Battling the Budget Bulge—Gracefully

How can the federal budget be cut? Let us count the ways, says the Grace Commission.


Would anyone pay $91 for a 3-cent screw? Or $511 for 60-cent lamp? The Pentagon would, according to the Grace Commission Report. Formally dubbed the "President's Private Sector Survey on Cost Control" (PPSSCC), the Grace Commission was pressed into action in early 1982 and by the end of 1983 had produced 47 reports, totaling 23,000 pages of cost-cutting recommendations for the federal government. And all this only scratches the surface, says industrialist J. Peter Grace, who directed the house cleaning.

Asked by President Reagan to study how to "root out waste and inefficiency in the federal government," Grace enlisted 161 business executives and professionals, who in turn recruited over 2,000 private-sector volunteers to probe for potential government savings. The commission was not to try to shape policy nor to propose the elimination of specific services or agencies. Although these ground rules heavily circumscribed the economies the commission could recommend, it still proposed 2,478 measures that could garner savings of $424 billion in the first three years of implementation.

The commission does not claim that the savings could all be achieved at once even with the best will. But it figures that the recommended measures would eventually produce savings not only of $424 billion but of more billions on into the future. The report starts with $46 billion in fiscal 1985—that's a seeming drop-in-the-bucket 5 percent of the federal budget forecast for 1985 under present policies. But by 1990, with Grace's savings, Uncle Sam's outlays would be $1,200 billion, or 27 percent less than the $1,633 billion forecast without the commission's cuts. And by the year 2000, outlays would be just over $3 trillion. Staggering as that number seems, it is still 44 percent less than the status-quo forecasted budget of $5.5 trillion.

These calculations are based first on a summing of cost-accounts estimates of what the commission admits are numbers of varying reliability. It insists the budget projections derive from conscientious and conservative estimates but admits imperfection: "Although PPSS has tried to be consistent and technically accurate in its calculations, its figures are of necessity, of a planning rather than a budget quality." Given the proven inadequacies of "budget-quality" numbers in recent budgets, there is room for great skepticism about "planning-quality" numbers! Moreover, the complexity of the numbers is magnified, since predictions are made by applying them to a complex long-term econometric model of the US economy, although the commission used a model devised by the well-respected economic forecasting firm Data Resources, Inc. Some will say the model inadequately accounts for various supply-side effects; others, that no model can properly account for such effects. In any case, the model does show the economy behaving better with the Grace Commission policies, with lower annual inflation and higher economic growth. In constant 1983 dollars, the report projects federal outlays growing 47 percent from 1983 to 2000 compared to 114 percent under the status quo. By the turn of the decade, the budget deficit would be reduced to about $30 billion a year from the present $195 billion.

The Grace Commission recommendations mean that dramatic reductions in the federal deficit could be accomplished without increasing taxes. Grace himself underlines the significance of this for taxpayers. Already, Grace notes, we have "runaway taxation." And while many taxpayers are keenly aware of the growing tax burden, they may not realize that "100% of what is collected is absorbed solely by interest on the federal debt and by federal contributions to transfer payments. In other words, all individual income tax revenues are gone before one nickel is spent on the services which taxpayers expect from government."

Despite ever-increasing taxes, government revenues have failed to keep pace with the explosion in expenditures. The national debt now stands at $1.4 trillion. The federal deficit, at $195 billion today, is more than 100 times larger than it was less than 20 years ago. And by the year 2000, the Grace Report estimates that the federal debt will be $13 trillion—that's a debt of $160,000 per current taxpayer!—and "the interest alone on this debt [will] be $1.5 trillion per year."

The Grace Report contends that the sizable savings proposals it recommends can enable us to avoid this horrendous scenario. But where are all the projected savings to come from? Eliminating so-called program waste accounts for 37.9 percent of the savings recommendations, while weeding out personnel management and system failures together make up 57.1 percent of the total projected savings. Of course, these categories may not be as clear-cut as they sound. What is "waste" and "inefficiency" in some eyes is "policy" in others—and policy changes had been declared off-limits to the commission. Many of the suggested savings will no doubt meet fierce resistance on that very score.

Take the biggest source of waste found by the Grace Commission—federal retirement programs. The government spent some $40 billion on pensions in fiscal 1983 and is likely to be spending $228 billion by the year 2000 given present policies. But, notes the commission, the government's pension programs are enormously more generous than private-sector retirement arrangements. They allow retirement on full pension much younger—at age 55 in the case of the civil service and at age 40 in the case of the military, compared to age 63 or 64 in the private sector. This cuts both ways, reducing the years of contributions, while increasing the years of payout. Full protection against inflation is provided in the government retirement arrangements, whereas the average private-sector pension scheme provides two to three percentage points less than full protection against increases in the cost of living. Finally, government pensions are based on average income in the last three years of employment, a significant advantage over the five-year base commonly used in business. Finally, vesting provisions and credit for years of service favor retirees from government over those from business.

Historically, more-generous retirement benefits were to compensate for supposedly inferior pay. Less pay, more security was the trade-off. But as the Grace Commission points out, the Federal Salary Reform Act of 1962 significantly changed the basic premise by mandating "comparability" of salaries. Naturally, it did not touch pensions. Indeed, these have steadily improved under pressure from federal employee unions.

A private-sector worker on a preretirement salary of $25,000 typically gets around $266,000 in private-sector pension plus Social Security in his or her retirement years. By comparison, the civil servant gets $542,000 and the military retiree $1,072,000. At higher salary levels the advantage favors federal retirees even more dramatically. At a preretirement salary of $50,000 the private-sector pensioner gets $398,000, the ex-civil servant $1,085,000, and the veteran $1,679,000. In short, the civil servant's retirement arrangements are two to three times as generous as the private-sector employee's, and the military's arrangements are over four times as generous.

The Grace Commission separately investigated the question of how civil-service pay compares with pay scales in business.

The "comparability survey" of pay, position for position, regularly conducted by the Office of Personnel Management usually shows government pay lagging, but those who conduct it doubt its validity. That's partly because the positions and jobs are rarely the same. But the Grace Commission found that there's much more top-heaviness in government and less resistance to "grade creep"—people getting their positions upgraded. Seventy-two percent of middle-and upper-management government employees are at GS-11 level and above, compared to 26 percent of private-sector personnel at comparable levels. The average grade of a federal employee was GS-5.2 in 1949, GS-8.0 in 1974, and GS-8.5 in 1981. It appears that federal blue-collar workers are better paid position by position, that white-collar workers are somewhat less well paid, and that top-level government executives are very much less generously paid than their private counterparts. But different promotion rates modify this picture.

In any case, the real issue in pay is always whether good enough people can be attracted and retained at existing pay rates and other benefits to do the job. By this measure, the federal government grossly overpays since, according to the Office of Personnel Management, there are around 10 qualified applicants for each federal job. Only at the very top executive levels is there a case for pay raises to attract and keep qualified people.

There is more overspending in the federal retirement program than the sums attributable to improved pay scales. Government employees get unnecessarily rich taking their early retirement and their generous pensions and taking on second careers, which then give them access to Social Security and often a second, private pension plan. Grace suggests that the cost-of-living adjustment (COLA) be 70 percent of the consumer price index for former employees without Social Security and 33 percent of inflation for those with access to Social Security. Retired military would fall into the second category.

Foreign service officers have a retirement system almost as generous as the military and can retire on full pension at age 50 (no doubt to compensate for the wear and tear of the international cocktail circuit). Grace proposes that pensions of foreign service officers be cut back to the level of civil service pensions.

The commission's proposed reductions in pensions throughout the government would save about $20 billion a year. The report cites not only the fact that the original justification for better pensions (lower pay) is long since gone, but that the number of retirees and their retirement lifespans have increased hugely, and that it is not fair to taxpayers to pay pensions to well-off civil servants many times those paid in the private sector. Even with the Grace Commission changes, federal employees would be better pensioned than private employees. It is only some of their fat that would go.

The proposed cuts in military pensions have already received a critical reception from the Secretary of Defense, who says they would be disastrous to service morale and would hamper the Pentagon's recruitment and retention of personnel. They are an integral part of the overall compensation package, etc., etc.

Every one of the suggested cuts will have to be relentlessly argued, and each will have to cope with the classic imbalance in the political process of budgeting: those who stand to benefit by the spending are a concentrated, coherent, organized group whose members have a large vested interest in the contest and therefore fight effectively; but those who benefit from cuts are the general public, who are diffuse, unorganized, not a coherent group, and therefore virtually unrepresented on the political battlefield. Each taxpayer has relatively little at stake in a single contest, because he or she is bled with a thousand small cuts. It is that structural defect in the political system that makes democratic politics perverse in its results and gives us overgrown and inefficient government at ruinous expense to the economy.

The Grace Commission does an excellent job documenting examples of unjustifiable government spending but, beyond the suggestion of a presidential line-item veto and biennial instead of annual budgeting, has no suggestions for overcoming at their roots the political disincentives to prudent budgeting. Maybe some of the smaller economies can be achieved through their mere documentation, as taxpayers see the sheer numbers and appalling extent of bloated spending. A few good businessmen like Mr. Grace appearing on talk shows and addressing conferences might help. And some feature articles and editorials? It would be nice to think that such action could rein in the federal budget beast. But even a random sampling of the abuses documented by the Grace Commission suggests that the battle to implement them will be fierce.

Take, for example, some of the abuses identified in the military (with the commission's savings calculations divided by three to give an estimate of annual savings):

• Maintenance of military bases other than those considered vital to national security costs $910 million annually.

• Providing separate heavy maintenance operations for each military branch costs $196 million more than a joint-service operation would.

• Underutilized Defense Department depots cost $39 million per year.

• Savings of $2 billion a year could be achieved simply by maintaining better information on defense spare parts. Currently, the Defense Department's failure to do standard "wall to wall" inventories results in massive anomalies in estimates of available spare parts.

• Pentagon purchasing idiocies accounting for untold millions include paying $91 for 3-cent screws, $100 for 25-cent breather caps for compressors, $114 for 9-cent batteries, and $511 for 60-cent lamps.

• "Dual sourcing," or competition, in providing equipment could save over $1.2 billion per year.

• Multiyear contracting by the Pentagon could save $1.1 billion per year.

• Commissaries (service supermarkets) operated by the Defense Department for current and retired military personnel lose $320 million per year and could, through private operation, earn the Pentagon hundreds of millions in rental income. Instead, the services are building new commissaries and proposing to expand the constituency supporting these taxpayer-subsidized food stores by allowing them to be used by broader categories of people, such as "former spouses" of military personnel and reservists and their families.

• Examples where private contractors run facilities on military bases show huge savings. In maintaining T-37 and T-38 trainer planes at Vance Air Force Base in Enid, Oklahoma, the Northrop Corp. uses only two-thirds the manpower and spends only 78 percent as much as the Air Force does elsewhere where it does its own maintenance. Moreover, says the Grace Report, aircraft availability rates under Northrop are 91.4 percent compared with 88.2 percent for the Air Force's air-training command system-wide.

• Veterans Administration nursing homes cost $109 per bed-day against $45 for private nursing homes (1981 numbers).

• The average length of stay in Veterans Administration hospitals is half as long again as comparable stays in private hospitals, resulting in excess costs of $1.6 billion per year.

• The Veterans Administration admits an error rate in its payouts totaling $500 million annually.

• The Civilian Health and Military Program of the Uniformed Services, a health-care program for the dependents of service personnel, is an expensive perk—$1.1 billion in fiscal 1983—which diverts dependents to civilian health services despite the gross underutilization of service hospitals and clinics.

• Of 124 military hospitals, only 8 reach the 85-percent utilization rate deemed optimal by private-hospital administrators—there's a potential saving of $314 million per year.

The Grace Commission unveiled equally inefficient practices in the myriad of federal welfare and disability programs:

• Disability payouts have risen from $75 million in 1967 to $650 million in 1982; and among the same total federal workforce (including military), there has been a massive rise in long-term disability cases.

• Food-stamp overpayment at a rate of 9.8 percent costs a billion dollars a year.

• Incompetence in the Social Security Administration has produced "suspense accounts" (items that cannot be posted to a specific category of expenditures or receipts) representing 138 million items and totaling $89 billion, severely hampering auditing of the system's financial status.

• Aid to Families with Dependent Children (AFDC) mispayments by the administering states cost the federal government $80 million per year.

• In 1982, $124 billion was spent on means-tested programs (welfare programs for which poverty-level requirements are set), but the Office of Management and Budget (OMB) has shown that 42 percent of those receiving such support had income in cash and in-kind benefits of more than 150 percent of the poverty level.

• Despite massive unfunded liability in the Social Security system and the prospect of confiscatory levels of payroll taxes to support it, $76 billion in Social Security payments goes to elderly people above the poverty line. Three-quarters of the payouts exceed entitlement, in the sense of what is due by way of the amount retirees and their employers paid in as premiums and the earnings on those. Therefore, three-quarters of Social Security is straight welfare, not insurance, and constitutes a transfer from today's workers and business owners to the generally comfortable retired class.

• Social Security is administered from a manual consisting of 25,000 pages, which is sent to 45,000 officers, while a condensed version of the regulations would save $28 million per year and who knows how many headaches.

• 4,352 Social Security field offices are superfluous and could be closed, saving $96 million per year.

• Half of those qualified do not take food stamps, indicating that something is wrong with the qualifications and giving a clue to the enormous potential for further growth of this expensive welfare program. Thirty-four percent of food stamps go to people above the poverty line. A prize for ripping off the food-stamp system goes to a man in Minneapolis who was on the rolls in 13 different counties in five states.

Claims of organizational overlap, information mismanagement, redundancy, and sloppiness crop up repeatedly in the Grace Report:

• The Department of Agriculture is rife with overlapping agencies, having three research outfits and two duplicative soil conservation organizations, each with separate offices even at the county level. Bureaucratic fiefdoms abound, that is.

• Six separate federal agencies maintain their separate inspection services at ports of entry into America, when they could be consolidated for savings of $43 million per year.

• Federal Aviation Administration air traffic control inefficiencies (too many regions and uneconomic, low-volume control centers) impose unnecessary costs of $212 million annually.

• Vast quantities of reports are produced by the government at great cost but are often not read, let alone acted upon. An example cited is a 2,000-page annual report on properties owned and leased by the federal government that its authors at the GSA admit is completely useless because it is impossible to consolidate the data on individual properties.

• $230 million extra could be collected annually in delinquent money owed to the federal government if agencies reported the debts properly and according to standard definitions to the Department of Justice.

• Federal government recording and depositing of checks is slow. The Department of the Interior, for example, takes two weeks for a task normally performed within a 24- to 48-hour period in the private sector.

• Inadequate software and incompatible computer systems make it impossible for federal government agencies to crosscheck income levels reported to detect fraud in welfare and other needs-based assistance programs. The resulting overpayments are estimated at about $1.4 billion.

• The Urban Mass Transportation Administration, despite a $10-million computer installation, has been unable to close its books since 1979, has not done accounts reconciliations since 1977, has no central ledger and so cannot sum its accounts payable or receivable, and was unable to provide the Grace Commission any financial data prior to 1980.

• There is no systematic depreciation accounting in government, so there is poor capital planning and a rundown in the nation's infrastructure.

• 123, or some 37 percent of, accounting systems used by the federal government are not up to standard according to the General Accounting Office.

• Payroll-check processing costs $3 to $4 per check in the federal government versus $1.25 to $1.50 in the private sector.

• The Department of Energy has eight separate accounting and payroll systems, with different monthly closing days, at an estimated unnecessary cost of $12 million annually.

• The federal government has 17,000 computers and spends $12 billion annually on them, but they are relatively old (6.7 years) and mismanaged. Acquisition of computers can take four years because of the involved internal approval process. Departments have incompatible systems, even internally. The Department of Health and Human Services has 10 different brands, all incompatible. Computer staff are underpaid, resulting in many unfilled positions.

• The federal government owns the world's largest motor-vehicle fleet (318,000), but the vehicles are driven an average of only 9,000 miles a year (compared with 25,000 miles found to be optimal by businesses), so the fleet could be reduced by at least 100,000.

• Sloppy air-travel arrangements, including "no shows" and failure to get discounts, cost $385 million per year. The no-show rate on Military Airlift Command is 12 percent, versus a percent average on commercial airlines, making for unnecessary underutilization of military aircraft.

• Employees in government maintenance shops work about 42 percent of the time, compared with 62 percent in the private sector.

• Mismanaged mailing lists are costly, and proper management could save $32 million. The Grace Commission came across an example of one addressee who received 29 copies of the same government publication—that's 29 copies of each issue.

• The federal government operates 242 printing plants, despite the fact that contracting out almost invariably reduces costs. Government Printing Office (GPO) costs average 70 percent more than low bids when work is contracted out.

• The GSA, with 8,600 buildings worth $9 billion, spends $125 million and employs 5,000 people in property management, whereas a large life insurance company with 10,000 buildings valued at $8 billion (comparable) manages them with 300 employees at a cost of $9 million.

• Federal employees take two-thirds more sick pay than private-sector employees, and the Grace Commission recommends limits on sick pay that could save $1.2 billion a year.

• Federal workers' compensation is wide open to fraud and abuse, as there are no checks on multiple claims, no cross-referencing to detect alternative incomes, no verification of medical certification, and no income checking, with the result that 6.3 percent of employees make claims against the scheme compared to 1.7 percent in the private sector, and 3.2 percent of employees lose time from work against 0.4 percent in business.

Numerous government tasks could be performed by the private sector, or rates for government-provided loans and services could better reflect real market values:

• Flood insurance premiums are far below sound actuarial rates, leading to the need for taxpayer subsidies of $220 million per year.

• The federal government's Bonneville Power Administration runs a deficit of close to $1 billion annually in supplying power to the Pacific Northwest, because it does not set proper electric rates.

• Sale of the Washington airports, National and Dulles, would relieve the budget by $152 million annually.

• Greater private-sector participation in the space shuttle would save $508 million annually.

• Private operation of earth remote-sensing satellites (Land-sats) would save $168 million per year.

• Killing handouts to agricultural market development outfits would save $61 million over four years.

• Discontinuance or privatization of the radio weather service would save $4 million.

• Fully a quarter of government employees (excluding the postal service) are estimated as engaged in some 11,000 activities identical to commercial operations (for example, maintenance, security, cleaning, food service). This work could be done by contractors at savings estimated by the Office of Management and Budget at $1.7 billion annually.

Given the scope of all these inefficiencies, it is no wonder the Grace Commission investigations concluded that, as businessmen, they would not acquire the government if it were an enterprise for sale. Unfortunately, American taxpayers have no choice in the matter. We can, of course, hope that policymakers in Washington take the Grace Commission's proposals seriously. But it remains to be seen whether they will in fact do so.

Even Reagan himself, who requested that J. Peter Grace undertake the survey on cost controls, came up with a 1985 budget including a paltry $8.4 billion in proposed spending cuts. Eight-and-a-half billion dollars? What happened to the $100 billion plus in other potential cuts outlined by his own cost-cutting commission? Perhaps Reagan intends to side-step Congress by implementing those recommendations (roughly 40 percent of the 2,478 total) that can be implemented in the executive branch without congressional approval. There are some signs that this is already happening on a small scale.

But even if Reagan is moderately successful in implementing changes through executive branch directives, 60 percent of the recommendations would still require congressional approval. Whether Reagan will confront Congress with these proposals is still uncertain. What is not uncertain is that if he does go to Congress, he will have a battle on his hands. The scope of that opposition is another whole story in itself.

Contributing Editor Peter Samuel is a feature writer with the Murdoch newspaper group in Washington, D.C. He taught economics in Melbourne and wrote on public policy for over 15 years for the Bulletin, Australia's leading weekly magazine.