An Analysis of the Army's Arsenal Support Program Initiative

July 21, 2010

The Congress created the Arsenal Support Program Initiative (ASPI) in 2001 to help maintain the viability of the Armys three manufacturing arsenals. Owned and operated by the federal government, those arsenalswhich are located in Rock Island, Illinois, Watervliet, New York, and Pine Bluff, Arkansasprovide a variety of services, including the manufacture, renovation, and demilitarization of weapons and other equipment. The broad intent of the ASPI is to encourage collaboration between the Army and commercial firms to preserve the arsenals capabilities and to reduce the costs to the government of operating and maintaining those arsenals. Originally established as a two-year demonstration program, the ASPI has subsequently been extended through a series of National Defense Authorization Acts. The program is currently scheduled to expire at the end of 2011.

The principal outcome of the ASPI to date is that commercial tenants have begun to lease unused property at the arsenals, typically vacant buildings or portions of buildings that the Army has renovated specifically for that purpose. Tenants compensate the arsenals mostly in the form of negotiated rental payments or services in lieu of rent. As of 2009, a total of 46 tenants were leasing more than 200,000 square feet of space at the arsenals under the ASPI.

In recent years, however, policymakers have expressed concern that the ASPI is not fulfilling its objectives. In the conference report that accompanied the National Defense Authorization Act for Fiscal Year 2008, legislators noted that receipts generated by the ASPI to that point were small relative to funding provided for the program; they also stated that the program was not clearly bolstering the arsenals core missions. As a result of those concerns, the Congress directed the Congressional Budget Office (CBO) to conduct a business case analysis of the ASPI. In response to that directive, CBO examined the costs, return on investment, and economic impact of the program; those findings are presented in this report. The Congress also directed the Government Accountability Office (GAO) to investigate how effectively the ASPI was fulfilling its objectives and to provide recommendations on restructuring the program to support the arsenals core missions. GAOs findings appear in a separate report that was released in November 2009.

Although the Department of Defense (DoD) has not requested any funding for the ASPI in its annual budget submissions, the ASPI has received more than $87 million in funding from its inception in 2001 through 2010. As of the end of 2009, a total of $69 million had been obligated for the program and, of that amount, $54 million had been disbursed. Over 90 percent of the obligations made for the program have been for the purpose of renovating and improving arsenal properties and infrastructure, CBO estimates. Funding for the ASPI is not used to pay employees who work for the office that manages the program; those costs are paid out of the Armys operation and maintenance account.

To determine the financial impact of the ASPI on the federal government, CBO first estimated the receipts and other financial benefits that the program has generated for the government so far and those that might be generated in the future. CBO then calculated the present value of those cash flows using a discount rate that attaches a market price to the risk associated with those flows. That present value can be compared to the present value of the governmental outlays needed to make space available to tenants.

Under the assumptions that the ASPI will receive no additional appropriations for renovations after 2010 and that the government will continue to pay for marketing and administering the program, CBO estimates that, measured in 2010 dollars, the present value of outlays for the program through 2075 is $99 million and the present value of the financial benefits that the program will generate for the government is $47 million. The resulting net present value is negative $52 million, meaning that the total stream of financial benefits that the ASPI has generated for the government so far and can be expected to generate in the future will fall short of the up-front investment required to ready the arsenal properties for tenants. That estimate translates into a government subsidy for the program of about 50 cents for every dollar spent.

Should the Congress provide further funding for renovations after 2010, each additional 100,000 square feet of space that the Army renovated under the ASPI would cost about $16 million in 2010 dollars, CBO estimates. At a subsidy of about 50 cents for every dollar spent, that spending would result in a net cost to the government of about $8 million.

In terms of the programs broader economic impact, the ASPI positively affects the local economies in the arsenal regions in two ways: Government spending for the program probably leads to additional jobs for civilians and income for area businesses; and commercial tenants who relocate to the arsenal regions because of the program buttress economic activity in the area. However, because of a number of uncertainties, CBO could not reliably quantify the positive economic impact of the ASPI within the arsenal regions.

On a national basis, the ASPI has had little if any net economic impact, in CBOs judgment, because the program primarily causes shifts in resources from one region of the country to another. It is possible that the governments spending for the ASPI has simply displaced appropriations that would have been made for other purposes within the federal budget, in which case any net impact on the economy would have been minimal. Alternatively, even if the spending added to federal deficits, the economy was operating at or near capacity during much of the programs existence. To keep inflation in check under those circumstances, the Federal Reserve generally takes into account information about the governments spending when it makes decisions about interest rates, with the intention of offsetting the impact on the economy of short-term fluctuations in such spending. As a result, additional government spending under those circumstances would not produce sustained increases in overall economic activity and employment. In addition, nearly all of the tenants currently leasing space at the arsenals were already located in the United States before they decided to participate in the program. Although the relocation of those tenants probably created an economic gain in the arsenal regions, it also probably resulted in an economic loss in the regions in which the tenants were previously located.