September 24, 2002

September 24, 2002 | Backgrounder on Department of Homeland Security

Improving Efficiency and Reducing Costs in the Department

Two vastly different bills before Congress, which seek to establish a new Department of Homeland Security (DHS), will have significantly different five-year costs, according to the Congressional Budget Office (CBO). Implementing President Bush's plan, for example, will cost the American taxpayer about $3.3 billion, while a bill introduced by Senate Governmental Affairs Committee Chairman Joseph Lieberman (D-CT) will cost about $10.7 billion. Both bills include measures of merit, such as the National Bio-Weapons Defense Analysis Center, and measures that may limit the overall effectiveness of the federal effort. But the President's bill offers the nation more flexibility and efficiency in improving homeland security as well as savings of at least $7 billion through 2007, compared to the Senate bill.

On June 24, President George W. Bush offered Congress a structure for the new department that focuses on consolidating existing federal functions to improve the efficiency and effectiveness of federal programs.2 He also notified Congress that he intended to pay for this massive reorganization of the government with funds he included in his fiscal year 2003 budget request.3 As the experience of private-sector mergers and acquisitions shows, the President's approach should increase the effectiveness of federal homeland security programs and also reduce overhead costs associated with bureaucracy. The House passed a modified version of the President's plan (H.R. 5005) on July 26.

That same day, however, the Senate Governmental Affairs Committee passed out a bill (S. 2452) that takes a different, more costly approach. The bill's language would prevent the President or Secretary of Homeland Security from consolidating any programs or functions that are transferred to the new department. S. 2452 also adds numerous new programs to the department, including some that are not directly related to and would not directly improve homeland security, such as repairing Amtrak's cars and tunnels.

The differences between these two approaches will dramatically affect the total cost of implementing and operating the new department. Overall, the Congressional Budget Office estimates that, between fiscal years 2003 and 2007, implementing S. 2452 will cost approximately $10.7 billion, about $7 billion more than the President's proposal ($3.3 billion). In addition, the Senate bill includes a prohibition on consolidating redundant federal roles, which is likely to increase overhead costs significantly while reducing the department's overall effectiveness in the foreseeable future.

Congress should provide a solid foundation for the new department that would not only improve security but also would reduce the total cost of the homeland security effort. Specifically, Congress should allow the Secretary of DHS to consolidate redundant and overlapping federal agencies and programs that are transferred to the new department, and it should refrain from adding numerous new programs, particularly any that clearly will not improve security against terrorism. S. 2452 fails to do either and, in its current version, will cost billions of dollars more over the next five years than would the President's plan.

Two different Approaches to Creating a DHS

On the same day that the Senate's Governmental Affairs Committee approved the costly S. 2452, the U.S. House of Representatives passed the National Homeland Security Act of 2002 (H.R. 5005), which was based on and still closely mirrors the President's initial proposal. The approach seeks to reduce redundancy and improve efficiency by consolidating many of the homeland security functions that are currently spread throughout the federal government. Among the many changes made to the bill during the legislative process, however, are detrimental provisions that would prevent the consolidation of the Customs Service and the United States Coast Guard--two of the most important agencies for border security--into the proposed DHS Directorate of Border and Transportation Security.

S. 2452, the National Homeland Security and Combating Terrorism Act introduced by Senator Lieberman that is currently being debated by the full Senate as a substitute to H.R. 5005, offers a radically different structure for the new DHS. It includes billions of dollars of new spending on many additional programs that are either unnecessary or unrelated to homeland security, and it severely limits the proposed Secretary of Homeland Security's authority to eliminate fragmentation among the programs transferred to the new department.

Such differences in the two approaches are significant, and will have a massive effect on the costs of both reorganizing the federal government for homeland security and running the new department in the foreseeable future.

CBO's Cost Estimates

This summer, the Congressional Budget Office reviewed both the President's proposed legislation (introduced as H.R. 50054) and the bill passed by the Senate Government Affairs Committee (S. 24525). CBO's scoring of S. 2452 shows an implementation cost between fiscal years 2003 and 2007 of almost $10.7 billion, compared with a cost of about $3.3 billion to implement the President's plan.

Both estimates are of spending that is beyond what CBO projects the federal government would have spent on the current federal activities transferred to the new department. The baseline estimates for these other activities were $31 billion for the President's proposal, and $33 billion for the department under S. 2452. CBO's estimates do not include additional funds designed to improve the effectiveness of the existing programs, nor does the CBO estimate account for potential savings due to efficiency gains through the President's proposal.

Most of the additional cost of S. 2452 would come from the new programs and policies that the Senate Government Affairs Committee wants to add to the President's request. Between 2003 and 2007, CBO estimates that these new programs would increase spending by about $9.6 billion. (See Table 1.) Of this amount, $1.9 billion would be for the Directorate for Science and Technology, $1.1 billion for new refugee and asylum adjudication and ombudsman programs in the Directorate for Immigration Affairs, and $1.2 billion for grants to Amtrak (mostly for programs unrelated to security, with other programmatic costs being distributed throughout the department).

Most of CBO's estimated $3.3 billion in additional spending over that period for new programs in the President's proposal would be used to establish a National Bio-Weapons Defense Analysis Center, also an element of S. 2452.

Additional Costs

The CBO estimates that the cost of administering the DHS would be $25 million higher a year under the Lieberman proposal than under the President's proposal ($250 million vs. $225 million), while this difference likely reflects the greater bureaucratic complexity of the department created under S. 2452. (See Chart 1 and Chart 2.)

In addition, CBO estimates that S. 2452 would increase costs by $1.2 billion to initiate a voluntary separation program promoting early retirement for DHS employees. The logic behind this kind of program is to achieve longer-term savings by providing employees in unnecessary positions an opportunity to retire early. However, such a provision, which is not included in the President's proposal, is likely to cost much more than CBO estimates and be ineffective in reducing unnecessary personnel.

The reason: CBO's estimate of the voluntary separation program only includes the cost of the federal payout to employees who retire early. Past experience with voluntary separation programs shows that, after such an employee retires, the position is rarely eliminated. Even when agencies were required to abolish one position for every employee that was bought out, the abolished position tended to be a low-paid entry-level position. By filling the position that had been deemed to be surplus, no real cost savings are really achieved.

Consolidation Authority: The Hidden Cost Saver

Federal homeland security policy has suffered from fragmentation and duplication for years, particularly in the areas of first responder assistance,6 border security, and critical infrastructure protection. Consolidating these functions into a more effective effort has been part of the Bush Administration's agenda since the terrorist attacks of September 11, 2001.7 Experience with the practice of mergers and acquisitions in the private sector indicates that, in addition to improving the effectiveness of federal homeland security efforts, the consolidation and rationalization of key agencies and programs in the DHS would allow the Administration to realize budgetary savings.

In addition, the President's proposal for the new DHS would provide the unified command structure to oversee effectively the maze of duplicative programs in the areas of first responder assistance, critical infrastructure protection, and border security. The basis of President's proposal is the elimination of duplicative functions and the standardization of practices and procurements. Under this proposal, no agency or program transferred to the DHS would retain its independent bureaucratic institutions or practices. They would be merged into those of the new department. This would transform the fragmented nature of the existing federal homeland security effort, making it more unitary. A streamlined chain of command in charge of a unitary effort would lead to significant budgetary savings.

Regrettably, neither the CBO nor the U.S. General Accounting Office (GAO) has developed a statistical model for estimating the direct savings or costs of the duplicative functions. Indeed, GAO cites the difficulty of estimating the true budgetary cost of past anti-terrorism efforts due to the complexity of the different agencies and lack of clarity regarding what constitutes anti-terrorism spending.8 Nonetheless, at least with regard to one new program within the DHS, the National Bio-Weapons Defense Analysis Center, CBO notes that "the degree to which existing personnel are consolidated into the new agency" would be a significant determinate of its overall cost.9

Lessons from the Private Sector

Fortunately, the experience of private-sector business mergers provides Congress with a model upon which expected savings from the consolidation of federal agencies and functions could be better estimated.

Mergers that emphasize reducing redundancy and overlapping functions are more likely to achieve savings and productivity gains because of the economies of scale. Many businesses are measurably successful, in budgetary and managerial terms, because of the sound principles they use to guide mergers and acquisitions. One of the most important of these principles is maintaining an adaptable and versatile leadership that can make decisions with the shared goal of improving the effectiveness and efficiency of the ever-changing company.10 This flexibility allows business leaders to make necessary adjustments to meet the needs of a consolidated, restructured, and larger company. This flexibility is especially significant in personnel practices, as the changing needs of the company can include a redefinition of job descriptions, new policies and procedures, and cultural and attitudinal adjustments for every employee. Upholding the important principle of flexible and versatile leadership helps to ensure that the merger is a success and that the separate companies transition smoothly into one.

Flexibility is also an important factor in determining the financial success of the merger. The consolidation process of companies involved in a merger presents a timely opportunity to reduce inefficiencies and achieve cost savings with a more streamlined process of doing business. Historically, in business, mergers can result in substantial administrative savings by eliminating redundant functions.11 Thus, the process of mergers and acquisitions in the business sector, when exercised properly using sound guiding principles, presents ample scope for generating profit. Indeed, an estimated 34 percent of companies enjoy such profits as a result of a well-planned process.12 The consulting firm of Booz-Allen & Hamilton has cited procurement savings of 3 percent to 25 percent.13 If the consolidation of federal homeland security programs into the DHS is able to achieve similar overhead savings, with the President's proposed homeland security budget for FY 2003 approaching $38 billion,14 this would mean budgetary savings of the hundreds of millions of dollars.

While cost reduction is not considered to be the sole goal of mergers and acquisitions, it is often the fortunate result of a flexible and well-managed business deal. The same is true of the creation of the Department of Homeland Security, the primary purpose of which is to make the disjointed federal homeland security effort more effective. By bringing together federal programs and agencies from a myriad of departments, the creation of this new department is similar to a large-scale business merger. The consolidation effort will require flexibility and principled management decisions to coordinate and streamline effectively the many duplicative and redundant functions in the federal government today.

Thus, business models provide a useful foundation for the process of consolidating federal agencies and functions, helping to reduce the cost of federal homeland security programs substantially while dramatically increasing their effectiveness and efficiency.

Obstacles to Effective Consolidation

While the private-sector experience shows that consolidation is a worthy goal, if S. 2452 emerges as the primary plan approved by the Senate for the new Department of Homeland Security, none of these potential savings would be realized. The bill in its current form would prevent any consolidation of the relevant federal agencies transferred to the new department and would further compartmentalize the already disjointed and redundant anti-terrorism efforts of the federal government.

S. 2452 also includes numerous measures to protect existing bureaucratic arrangements and stifling institutional policies. For example, Section 191 of the bill would prevent the Secretary of Homeland Security from consolidating, rationalizing, transferring, or eliminating any program of function created by law. Since most of the programs to be transferred to the department have a statutory base, the Secretary would not have the authority to merge or change any of them. The bill also would maintain the Coast Guard, Customs Service, and Federal Emergency Management Agency (FEMA) as "distinct entities" largely independent of management from the Undersecretaries for Border and Transportation Security and Emergency Preparedness and Response, respectively. The President's proposal provides no such limitations.

S. 2452 further complicates the consolidating effort by complicating the chain of command within the DHS. It would divide responsibility for two of the DHS's most critical functions--border security and critical infrastructure protection. Under S. 2452, the Coast Guard, the Directorate for Immigration Affairs, and the Directorate for Border and Transportation Security would be independently responsible for parts of border security policy, essentially preserving the ineffective status quo at the nation's points-of-entry.

The Senate was wise to recognize that an effective infrastructure protection policy requires a myriad of risk, vulnerability, and threat assessments, none of which are currently being conducted by any one agency of the federal government. However, it would divide responsibility for these tasks between the Directorates for Intelligence, Critical Infrastructure Protection, and Science and Technology, which would undermine effective information-sharing and coordination. A single process, under the management of one directorate, should be responsible for such assessments. The Senate bill's focus on protecting bureaucracy would reduce the effectiveness of the DHS while luring Americans into the false sense that improvements had been made. It also would likely drive up costs and personnel requirements, while severely limiting the flexibility of the departmental leadership to adjust to the evolving threat of terrorism.

Restraint and Consolidation are Key

To be efficient and effective, the new Department of Homeland Security must be designed around models of good governance. Its leaders must succeed in keeping bureaucracy and budgets in check, and they must have flexibility if they are to be able to meet the ever-changing threat of terrorism.

Nine months after September 11, to enhance homeland security, the President proposed the greatest reorganization of the federal government since the establishment of the Department of Defense in 1947. His proposal was designed to create a unified effort to secure the homeland by overcoming the limitations imposed by the historically divided and bureaucratic homeland security functions.

The longer Congress takes to debate the final legislation to enact this responsible plan, the further it seems to get from its critical objective. The department outlined by the Senate Governmental Affairs Committee in S. 2452 would increases costs by adding numerous new programs (including some unrelated to homeland security) while prohibiting any effort to breakdown existing barriers by consolidating duplicative and overlapping programs and functions across the government.

As the full Senate now debates what kind of Department of Homeland Security it wants to create, S. 2452 should be revised to:

  • Allow for the complete consolidation and rationalization of functions transferred to the new department. Congress should legislate which existing federal agencies, programs and functions should be transferred to the DHS, but it should leave the bureaucratic structure of the department up to the President. Reducing redundancy and overlap of function will prove vital to improving the effectiveness and efficiency of federal homeland security policies and programs.
  • Remove unnecessary new programs and spending. Repairing Amtrak's cars and tunnels and programs to assist child immigrants will not make the United States safer from terror, and thus should not be funding with direct homeland security spending. In the new reality of global terrorism, the U.S. taxpayer should not be burdened with non-germane spending in the name of homeland security.


President George Bush proposed the establishment of a new Department of Homeland Security in order to improve the effectiveness and efficiency of federal efforts to combat terrorism. Congress, by providing America with a solid foundation for the new department, would not only help to improve homeland security but also make effective and efficient use of the resources dedicated to this important task and reduce the cost for American taxpayers.

Meeting these twin objectives will require Congress to allow the Secretary of Homeland Security to consolidate the redundant and overlapping federal agencies and programs transferred to the DHS, while refraining from adding numerous new programs, particularly any unrelated to homeland security. S. 2452 fails to do either and will likely cost at least $7 billion more than the President's proposal over the next five years. The Senate should work to remove the prohibition on consolidation of programs and agencies and the unnecessary new programs from S. 2452.

--Michael Scardaville is Policy Analyst for Homeland Security in the Kathryn and Shelby Cullom Davis Institute for International Studies, and Rea S. Hederman, Jr., is Manager for Operations in the Center for Data Analysis, at The Heritage Foundation.

1. The authors would like to thank Melissa Glass, Research Assistant in the Kathryn and Shelby Cullom Davis Institute for International Studies at The Heritage Foundation, for her assistance with this report.

2. The President's proposal was adopted as the initial draft of H.R. 5005, introduced by Representative Dick Armey (R-TX). The CBO has scored this version. During the course of deliberations, the House added significant changes, but to date, the CBO scoring of the final version is not available.

3. The White House, "Securing the Homeland, Strengthening the Nation," at

4. Congressional Budget Office, "H.R. 5005, Homeland Security Act of 2002," July 9, 2002. The version of H.R. 5005 passed by the House on July 26 includes significant modifications and additions to the President's proposal. However, at the time at which this analysis was written, no scoring of the final bill as passed by the House was available from CBO.

5. Congressional Budget Office, "S. 2452, National Homeland Security and Combating Terrorism Act of 2002," August 14, 2002.

6. Michael Scardaville and Jack Spencer, "Meeting the Needs of America's Crucial First Responders," Heritage Foundation Backgrounder No. 1548, May 13, 2002.

7. The President's first major consolidation proposal was the First Responder Initiative in his FY 2003 budget request. The Director of the Office of Homeland Security, Governor Tom Ridge, reportedly sought a similar consolidation of federal agencies with border security missions. These policies were incorporated into the President's proposal.

8. U.S. General Accounting Office, Combating Terrorism: Spending on Government-Wide Programs Requires Better Management and Coordination, GAO/NSIAD-98-39, December 1997.

9. Congressional Budget Office, "S. 2452, National Homeland Security and Combating Terrorism Act of 2002," August 14, 2002, p. 9.

10. "Lessons from Master Acquirers: A CEO Roundtable on Making Mergers Succeed," Harvard Business Review, June 2000.

11. "Merger Integration: Delivering on the Promise," Booz-Allen &Hamilton, 2001.

12. "Making Acquisitions Work: Capturing Value After the Deal," Booz-Allen & Hamilton, 1999.

13. Ibid.

14. The President's FY 2003 budget request for homeland security was $37.7 billion. For details see, The White House, "Securing the Homeland, Strengthening the Nation," February 2002, at

About the Author

Michael Scardaville Policy Analyst
The Kathryn and Shelby Cullom Davis Institute for National Security and Foreign Policy

Rea S. Hederman, Jr. Director, Center for Data Analysis and Lazof Family Fellow
Center for Data Analysis