US Government Efficiency Solution: Built Infrastructure Cost Accounting and Asset Management Investment Analysis

Miniseries on the US Government's Failure to Efficiently Manage its Built Infrastructure Portfolio

Feb 18, 2025

This Asset Management Partnership (AMP) Newsletter continues a miniseries that covers how the US Government is failing to manage its built infrastructure and how this problem can be solved.

Introduction:

This article addresses two critical failure points that require solutions to enhance the management of the U.S. Government's built infrastructure, which currently incurs an inefficient annual cost of $70 billion. These failure points involve:

Improve Federal accounting for built infrastructure.
Enhancing asset management investment analysis.

Both issues are thoroughly discussed in the National Academies' report titled "Strategies to Renew Federal Facilities."

The purpose of this National Academies’ report was to identify best practices for managing the U.S. Government's vast built infrastructure portfolio. As the saying goes, "You can't manage what you don't measure." Addressing these two failure points is fundamental for the U.S. Government to effectively measure and evaluate the performance of its built infrastructure. This a first step to determine if it is or is not being managed efficiently. Not even knowing this is a US Government fiduciary failure.

1^st Failure Point – Federal Cost Accounting:

The first point of failure can be solved by fixing core accounting. The Federal government’s core accounting structure is established in OMB Circular A-11: Preparation, Submission, and Execution of the Budget, specifically in Section 83 – Objective Classification.

The National Academies' report highlights a "fundamental flaw" in this structure, which is that it focuses on "activity-based" accounting while lacking a basis for "asset-based" accounting for built infrastructure. Here's how this flaw manifests:

Activity-Based Focus: Section 83 is designed to track expenditures according to the activities for which funds are appropriated by Congress. This ensures that the budget is used as intended. This approach aligns with Congress's oversight role but does not facilitate linking funding to the assets that consume this funding.
Challenges in Relating Activities to Assets:
- Personnel Expenditures: These are lumped into general salary and benefit accounts, making it hard to proportionally allocate costs to specific assets and built infrastructure in general.
- Contracted Services: Services like outsourced facility operations and maintenance, professional and administrative support are not differentiated, which complicates identifying expenditures related to built infrastructure.
- Materials and Products: Similarly, fungible items like fuel or raw materials are grouped, obscuring their relation to specific infrastructure.
Agency Accounting Variability: Agencies use a variety of accounting systems, which complicates the uniform tracking of expenditures across different rules, regulations, and activities related to built infrastructure management.
Additional Accounting Issues:
- Owned vs. Leased Assets: Different tracking methods and funding sources are used for owned and leased assets. This makes it difficult to perform comprehensive cost-benefit analyses between them or to account for how funds are consumed through supporting activities.
- Real Property Value: The accounting system does not account for the value or productive capacity of real property, including various forms of property rights and uses. Current accounting only evaluates real property transactional costs.

The core of the problem is the need for an accounting structure that can handle both activity-based and asset-based cost accounting related to built infrastructure management. While activity-based accounting ensures legal and Congressional oversight on fund usage, there's also a critical need to track how these funds relate to the management, acquisition, operations, maintenance, and disposition of built infrastructure. Development of a dual approach would allow for more efficient and effective planning and use of Federal assets.

Updating OMB Circular A-11 Section 83 to characterize owned and leased expenses across acquisition and construction, operations and maintenance, and disposition would be a significant step toward increasing transparency in how Federal funds are used for built infrastructure. This could be executed through decisions within the Office of Management and Budget (OMB) and would directly address the transparency and accountability issues identified in the National Academies' report "Strategies to Renew Federal Facilities."

Federal Built Infrastructure Accountancy Improvements

Here's how this could be implemented through changes to OMB Circular A-11, Section 83 and its implications:

Characterization of Expenses for Both Owned and Leased Assets:
- Acquisition and Construction: Clearly delineate costs associated with purchasing or building new infrastructure. For leased assets this is the basis of exchange for the lease.
- Operations and Maintenance: Track ongoing costs to keep infrastructure functional and in good repair.
- Disposition: Account for costs related to decommissioning, selling, or otherwise disposing of assets no longer needed or serviceable.
Implementation through OMB:
- OMB can revise Section 83 to include these classifications, providing a more detailed structure for Federal agencies to follow. This would involve updating guidance, ensuring all agencies adopt the new classifications, and possibly developing new reporting tools or systems.
Impact on Transparency and Management:
- Enhanced ability to track where federal dollars are specifically going in relation to built infrastructure.
- Better alignment with the government's fiduciary responsibilities to manage taxpayer investments in infrastructure effectively.

2^nd Failure Point – Asset Management Investment Analysis:

The second failure point is the U.S. Government’s ability to perform a balance-sheet analysis for the built infrastructure it owns and operates. A solution for this relies partially on resolving the first problem (updating OMB Circular A-11 Section 83 for better expense tracking). The National Academies’ report referenced extends the traditional concept of a balance-sheet analysis into an asset management investment analysis that is tailored for built infrastructure management. This approach aligns with ISO 55000 – Asset Management System standards and generally accepted accounting principles (GAAP). Below, outlines the distinction between a simple balance-sheet analysis and an asset management (balance-sheet) investment analysis,

Simple Balance Sheet Analysis

A traditional balance sheet compares an organization’s assets and liabilities to assess its financial health:

Assets:
- Short-Term Assets: Cash, accounts receivable, or other liquid assets that can be quickly converted to cash.
- Long-Term Assets: Investments, real property (e.g., land, buildings), equipment, and intangible assets (e.g., patents, rights).
Liabilities:
- Short-term liabilities (e.g., accounts payable, short-term debt).
- Long-term liabilities (e.g., bonds, loans, future commitments).
Purpose: Determines whether assets exceed liabilities (a positive balance), indicating the organization’s ability to meet its financial commitments.

This approach is broadly applicable to organizations but does not fully address the unique needs of managing built infrastructure, where the focus extends beyond financial liquidity to operational performance and lifecycle costs.

Asset Management (Balance Sheet) Investment Analysis - National Academies’ Extension

The National Academies’ report adapts the balance-sheet concept into an asset management investment analysis specifically for built infrastructure. This analysis compares the costs required to achieve infrastructure management objectives with the budget available to fund these requirements. It shifts the focus from purely financial health to the ability to sustain and optimize infrastructure assets over time.

Components:
- Costs to Achieve Objectives (akin to "liabilities" in a traditional balance sheet):
  - Sum of all management and operating requirements for built infrastructure, including:
    - Acquisition and construction costs needed to deliver needed asset enabling capabilities for the organization.
    - Operations and maintenance costs to achieve set levels of performance.
    - Disposition costs (e.g., decommissioning, disposal).
  - These costs represent the financial and operational obligations needed to maintain infrastructure at a desired performance level.
- Budget Available (akin to "assets" in a traditional balance sheet):
  - Total funding allocated or available to meet the management and operating requirements.
  - Includes appropriations, grants, and other revenue streams dedicated to built infrastructure.
Purpose:
- Assess whether the available budget is sufficient to cover the costs of managing and operating infrastructure effectively.
- Identify funding gaps or surpluses, enabling better planning and prioritization of infrastructure investments.
- Support long-term asset management by ensuring infrastructure remains functional, safe, and cost-effective throughout its lifecycle.
Alignment with Standards:
- ISO 55000: This international standard emphasizes a systematic approach to managing assets, focusing on value, risk, and performance over the asset’s lifecycle. The asset management (balance-sheet) investment analysis aligns with ISO 55000 by linking costs to specific asset management objectives.
- GAAP: Ensures that the analysis adheres to consistent, transparent accounting principles, making it auditable and comparable across agencies.

Key Differences Between the Two Analyses

Dependency on the First Solution

The asset management balance-sheet investment analysis depends on accurate and detailed data about infrastructure expenditures, which is where the first solution (updating OMB Circular A-11 Section 83) becomes critical:

Without a revised Section 83 that tracks owned and leased expenses across acquisition, operations, maintenance, and disposition, the government lacks the granular data needed to calculate the "costs to achieve objectives."
Improved activity-based and asset-based accounting (from the first solution) provides the foundation for identifying and aggregating these costs, enabling a meaningful balance-sheet analysis.

Implications

Implementing an asset management balance-sheet analysis, supported by an updated Section 83, would:

Enhance Transparency: Provide a clear picture of how infrastructure funding aligns with actual needs.
Improve Decision-Making: Enable prioritization of investments based on asset condition, performance, and lifecycle costs.
Address Fiduciary Failures: Rectify shortcomings identified in "Strategies to Renew Federal Facilities" by ensuring better management of federal infrastructure assets.
Support Long-Term Sustainability: Align infrastructure management with international standards (ISO 55000), promoting efficient use of resources over time.

This dual-solution approach bridges the gap between financial oversight and strategic asset management, addressing both Congressional accountability and the practical needs of infrastructure stewardship.

Synopsis:

This AMP Newsletter article identifies two critical points of failure in the U.S. Government's management of its built infrastructure:

Cost Accounting:
- Problem: OMB Circular A-11, which outlines the development and execution of the federal budget, primarily focuses on activity-based accounting. This method ensures that appropriated funds are used for their intended legal purposes but does not provide a structure for asset-based accounting. As a result, there's no clear way to assess how funds are contributing to the performance and management of built infrastructure nor its contribution to Federal Agency performance.
- Impact: This deficiency means there's no comprehensive tracking of what assets are consuming funds, which leads to inefficiencies and a lack of accountability. The infrastructure portfolio consumes over $70 billion annually, but without asset-based accounting, the effectiveness and efficiency of these expenditures remain opaque.
- Solution: Updating OMB Circular A-11 Section 83 to include classifications for owned and leased expenses related to acquisition, construction, operations, maintenance, and disposition would allow for a dual activity- and asset-based accounting system. This would provide transparency and enable better performance evaluation of infrastructure management activities in the context of Agency performance and mission achievement.
Balance Sheet Analysis (Asset Management):
- Problem: The government does not sufficiently integrate Asset Management Objectives into its budgeting process to create Requirements Based Budgets (RBBs) that are then reconciled with actual agency budget submissions. This leads to a lack of understanding of the risks associated with underfunding infrastructure. It also means there's no accountability at the agency executive level for managing these assets efficiently.
- Impact: Without this analysis, the true financial health and operational sustainability of the government's infrastructure assets are not known, leading to potential mismanagement, hidden risks, and a lack of accountability for agency leaders.
- Solution: Implementing an asset management investment analysis, as suggested by the National Academies, would involve comparing the costs to achieve infrastructure management objectives against the budget available. This would align with ISO 55000 standards for asset management and GAAP, providing a framework to assess whether funding matches the needs of infrastructure management and operations.

Resolving these Points of Failure:

By updating accounting practices and implementing a more sophisticated balance sheet analysis, the U.S. Government can:
- Gain a clearer picture of how funds are being used in relation to infrastructure assets.
- Assess the performance and condition of infrastructure in a way that's directly tied to financial inputs.
- Identify and mitigate risks associated with underfunding or mismanagement.
- Hold agency executives accountable for the efficiency and effectiveness of infrastructure management.
These solutions are pivotal for addressing the fiduciary responsibilities highlighted in the "Strategies to Renew Federal Facilities" report, promoting better stewardship of public resources, and ensuring that infrastructure investments deliver value over time.

Implementing these solutions requires a concerted effort from OMB, federal agencies, and possibly legislative changes to ensure that the accounting and budgeting practices reflect the needs of asset management in the 21st century. If these problems are not addressed the Federal government will never know how efficient or inefficient built infrastructure is managed. It also means the US Government will continue to fail to meet its fiduciary obligations to US Taxpayers regarding built infrastructure management.

Written by Jack Dempsey | February 18, 2025

AMP Newsletter #110

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