September 8, 1999 | Backgrounder on Federal Budget
When the Office of Management and Budget (OMB) and the Congressional Budget Office (CBO) released their June 1999 reports that projected an "on budget" surplus for fiscal year (FY) 2000 for the first time since 1969, President Clinton immediately presented a shopping list of ways to spend the surplus. Unfortunately, Members of Congress were not far behind. Indeed, many have proposed disguising a host of pork-barrel projects as "emergencies" in order to avoid breaking the letter of the law on the spending caps agreed to in the 1997 Balanced Budget Agreement.
Although it is hardly unusual for Congress and the President to try to ignore promises of fiscal discipline, responsible lawmakers should make a real effort to avoid squandering a surplus that has not yet materialized. At a minimum, to avoid the temptation to squander the surplus, lawmakers must resist "creative accounting" techniques and other efforts to fund many unnecessary new initiatives, and must hold down or eliminate spending on existing programs that are obsolete or duplicative.
Before the August recess, the Senate voted $7.6 billion in "emergency" agriculture spending, which will consume about half the projected on-budget surplus for FY 2000. Although "emergencies" do not count against budget caps, increased spending, regardless of classification, eliminates the possibility of keeping other commitments made by Congress, including protecting Social Security and recently passed tax cuts. Senator Richard Lugar (R-IN), chairman of the Agriculture Committee, noted during floor debate that federal assistance payments for crop year 1999 will total $16.6 billion, even without "emergency" spending. According to the most recent (1997) Census of Agriculture, 685,029 of America's 1,911,824 farms receive federal payments, yielding an average subsidy of $24,233. Yet a significant number of these farms are little more than hobbies or sidelines for people with other main sources of income, and others are operated by large businesses. Nevertheless, the Senate voted to increase agricultural assistance payments by $7.6 billion for crop year 1999, increasing total payments to $24.2 billion or $35,327 per "farm."
The December 1998 20th Annual Family Farm Report from the Economic Research Service of the U.S. Department of Agriculture (USDA) indicates that the definition of "family farm" is tested at both ends of the spectrum. "Large family farms" produce an average household income of about $118,450 per year and have a net worth of $925,782. At the opposite end of the spectrum, "Retirement and Residential/Lifestyle" farms are little more than large gardens or open pasture dedicated to the Conservation Reserve Program. Residential/lifestyle farmers (average income $57,242) are individuals or families deriving the bulk of their income from non-farm sources who operate farms as part of a rural lifestyle.
Although some Senators suggested that only farmers who could demonstrate a real loss of income should receive emergency assistance, 89 members of the Senate voted instead to provide a 100 percent increase in the Agriculture Marketing Transition Act (AMTA) payments for any farmer with an AMTA contract (effectively doubling their subsidy) without regard to income level, crop loss, revenue fluctuation, or importance of farming to their income. Limiting emergency assistance to the more needy (for example, farmers with net taxable incomes below $50,000 who derive a minimum of 25 percent of their income from farming) would at least target resources to the needy, rather than simply giving away tax dollars to wealthy corporate farmers or "lifestyle" farmers.
Americans are generous people who have always been willing to assist their neighbors when necessary. Congress should not abuse that generosity by extending "emergency" assistance to those who clearly do not need it. Farm households with an unsubsidized net taxable income of over $50,000 per year do not need additional payments from their less wealthy neighbors. Likewise, rural residents who derive less than 25 percent of their income from agriculture do not need federal subsidies to maintain their lifestyle. Congress should restrict any emergency agricultural assistance to those farmers who can demonstrate an actual loss of income that threatens the survival of their family or their business. Middle-income taxpayers should not be subsidizing either hobbies or six-figure incomes.
President Clinton is proposing to spend $118 billion over the next 10 years to add prescription drug coverage to Medicare. Under the Administration's plan, seniors would pay $24 per month for the program, which would reimburse them for 50 percent of up to $2,000 in drug costs in the year 2002. The cost would increase gradually to $44 per month by 2008 for 50 percent of up to $5,000 in drug costs. This plan:
Would not give real protection to seniors who face the highest costs. The Administration's proposal does not give catastrophic "stop-loss" protection or cover costs exceeding $5,000. Thus, seniors requiring costly drug therapy still could be unable to pay.
Would subsidize rich retirees at the expense of lower-income workers. If Ross Perot, for example, incurred $4,000 in drug costs in 2002, under the plan he could pay $24 per month and get a $1,000 subsidy from the taxpayers toward the cost of his medications.
Would induce many seniors to give up better drug coverage that they already have. Many seniors will assume mistakenly that Medicare benefits must be better than other coverage and give up good drug benefit protections in a private plan for the Medicare coverage, leaving them exposed to unlimited out-of-pocket costs.
Congress can solve the problem that does exist today with two simpler, far less expensive steps. First, it can change the rules governing Medigap insurance to permit insurers to offer drug-only coverage (with catastrophic protection), or some similar revision of the rules. Currently, seniors are forced to pay for other expensive features just to get drug coverage. Second, it can provide lower-income seniors with a larger subsidy than President Clinton proposes to buy such Medigap coverage, giving better protection at far less cost to taxpayers. This makes far more sense than creating another costly subsidy for everyone, rich or poor, over 65.
Despite recent reports by both the U.S. General Accounting Office (GAO) and the CBO concluding that federal agencies have not been good stewards of the land the government already owns, the Clinton Administration is recommending the establishment of a new trust fund to empower government to acquire more land to mismanage. The CBO recently recommended that because the federal land management agencies find it difficult to maintain operations on existing land holdings, Congress should place a 10-year moratorium on land acquisitions.3
President Clinton's Land Legacy Initiative would establish a $1.3 billion trust fund for new federal and state land acquisitions, which includes $450 million for federal land acquisition and $580 million for state and local government land acquisitions.4 This amounts to an increase of 125 percent over the federal funds available in the FY 1999 budget.5
The question Members of Congress and Americans generally should ask is whether the acquisition of more private land by federal, state, and local governments will accomplish the objective put forth by Theodore Roosevelt: to leave this magnificent country a better land for future generations. Because federal land managers have a poor record of caring for the nation's precious natural land resources, the answer to this question is clearly "no."6
The President is requesting legislation to authorize "new markets venture capital, which would focus on smaller companies, more startup entrepreneurs...so that people could get up to $1.5 million for technical assistance."7 The President also proposes to allow "for the larger type investments that the SBIC [Small Business Investment Corporation] does not allow for. Under this, several companies could raise up to $100 million and get $200 million in government backed financing."8 Finally, the President proposes "a New Markets Tax Credit, essentially a 25 percent equity tax credit for people who are putting investments in these type of [investment] vehicles or in existing [investment] vehicles, like community development banks."9
The wasteful aspect of these New Markets initiatives is that they subsidize failure and encourage false hope of sustained growth in areas that are not economically viable. If state and local leaders, who are closest to these communities, have been unable or unwilling to transform these areas, it is unlikely that the federal government will do much more than waste resources and funnel money to a few local special interests. America's prosperity has been built on a pioneer spirit that encourages individuals and families to seek personal advancement through relocation from overdeveloped or impoverished communities to areas with greater potential for economic growth. President Clinton's New Markets initiative proposes to reverse the process and attempt to bring economic growth to areas that have proven they cannot sustain it. If this logic had prevailed in the 19th century, most of our population would still be in Europe, Asia, or clustered on the Atlantic coast.
Created in 1997, the Community Builders program within the Department of Housing and Urban Development (HUD) spends over $85 million each year to hire, train, and equip (with laptop computers) over 769 "Community Builders" whose primary task is to promote and organize grass-roots community development activities. In 1997, HUD's Inspector General examined the new Community Builders program and raised serious concerns about the potential for waste and abuse:
Given HUD's significant staff downsizing, management's decision to establish approximately 600 "Community Builder" positions raises several questions. HUD's current plan is to staff about one-third of the 600 Community Builder positions nationwide with 2-year temporary employees. Whether these Community Builders can acquire adequate expertise in all of HUD's programs and activities remains to be seen. This could be a difficult task even in the event HUD undergoes major program consolidation, particularly for the 2-year temporary Community Builders. If the Community Builders are unable to acquire program expertise, our concern is that these positions may do little to assist communities and further HUD's mission.
Also, in some respects, Community Builders might take on conflicting dual roles. In other words, they may be viewed as representing the communities they serve, in addition to representing HUD. We would expect that Community Builders would be identifying what communities need from HUD and would be involved in advising such communities how to obtain what they need from HUD. Therefore, depending on the capabilities and influence of particular Community Builders, these individuals may be in a position to unduly affect HUD's funding of certain communities.10 [Emphasis added.]
The proper role of Community Builders may be uncertain, but their potential for abuse is very real. According to testimony submitted to Congress,11 Community Builders' training and goals include:
This last goal may be permissible, even laudatory, for private-sector advocacy organizations. It is certainly the full-time occupation of our nation's major political parties. It is a totally inappropriate activity, however, for government employees who are expected to restrict their advocacy activities to off-duty hours.
H.R. 1000, popularly known as AIR-21, would open a floodgate of pork-barrel spending on aviation programs by taking the Aviation Trust Fund "off budget." In order to maintain annual congressional review and oversight of aviation programs, this legislation--recently passed by the House of Representatives--the Senate should craft an alternative to AIR-21. To the extent that new funding is needed for airports, this could be accomplished far more effectively by clearing the way for major airports to be privatized through sales and leasing arrangements, which have yielded huge amounts of private capital for airports in other countries.12
AIR-21 would make sound public finance decisions more difficult. Moving aviation spending off budget would erase any remaining notion of fiscal discipline and would weaken both congressional and presidential oversight of federal programs. As Senate Budget Committee Chairman Pete Domenici (R-NM) noted recently, "Off-budget gimmicks or `firewalls' reduce management and oversight of the FAA by taking trust fund spending out of the budget process."13 Off-budget protection would diminish opportunity for reform. Once a program is moved off budget, Congress has fewer scheduled opportunities to review it and, therefore, fewer opportunities to effect needed reforms. The federal budget would be even more misleading than it is today. Removing aviation funding from the budget would understate the size of the federal government. Supporters of other programs would seek similar protection. As a consequence, what remains "on budget" soon would amount to a minor share of federal spending, and much of the rest--now afforded off-budget status--would be beyond control, oversight, and reform by either the President or Congress.
The Vice President proposes using federal funding as both carrot and stick to insert federal bureaucrats into local development decisions. The Department of Housing and Urban Development will be in charge of cultivating and funding these "smart-growth" strategies among metropolitan jurisdictions. HUD is the federal agency recently described by its own Secretary, Andrew Cuomo, as a "poster child for inept government." Many of these programs, such as federal mass transit subsidies, have been spectacularly unsuccessful in relieving traffic congestion or improving the quality of suburban life--as anyone subjected to High Occupancy Vehicle (HOV) restrictions can testify. They also encourage local officials to adopt transportation and development options that are not supported, or even may be actively opposed, by the local community in order to qualify for federal funding.
Although there is some debate as to whether "sprawl" is a real problem that must be addressed by society or merely the natural result of an expanding prosperous population choosing a suburban lifestyle, it is difficult to describe the situation as anything other than a local land use issue that should be addressed at city and county levels. Federal intervention is unneeded, unwanted, and likely to be counterproductive. Seemingly little more than a generous handout to suburbanites, the Clinton Administrattion's newest exercise in trickle-up economics also includes an unprecedented effort to inject the federal government into local decisions on development, land use, and transportation by funding and promoting "smart growth" strategies that regulate what people can build and where they can build it.14
In January 1998, President Clinton proposed a new federal tax credit to subsidize the interest costs on a total of $19.4 billion in special 15-year bonds issued by local school systems to construct or renovate their school facilities.15 Congress did not include the proposal in its FY 1999 budget. President Clinton attempted unsuccessfully to revive it in during the final days of federal budget negotiations in October 1998. He proposed this initiative again in his FY 2000 budget, but increased the volume of eligible bonds to $22 billion.16
The many proposals to move the federal government into providing financial support for public school construction confront Congress with two considerable risks. The first is the prospect of creating a new budget-busting spending program that very easily could become another costly pork-barrel program. The second is that such a program could greatly expand the scope and power of the federal government into an area that traditionally has been the responsibility of local and state governments.17
Even in the absence of state and federal regulatory mandates, privately funded and owned private-sector construction projects generally have a cost advantage over publicly funded projects because the owner has a powerful incentive not to waste money or incur unnecessary costs that will directly reduce or eliminate profits. With public construction operating with taxpayer money, and in the absence of a profit incentive, the pressure to keep costs down is less compelling. Indeed, to the extent that such buildings become monuments to the existing political leadership, there often is the temptation toward costly and grandiose designs--as is frequently the case with federal office buildings, government housing projects, and courthouses.18
The federal government is full of duplicative programs that waste millions if not billions of dollars annually. Congress needs to get serious about consolidating duplicative programs. In 1997, the General Accounting Office reported to Congress:
Our work has documented the widespread existence of fragmentation and overlap from both the broad perspective of federal missions and from the more specific viewpoint of individual federal programs [and] has shown that as the federal government has responded over time to new needs and problems, many federal agencies have been given responsibilities for addressing the same or similar national issues.19
We have also done a large body of work reviewing specific federal programs. Again, in program area after program area--from early childhood programs to land management and from food safety to international trade--the picture remains the same: widespread fragmentation and overlap, often involving many federal departments and agencies. Such unfocused efforts can waste scarce funds, confuse and frustrate program customers, and limit overall program
The federal government operates redundant programs to address many issues including juvenile justice, job training, environmental protection, technology research, and economic development. There is hardly an agency within the government that does not duplicate, to some extent, the work of some other agency. Congress should use the GAO's report, Using the Results Act to Address Mission Fragmentation and Program Overlap, as a roadmap to consolidate and eliminate redundant programs.
Many federal programs were created to achieve very specific, limited objectives. The purposes of these agencies and programs were tightly defined in the legislation which first authorized them, and the original intent of Congress was that they should be terminated once they had achieved these goals. Programs that have outlived their usefulness include--but are not limited to--the Rural Utilities Administration (RUA), the Power Marketing Administrations (PMAs), and the Corporation for Public Broadcasting (CPB).
Nearly 100% of all farms and rural areas now have reliable electric and telephone service at reasonable rates. In constant dollars, the price of electricity is now about the same as it was 20 years ago. Rural electric and telephone utilities are, by and large, financially successful and stable. Some are now large corporations serving suburban areas in healthy competition with urban utilities.21
Customers of the PMAs and TVA (Tennessee Valley Authority) have enjoyed hidden taxpayer subsidies because these government-owned utilities have been able to borrow at below-market interest rates from the Federal Treasury and take as long as 50 years to pay back the loans. Of the more than $16 billion lent to the PMAs by the Treasury, only about 25 percent has been repaid. In addition, these subsidies are neither targeted nor means-tested; they simply transfer wealth to a set of lucky citizens who are no less affluent than their fellow citizen-taxpayers.22
While the Rural Utilities Administration and Power Marketing Administrations are examples of programs that have achieved their objectives and are no longer needed, the Corporation for Public Broadcasting is an example of an agency whose mission has been made irrelevant by advances in technology and the economy. Ironically, CPB President and CEO Robert T. Coonrod makes this point eloquently:
In addition to Discovery [Channel] and its siblings, The History Channel, Home and Garden Television, and A&E, the expansion of cable's digital tier will give birth to tens if not hundreds of new channels. What impact this tidal wave of content will have on viewers we do not know, but we can predict competition on a level we have never before contemplated.23
It is this very competition, however, that makes the CPB's original mission obsolete. In a world of proliferating options, taxpayer funding of the CPB makes little sense.24
work, creativity, and entrepreneurial risk-taking by the American
people have produced record levels of economic growth, and this in
turn has filled the coffers of the federal government. The wealth
created by American taxpayers rightfully belongs to those who
created it, and Congress should avoid squandering any projected
surplus on wasteful programs or targeted benefits to
Peter Sperry is a former Grover M. Hermann Fellow in Federal Budgetary Affairs in the Thomas A. Roe Institute for Economic Policy Studies at The Heritage Foundation.
1. For more information, see John Frydenlund, Freeing America's Farmers: The Heritage Plan for Rural Prosperity (Washington, D.C.: The Heritage Foundation, 1995), and Peter Sperry, "How `Emergency' Farm Spending Squanders the Surplus," Heritage Foundation Executive Memorandum No. 621, September 3, 1999.
10. Inspector General's Office, U.S. Department of Housing and Urban Development, Semiannual Report to the Congress as of September 30, 1997, available at /static/reportimages/396494EBB54017F3F0B59E5B11055D5F.pdf; viewed on September 1, 1999.
11. Hearing on HUD FY 2000 Budget Request, March, 3, 1999, Subcommittee on Housing and Community Opportunity, Committee on Banking and Financial Services, U.S. House of Representatives, available at http://commdocs.house.gov/committees/bank/hba55534.000/hba55534_0f.htm; viewed on September 1, 1999.
14. For more information, see Ronald Utt, "Al Gore's Livable Communities: A Program in Search of a Problem," Heritage Foundation Insider No. 256, February 1999, and Wendell Cox, "The President's New Sprawl Initiative: A Program in Search of a Problem," Heritage Foundation Backgrounder No. 1263, March 18, 1999.
21. Rural Electrification Administration, Return to The Mission: The Administration's Budget and Legislative Proposals for the Future of the Rural Electrification Administration, February 1991, cover letter.
23. Available on the Corporation for Public Broadcasting Web site, http://www.cpb.org; viewed on September 1, 1999.