Topic: Tax and Budget Policy

The Real Costs of HealthCare.gov

In May, Department of Health and Human Services (HHS) Secretary Sylvia Burwell testified to Congress that costs for building HealthCare.gov were $834 million. New research from Bloomberg Government suggests that Burwell’s estimate represents a low-end estimate.

According to the new report, spending for HealthCare.gov has been an estimated $2.14 billion. Burwell’s estimates did not include numerous costs related to the project. For instance, she did not include the contract costs for processing paper applications, which are used as a backup. That contract cost $300 million.

Burwell’s figure also does not include spending at the IRS and other agencies related to ACA requirements. For instance, the IRS is required to provide real-time interfacing with HealthCare.gov to verify income and family size for insurance subsidy calculations. Those requirements cost $387 million.

Bloomberg also includes $400 million in costs that were excluded by HHS using creative accounting. When it wrote the ACA, Congress did not appropriate money to HHS for the construction of a federal exchange. Instead, it provided unlimited grants to states to construct their portals. When many states refused to construct their exchanges, HHS was forced to develop HealthCare.gov, but without a dedicated source of funding. HHS said it would need to “get creative” about funding options, leaving many wondering where HHS would eventually get the money. According to Bloomberg, HHS shifted money around to finance the construction of HealthCare.gov, using a number of existing contracts to finance the website’s construction.

Finally, Bloomberg included $255 million more in costs than Burwell due to time period differences. Burwell’s costs were as of February 2014. Bloomberg included costs until August 20, 2014, and then projected the current level of spending forward to the end of the fiscal year, September 30th. But this means that their figures are likely conservative too because federal agencies often ramp up spending— particularly contract spending—as it closes out its fiscal year.

Implementing the ACA is a costly exercise; Bloomberg says the $2.14 billion for HealthCare.gov administration is only a small part of the full $73 billion costs of Obamacare since its passage in 2010. But the administration nonetheless owes taxpayers an accurate accounting for the costs of the system.

Travel Card Abuse in the Department of Transportation

Department of Transportation (DOT) employees are abusing their government travel cards, according to a new report from the agency’s Inspector General. The report suggests that DOT officials missed $183,000 in unallowable cash advances and $2.1 million in unauthorized purchases on government travel cards.

The report details numerous examples of abuse such as:

  • A Federal Aviation Administration (FAA) cardholder traveled to Houston, Texas, for 3 days and withdrew a $301 cash advance on the last day of the trip at an automated teller machine located 40 miles from his residence.
  • Between October 2011 and June 2012, an FAA cardholder collected seven cash advances totaling $719 while not on Government travel. On one occasion, this employee obtained a $104 cash advance on a race day at an Alabama Superspeedway…
  • Between February and August 2012, another FAA cardholder collected five cash advances totaling over $1,400 while not on Government travel…
  • An FAA employee who was not on Government travel visited a casino in Shawnee, OK, and collected three cash advances totaling $492 from his Government-issued travel card.
  • A former OIG employee collected two cash advances totaling $488, more than 2 years after separating from the Agency. DOT’s Financial Management Travel Card Management Policy requires that travel card accounts be closed when an employee leaves the department.

DOT is not the only agency with this issue. Last year, the Treasury Department announced misuse of cards within the Internal Revenue Service. Treasury found “more than 1,000” employees who abused their travel cards in fiscal year 2010 and 2011.

These types of employee ripoffs are not limited to travel cards. A 2008 report from the Government Accountability Office (GAO) found 41 percent of transactions on government purchasing cards violated “basic internal control standards.” Agencies were unable to provide appropriate documentation for 48 percent of large purchases that GAO studied. GAO found: “the Department of the Army could not adequately account for 256 items … each of which cost nearly $100,000.” One employee was able to withdraw $642,000 from her purchasing card over six years before being caught and sent to prison.

Purchasing and travel cards can be efficient in reducing overhead and streamlining processes, but agencies should ensure that proper audit controls are met so that more taxpayer funding is not wasted. Our bloated federal government purchases about $570 billion worth of supplies and equipment each year, so reform in this area is essential.

SBA’s Risky Franchise Lending

The Small Business Administration’s (SBA) stated mission is to aid small businesses and strengthen the economy. Under its popular 7(a) program, SBA provides private lenders with loan guarantees. In the case of default, SBA steps in to cover up to 85percent of the lender’s losses.

This structure encourages lenders to provide more loans, but also encourages the approval of riskier loans. The lenders are insulated from most of the risks of default.  

A new analysis conducted by the Wall Street Journal confirms that this arrangement induces SBA to provide loans that result in a large number of defaults. Default rates for some franchise companies can be as high as 40 percent. According to the Wall Street Journal:

Quiznos, Cold Stone Creamery, Planet Beach Franchising and Huntington Learning Centers Inc. ranked among the 10 worst franchise brands in terms of Small Business Administration loan defaults.

Franchisees of the 10 brands in the ranking defaulted at more than double the rate for SBA borrowers who invested in all other chains, according to a Wall Street Journal analysis of charge-offs of all SBA-backed franchise loans in the past decade.

Put another way, franchisees of those 10 brands have left taxpayers on the hook for 21% of all franchise-loan charge-offs in the past decade, collectively failing to pay back $121 million in SBA-guaranteed loans from 2004 through 2013.

Thirty percent of the loans provided to Quiznos and Cold Stone Creamery franchises ended in default. The losses from loans to Quiznos franchises totaled $38.4 million during the 2004 to 2013 period, while losses to Cold Stone Creamery amounted to $34.1 million.

This is not the first time that SBA’s franchise lending has been criticized. In a report focused on franchises, SBA’s Inspector General noted in 2013 that SBA “had not implemented a program or process to monitor risk in its portfolio.” The report continues: “SBA did not monitor portfolio segments to identify risk based on default statistics…SBA continued to guarantee loans to high-risk franchises and industries without monitoring risks, and where necessary, implementing controls to mitigate the risks.”

Franchise businesses are an important component of SBA’s activities. In its new analysis, the Wall Street Journal points out that “SBA guaranteed nearly $18 billion in 7(a) loans [in 2013], including $2 billion for franchisees.”

Taxpayers are picking up the costs of these government loan guarantees. SBA charges lenders fees to mitigate the costs of default, but the fee amount seem to be too low. Most recent years, SBA has received a net outlay, or subsidy, from Congress.

What should be done? At the very least, SBA should take its inspector general’s recommendations and review its practices regarding franchise loans to reduce the number of defaults. Ideally as argued on www.downsizingovernment.org, SBA should be closed down.

Secret Service Spending

Another federal agency has screwed up. This time it is the Secret Service, which almost allowed an intruder to make a surprise visit on the Obamas. The Washington Post reports:

The Secret Service on Saturday launched a security review to learn how a man carrying a knife was able to get inside the front door of the White House on Friday night after jumping a fence and sprinting more than 70 yards across the North Lawn.

In response to the failure, Rep. Jason Chaffetz observed that “the Secret Service has a serious management problem.” According to the Post:

The service, which once enjoyed a sterling reputation as an elite law enforcement agency, has struggled with some embarrassing episodes recently and the perception that its leadership is lagging in the best security strategies. In spring 2012, the service faced a humiliating moment when a dozen agents were shipped home from a presidential trip in Cartagena, Colombia, where they were implicated in a night of carousing and boozing with prostitutes.

The latest fence-jumping incident is no laughing matter, but this line from the Post did make me chuckle: “Former agents said they fear the breach may be related to a severe staffing shortage the agency has struggled with in the last year in its Uniform Division.”

Staffing shortage? How is that possible when the Secret Service budget has doubled in real (inflation-adjusted) terms since 1998—from $0.9 billion to more than $1.8 billion? The chart shows the particularly strong growth during the George W. Bush years.  

Bipartisan Agreement against the Taxpayers

The Washington Post reports on strong disagreements in consecutive appearances by Virginia Senate candidates Mark Warner and Ed Gillespie. Obamacare, terrorism, lobbying, partisanship – lots of arguments. But take heart, the Post advises us: “Despite the positioning, both candidates agreed on a few topics.” As usual, as I’ve written before, when you hear about bipartisanship, watch your wallet. Here’s what Warner and Gillespie agree on:

For example, they each called federal sequestration cuts devastating to the Northern Virginia economy.

Gillespie said Warner was in support of sequestration, while Warner blamed Republicans for allowing the automatic spending cuts to go through after Congress failed last year to resolve the debt-ceiling crisis.

“Sequestration is stupidity on steroids,” Warner said, promising to look for places to cut spending in other areas. “You have to take on entitlement reform and tax reform.”

Both also agreed that there is an urgent need to improve Virginia’s transportation infrastructure, though Gillespie said the solution lies in bringing in more revenue through deep-sea oil drilling and Warner argued for privatizing portions of transportation improvements.

On national security, Gillespie and Warner agreed on a need to spend more on the U.S. military in the face of the threat posed by the Islamic State.
Once again, what the candidates agree on is spending the taxpayers’ money.

Patent and Trademark Employees Cheat on Bonuses

Two years after whistleblowers submitted tips to the Commerce Department Inspector General’s office, the United States Patent and Trademark Office (USPTO) is acknowledging extensive timekeeping fraud among its employees. Many employees have reported working more hours and achieving higher levels of production than they actually did in order to secure overtime pay and bonuses.

The Washington Post has the details:

For example, patent examiners are allowed to submit incomplete reviews in order to meet productivity deadlines that ensure their work will be rewarded with bonuses. But the work is not always completed, the officials told congressional investigators.

They also said they believe they have adequate tools to allow managers to make sure the examiners they supervise are working, primarily through e-mail and phone calls. The 32-page review had concluded that many managers feel they have little authority to oversee their employees’ work; examiners have a full day to respond to calls and are not required to log into the agency’s internal Web site, so their bosses do not know if they are at their desks at a given time…

More than 70 percent of the 80 managers interviewed told the internal review team that a “significant” number of examiners did not work for long periods, then rushed to get their reviews done at the end of each quarter. The supervisors were concerned that the practice negatively affected the quality of the work.

After the tips were received, USPTO assigned an internal team to investigate. The team produced a 32 page report detailing the abuse. However, the agency scrubbed the report before submitting it to the inspector general. According to the Washington Post, “top patent officials removed the most damaging revelations from the report, providing the agency’s inspector general with an account half the length and with many potentially embarrassing findings removed.”

The agency now claims that the issue is under control. Workers are required to log into the agency’s remote server while teleworking. Unlike many federal agencies, the USPTO is specifically authorized by the U.S. Constitution, but it still has a duty to spend money wisely. 

Customs and Border Protection’s Extravagant Houses

U.S. Customs and Border Protection is the second largest agency within the Department of Homeland Security (DHS). The agency cost taxpayers $13 billion in fiscal year 2014, and its budget is growing quickly. Spending has increased 85 percent in the last ten years, after accounting for inflation.

This chart shows CBP spending since 1970, including its recent meteoric rise.

Regrettably for taxpayers, all of that money is not being spent wisely. The Washington Post recently highlighted one example of egregious CBP spending:

U.S. Customs and Border Protection “vastly overpaid” for an employee housing project near one of its checkpoints in rural Arizona, spending nearly eight times the average price of homes in the area to build each of the units, according to a federal audit.

The 21 agency homes in Ajo, Ariz, cost about $680,000 each, whereas the average price for a home in the city is $86,500, the Homeland Security Office of Inspector General said in a report on Thursday.

Auditors determined that CBP overpaid for the land, added “nonessential items” and ignored recommendations for the types of houses that should be built. A CBP study had called for one-bedroom homes, but the agency instead built two- and three-bedroom units with amenities such as quartz counter tops, three-car garages and stand-alone freezers.

The report concluded that the homes exceeded employee needs, noting that 80 percent of the agency’s field officers own permanent residences in other locations.

“CBP did not effectively plan and manage employee housing in Ajo, Arizona, and made decisions that resulted in additional costs to the federal government,” the report said.

All told, the auditors identified $4.6 million in expenses that “could have been put to better use.” They noted that CBP increased the cost of the project seven times without explaining how the extra funds would be spent.

Ajo, Arizona represents just one of six areas where CBP is building new homes for its agents. The Inspector General’s report calls on CBP to postpone further construction until it gets this wasteful spending under control.

This is one more example to add to the ever-growing list of wasteful federal spending.
——–

Curious how much other agencies spend? You can make your own spending charts here at www.DownsizingGovernment.org.