April 2005
Top 10 Examples of Government Waste
by Brian M. Riedl
President George W. Bush has proposed terminating or strongly
reducing the budgets of over 150 inefficient or ineffective programs.
This is a step in the right direction to pare back the runaway
spending that has pushed the budget deficit over $400 billion. In less
than three years, the first baby boomers will begin to collect Social
Security: Lawmakers must therefore begin to reduce spending now to
make room for the massive Social Security and Medicare costs that will
follow.
The first place to trim runaway federal spending is in waste, fraud,
and abuse. Congress, however, has largely abandoned its constitutional
duty of overseeing the executive branch and has steadfastly refused to
address the waste littered across government programs. In 2003, an
attempt by House Budget Committee Chairman Jim Nussle (R–IA) to
address wasteful spending was rejected by the House of
Representatives, and similar calls in 2004 by then-Senate Budget
Committee Chairman Don Nickles (R–OK) were rejected by the Senate. A
small group of House lawmakers has formed the Washington Waste
Watchers, but their agenda has not been embraced by the whole House.
Lack of information is not the problem. Today, government waste
investigations and recommendations can be found in hundreds of
reports, such as:
*
Studies published by the U.S. Government Accountability Office
(GAO),[1]
*
The Congressional Budget Office’s Budget Options book,
*
Inspector general reports of each agency,
*
Government Performance and Results Act reports of each agency,
*
The White House’s Program Assessment Rating Tool (PART) program
reviews, and
*
The Senate Governmental Affairs Committee’s 2001 Government at
the Brink reports.
For those seeking past recommendations that went unheeded, the 1984
Grace Commission report on government waste and the 1993–1995
publications of Vice President Al Gore’s National Performance Review
can still be found.
With all of this available information and in an era of tight budgets,
why are lawmakers so resistant to reducing waste? One reason is that
they see it as a thankless job that would go unnoticed back home. With
Congress in session just 80 days annually, reducing waste would take
precious time away from most lawmakers’ higher priorities of increas
ing spending on popular programs and bringing pork-barrel projects
home.
A second reason is that some of the most wasteful programs are also
the most popular (e.g., Medicare), and lawmakers fear that opponents
would portray them as “attacking” popular programs. Consequently,
waste and inefficiencies continue to build up, costing taxpayers more
while providing beneficiaries with less.
A real war on government waste could easily save over $100 billion
annually without harming the legitimate operations and benefits of
government programs. As a first step, lawmakers should address the 10
following examples of egregious waste.
1. The Missing $25 Billion
Buried in the Department of the Treasury’s 2003 Financial Report of
the United States Government is a short section titled “Unreconciled
Transactions Affecting the Change in Net Position,” which explains
that these unreconciled transactions totaled $24.5 billion in 2003.[2]
The unreconciled transactions are funds for which auditors cannot
account: The government knows that $25 billion was spent by someone,
somewhere, on something, but auditors do not know who spent it, where
it was spent, or on what it was spent. Blaming these unreconciled
transactions on the failure of federal agencies to report their
expenditures adequately, the Treasury report concludes that locating
the money is “a priority.”
The unreconciled $25 billion could have funded the entire Department
of Justice for an entire year.
2. Unused Flight Tickets Totaling $100 Million
A recent audit revealed that between 1997 and 2003, the Defense
Department purchased and then left unused approximately 270,000
commercial airline tickets at a total cost of $100 million. Even
worse, the Pentagon never bothered to get a refund for these fully
refundable tickets. The GAO blamed a system that relied on department
personnel to notify the travel office when purchased tickets went
unused.[3]
Auditors also found 27,000 transactions between 2001 and 2002 in which
the Pentagon paid twice for the same ticket. The department would
purchase the ticket directly and then inexplicably reimburse the
employee for the cost of the ticket. (In one case, an employee who
allegedly made seven false claims for airline tickets professed not to
have noticed that $9,700 was deposited into his/her account). These
additional transactions cost taxpayers $8 million.
This $108 million could have purchased seven Blackhawk helicopters, 17
M1 Abrams tanks, or a large supply of additional body armor for U.S.
troops in Afghanistan and Iraq.
3. Embezzled Funds at the Department of Agriculture
Federal employee credit card programs were designed to save money.
Rather than weaving through a lengthy procurement process to acquire
basic supplies, federal employees could purchase job-related products
with credit cards that would be paid by their agency. What began as a
smart way to streamline government has since been corrupted by some
federal employees who have abused the public trust.
A recent audit revealed that employees of the Department of
Agriculture (USDA) diverted millions of dollars to personal purchases
through their government-issued credit cards. Sampling 300 employees’
purchases over six months, investigators estimated that 15 percent
abused their government credit cards at a cost of $5.8 million.
Taxpayer-funded purchases included Ozzy Osbourne concert tickets,
tattoos, lingerie, bartender school tuition, car payments, and cash
advances.
The USDA has pledged a thorough investigation, but it will have a huge
task: 55,000 USDA credit cards are in circulation, including 1,549
that are still held by people who no longer work at the USDA.[4]
4. Credit Card Abuse at the Department of Defense
The Defense Department has uncovered its own credit card scandal. Over
one recent 18-month period, Air Force and Navy personnel used govern
ment-funded credit cards to charge at least $102,400 for admission to
entertainment events, $48,250 for gambling, $69,300 for cruises, and
$73,950 for exotic dance clubs and prostitutes.[5]
5. Medicare Overspending
Medicare wastes more money than any other federal program, yet its
strong public support leaves lawmakers hesitant to address program
efficiencies, which cost taxpayers and Medicare recipients billions
of dollars annually.
For example, Medicare pays as much as eight times what other federal
agencies pay for the same drugs and medical supplies.[6] The
Department of Health and Human Services (HHS) recently compared the
prices paid by Medicare and the Department of Veterans Affairs (VA)
health care program for 16 types of medical equipment and supplies,
which account for one-quarter of Medicare’s equipment and supplies
purchases. The evidence showed that Medicare paid an average of more
than double what the VA paid for the same items. The largest
difference was for saline solution, with Medicare paying $8.26 per
liter compared to the $1.02 paid by the VA.[7] (See Table 1.)
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These higher prices not only cost the program more money, but also
take more money out of the pockets of Medicare beneficiaries. In 2002,
senior citizens’ co-payments accounted for 20 percent of the $9.4
billion in allowed claims for medical equipment and supplies.[8]
Higher prices mean higher co-payments.
Medicare also overpays for drugs. In 2000, Medicare’s payments for 24
leading drugs were $1.9 billion higher than they would have been under
the prices paid by the VA or other federal agencies. Although Medicare
is supposed to pay wholesale prices for drugs, it relies on drug manu
facturers to define the prices, and manufacturers have strong
incentives to inflate their prices.[9]
Nor are inflated prices for drugs and supplies the most expensive
examples of Medicare’s inefficiencies. Basic payment errors—the
results of deliberate fraud and administrative errors—cost $12.3
billion annually. As much as $7 billion owed to the program has gone
uncollected or has been written off.[10] Finally, while Medicare
contracts claims processing and administration to several private com
panies, 19 cases of contractor fraud have been settled in recent
years, with a maximum settlement of $76 million.[11]
Putting it all together, Medicare reform could save taxpayers and
program beneficiaries $20 billion to $30 billion annually without
reducing benefits. That would be enough to fund a $3,000 refundable
health care tax credit for nearly 10 million uninsured low-income
households.
6. Funding Fictitious Colleges and Students
In 2002, the Department of Education received an application to
certify the student loan participation of the Y’Hica Institute in
London, England. After approving the certification, the department
received and approved student loan applications from three Y’Hica
students and disbursed $55,000.
The Education Department administrators overlooked one problem:
Neither the Y’Hica Institute nor the three students who received the
$55,000 existed. The fictitious college and students were created (on
paper) by congressional investigators to test the Department of
Education’s verification procedures. All of the documents were faked,
right down to naming one of the fictional loan student applicants
“Susan M. Collins,” after the Senator requesting the investigation.
[12]
Such carelessness helps to explain why federal student loan programs
routinely receive poor management reviews from government auditors.
At last count, $21.8 billion worth of student loans are in default,
and too many cases of fraud are left undetected.[13] Tracking
students across federal programs, verifying loan application data with
IRS income data, and implementing controls to prevent the dis
bursement of loans to fraudulent applicants could save taxpayers
billions of dollars.
7. Manipulating Data to Encourage Spending
The Army Corps of Engineers spends $5 billion annually constructing
dams and other water projects. Yet, in a massive conflict of interest,
it is also charged with evaluating the science and economics of each
proposed water project. The Corps’ “strategic vision” calls on
managers to increase their budgets as rapidly as possible, which
requires approving as many proposed projects as possible.[14]
Consequently, the Corps has repeatedly been accused of deliberately
manipulating its economic studies to justify unworthy projects.
Investigations by the GAO, The Washington Post, and several private
organizations have found that Corps studies routinely contain dozens
of basic arithmetic errors, computer errors, and ridiculous economic
assumptions that artificially inflate the benefits of water projects
by as much as 300 percent.[15] In one case, a study’s authors
inflated a project’s benefits by using a 2.5 percent interest rate
that dated back to 1954. In many cases in which the Corps calculated
that a project would be a net benefit, arithmetic corrections revealed
that the costs would be many times greater than the benefits.[16] By
that point, of course, the unnecessary and wasteful project is often
underway and cannot be stopped.
These errors appear to reflect more deception than sloppiness. A
Washington Post investigation uncovered managers ordering analysts to
“get creative,” to “look for ways to get to yes as fast as pos
sible,” and “not to take no for an answer.” After a public outcry, in
2002, the Corps suspended work on 150 projects to review the economics
used to justify them.[17] However, given the combination of Congress’s
thirst for pork-barrel projects and the Corps’ built-in incentives to
approve projects that will increase its budget, real reforms seem
unlikely.
8. State Abuse of Medicaid Funding Formulas
Significant waste, fraud, and abuse pervade Medicaid, which provides
health services to 44 million low-income Americans. While states run
their own Medicaid programs, the federal government reimburses an
average of 57 percent of each state’s costs.
This system gives states an incentive to overreport their Medicaid
expenditures in order to receive larger federal reimbursements. Not
surprisingly, the GAO has identified state schemes that shift money
between state accounts to create an illusion of higher Medicaid
expenditures. Similarly, some states have spent their federal
Medicaid dollars on non-Medicaid purposes. Tight state budgets like
those experienced by most states today have increased the pressure to
use such deceptive tactics.
The GAO and the HHS Inspector General have also uncovered some states’
practice of recovering improper payments, retaining the funds, and
then spending them on unrelated programs—a practice that costs the
federal government well over $2 billion per year. Congress could
enact legislation to prohibit these actions more effectively.
Minor reforms enacted by HHS in 2001 and 2002 are expected to save
Medicaid $70 billion over the next decade. A small sample of financing
schemes uncovered in a few states suggests that, if Congress acts,
even larger savings are available.[18]
9. Earned Income Tax Credit Overpayments
The earned income tax credit (EITC) provides $31 billion in refundable
tax credits to 19 million low-income families. The IRS estimates that
$8.5 billion to $9.9 billion of this amount—nearly one-third—is wasted
in overpayments.
The complexity of the EITC law leads to many of these mistakes.
Calculating the credits is more complex than calculating regular
income taxes. While the credit amount depends on the number of
children in a household, the tax code does not clearly define how a
child qualifies for the credit. In addition, fraud and underreporting
of income are common, and the IRS lacks the resources to verify the
qualifications of all EITC claimants.
Efforts are being made to address this problem, but Congress can do
more by requiring better verification of incomes and by clearly
defining the standards by which a child qualifies for the EITC.[19]
10. Redundancy Piled on Redundancy
Government’s layering of new programs on top of old ones inherently
creates duplication. Having several agencies perform similar duties
is wasteful and confuses program beneficiaries who must navigate each
program’s distinct rules and requirements.
Some overlap is inevitable because some agencies are defined by whom
they serve (e.g., veterans, Native Americans, urbanites, and rural
families), while others are defined by what they provide (e.g.,
housing, education, health care, and economic development). When these
agencies’ constituencies overlap, each relevant agency will often have
its own program. With 342 separate economic development programs, the
federal government needs to make consolidation a priority.
http://www.heritage.org/research/budget/bg1840.cfm
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