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Backgrounder #1014

January 16, 1995

A Budget Strategy to Reinvent the Federal Government

By


(Archived document, may contain errors)

1014 January 16,1995 A BUDGET STRATEGY TO REINVENT THE FEDERAL GOVERNMENT INTRODUCTION President Bill Clinton soon will submit his fiscal 1996 budget to a Congress commit ted to changing Washingtons spending and taxing priorities. In apparent response to the election results, and to the House Republicans Contract With America, Clinton last month announced a plan for a mode st $60 billion tax cut to be financed by reforms in five agencies such as the Departments of Energy, Housing and Urban Development, and Transportation.

But while the White House and congressional Republicans seem broadly to agree that taxes on families, sa vings, and investment should be reduced and that government should be made smaller, there has been little discussion about what the federal government ulti mately should look like. What government functions, for instance, are carried out most appropriatel y at the federal level and which at the state or local level? What functions should government shed completely? Meeting congressional demands for reduced taxes and a balanced federal budget will require a radical overhaul of the federal government.

The Presidents budget thus should propose a genuine reinvention of government, and so must the Budget Resolution which the House and Senate Budget committees are re sponsible for drafting.

The budget for fiscal year 1996 also must be constructed in a way that re cognizes the crucial political linkage between tax cuts and spending reductions. Tax cuts should be an integral part of any comprehensive strategy to reduce the size of government, not just be cause tax cuts are needed to return resources-as well as respo n sibilities-to the Ameri can people, but also to build constituencies for change. The Republicans $500-per-child tax credit, for instance, gives 35 million American families, raising 5 1 million children, a financial stake in cutting government spending. C u tting taxes for these families creates an instant, 35-million-strong grass-roots constituency who will benefit materially from smaller government and thus will be motivated to confront the pro-government lobbies whose programs face the ax. Members of Cong ress who want to downsize and reorder government must employ tactics, such as tax relief, that create constituencies for reform.

Cutting spending is impossible without mobilizing interest groups to lobby as strenu ously for reform as those who will lobby against reform.

A budget strategy to cut the federal government and reassign functions also must deal with the many legal obstacles to a proper reordering of government A host of budget rules, typically the result of interest group lobbying or the tactics of supporters of a larger federal government, waste taxpayers money and make it literally illegal for agency offi cials to save money in certain ways.

Conservatives and other reformers on Capitol Hill therefore should move quickly on a budget strategy tha t will lead to a permanent reordering and downsizing of the federal government. There are three essential steps to such a strategy B Establish clear themes for the FY 1996 budget based on principles for the proper role of the federal government Among the p rinciples for such an overhaul of federal functions d The federal government should not engage in any activity that is more appro priately within the purview of state and local government d The federal government should cease activities that are properly t he responsi bility of private sector institutions, or of the American people directly, and avoid those that stifle the marketplace have become outmoded or obsolete, or that duplicate other programs d The federal government should discontinue programs that do not work, that 9 Create constituencies for smaller government Among the techniques that can build constituencies for reforming government d link blocks of spending cuts directly to specific tax cuts in order to show tax payers that a cut in particular g overnment programs is needed to put cash back in their wallets d Use privatization to create groups with an interest in transferring certain func tions out of government control and keeping them in the private sector d Ease the concerns of state and local officials by using flexible block grants removing mandates, and shifting to local governments both the taxing and spending authority for many federal functions B End congressional practices that waste taxpayers money and thwart reform Congress should d En d the practice of current services budgeting d Amend the pay-go rule, which prevents using cuts in discretionary programs to finance tax cuts 2 d End all prohibitions on privatization d Abolish all employment floors forced on federal agencies d Repeal the Davis-Bacon Act and the Service Contract Act.

The White House and congressional leaders soon will have an opportunity to show tax payers how committed they are to reinventing government and returning resources to ordinary Americans when the serious work of crafting the fiscal 1996 budget begins next month. The test of this commitment is how aggressively the Presidents budget and the Budget Resolution challenge the federal governments relationship with local govern ments and the private sector, and how swif t ly outmoded and inefficient programs are eliminated THREE STEPS TO REINVENTING GOVERNMENT The budget debate will begin in earnest in early February, when President Clinton sub mits his fiscal 1996 budget to Congress. Given the vast differences between the modest reforms being discussed at the White House and the bolder vision of House Republicans the Clinton budget most likely will be termed dead on arrival. The House Budget Com mittee will begin drafting its own budget in the form of a Budget Resolution, a non-bind ing blueprint (meaning it is not signed by the President) outlining the governments spending and revenue priorities for the next fiscal year. Typically voted on in March, the Budget Resolution tells the Appropriations Committees how much money t hey can spend and, if necessary, tells the Ways and Means Committee and the authorizing com mittees whether changes need to be made in tax or entitlement laws. Such changes are voted on later in what is known as a reconciliation bill.

The Budget Resolution thus is the first opportunity reform-minded Members have in the first weeks of the new Congress to show taxpayers what the government will look like once they have redefined Washingtons relationship with state governments and the pri vate sector and have eliminated programs that are outmoded, inefficient, or wasteful.

The final product should outline a government that is lean, focused only on national is sues, and concerned with putting money and responsibility back in the hands of har d working Americans defines the federal government STEP# 1 SET BOLD PRINCIPLES FOR REINVENTING GOVERNMENT There are three important steps that need to be taken in drafting a budget that truly re I A conservative Budget Resolution should set out bold theme s that truly would rein vent government with spending decisions that reflect the proper functions of the federal government. This means doing three things, clearly and unambiguously d Defining the role of the federal government, compared to that of state a n d local d Distinguishing between public, or government, functions and those which governments should be the exclusive responsibility of the private sector 3 d Determining which federal programs are outmoded, do not work, have com pleted their missions and are no longer needed, or duplicate the efforts of other programs.

Every spending change in the Budget Resolution should flow directly from three basic principles PRINCIPLE #1: The federal government should not engage in any activity that is more appropria tely carried out by state and local government Since World War II, Washington has assumed hundreds of functions that were once exclusively within the jurisdiction of state and local governments. Many others must be undertaken by state and local officials i n ways prescribed by Washington as a condi tion for receiving federal funds. According to Vice President Al Gores National Per formance Review, much of Washingtons domestic agenda 226 billion, to be pre cise, is allocated to state and local governments th rough an array of more than 600 different grant programs.

A conservative Budget Resolution should be, among other things, a Federalism Budget. Congress should declare in the Budget Resolution that the first responsibility of the federal government is natio nal defense. It then should examine every other pro gram to determine whether it is truly national in scope and can be carried out on a na tional scale only by the federal government. Funding for all agencies and programs that fail to meet this test, such as many education, welfare, health, transportation, and other programs, should be transferred to the states or returned to the people as federal tax reductions-leaving the states to decide whether and how to raise appropriate funds from their own citizens 1 For example, the Budget Resolution should call on Congress to d Devolve all Department of Education functions to the states and close down d Transfer the federal gas tax to the states along with full authority for highway the Department and local transi t spending. Eliminate any federal prohibitions against the priva tization of these assets once they are in local hands d Consolidate over 70 federally funded, means-tested anti-poverty programs into a single block grant and then limit the overall growth in spending for this new grant to 3 percent annually. Grant state and local governments broad authority to experiment with their own approaches to assisting the poor and ending dependency. This authority should be subject to general principles to re quire wo r k and reduce illegitimacy d Fold the acute care portion of Medicaid into the welfare system and transfer it to the states, with state flexibility, in statute, to integrate health programs and other services. As a first step toward this reform of Medicaid, give states fixed 1 The National Performance Review: Creating a Government that Works Better and Costs Less (Washington, D.C.: U.S.

Government Printing Office, September 7, 1993 p. 51 4 or capitated, payments. Also, remove most federal mandates and replac e them with a simple requirement to provide a basic level of care d Perform a comprehensive inventory of all federal lands held by the U.S. For est Service, the Bureau of Land Management, the Bureau of Reclamation, the U.S. Fish and Wildlife Service, and t he U.S. Park Service. Transfer all land to the states other than those parks and. wilderness areas deemed to be of national significance d Eliminate all federally funded infrastructure, community, and economic devel opment programs. Use a portion of the s a vings to finance federal tax cuts in En terprise Zones funds for specific local projects in appropriations bills. Last year, Congress ear marked spending for hundreds of such purely local projects, including 1 million for an airport access road in Jackson v ille, Florida 1 million to upgrade 96th Street in Indianapolis, Indiana 2 million for the Farmers Market inToledo, Ohio; and 750,000 for the SciTrek Science Museum in downtown Atlanta PRINCIPLE #2: The federal government should cease activities that are p r operly I d Institute a blanket prohibition on the congressional practice of earmarking the responsibility of the private sector A conservative Budget Resolution should distinguish clearly between those activi ties that are the exclusive responsibility of t he public, or government, sector and those that should be the exclusive responsibility of the private sector. In addition, it should describe areas where there is a public purpose but the activity still should be carried out by private institutions, eithe r directly or under contract to government.

An intensive privatization, or denationalization, effort to reassign essentially private functions to the private sector is long overdue in this country. Governments throughout the world, from Russia to Mexico an d from Japan to Great Britain, have been redefin ing the role of government in a private economy. These governments are aggressively denationalizing state-owned enterprises, cutting subsidies to inefficient industries, re moving barriers to private invest m ent, and restoring property rights. Yet the U.S. gov ernment continues to control hundreds of private activities and functions such as pub lic utility management, railroad services, small business loans, printing and publishing agriculture subsidization, and oil extraction and storage.

Privatizing commercial functions can yield considerable short-term revenues while greatly improving the efficiency of services. Candidates for sale to the private sector in clude the $200 billion direct loan portfolio, Amtra k, the Power Marketing Administra tions, part of the Postal Service, many federal buildings and real estate holdings, and some public lands. In some cases, such as transferring the ownership of public housing to residents, the aim is not to raise revenue, but to change the social environment of communities 5 In some cases, privatization provides the only hope for many inefficient and unre formed programs starved of capital due to federal budget constraints. But in the private sector, investment flows to en terprises that can produce valuable goods and services.

Consider the problems in five programs documented by the U.S. General Accounting Office (GAO Many of the 337 dams built by the Bureau of Reclamation are over a half century old and in desperate need of repair.

The Forest Service now needs $644 million to maintain and reconstruct trails and recreation sites.3 Within a few years, much of the Army Corps of Engineers $125 billion inventory of water resources projects will have reached the end of its de sign life!

Ongoing modernization projects at the Federal Aviation Administration are billions of dollars over budget and years behind schedule. Of the more than 200 projects in FAAs modernization effort, only 36 are com pleted, accounting for just 3 percent of the $32 billion FAA will spend to upgrade the air traffic control system between 1982 and 2000.5 The best solution to this problem would be to transfer the air traffk control system to a corporation owned jointly by the airlines.

The National Weather Service modernization program has exceeded its expected cost and is far behind schedule. The initial cost estimate of nearly 2 billion has risen to $4.6 billion, and the projected completion date has slipped from 1994 to 1998.7 2 6 Reinventing programs as broken as these will not save them from their eventual collapse. Privatization is the only remaining way to raise,the capital necessary to res cue them.

The Budget Resolution can set out changes to restore the proper demarcation be tween public and private activity according to the following framework D Denationalize government-owned commercial activities.

Examples d Dismantle the Power Marketing Administrations and sell them through public stock offerings 2 3 Ibid p. 9 4 Ibid 5 6 7 U.S. General Accountin g Office, Transition Series, Natural Resource Management Issues (GAO/OCG-93- 17TR December 1992 U.S. General Accounting Office, Transition Series, Transporrarion Issues (GAO/OCG-93- 14TR December 1992, p. 13.

See Robert W. Poole, Jr Restructuring the Air Traffic Control System, in Edward L. Hudgins and Ronald D. Utt, eds How Privariulrion Can Solve Americas Infrusrrucrure Crisis (Washington, D.C The Heritage Foundation, 1992).

U.S. General Accounting Office, T ransition Series, Commerce Issues (GAO/OCG-93- 12TR December 1992, p. 14 6 d Dismantle the Tennessee Valley Authority and sell it to the public and to inves d Sell Amtrak in the same manner as Conrail d Sell or give the air traffic control system to a con s ortium controlled by the d Privatize the National Weather Service and weather-related satellites tor-owned utilities major U.S. airlines 8 Sell commercial assets and use the proceeds to finance tax cuts or to buy down the federal debt Examples d Sell the $ 200 billion direct loan portfolio to the secondary loan market d Sell the Naval Petroleum Reserves d Sell commercial public lands d Sell most of the nearly 1,200 government-owned non-defense aircraft d Sell the Federal Helium Reserves d Sell the Defense S t ockpile d Sell federally owned buildings and real estate, including the real estate hold ings of the Postal Service Make government business-neutral by funding no program, project, or research initiative that benefits private industry directly Examples d E liminate agriculture research programs d Eliminate energy research programs d Halt funding for the Magnetic Levitation (MagLev) high-speed rail research d Close the US. Travel and Tourism Administration d Eliminate the Market Promotion Program d Close the Export-Import Bank d Terminate maritime programs such as Operating-Differential Subsidies and the Ocean Freight Differential program d Abolish the Small Business Administration d End export subsidy programs such as the Export Enhancement Program and the F o reign Agriculture Service d Eliminate below-cost timber sales program 7 Cut regulatory spending in order to enhance competition, benefit consumers and honor property rights d Phase out agriculture subsidies d Eliminate agriculture quota and marketing orde r programs d Terminate the Conservation Reserve Program d Eliminate the federal fuel tax subsidy for Ethanol d Impose a moratorium on federal land purchases d Eliminate the National Biological Survey d Reduce overhead expenses for the Environmental Protect i on Agency d Privatize the Consumer Product Safety Commission Eliminate the governments risk exposure d Sever all federal ties and implicit taxpayer guarantees to Government-Spon sored Enterprises such as the Federal Home Loan Bank System (FHLBS Fed eral N a tional Mortgage Association (FNMA), Federal Home Loan Mortgage Corporation (FHLMC and Government National Mortgage Association GNMA d Close the Farmers Home Administration (FmHA) and Farm Credit System FCS d Terminate the Federal Crop Insurance Corporatio n (FCIC d Allow the Pension Benefit Guarantee Corporation greater flexibility in setting its premiums so that revenues cover losses and expenses on a sustained basis Require users of federal enterprises to cover program costs through user fees d Allow Nati o nal Parks to increase entrance fees to cover a greater share of main d Allow airports to establish market-based take-off and landing fees d Raise Medicare Part B premiums to reflect the true cost of service d Turn over all responsibility for harbor mainte n ance and dredging to local tenance and reconstruction costs authorities and allow them establish market-based fees to cover the cost of this dredging. owners. d Increase user fees to cover the cost of Coast Guard services to private boat 8 Privatize socia l services d End HUD low-income housing subsidies and use a portion of the savings to fi d Sell or give public housing to tenants nance portable vouchers 8 End federal funding for ACTION End federal funding for ACTIONS VISTA program I/ Terminate the new Am e riCorps volunteer program work, that have become outmoded or obsolete, that duplicate other programs or that do not involve legitimate government functions PRINCIPLE #3: The federal government should terminate programs that do not Most would be stunned to learn how old many federal programs and agen cies really are. Large segments of the federal bureaucracy were created dec ades ago for purposes long since forgot ten. It is time, for instance, to strip out of the budget such pre-World War II programs as th e Rural Electrification Administration, the National Helium Re serves, Impact Aid, and the Interstate Commerce Commission.

Many relatively new programs also have seen their missions made obsolete by technological and social changes.

The Corporation for Pu blic Broadcast ing, international broadcasting pro grams such as the Voice of America Low-Income Home Energy Assistance and the Department of Energy, for ex ample, are all outmoded or irrelevant be cause of technological and market changes.

Because outmod ed, obsolete, or ineffi cient programs almost never die, bu reaus, agencies, and programs that dupli cate each others functions have sprung up all over the government. Last year the National Performance Review iden tified astaggering degree of duplication throughout the federal bureaucracy. For example Some 14 separate government departments and a encies spend $24 billion a year on 150 employment and training programs. 53 0 National Performance Review, p. 49 9 Washington spends about $60 billion a year on the well-being of chil dren. But we have created at least 340 separate programs for families and children administered by 11 different federal agencies and departments.

The U.S. General Accounting Office also has documented massive duplication throughout t he federal government. Entire Cabinet agencies are duplicated by other fed eral departments. Among the GAOs findings The Department of Commerce shares its mission with at least 71 federal departments, agencies, and offices lo Export promotion programs are fragmented among 10 agencies. The U.S Department of Agriculture, not Commerce, receives about 74 percent of to tal funding for these programs, although it accounts for only about 10 per cent of U.S. exports A conservative Budget Resolution should expose t h ese outmoded, inefficient, or dupli cative programs and excise them from the budget. As Members of Congress draw up the Budget Resolution, they should 0 Question the need for any program that is more than 50 years old and eliminate any which is outmoded o r obsolete Examples d Reduce the scope and activities of the 170-year-old Army Corps of Engineers d Close the 85-year-old Bureau of Mines d Abolish the 8 1-year-old Agricultural Extension Service d Terminate the 60-year-old Soil Conservation Service d Term i nate the 60-year-old Rural Electrification Administration d Close the 70-year-old National Fertilizer Development Center d Abolish the 108-year-old Interstate Commerce Commission Terminate newer programs that are outmoded or obsolete Examples d Close down the Department of Energy, moving nuclear defense functions to d Stop funding the Corporation for Public Broadcasting and allow it to become a d End Impact Aid the Department of Defense and abolishing all research programs self-supporting grant-making foun d ation much like the United Way 9 Ibid.,p.51 10 GAO, Transition Series, Commerce Issues, p. 9 11 Ibid 10 d End Low-Income Home Energy Assistance d Terminate P.L. 480 foreign aid grants d Terminate the Targeted Export Assistance Program d End Trade Adjustme nt Assistance d Phase out the Federal Communications Commission while deregulating the in dustry 9 Eliminate programs that duplicate or overlap other programs Examples d Close down the Department of Commerce, moving trade programs to the U.S.

Trade Represe ntatives Ofice and the National Oceanic and Atmospheric Ad ministration to the Department of Interior councils, and boards to the states or use the savings to finance a training credit d Close most, if not all, of the governments 1,200 independent commiss i ons d Consolidate the 150 federal job-training programs and either block grant them 5 Cancel programs with a long history of failure or irrelevance Examples d Terminate the Appalachian Regional Commission d Abolish the Small Business Administration d Clos e down the Minority Business Development Administration d Abolish the Economic Development Administration i) Terminate programs that should not be undertaken by the federal government Examples d Shut down the Legal Services Corporation d Abolish the Nation a l Endowments for the Arts and Humanities and the Insti d End the College Work Study Program d End Law-Related Education Grants and Law School Clinical Experience Grants d End Health Professionals Education Subsidies tute of Museum Services 11 STEP #2 BUIL D CONSTITUENCIES FOR SMALLER GOVERNMENT Reinventing government is no easy task politically. As government has exploded over the past forty years so also have the number of interest groups-in and out of govern ment-whose livelihoods depend upon government l a rgess. When reductions in or elimi nations of programs are announced, groups which stand to lose benefits can be expected to launch campaigns to keep them in the budget. However, this can be offset by creating or identifying other interest groups which st a nd to benefit materially from less govern ment and will be highly motivated to campaign on behalf of spending cuts. Indeed, it is even possible in some cases to turn opponent groups, such as public employees, into ad vocates for reform by designing reform s that appeal to their particular interests.

Three strategies should be employed to counter the pro-spending lobbies and to build constituencies for smaller government D Directly link tax cuts to spending cuts The House Republican Contract With America con tains a five-year 200 billion tax cut package for families with children, seniors, businesses, and entrepreneurs. Link ing these tax cuts directly to spending cuts has two positive effects. First, it creates an instant grass-roots lobby in favor of lower government spending. Second, it sugar coats the political pain of deep cuts in spending, allowing politicians to bring home the tax cuts in the same manner they traditionally have brought home the ba con.

The proposed $500-per-child tax credit creates a sp ending-cut constituency. Some 35 million families, caring for 5 1 million children, are eligible for this tax credit. This represents a powerful grass-roots force which will benefit materially from reduced fed eral spending and thus can be motivated to pr e ss for the elimination of programs yielding the savings needed to cover the revenue cost of tax relief. Conservatives should bundle programs into an omnibus spending cut and tax relief package. Then let the defenders of arts subsidies or the Rural Electri f ication Administration argue that families with children should not get tax relief because their programs are too impor tant Family tax cuts linked to spending cuts also address the political concerns of uneasy Members of Congress. Using U.S. Census data, Heritage Foundation analysts have cal culated the number of eligible children in every state and congressional district. The typical congressional district has some 117,000 children in families eligible for the 500-per-child credit. Thus it would receive n early $59 million per year in family tax relief under this plan. These statistics allow Members of Congress to balance the politi cal interests of constituents who may be hurt by spending cuts with those of the thou sands of families whose finances will b e improved through tax cuts. This calculus could be used with other tax cuts as well Example. Bundled cuts in business-oriented programs (such as the Small Business Administration, Export-Import Bank, and Market Promotion Program) could be used to finance a reduction in the capital gains tax and improvements in the deductibility of capital investments. While these spending cuts take government programs away from a 12 few politically connected industries, the tax cuts will benefit a strong grass-roots con st i tuency of entrepreneurs and small businesses 9 Create constituencies through privatization Countries all over the world have used various privatization techniques to overcome opposition to reform from vested interests, including public employees. Britain, for ex ample, used gifts of stock to managers and workers in nationalized industries to build strong support for the privatization of firms. The Netherlands generated broad-based public support for privatizing its postal service by selling the public a mi n ority interest in the operation. This is merely a first step toward full private ownership. Other coun tries such as Chile, Colombia, and Peru have successfully privatized their Social Secu rity systems by giving individuals greater control over funds. l2 Example. Cutting or eliminating HUD public housing subsidies certainly will raise opposition from local bureaucrats and private landlords who benefit directly from those subsidies. But using some of these savings to finance portable vouchers for ten ants, or offering to sell housing at deep discounts to residents, creates a new constitu ency of residents who benefit directly from this spending cut. The experience of the huge program of public housing sales in Britain, and of more limited sales in this coun try, also indicates that when residents own or control their own homes they have a far greater interest in caring for housing than bureaucrats ever can have Example. The White House has proposed turning the Federal Aviation Administra tions air traffic co ntrol functions into a government-owned corporation like Amtrak.

This is not the best way to privatize or improve this operation. Making this a fully pri vate corporation, owned wholly or in part by the private airline industry, would put control of this u nderfunded service directly into the hands of those with the most to gain from tertiary steps to invest in new technology and improve the level of service Example. There is considerable political opposition to selling or denationalizing the government-own ed dams and utilities known as the Power Marketing Administrations.

However, based upon the success achieved by other countries in selling state-owned utilities, this opposition can be neutralized by offering favorable stock options in the new utility to e mployees, residential customers, environmentalists, fishing and agricul tural interests, or others who may feel that they stand to lose by the elimination of bu reaucratic control over these subsidized utilities. Several countries have found that it is ev e n worthwhile to sell stock options at below-market prices in order to encourage broad public support for denationalization b Build state and local cooperation through federalism Understandably, many governors and local officials fear that reduced federal s pend ing will mean a rise in federal mandates. Other officials fear that when current federal functions are transferred to local levels, they will be left with the painful task of raising local taxes to finance these new responsibilities. These fears can b e eased. Conserva 12 James K. Glassman, How Much Would Be Offered for the 14th Street Bridge? The Washington Posr, December 21, 1994 13 tives should develop plans to make state and local officials both partners in the effort to shrink the federal budget a nd beneficiaries of that process.

Five measures would reduce the concerns of most local officials l3 r/ Require full federal funding of any program mandated by the federal govern ment r/ Whenever possible, transfer full control and financing of federally f unded pro grams currently operated by states to the respective state governments r/ Reform the requirements on the states to compensate the federal government for any assets they privatize that are held jointly or that once received federal funds r/ In ke e ping with Ronald Reagans Executive Order 12612, monitor all federal rules and regulations for their impact on the states and minimize this impact r/ Extend regulatory waivers to allow states more effectively to manage envi ronmental and housing programs E x ample. There are sound public policy reasons for cutting federal highway spend ing and federal grants to inefficient local public transit systems. There also are poten tially large budget savings. However, these programs are financed through the federal g a soline tax so cutting the federal grants would unfairly burden local governments while allowing Washington to pocket gas tax revenues. A more reasonable solution would be to eliminate both the federal gas tax and the spending programs, transferring to sta t e governments the responsibility for highway and transit spending along with the financing mechanism. State governments then could decide for themselves whether higher state gas taxes are needed to finance local projects. Some might choose to use tolls or other privatization methods to operate local highways or transit systems STEP #3 REMOVE OBSTACLES TO SAVING TAXPAYERS MONEY 1 AND REORGANIZING GOVERNMENT No owner of a private fm would knowingly institute rules that force company manag ers to waste money. But Congress routinely enacts rules and mandates that force agency managers to waste billions of taxpayers dollars. Some legislative requirements stop agencies from even studying ways to save money. Most of these rules have been insti tuted under pressure from agency officials or program beneficiaries. Others are the bypro duct of ill-conceived budget process reforms in the past.

A conservative Budget Reso lution should propose legislation to eliminate these rules as part of a general reform of the budget process ment Five specific budget reforms are needed to permit a restructuring of the federal govern 13 For a full description of these recommendations, see Scott A. Hodge and Adam D. Thierer, he National Performance Review: Falling Short of Real Governme n t Reform, Heritage Foundation Buckgrounder No. 962, October 7,1993 14 10 Eliminate baseline budgeting On the first day of the 104th Congress, House Republicans fulfilled one of the provi sions of the Contract With America by voting to eliminate the practi ce of baseline or current services budgeting. The Senate should act quickly on this House initiative.

Under current services budgeting, program costs are projected into the future based upon such criteria as the requirements of current law, estimated inflation rates, and the expected growth in demand for the good or service provided.

Using current service s budgeting, a program that costs $100 million this year might be projected to cost $1 10 million next year. But if the program is budgeted at $105 mil lion instead of at the projected 1 10 million, it is said the program has been cut by 5 million-even th o ugh it received $5 million more than in the previous year. If the program actually is cut in the way understood by Americans outside of Washington say by 5 million, to $95 million-Washington registers this as a $15 million cut Baseline budgeting is not ju s t a deception at taxpayers expense. According to budget scholar Allen Schick, it also weakens lawmakers control over the budget by strengthening the claims on funds by interest groups before any allocation decisions have been made l4 These groups effectiv ely become entitled to the projected increases in a program and are permitted to claim that their funding has been cut merely because the current years increase falls below the baseline increase.

These interest groups can be held in check, at least to a de gree, if spending levels are discussed in laymans terms that indicate just how much spending is to rise or fall com pared with the previous year. If current services budgeting is eliminated, the fiscal 1996 budget could become the first honest budget sinc e that practice was introduced in 1974 8 Allow cuts in discretionary, or appropriated, programs to finance tax cuts Current budget rules mean that tax cuts (which can cause permanent reductions in revenues to the Treasury) may be financed only by cuts in e n titlement programs or by increases in other taxes. Under this pay-go (for pay-as-you-go) rule, only changes in programs which operate under permanent law can offset each other. While this rule cor rectly requires that legislated increases in entitlement s p ending be balanced by cuts in other entitlements, it does not allow tax cuts to be financed by cuts in discretionary, or annually appropriated, programs. Thus, for example, cuts in pork barrel and other wasteful spending may not be used to fund tax relief for needy families. This provision within the pay-go rule should be repealed and the requirement to balance increases in entitlements with cuts in other programs should be retained.

The White House opened the door to elimination of this anti-taxpayer budg et rule when it announced its $60 billion tax cut package for middle-class families. Clinton proposed financing these tax cuts by cutting discretionary spending programs such as energy, transportation, and housing. The new Congress should join the White H o use in repealing this rule 14 Allen Schick, The Cupuciry to Budger (Washington, D.C The Urban Institute Press, 1990 p. 210 15 b End all prohibitions on, and micromanagement of, the privatization process Since 198 1, Congress has enacted over 40 separate l a ws expressly prohibiting the privatization of government services. In some cases these laws prohibit agencies from even studying privatization options. Such bans cost taxpayers billions each year Example. The Farmers Home Administration (FmHA) wrote off s o me $8.5 billion in loan losses during the early 1990s, partly because Congress prohibits it from crack ing down on bad debtors or from hiring private collection firms to collect on delin quent loans. In many cases, new loans must be given to known poor cr edit risks this study.

For a comprehensive listing of these congressional roadblocks, see the appendix to 9 End the practice of setting agency employment floors Congress regularly sets minimum staffing levels for certain agencies, even if the work could be done with a fraction of the staff. These employment floors are de signed to protect jobs in agencies or field offices and prevent managers from making the most effective use of the employees they supervise, such as by shifting workers from one department to another managers greater flexibility, employment floors still exist. The practice should be stopped, and work should begin on allowing even greater agency flexibility While the National Performance Review has worked to lessen this practice and give b R e peal the Davis-Bacon Act and the Service Contract Act The Davis-Bacon Act of 1931 increases the costs of government construction con tracts by over $1 billion annually by forcing contractors to pay union scale wages on all federally funded construction co n tracts, even though less expensive labor often is available. This legislation was enacted to keep black workers off federal construction sites, and that is precisely what it has done for 60 years. A similar law, the Service Contract Act of 1965, has the s a me impact on federally funded service contracts. The extra costs imposed by these two laws: $2 billion per year CONCLUSION Now that the White House and congressional reformers seem to agree on the need to shrink the size of the federal government and retu r n to taxpayers their hard-earned money, it is time to outline what the federal government should look like after its rein vention has been completed. Once the Clinton plan has been submitted to Congress in early February, the House Budget Committee will b e gin work on its own version of the fiscal 1996 budget. Each of these documents should describe what government func tions, for instance, are carried out most appropriately at the federal level and which at the state or local level as well as which ones go vernment should shed completely because they conflict with the private sector or have become obsolete.

Just as important, however, these documents also must address the crucial linkage be tween tax cuts and spending reductions. They should recognize that r einventing govern ment involves not just cutting spending, but also redefining which institution-the 16 American family or the central government-is best equipped to spend money on such important matters as housing, food, welfare, and raising children. Th e answer to this ques tion will reveal whether the White House or Congress is more committed to changing Washingtons spending and taxing priorities.

Scott A. Hodge Grover M. Hermann Fellow in Federal Budgetary Affairs 17 HOW CONGRESS HAS BLOCKED PRlVATlZAT lON AGRICULTURE 8 Minimum employment levels exist at the Farmers Home Administration, Agri cultural Stabilization and Conservation Service, and the Soil Conservation Serv ice. 8 The Farmers Home Administration is prohibited from contracting with private d ebt collection firms to collect delinquent payments 8 Agriculture is precluded from selling loans made by the Agricultural Credit In- surance Fund.

COMMERCE 8 NOAA is prohibited from commercializing meteorological satellites 8 NOAA is required to use appro priated funds for certain projects 8 The Department of Commerce is prohibited from selling its economic develop ment loans 8 The National Technical Information Service is prohibited from contracting out services.

DEFENSE Minimum civilian employment levels exist at Army depots.

The Department of Defense is prohibited from contracting out security and fm- fighting services.

The Crane Army Ammunition Activity and McAlester Army Ammunition Plants are prohibited from contracting out services.

The Department of Defense is prohibited from contracting out core logistics maintenance functions.

The Philadelphia Defense Personnel Support Center is prohibited from contract ing out services.

The Department of Defense is prohibited from contracting out any activity per- formed by 10 or more civilian employees.

The Department of Defense is prohibited from contracting out logistics activities to non-governmental personnel.

The Department of Defense is prohibited from contracting out entire medical fa- cilities 18 Officers at Fort Benjamin Harrison, Indiana are prohibited from A-76 proce dures.

A-76 implementation is impeded by complicated requirements for notice and re porting.

The Army Corps of Engineers is prohibited from contracting out reservoirs in Mississippi.

The Army Corps of Engineers is prohibited from contracting out the operations and maintenance of hydroelectric power facilities.

Only installation commanders have the authority to decide which commercial ac tivities will be subject to A-76 review (Nichols amendment 15 ENERGY 8 The Department of Energy is prohibited from studying alternative pricing struc tures 8 The Department of Energy is prohibited from studying the sale of the P ower Marketing Administrations, except Alaska 8 The Department of Energy is prohibited from using appropriations for the priva tization of the Naval Petroleum Reserves 8 The Department of Energy is prohibited from studying or proposing the privati zation o f the uranium enrichment programs GENERAL SERVICES ADMl NISTRATION 8 GSA is prohibited from contracting out certain intra-agency service positions HEALTH AND HUMAN SERVICES 8 The FDA is prohibited from adopting user fees 8 The Social Security Administrati o n is prohibited from contracting outside the United States for printing services HOUSING AND URBAN DEVELOPMENT I( HUD is prevented from selling section 202 loans 8 Minimum employment levels exist within the Public and Indian Housing Pro gram 8 HUD is proh i bited from selling section 3 12 direct loans 15 A-76 is the title of the OMB circular that outlines and regulates the process and procedures for federal contracting out of competition 19 INTERIOR 8 The National Park Service, Fish and Wildlife Service and B ureau of Land Man agement are prohibited from contracting out any services IUSTICE 8 The Department of Justice is prohibited from contracting out any functions in volving law enforcement, litigation or the administration of justice 8 The Department of Jus t ice is prohibited from the sale of loans or guarantees held by the Federal Financial Bank LABOR 8 The Job Corps is forbidden to contract out any Civilian Conservation Center TRANSPORTATION 8 The FAA is prohibited from contracting out maintenance for natio n al airways system facilities 8 The Coast Guard must delay the A-76 process for congressional review 8 Minimum employment levels exist within the FAA for air traffic controllers 8 The Department of Transportation is prohibited from funding changes in the c u r rent federal status of the Transportation Systems Center or the Tumer-Fairbank Highway Research Center TREASURY 8 Minimum employment levels exist at the Customs Service despite the fact that automation has reduced the need for large staffing levels VETE R ANS AFFAIRS 8 Minimum employment levels exist within the VA medical care staff 8 The Department of Medicine and Surgery is prohibited from contracting out cer tain activities RAILROAD RETIREMENT BOARD 8 Minimum employment levels exist within the Railroad Unemployment Insurance Trust Fund SMALL BUSINESS ADMINISTRATION 8 The SBA is prohibited from selling loans held or guaranteed by SBA and held by FFB 20

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