The federal government has long relied on leases as one way to obtain the use of buildings, equipment, and other forms of capital. The organizations most concerned with federal budgeting--the Congressional Budget Committees, the Office of Management and Budget, and the Congressional Budget Office--have adopted relatively clear and consistent guidelines for the budgetary treatment of leases. Those guidelines, which were first set forth in connection with the Budget Enforcement Act of 1990 (BEA) and later refined in the conference report to the Balanced Budget Act of 1997, distinguish among different types of leases. Some leases are, in effect, to be viewed as purchases of assets. In accordance with general budget principles, budget authority equal to the present value of lease payments over the life of such a lease--that is, the full costs of the commitment--is scored up front, at the time that budget authority is first provided for the lease, and the corresponding obligation is recorded up front when the lease is signed. Other leases, however, reflect the purchase of the services of an asset for only a part of its life; their budget authority is scored and obligations are recorded on an annual basis rather than capitalized.⁽¹⁾

Rapid growth in the use of lease-purchases in the 1980s highlighted the need for up-front scoring of those leases that amounted to asset purchases. In response to budgetary pressures, federal managers increasingly relied on such leases even though, viewed over the life of the asset, they were almost always more costly than outright purchases. In addition, the extensive use of leases threatened to undermine efforts to control total federal spending. The guidelines for the budgetary treatment of leases that accompanied the Budget Enforcement Act of 1990 were expected to curb the rapid growth of leasing, promote fiscal discipline, and encourage more cost-effective choices between leases and outright purchases.

Although the BEA guidelines for leases were adopted in response to the specific budgetary problems of the 1980s, they might also be viewed as part of a gradual and sometimes erratic long-run shift toward a budget process that provides greater visibility and control over federal spending. Evidence of that shift is seen in the 1967 Commission on Budget Concepts, which set out the basic principles of federal budgeting, and later in the Congressional Budget and Impoundment Control Act of 1974, which gave the Congress the ability to set revenue and spending targets and monitor progress toward those targets. OMB's current guidelines for the full funding of investments--which initially applied only to the Department of Defense's acquisition of weapons systems but now are applied much more widely--are consistent with that trend.
 

Current Guidelines for the Budgetary Treatment of Leases

Under current budgetary guidelines, leases fall into three distinct categories: operating leases, lease-purchases, and capital leases. Operating leases are limited ones that are not considered the equivalent of an asset purchase. As defined in the current scorekeeping guidelines, operating leases satisfy six criteria (see Box 3). Those criteria include a limit on the total amount spent on the lease (90 percent of the asset's fair market value) and a limit on the portion of the useful service life of the asset covered by the lease (75 percent). Because operating leases are not equivalent to an asset purchase, the budget authority for such leases is scored either for the full amount of future lease payments up front or, if the contract includes a cancellation clause, for the first year's payment plus any cancellation penalty, with future years' payments scored incrementally over the term of the lease (see Table 1).
 

Box 3. The Criteria for Operating Leases According to the Office of Management and Budget, to qualify as an operating lease with the government, a lease must satisfy six criteria: Ownership of the asset remains with the lessor during the term of the lease and is not transferred to the government at or shortly after the end of the lease term; The lease does not contain a bargain-price purchase option; The lease term does not exceed 75 percent of the estimated economic life of the asset; The present value of the minimum lease payments over the life of the lease does not exceed 90 percent of the fair market value of the asset at the beginning of the lease term; The asset is a general-purpose asset rather than being for a special purpose of the government and is not built to the unique specification of the government as lessee; and There is a private-sector market for the asset.1 1.  Source: Office of Management and Budget, Preparation, Submission, and Execution of the Budget, Circular No. A-11 (2002), Appendix B.

Table 1.
The Office of Management and Budget's Summary of Scorekeeping Requirements
Transaction	Budget Authority	Outlays
Lease-Purchase Without Substantial Private Risk	Amount equal to asset cost recorded up front; amount equal to imputed interest costs recorded on an annual basis over the lease period	Amount equal to asset cost scored over the construction period in proportion to the distribution of the contractor's costs; amount equal to imputed interest costs recorded on an annual basis over the lease term
Lease-Purchase with Substantial Private Risk	Amount equal to asset cost recorded up front; amount equal to imputed interest costs recorded on an annual basis over the lease term	Scored over lease term in an amount equal to the annual lease payments
Capital Lease	Amount equal to asset cost recorded up front; amount equal to imputed interest costs recorded on an annual basis over the lease term	Scored over lease term in an amount equal to the annual lease payments
Operating Lease	Amount equal to total payments under the full term of the lease or amount sufficient to cover first-year lease payments plus cancellation costs recorded up front	Scored over lease term in an amount equal to the annual lease payments
Source: Office of Management and Budget, Preparation, Submission, and Execution of the Budget, Circular No. A-11 (2002), Appendix B.

In contrast, the budget authority for a lease that fails to meet the criteria for an operating lease is scored up front for the full present discounted value of all future lease payments, regardless of any cancellation clause.⁽²⁾ Scoring the budget authority up front in this way acknowledges that such leases are, in effect, a commitment to purchase an asset on the installment plan. Such leases are either lease-purchases--leases in which the ownership of the asset transfers to the government at the end of the lease--or capital leases, a category that includes all leases that are neither operating leases nor lease-purchases.⁽³⁾

The budgetary treatment of federal outlays for leases also distinguishes between lease-purchases in which the government assumes substantial risk and those in which the private sector retains substantial risk (see Box 4). Lease-purchases with substantial risk for the government are those that most closely resemble the government purchase of an asset. Such a lease will have the same effect on the economy--for example, in terms of crowding out private investment--as would the government's decision to acquire the asset by deficit financing through borrowing by the U.S. Treasury. To reflect that economic effect, outlays for lease-purchases with substantial government risk are recorded over the period that the asset is constructed or acquired. That treatment ensures that such a lease-purchase has the same impact on outlays and deficits as would a debt-financed government purchase. In contrast, outlays for leases in which the private sector retains substantial risk are recorded over the course of the lease as payments are made.
 

Box 4. Identifying the Degree of Risk for the Government The scoring of outlays for lease-purchases depends on whether substantial risk exists in the lease agreement for the private-sector participants. Applying the scorekeeping guidelines included in the conference report for the Balanced Budget Act of 1997 to determine the degree of private-sector risk involves judgment.1 Rather than providing an exact definition, the guidelines offer the following illustrative criteria to indicate how a project would be less governmental and would thus entail greater private-sector risk. There should be no provision of government financing and no explicit government guarantee of third-party financing. Risk of ownership of the asset should remain with the lessor unless the government was at fault for losses. The asset should be for a general purpose rather than a special purpose for the government and should not be built to the government's unique specification as the lessee. There should be a private-sector market for the asset. The project should not be constructed on government land. 1.  U.S. House of Representatives, Balanced Budget Act of 1997, conference report to accompany H.R. 2015, Report 105-217 (July 30, 1997), pp. 1010-1013.

The criteria used to distinguish among the different categories of leases are to some extent arbitrary.⁽⁴⁾ However, the problem of distinguishing among different types of leases is not unique to the federal government. Indeed, the criteria for asset value and service life used in the guidelines to identify operating leases were closely modeled on those used by private firms. For example, to define operating leases in contrast to capital leases, the Financial Accounting Standards Board, which sets the accounting standards used by private industry, applies the limits of 90 percent of an asset's value and 75 percent of the service life consumed by the lease.⁽⁵⁾ Similarly, under FASB's standards, for a capital lease, the lessee records the liability on the basis of the present discounted value of the minimum lease payment over the term of the lease, whereas for an operating lease, the lessee does not capitalize the costs but treats them as expenses over the term of the lease. (In FASB's terminology, both lease-purchases and capital leases would be characterized as different kinds of capital leases.)
 

Factors Contributing to the Adoption of the Current Guidelines

Before the implementation of the current lease-purchase guidelines in 1991, OMB's standard practice was to record the budget authority and outlays for lease-purchases that were specifically exempted from the Anti-Deficiency Act in their authorizing legislation incrementally, over the term of the lease. That approach made lease-purchases appear much less costly, in the near term, than direct purchases of assets. In some cases, that budgetary treatment encouraged managers to purchase assets that were of lower priority and could not otherwise compete in the budget process. It also encouraged managers to use lease-purchases even if a direct purchase would have been more cost-effective.

The Growth of Leasing in the 1980s
The Economic Recovery Tax Act of 1981 was one factor contributing to growth in the use of leases in the early 1980s in the private, nonprofit, and public sectors. Firms are taxed on their corporate profits net of the depreciation charges on their assets. Under the 1981 tax law, firms were able to reduce their corporate tax liabilities by investing in assets and then taking both an investment tax credit and accelerated depreciation charges. They then leased the assets to government agencies or to other firms that could not take advantage of the favorable tax treatment.

The Deficit Reduction Act of 1984 eventually reduced the tax advantages available to owners of assets leased to the government. By then, however, concerns about the size of the federal deficit were driving the government's increasing reliance on lease-purchases. The Balanced Budget and Emergency Deficit Control Act of 1985, also known as Gramm-Rudman-Hollings, set ceilings for federal deficits and provided for the automatic sequestration (or cancellation) of appropriations if those ceilings were breached. Lease-purchases and capital leases offered a way for agencies to gain access to capital without formally breaching the deficit ceilings. Although the lease-purchases had the same impact on the economy as deficit spending had, their impact on measures of the federal deficit was spread over many years.

Because lease-purchase payments could be spread over an asset's entire useful life, they were especially attractive to agencies seeking costly, long-lived assets, such as ships or buildings. In the early and mid-1980s, the Navy successfully used "build to charter" contracts to acquire 13 prepositioning ships and five T-5 tankers to transport petroleum products. In each case, the Navy agreed to charter vessels that were built to its specifications using private capital. The business arrangement, while typical for a build-to-charter project, was very complex (see Box 5).
 

Box 5. The Structure of a Lease-Purchase: the Example of T-5 Tankers In the early 1980s, the Navy arranged a build-to-charter program for five T-5 tankers. The winning bidder, Ocean Shipholdings, established separate special-purpose entities (SPEs) to act as the contractor for each vessel. The SPEs obtained construction financing through commercial bank syndicates. SPEs are often used for that purpose because they assure the lender that the project is isolated from any losses the parent company might incur in its other operations. Once each vessel was completed, the SPE sold it to a lessor trust and then leased it back. The SPE then chartered the ship to the Navy for five years, with three or four five-year renewals and a purchase option at the end of the charter. The SPE paid back its construction loan using proceeds from the sale of the ships to the lessor trust. The lessor trust funded its purchase of the vessels with a combination of equity provided by investor companies (30 percent) and debt (70 percent). The investor companies were the legal owners of the vessels, although the vessels were designed specifically to meet the Navy's needs, with the expectation that they would be used by the Navy throughout their service life. The investor companies received a return from a combination of lease payments, tax benefits in the form of accelerated depreciation, and the residual value of the vessels. The debt was financed through the Federal Financing Bank (FFB), a wholly owned corporation of the United States that was created to make low-cost loans to federal agencies as well as to nonfederal borrowers whose loans are guaranteed against default by a federal agency guarantee. Although the Navy did not provide a guarantee against default in this case, its charter agreement was considered to be equivalent. The FFB did not provide financing during the construction phase of the project because the construction contract entailed risk for private-sector entities. For subsequent phases of the project, however, the FFB provided low-cost financing (one-eighth of a percentage point above the applicable Treasury rate). Costs would have been greater if private-sector borrowing had been used. The reliance on 30 percent private equity was advantageous to the Navy--although not to the federal government as a whole--because the tax benefits that the owners received allowed them to accept a low interest rate. That tax advantage has since been eliminated, and a 1997 study prepared for the Navy by a contractor, the Argent Group Ltd., proposed using 100 percent financing from the FFB in any future charters.

In another use of lease-purchases, DoD obtained on-base housing units for military families. The 1984 Military Construction Authorization Act (Public Law 98-115, section 801) gave DoD authority for a program in which contractors would build housing that DoD would lease back for up to 20 years. At the end of the lease, DoD would have the right to acquire the units. The units, many of which were to be on federal land, were built to DoD's specifications and assigned rent-free to eligible military members. In 1987, DoD produced a five-year plan that relied on units built under section 801 of the law for 40 percent of its new housing. By 1990, DoD had received authorization for 19,500 Section 801 build-to-lease housing units; solicitations for four projects covering 1,150 units had been issued, and 24 projects comprising a total of 8,160 units were in review.

The General Services Administration (GSA) used lease-purchases to obtain office space for federal agencies. In the 1987, 1988, and 1989 appropriation acts, the Congress authorized GSA to contract for the lease-purchase of a number of specific buildings. In 1989, before implementation of the current guidelines for the budgetary treatment of leases, GSA was planning to seek additional lease-purchase authority, citing a projected need for $2.5 billion more for the construction of federal office space from 1991 through 1993. Projects included the Thurgood Marshall Federal Judiciary Building near Union Station in Washington, D.C. (authorized by P.L. 100-480), and a National Archives facility in College Park, Maryland (authorized by P.L. 100-440). Both projects, which were exempted from the Anti-Deficiency Act, involved 30-year lease-purchases. In each case, the government's commitment to make lease payments was the deciding factor in the developer's ability to obtain financing.

Although lease-purchase arrangements were particularly common for buildings and ships, the range of assets that could be leased rather than purchased was very wide. According to one estimate, government agencies in 1990 were leasing more than $4 billion in automated data processing equipment, most of it through capital leases. In 1990, the Department of Energy (DOE) proposed leasing oil for the Strategic Petroleum Reserve; that proposal, however, was not implemented.

Concerns About Fiscal Discipline and the Efficient Use of Resources
By the late 1980s, the proliferation of lease-purchases was a source of concern within the Congressional Budget Committees, OMB, and CBO. In October 1988, the acting director of OMB notified the heads of executive departments and agencies that, although "a number of agencies and committees of Congress have proposed financing schemes involving lease-purchase arrangements," those arrangements understated the cost of capital acquisitions in the budget and were opposed by the Administration.⁽⁶⁾ In 1989, OMB began to record up front the full costs of some lease-purchases. For example, it recorded borrowing authority and outlays for the National Archives lease-purchase project--a project in which the federal government guaranteed the lessor's debt and had full control over the design and operation of the new building--in the same way it would have recorded borrowing authority and outlays for federal construction financed by federal borrowing.⁽⁷⁾

The demand for a budgetary treatment that would consistently put the costs of lease-purchases up front in the budget reflected three basic concerns. One was that the ability of agencies to rely on private borrowing--albeit private borrowing backed by future lease payments by the government--had the potential to seriously undermine fiscal discipline, rendering limits on deficits or caps on federal spending ineffective. In some lease-purchases, financing was obtained using certificates of participation that were backed by the government's promise to make lease payments. In other cases, a special-purpose entity--distinct from the government and the vendor of the asset--was created to borrow the funds needed for the project, pay off the vendor, and then manage the transfer of the government's lease payments to creditors. Regardless of the exact method used, the effects on the economy--including the potential for crowding out private investment--were essentially the same as they would have been had the Treasury issued debt to finance the asset.

A second concern was that the ability of agencies to avoid the up-front costs of their decisions could make it more likely that they would undertake projects of lower priority, leading to an inefficient allocation of resources. That concern would have been valid even if control of the budget deficit had not been an issue. The likelihood that managers would undertake such investments was further increased by the lack of transparency in the federal budget. As long as the full costs of lease-purchases were not reflected in the budget at the beginning of the lease term, the budget would not provide Congressional overseers and others with the information they needed to effectively monitor and control such investments.

A third concern was that, even if the investment project was a priority, agencies had a strong incentive to use lease-purchases when an outright purchase would have entailed lower budgetary and economic resource costs over the long run. That concern was intensified by the recognition among budget analysts of the time that a lease-purchase is almost always more costly than the direct purchase of the same asset.⁽⁸⁾ For example, according to a 1990 internal CBO analysis of the lease-purchases of the Federal Judiciary Building and of the National Archives facility, in each case the approach was about 10 percent more costly, in present discounted terms, than a direct purchase would have been. Factors that tend to raise the budgetary costs of a lease-purchase include the degree of risk borne by the private sector and the difficulty in ensuring adequate competition for those specialized contracts. One factor that tends to raise the economic resource costs of a lease-purchase is the additional complexity of the transactions. (See the appendix for a detailed discussion of the factors that can cause the budgetary and economic resource costs of a pure lease-purchase to differ from the costs of directly purchasing the same asset.)
 

The Effects of the 1991 Lease-Purchase Guidelines

With their implementation in 1991, the lease-purchase guidelines accomplished many of their objectives. They halted the rush toward lease-purchases that had been occurring in the late 1980s, in some cases forestalling lower-priority investment projects. In other cases, the level playing field between lease-purchases and direct purchases led managers to substitute direct purchases for the more costly lease-purchases. The guidelines also reduced the number of leasing authorities provided or extended by the Congress. Yet the guidelines have also had unintended consequences. Federal agencies have, at times, responded to the guidelines by adopting approaches--such as short-term leases--that are even less cost-effective than the lease-purchases they replaced.

Reduced Reliance on Lease-Purchases
In 1991, DoD scrapped plans to enter into additional contracts for Section 801 projects--projects that could not compete in the budget process on a level playing field--when it learned from OMB that the total obligations associated with the contracts would be scored in the first year. Instead, it chose to go forward with a limited number of projects using appropriated funds. Likewise, the Congress decided not to extend authority for Section 801 and similar programs for military family housing in the National Defense Authorization Act for Fiscal Years 1992 and 1993 when it became clear that, under the new rules, direct spending equal to the government's total obligations under the extended authority would be scored (see Box 6).⁽⁹⁾
 

Box 6. The Scoring of Direct Spending The Congressional Budget Office's (CBO's) scoring of bills that would create or extend federal programs depends in part on whether the legislation is deemed to provide sufficient authority for agencies to enter into obligations in advance, or in excess, of appropriations for that purpose. If a bill provides such authority, CBO's scoring will include direct spending in the amount needed to cover the agreements that agencies are expected to enter into. On the one hand, a bill that directs an agency to enter into obligations and explicitly waives the Anti-Deficiency Act clearly creates direct spending authority. On the other hand, language that grants an agency general authority to enter into obligations only if it subsequently obtains appropriations for that purpose does not provide direct spending authority. (In that case, CBO will score budget authority if and when appropriations for that purpose are provided.) Some bills, however, fall between those two extremes. CBO's practice is to score direct spending if it believes the agency will interpret wording in the bill to allow it to enter into obligations in advance, or in excess, of appropriations for that purpose.

After 1990, appropriation acts no longer included provisions allowing GSA to enter into lease-purchase contracts for specific federal buildings. And the Navy ceased acquiring ships through build-to-charter programs, although that change can be attributed in large part to the enactment of an earlier statute--itself a reflection of growing concern about lease-purchases--that required Congressional authorization of long-term leases for vessels and aircraft.⁽¹⁰⁾

The effect of the new guidelines on lease-purchases was clearly recognized by those agencies and committees that had relied on them to support capital programs. In May 1991, the Chairwoman of the House Armed Service's Subcommittee on Military Installations and Facilities noted that the guidelines associated with the Budget Enforcement Act of 1990 were having a "devastating impact" on DoD's plans to use third-party financing to provide new housing for military families.⁽¹¹⁾ In 1994, as the impact of the new budgetary treatment continued to be felt, the House Committee on Public Works reported a bill (H.R. 2680) that would have restored the budgetary treatment of leases to pre-1991 practices. Although that bill never became law, the concerns expressed by the bill's sponsors suggested that the new guidelines had reduced GSA's ability to rely on private financing to build federal office space.

Although it is not possible to quantify the effect, such examples suggest that the 1991 guidelines have contributed to efficiency and fiscal discipline by discouraging lower-priority investments. Because the costs of federal purchases are now shown up front in the budget, the result is a more transparent budget that better reflects the full costs of government activities and that provides the information needed for effective monitoring. In addition, the guidelines may also have had some indirect benefits. For example, the need to budget for acquisitions up front has helped increase federal managers' interest in new tools--such as five-year capital spending plans--that place a greater emphasis on planning for those acquisitions.

Nonetheless, the guidelines have had some unintended consequences. They have led federal officials to seek alternatives to both direct government purchases and lease-purchases. In some cases, those alternatives are less cost-effective than the lease purchases they replaced.

Reduced Reliance on the Direct Purchases of Federal Assets
Given the lease-purchase guidelines, federal managers seeking to maintain or increase their agencies' production of services while reducing their purchases of assets could take various approaches. They can substitute a series of short-term operating leases for a lease-purchase or capital lease, contract out capital-intensive tasks, or postpone acquiring new facilities and equipment even if doing so might be inefficient over the longer term. Managers have at times used each of those approaches to reduce their direct purchases of assets, although the extent to which the new lease-purchase guidelines have contributed to that practice is uncertain.

Substituting Operating Leases for Lease-Purchases. Since the implementation of the lease-purchase guidelines, GSA has increased its use of relatively short-term leases for general office space. GSA argues that the rental receipts paid by the tenant agencies into its building fund are not enough to cover the up-front costs of construction or lease-purchases. As a result, it sees no alternative to relying on serial short-term leases to meet long-term federal needs even though it asserts that such leases are less cost-effective than lease-purchases.⁽¹²⁾

There is some evidence that GSA has shifted from using lease-purchases to using short-term leases, rather than purchasing buildings outright. Between 1986 and 1989, before implementation of the lease-purchase guidelines, 10 of 12 buildings that the Congress authorized GSA's Federal Building Fund to obtain through lease-purchases were to provide office space for executive agencies. Today, GSA typically obtains the use of such buildings through short-term leases, and its spending to purchase buildings has been directed toward other types of facilities. Since 1995, more than 80 percent of the spending to purchase buildings has been for specialized facilities, such as courthouses and border stations, that cannot be obtained using short-term leases.

Calculations that look only at budgetary costs overstate the disadvantage of relying on short-term leases for general office space. When the government purchases a building, it takes on the risk that it will not need the asset in the future and that the costs of renting comparable space might fall, making renting more attractive. Those risks represent ownership costs that the government bears only when it chooses to purchase rather than lease. The potential advantages offered by leases are reflected in the fact that about 11 percent of GSA's owned office space was vacant in 2002, while only 3 percent of its leased space was vacant.

In the case of more-specialized assets, however, the disadvantages of substituting a series of operating leases for a direct purchase or lease-purchase are clear. One example of an arrangement that might be considered an operating lease for a specialized asset involves the provision in the Department of Defense Appropriation Act for Fiscal Year 2002 that authorizes the Air Force to lease up to 100 Boeing 767 aircraft in a general-purpose, commercial configuration for up to 10 years.⁽¹³⁾ One plan that the Air Force considered was to lease commercial 767 aircraft, convert them to a tanker configuration, and then pay to restore them to their commercial configuration before returning them to Boeing at the end of the 10-year lease term.⁽¹⁴⁾ If such a lease was implemented, it might meet the technical criteria for an operating lease--the asset being leased would, in fact, be a commercial asset rather than a specialized military asset--and the obligations could be recorded on an annual basis. Nonetheless, CBO estimates that over the long run, using operating leases to obtain the services of tanker aircraft would prove not only more costly than an outright purchase, but also more costly than a lease-purchase agreement.⁽¹⁵⁾

An example of an operating lease for a somewhat less specialized asset is that for the Patent and Trademark Office building, which was designed largely to government specifications and then leased--under an operating lease--for 20 years at $1.2 billion dollars. Although OMB's classification of that lease as an operating lease was a source of controversy, the General Accounting Office (GAO) eventually concluded that the value of that total lease payment was less than 90 percent of the asset's value, thus allowing the lease to be categorized as an operating lease. GAO also concluded, however, that the operating lease was not a cost-effective alternative.⁽¹⁶⁾

Contracting Out Capital-Intensive Tasks. The lease-purchase guidelines apply explicitly to the budgetary treatment of leases, and not to purchases of goods or services. In some cases, however, the line between a contract for goods and services and a contract that commits the government to paying for a capital asset is not entirely clear. For example, contracting out has enabled DoD to obtain gas, water, and electric utilities at military installations without the need to finance the replacement of its own aging infrastructure of electrical wiring, gas lines, and water or sewage conduits. Instead, DoD pays for the cost of the new infrastructure on its bases over time through the rates it pays suppliers for utility services.⁽¹⁷⁾

Contracting out for utilities may be a cost-effective solution at many military bases if it provides competition and economies of scale. However, even if contracting out for energy services resulted in higher long-run costs, it might be an attractive option for DoD in the short run given the need to recapitalize aging utility systems.

Even if a contract for capital-intensive services is scored as a capital lease with budget authority required up front, it can reduce the reported outlays for an agency in the near term. For example, in the mid-1990s, the Department of Energy developed a plan to purchase environmental remediation services at its Hanford Site in Washington State.⁽¹⁸⁾ Under that plan, the contractor was to build a large remediation facility that had no purpose other than the processing of waste at that site. Although CBO categorized that project as a lease-purchase with substantial risk for the government, OMB scored it as a capital lease, thus allowing outlays to be spread out over the term of the lease.⁽¹⁹⁾

Some service contracts are clearly hidden lease-purchases and could be scored as such. In a 1995 analysis of a hypothetical agreement by DoD and the National Aeronautics and Space Administration (NASA) to purchase satellite launch services from a private contractor, CBO concluded that the agreement would be a lease-purchase with substantial government risk.⁽²⁰⁾ In that example, the contractor would have financed the construction of launch facilities on the basis of NASA's prior commitment to purchase launch services. The commitment would not have formally transferred ownership of the launch system to the government. Yet CBO concluded that the substance of the arrangement was a lease-purchase, because only a commitment by NASA that covered almost all of the system's costs would be sufficient to allow the developer to obtain financing.

Other proposals for service contracts can be difficult to characterize. A contract for a multiyear lease of automatic data processing equipment might qualify as a lease-purchase, whereas a contract that called for seat management--in which the contractor is responsible for providing computer equipment, software, and maintenance subject to performance criteria--might not. Similarly, lease-purchase guidelines might not apply if the Air Force, instead of leasing Boeing 767 aircraft, entered into a multiyear contract for tanker services in which the contractor provided the aircraft, crews, and maintenance and bore the risk of failing to meet performance goals. The Navy currently has a short-term contract with a private firm, Omega Air, in which it pays $6,000 per flying hour for the services of a tanker.⁽²¹⁾

Postponing the Acquisition of New Capital Assets. Agencies faced with the up-front costs of acquiring new capital assets--facilities and equipment--often have the option of continuing to produce goods and services using what they have, even if it is old or obsolete. Although that approach can increase the costs of producing output in the long run, it holds down budgetary costs in the short run. DoD, for example, has traditionally spent less on major repair and renovation of its buildings than does private industry. Property managers within DoD assert that renovation projects are often not a high priority, even though failure to invest in buildings ultimately leads to higher maintenance costs.

At the same time, however, there is no clear evidence that the need to pay for capital up front leads to systematic underinvestment in infrastructure such as highways, bridges, and water projects that the government provides for the direct benefit of the public.⁽²²⁾ Those assets differ from the support facilities cited earlier in that producing them is seen as a core function of the agency involved. To the extent that the lease-purchase guidelines have led agencies to continue to produce with obsolete capital assets, the activities are likely to be ones without strong political support within the agencies or the Congress.

Increased Reliance on Alternative Budgeting Techniques
In some cases, the lease-purchase guidelines encouraged federal managers to seek other budgeting techniques--such as incremental funding, advance appropriations, and revolving funds--that reduce the requirement to recognize the costs of capital investments at the time that the commitment is made. Nonetheless, the budgetary benefits that those approaches offer to agencies are much less than what the benefits from lease-purchases had been. Unlike lease-purchases--which before 1991 could be used to amortize the costs of assets over their entire service life--the newer techniques are generally capable of spreading capital costs only over the period in which an asset is being constructed.

Incremental funding occurs when the Congress appropriates funds for part of a project even though that part has no value as a stand-alone project. Under incremental funding, the agency must enter into a contract that commits it to purchase only the piece of the project that has been funded. Funding, scoring, and contracting proceed by increments. In the case of advance appropriations, the Congress authorizes and appropriates funds for an entire project, but the appropriations do not become available for obligation until later. The budget authority is then scored in the period that it becomes available for obligation. Although the use of incremental funding is almost invariably opposed by budget experts who support the principle of full funding, advance appropriations are sometimes viewed as an appropriate tool to use in the case of acquisition projects that have a few items with long lead times.⁽²³⁾

Evidence that the lease-purchase guidelines have encouraged the use of advance appropriations or incremental funding is anecdotal. Nonetheless, buildings and support ships--the two types of assets that in the past were most often acquired through lease-purchases--figure prominently in a December 2000 briefing that GAO gave to the Senate Budget Committee on assets that were being procured using those methods. Among the buildings being procured with advance appropriations were a number of federal prisons. The ship construction being funded incrementally included one LDH-8 amphibious ship and two LPD-17 amphibious ships. In addition, DoD's new Large, Medium-Speed, Roll-on/Roll-off (LMSR) ships are being purchased through the National Sealift Revolving Fund. Because the funds are not being appropriated to the Navy's procurement accounts, the Navy argues that "full funding provisions as normally understood for ship acquisition do not apply."⁽²⁴⁾

Although some agencies and Congressional committees are more accepting of incremental and advance appropriations than others, efforts to expand the use of those tools are often criticized on the grounds that they reduce the visibility of costs. For example, in its report on the fiscal year 2002 appropriation for defense, the House Appropriations Committee said it was "dismayed" at the Navy's continued use of such mechanisms, which "only serve to decrease cost visibility and accountability on these important programs."