Salami Strategy on Federal Costs

This article appeared in the Washington Times on January 9, 2005.
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As the D.C. baseball saga continues unfolding, I’ve been shocked—shocked!—at the soaring estimated costs of the stadium project. At least I would be shocked if it weren’t for recent news the Capitol Hill Visitor’s Center is 50 percent overbudget and federal air traffic control upgrade costs are up 81 percent. At the Pentagon, the Global Hawk aircraft is 44 percent overbudget. A new spy satellite program has nearly doubled in cost.

Are these simply examples of poor management? Unfortunately, it’s a more serious problem called a “salami strategy.” Public officials routinely low‐​ball initial cost estimates to win approval for projects, then they reveal the true costs one slice at a time after it is too late to turn back.

Last year’s Medicare prescription drug bill was a classic case. The Bush administration said that the bill would cost $400 billion over 10 years. But soon after the bill was enacted, we found out that the real cost would be at least $534 billion. Investigations revealed that Medicare’s chief cost analyst knew about the higher costs, but he was threatened with termination if he went public.

Cost overruns are routine in federally‐​financed projects. The estimated cost of the Springfield highway interchange jumped from $241 million to $676 million. The cost of the Kennedy Center parking lot project increased from $28 million to $88 million. Most infamously, the cost of Boston’s Big Dig soared from an initial $2.6 billion to $14.6 billion.

With projects such as the Big Dig, state officials have the incentive to understate costs because they compete against other states for federal funds. Members of Congress are also to blame. The estimated cost of NASA’s Space Station skyrocketed from $17 billion in 1995 to $30 billion today. NASA’s reward? More money for manned space flight in the recent omnibus spending bill, courtesy of Majority Leader Tom DeLay.

The sad truth is that members of Congress who secure projects for their districts don’t care about cost efficiencies. What counts is the cash brought home and the number of government‐​funded jobs created. If highway projects or space stations are overbudget, it simply means more hometown federal jobs for powerful legislators.

The biggest government jobs creator is also the most notorious overspender: the Pentagon. The unit costs of weapon systems can double or even triple during development. The unit cost of the F/A-22 Raptor soared from $89 million to $248 million, the cost of the V-22 Osprey from $23 million to $90 million, and the cost of the Patriot missile from $4 million to $10 million.

Some government projects must come in underbudget, but I can’t think of any. A 2002 study in the Journal of the American Planning Association did look at a representative sample of 258 government projects here and abroad. It found that 9 out of 10 projects had cost overruns, with an average overrun of 28 percent. The study found that cost overruns usually stem from intentional deception not honest errors, and concluded: “Project promoters routinely ignore, hide or otherwise leave out important project costs and risks in order to make total costs appear low.”

That appears to be the case, for example, with the Department of Energy’s $18 billion per year in procurement, which has long been on the General Accountability Office’s watch list for waste, fraud and abuse. One GAO review found that 38 percent of DOE projects examined had more than doubled in cost.

Federal entitlement programs work the same way. When politicians add entitlement benefits, they keep the official budget costs down by including supposed cost controls into legislation. But over time the controls are either evaded or repealed. Then the blame game begins. Congress holds hearings to point the finger at agency administrators, drug firms, and other promising targets. With projects such as the Big Dig, federal officials blame the states, and in turn the states blame private contractors.

The fundamental problem, of course, is that no one spends someone else’s money as carefully as they spend their own. Thus, part of the solution is to move funding of highways, airports, and other projects to the private sector when feasible. Private firms are offering to build highways in Virginia. Airports can also be privatized, as they have been in Copenhagen, Frankfurt, London, Melbourne, Rome, and Sydney.

Private entrepreneurs are even tackling manned space flight with the recent success of SpaceShipOne. Take note Mr. DeLay: NASA’s black hole for taxpayer dollars is no longer needed.