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4 Ways Sequestration Cost Taxpayers Money

A general view of the Internal Revenue Service (IRS) Building in Washington, May 14, 2013.

Last Thursday, the GAO issued a report detailing how agencies implemented sequestration. The report included a discussion of the costs of sequestration. In many agencies, mandatory spending reductions affected programs that provided returns on investment. Ironically, sometimes budget cuts cost the government money—and sequestration did. The problem is compounded when policymakers apply blanket, shortsighted solutions to complex problems. Below we outline four ways the public was shortchanged by sequestration.

  1. Limiting Internal Oversight – Reduced Waste Prevention
    One part of the federal government hit hardest by sequestration were offices of inspectors general (IGs) and chief financial officers (CFOs). Both types of offices are charged with oversight and monitoring actions that are designed to detect waste, fraud, and abuse. Such investigations allow agencies to recoup money and streamline processes. For example, DOT, HUD, State, DOE and others noted that oversight activities were limited, including planned audits, investigations, and inspections. The report notes, “the DOT IG delayed or curtailed several planned audits, including audits on FAA implementation of modernization programs related to the Next GenerationAir Transportation System, and oversight of major transit projects in New York City and on the West Coast.” As our colleague Phil Wallach has noted on this blog before, serious prevention of waste, fraud and abuse requires an investment in the capabilities of agencies to detect fraud and conduct meaningful oversight.
  2. Limiting Finding Fraud – Reduced Revenue Recovery
    Budget cuts for IGs and CFOs did not simply affect waste detection within federal agencies. Those offices and other enforcement divisions throughout the federal government help prevent fraud and abuse in a variety of areas. IRS faced profound challenges under sequestration that cost taxpayers substantially—and contributed to the deficit. The tax enforcement division is one area where the Department of Treasury can predict lost revenue due “to fewer tax return reviews and diminished fraud detection.” In the past, the Treasury has, “collected roughly $4 in enforcement-related revenue for each dollar spent on the IRS.”

    IRS wasn’t alone, however. Sequestration led to reductions in government revenue from the Department of Interior (delays in production from new onshore oil and gas leases) and DOJ (hiring freezes reduced financial fraud and drug trafficking investigations). Budget cuts also limited the Social Security Administration’s ability to conduct disability reviews. Such reviews prevent fraud and save money. The savings are real as, “SSA officials estimate are about $9 for every $1 spent conducting the reviews over a 10-year period.” Under these circumstances, budget cuts—intended to reduce the federal deficit—can have deficit-increasing, offset effects from reductions in revenue.
  3. Limiting Government Investment – Reduced Long-Term Returns
    Government also reduces long-run costs by investing in itself and its surroundings. This includes upkeep of federal buildings, IT systems, public infrastructure, and procurement systems, among others. Sequestration led to costly reductions in investment. Pentagon officials stated that “delaying and reducing installation support services in fiscal year 2013 will likely lead to higher future costs for these services due to facility degradation.” Similarly, DOT reduced transit project grants leading to increased costs of infrastructure maintenance and replacement in the future.
  4. Limiting a Skilled Federal Workforce – Reduced Efficiencies in Bureaucracy
    It is no secret that hundreds of thousands of federal workers were furloughed at some point in 2013—even prior to the government shutdown. GAO estimates the number to be nearly 800,000. Furloughs resulted in pay reductions for federal employees that had come on the heels of multi-year pay and hiring freezes within agencies, forcing federal employees to do more work with fewer resources. The result was “a notable reduction in employee morale” based on “employees’ satisfaction with their work pay and organization.” Any business owner knows the loss of efficiency from unhappy workers, and the government is no different.

    Beyond morale, there were more palpable losses to efficiency in government. The GAO report notes that “19 agencies reported that they restricted employee training.” Additional training for federal workers helps advance agencies’ missions and align skills with need. In a direct way, those reductions limit the ability of federal workers to do their jobs, reduce costs, and gain efficiency in the workplace. Each is cost saving, and each was burdened by sequestration.

Who’s to Blame?

Given that sequestration was born from the Budget Control Act of 2011 (BCA), passed by a Republican House and Democratic Senate and signed by a Democratic president, no party is spared blame.

First, Congress designed and passed a law that had blanket effects on a dynamic, large bureaucracy, leading to costs to the taxpayer. A budget-conscious, deficit-wary, fiscally-concerned Congress should have been sensitive to such programs, given their broader effort to balance the books.

How could Congress have achieved this? It could have asked the Budget and Appropriations Committees, OMB, or specific agencies for lists of programs that were revenue producers or provided cost savings and exempted them under BCA. If Congress felt such requests were not feasible, they could have relied on a different “blanket approach” and exempted every IG, CFO, and/or enforcement division of federal agencies. The latter approach surely would have exempted some offices and programs that did not provide cost savings. Given that Congress clearly had no objection to using broad brushstrokes in BCA, such a waiver would not have been outside the norm for Congress.

Second, the GAO report highlighted some of the errors of the Obama administration, and specifically, OMB. The report criticized OMB’s delays in providing formal, detailed guidance to agencies on how to prepare for and implement sequestration. This led to implementation challenges and added substantial staff demands. Would better OMB guidance have prevented reductions in funding to revenue producing and cost saving programs? Likely not. However, managerial failures stemming from delayed guidance had costly ripple effects throughout the executive branch and likely led to inefficiencies and errors.

In the end, the GAO report serves not simply as a review of sequestration-related problems, but it offers a serious lesson for this administration and Congress as well as future ones. Blanket, across-the-board budget cuts make for bad policy—even when they make for good politics. As Congress and the White House consider how to adjust to sequestration in the years to come, they should and must focus on sparing revenue producing or cost saving programs; otherwise they should refrain from calling themselves serious opponents of deficits or waste, fraud, and abuse.

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