into smaller, less risky modules, as is advocated in the Cohen Act.

Some think funding decisions for federal investments such as IT should be treated differently by Congress than general operating expenses. Advocates of creating a capital budget for the government have argued that investments that produce measurable returns should not have to compete for funding against day-to-day expenditures such as salaries, grants and benefits paid to taxpayers.

One problem, however, is that it may be hard politically to define what to count as investment spending. A House staff member who works for the Government Reform and Oversight Committee's Government Management, Information and Technology Subcommittee said some fear that a separate investment budget could be used to exempt programs from cuts required to balance the budget—now a goal of the administration and Congress.

Nevertheless, the aide said, "it makes a lot of sense to consider it. There might be something to be gained by having one pot for IT funds."

The committee is planning a hearing on the subject soon. Last year lawmakers introduced three bills that would establish capital budgets for the government, including Reps. William Clinger (R-Pa.) [H.R. 767], Bob Wise (D-W.Va.) [H.R. 1233] and Ray Thornton (D-Ark.) [H.R. 1109].

Meanwhile, Collender, working with the Information Technology Association of America, has been developing a proposal that would create some type of special rule for IT spending that would allow Congress to take into account the savings a project would produce.


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