Tag Archives: GAO

How Complete Are Federal Agencies’ Regulatory Analyses?

A report released yesterday by the Government Accountability Office will likely get spun to imply that federal agencies are doing a pretty good job of assessing the benefits and costs of their proposed regulations. The subtitle of the report reads in part, “Agencies Included Key Elements of Cost-Benefit Analysis…” Unfortunately, agency analyses of regulations are less complete than this subtitle suggests.

The GAO report defined four major elements of regulatory analysis: discussion of the need for the regulatory action, analysis of alternatives, and assessment of the benefits and costs of the regulation. These crucial features have been required in executive orders on regulatory analysis and OMB guidance for decades. For the largest regulations with economic effects exceeding $100 million annually (“economically significant” regulations), GAO found that agencies always included a statement of the regulation’s purpose, discussed alternatives 81 percent of the time, always discussed benefits and costs, provided a monetized estimate of costs 97 percent of the time, and provided a monetized estimate of benefits 76 percent of the time.

A deeper dive into the report, however, reveals that GAO did not evaluate the quality of any of these aspects of agencies’ analysis. Page 4 of the report notes, “[O]ur analysis was not designed to evaluate the quality of the cost-benefit analysis in the rules. The presence of all key elements does not provide information regarding the quality of the analysis, nor does the absence of a key element necessarily imply a deficiency in a cost-benefit analysis.”

For example, GAO checked to see if the agency include a statement of the purpose of the regulation, but it apparently accepted a statement that the regulation is required by law as a sufficient statement of purpose (p. 22). Citing a statute is not the same thing as articulating a goal or identifying the root cause of the problem an agency seeks to solve.

Similarly, an agency can provide a monetary estimate of some benefits or costs without necessarily addressing all major benefits or costs the regulation is likely to create. GAO notes that it did not ascertain whether agencies addressed all relevant benefits or costs (p. 23).

For an assessment of the quality of agencies’ regulatory analysis, check out the Mercatus Center’s Regulatory Report Card. The Report Card evaluation method explicitly assesses the quality of the agency’s analysis, rather than just checking to see if the agency discussed the topics. For example, to assess how well the agency analyzed the problem it is trying to solve, the evaluators ask five questions:

1. Does the analysis identify a market failure or other systemic problem?

2. Does the analysis outline a coherent and testable theory that explains why the problem is systemic rather than anecdotal?

3. Does the analysis present credible empirical support for the theory?

4. Does the analysis adequately address the baseline — that is, what the state of the world is likely to be in the absence of federal intervention not just now but in the future?

5. Does the analysis adequately assess uncertainty about the existence or size of the problem?

These questions are intended to ascertain whether the agency identified a real, significant problem and identified its likely cause. On a scoring scale ranging from 0 points (no relevant content) to 5 points (substantial analysis), economically significant regulations proposed between 2008 and 2012 scored an average of just 2.2 points for their analysis of the systemic problem. This score indicates that many regulations are accompanied by very little evidence-based analysis of the underlying problem the regulation is supposed to solve. Scores for assessment of alternatives, benefits, and costs are only slightly better, which suggests that these aspects of the analysis are often seriously incomplete.

These results are consistent with the findings of other scholars who have evaluated the quality of agency Regulatory Impact Analyses during the past several decades. (Check pp. 7-10 of this paper for citations.)

The Report Card results are also consistent with the findings in the GAO report. GAO assessed whether agencies are turning in their assigned homework; the Report Card assesses how well they did the work.

The GAO report contains a lot of useful information, and the authors are forthright about its limitations. GAO combed through 203 final regulations to figure out what parts of the analysis the agencies did and did not do — an impressive accomplishment by any measure!

I’m more concerned that some participants in the political debate over regulatory reform will claim that the report shows regulatory agencies are doing a great job of analysis, and no reforms to improve the quality of analysis are needed. The Regulatory Report Card results clearly demonstrate otherwise.

Some private sector pensions also face funding trouble

A new report by the Pension Benefit Guaranty Corp (PBGC) warns that while the market recovery has helped many multiemployer pension plans improve their funding there remain some plans that,”will not be able to raise contributions or reduce benefits sufficiently to avoid insolvency,” affecting between 1 and 1.5 million of ten million enrollees.

Multiemployer plans are defined as those which unions collectively bargained for, with multiple employers participating within an industry (e.g. building, construction, retail, trucking, mining and entertainment). They are also known as Taft-Hartley plans. Multiemployer plans grew out of the idea of offering pension benefits for unionized employees in transient kinds of work such as construction. These plans have been in trouble for awhile due to a variety of factors. Many plans have taken measures by increasing contributions and in a few cases cutting benefits according to GAO. But those steps have not been nearly enough to fix the growing shortfalls.

When a PBGC-insured pension plan goes insolvent beneficiaries are only guaranteed a fraction of their benefits. Those funds come from the premiums paid by remaining plans. The projected deficit for the ailing multiemployer plans range from $49.6 billion to $79.6 billion in 2022. By contrast the PBGC reports that single employer plans fare better with the current funding deficit of $27.4 billion narrowing to $7.6 billion by 2023.

Source: FY 2013 PBGC Projections Report

 

Why Regulations Fail

Last week, David Fahrenthold wrote a great article in the Washington Post, in which he described the sheer absurdity of a USDA regulation mandating a small town magician to develop a disaster evacuation plan for his rabbit (the rabbit was an indispensible part of trick that also involved a hat). The article provides a good example of the federal regulatory process’ flaws that can derail even the best-intentioned regulations. I list a few of these flaws below.

  1. Bad regulations often start with bad congressional statutes. The Animal Welfare Act of 1966, the statute authorizing the regulation, was meant to prevent medical labs from using lost pets for experiments. Over time, the statute expanded to include all warm-blooded animals (pet lizards apparently did not merit congressional protection) and to apply to zoos and circuses in addition to labs (pet stores, dog and cat shows, and several other venues for exhibiting animals were exempt).The statute’s spotty coverage resulted from political bargaining rather than the general public interest in animal welfare. The USDA rule makes the statute’s arbitrariness immediately apparent. Why would a disaster plan benefit circus animals but not the animals in pet stores or farms? (A colleague of mine jokingly suggested eating the rabbit as part of an evacuation plan, since rabbits raised for meat are exempt from the regulation’s requirements).
  2. Regulations face little oversight. When media reported on the regulation’s absurdity, the USDA Secretary Tom Vilsack ordered the regulation to be reviewed. It seems that even the agency’s head was caught off guard by the actions of his agency’s regulators. Beyond internal supervision, only a fraction of regulations face external oversight. Of over 2600 regulations issued in 2012, less than 200 were subject to the OMB review (data from GAO and OMB). Interestingly, the OMB did review the USDA rule but offered only minor revisions.
  3. Agencies often fail to examine the need for regulation. In typical Washington fashion, the agency decided to regulate in response to a crisis – Hurricane Katrina in this case. In fact, the USDA offered little more than Katrina’s example to justify the regulation. It offered little evidence that the lack of disaster evacuation plans was a widespread problem that required the federal government to step in. In this, the USDA is not alone. According to the Mercatus Center’s Regulatory Report Card, which evaluates agencies’ economic analysis, few agencies offer substantial evidence justifying the need for promulgated regulations.
  4. Agencies often fail to examine the regulation’s effectiveness. The USDA’s plan to save animals in case of a disaster was to require owners to draw up an evacuation plan. It offered little evidence that having a plan would in fact save the animals. For example, the magician’s evacuation plan called for shoving the rabbit into a plastic bag and getting out. In the USDA’s view, the magician would not have thought of doing the same had he not drawn up the evacuation plan beforehand.
  5. The public has little influence in the process. By law, agencies are required to ask the public for input on proposed regulations. Yet, small businesses and individual consumers rarely have time or resources to keep an eye on federal agencies. In general, organized interests dominate the commenting process. The article describes the magician’s surprise to learn that he was required to have a license and a disaster evacuation plan his rabbit, even though the regulation was in the works for a few years and was open for public comments for several months. Most small businesses, much like this magician, learn about regulations only after they have passed.
  6. Public comments are generally ignored. Most public comments that the USDA received argued against the rule. They pointed out that it would impose substantial costs on smaller businesses. The agency dismissed the comments with little justification. This case is not unique. Research indicates that agencies rarely make substantial changes to regulations in response to public comments.

Local control over transportation: good in principle but not being practiced

State and local governments know their transportation needs better than Washington D.C. But that doesn’t mean that state and local governments are necessarily more efficient or less prone to public choice problems when it comes to funding projects, and some of that is due to the intertwined funding streams that make up a transportation budget.

Emily Goff at The Heritage Foundation finds two such examples in the recent transportation bills passed in Virginia and Maryland.

Both Virginia Governor Bob McDonnell and Maryland Governor Martin O’Malley propose raising taxes to fund new transit projects. In Virginia the state will eliminate the gas tax and replace it with an increase in the sales tax. This is a move away from a user-based tax to a more general source of taxation, severing the connection between those who use the roads and those who pay. The gas tax is related to road use; sales taxes are barely related. There is a much greater chance of political diversion of sales tax revenues to subsidized transit projects: trolleys, trains and bike paths, rather than using revenues for road improvements.

Maryland reduces the gas tax by five cents to 18.5 cents per gallon and imposes a new wholesale tax on motor fuels.

How’s the money being spent? In Virginia 42 percent of the new sales tax revenues will go to mass transit with the rest going to highway maintenance. As Goff notes this means lower -income southwestern Virginians will subsidize transit for affluent northern Virginians every time they make a nonfood purchase.

As an example, consider Arlington’s $1 million dollar bus stop. Arlingtonians chipped in $200,000 and the rest came from the Virginia Department of Transportation (VDOT). It’s likely with a move to the sales tax, we’ll see more of this. And indeed, according to Arlington Now, there’s a plan for 24 more bus stops to compliment the proposed Columbia Pike streetcar, a light rail project that is the subject of a lively local debate.

Revenue diversions to big-ticket transit projects are also incentivized by the states trying to come up with enough money to secure federal grants for Metrorail extensions (Virginia’s Silver Line to Dulles Airport and Maryland’s Purple Line to New Carrolton).

Truly modernizing and improving roads and mass transit could be better achieved by following a few principles.

  • First, phase out federal transit grants which encourage states to pursue politically-influenced and costly projects that don’t always address commuters’ needs. (See the rapid bus versus light rail debate).
  • Secondly, Virginia and Maryland should move their revenue system back towards user-fees for road improvements. This is increasingly possible with technology and a Vehicle Miles Tax (VMT), which the GAO finds is “more equitable and efficient” than the gas tax.
  • And lastly, improve transit funding. One way this can be done is through increasing farebox recovery rates. The idea is to get transit fares in line with the rest of the world.

Interestingly, Paris, Madrid, and Tokyo have built rail systems at a fraction of the cost of heavily-subsidized projects in New York, Boston, and San Francisco. Stephen Smith, writing at Bloomberg, highlights that a big part of the problem in the U.S. are antiquated procurement laws that limit bidders on transit projects and push up costs. These legal restrictions amount to real money. French rail operator SNCF estimated it could cut $30 billion off of the proposed $68 billion California light rail project. California rejected the offer and is sticking with the pricier lead contractor.

 

 

 

 

Reforming State and Local Pension Plans

The Government Accountability Office recently issued a report that provides a nice analysis on the changes that have been taking place in state and local pension plans over the past few years. According to the GAO’s tabulations, the following reforms have been implemented since 2008:

 • Reducing benefits: 35 states have reduced pension benefits, mostly for future employees due to legal provisions protecting benefits for current employees and retirees. A few states, like Colorado, have reduced post-retirement benefit increases for all members and beneficiaries of their pension plans.

• Increasing member contributions: Half of the states have increased member contributions, thereby shifting a larger share of pension costs to employees.

• Switching to a hybrid approach: Georgia, Michigan, and Utah recently implemented hybrid approaches, which incorporate a defined contribution plan component, shifting some investment risk to employees.

The reforms listed in this report seem to indicate that some states and localities are taking a step in the right direction in regards to pension reform. There is, however, a lot more work that needs to be done. One reform, for example, that we need to see more of is shifting public sector pensions from defined benefit to defined contribution plans (see Scott Beaulier’s recent paper for more on this topic). As the GAO report points out, roughly 78 percent of state and local employees participated in defined benefit plans in 2011 – compared to 18 percent of private sector employees.

Another important topic that this report touches on is the discount rate debate. That is, whether or not states should base the discount rate on the expected return of plan assets or on relevant interest rates in the bond market (Eileen Norcross has done some valuable research on this topic here and here).

 

Medicare fraud: bogus clinics in barns

Each year the Medicare program loses millions of dollars to fraud. Applicants simply set up fake clinics using stolen medical IDs and real addresses in barns, UPS stores and abandoned apartments. It’s called the drop box scheme and apparently it’s hard to catch every bogus clinic operator given the ease of presenting what looks like a legitimate medical clinic on paper. Reuters tracks down the scheme. But it’s just one of several the program has to contend with. Other kinds of fraud documented by GAO include “rent-a-patient” and “pill mills.”

 

In Less Than One Month the USPS will Face Financial Insolvency

According to a report that the GAO released yesterday, “By the end of this fiscal year—in less than one month—the U.S. Postal Service (USPS) projects that it will incur a $9 billion loss; reach its $15 billion borrowing limit; not make its $5.5 billion retiree health benefits payment; and thus, become insolvent.”

The GAO report examines a series of structural policy recommendations, focusing largely on making changes to pension benefits for new employees, employee health benefits, collective bargaining agreements, and retail services.

However, other ideas for reform that have become more popular in the media, such as getting rid of Saturday delivery, are often marginal in nature and fail to address the underlying structural issues that the USPS faces. It is unlikely that a few minor tweaks to the largest federal civilian employer will significantly improve its current financial crisis.

One key factor contributing to the inefficient performance of the USPS is simply that it is an outdated organization. As Maurice McTigue argues, the USPS is “trying to run a 1920s business in a 21st Century economy….The current system is poorly configured with archaic facilities in the wrong places.”

Joshua Hall and I further argue that the main concern with the USPS is that it is a quasi-monopoly. The Federal government has implemented barriers to postal delivery that directly prevent people from reaping the benefits of competition. Removing these barriers and letting markets work would allow competitive forces to eliminate inefficiencies and determine better ways of operating.

Therefore, with the USPS nearing financial insolvency, it seems that there are three possible paths for its future: 1) making minor tweaks that will result in little (if any) improvement, 2) making structural reforms to the current system, or 3) letting the market process work via privatization of postal delivery.

Local government and GAAP accounting

It may be a surprise, but a good number of municipal governments do not use Generally Accepted Accounting Principles (GAAP) when preparing their financial reports. According to a GASB survey of 17,577 local governments (out of the over 87,000 non-federal governments in the U.S.) about 67 percent use GAAP.

Is this a problem? Publicly traded companies must be GAAP compliant but bond-issuing municipalities need not comply. A January 2011 study by GAO finds that stakeholders (analysts and issuers), consider GAAP reports more accurate and complete, but there are other sources of information on the quality of municipal securities. Interestingly the decline in the use of bond insurance – a piece of information that investors use in lieu of GAAP statements – may increase the need for local governments to comply with GAAP in their annual financial statements.

The main argument against local governments using GAAP is that it is complex and thus costs more money to prepare the reports. Having reviewed the financials of several municipal governments with looming long-term obligations I suggest GAAP accounting might have helped to better alert officials to the potential risks on their books.

Me on CNBC

I was on CNBC yesterday morning debating Professor Harley Shaiken on the Wisconsin situation. Here is the video:

Here is a link to Professor Shaiken’s website.

Here is a link to the GAO report I referenced. If you think the budget gaps of the last few years have been bad, you ain’t seen nothing yet: States face a $9.9 trillion shortfall over the next several decades.

In order to close these long-term gaps, the GAO estimates that states need to immediately cut 12.3 percent (or increase taxes by the same amount) and maintain these changes each and every year for the next 50 years. To put that in perspective, last year states cut 5.9 percent out of their General Funds (total spending, which includes borrowed funds, other state funds and federal funds actually increased!). So, as painful as the last few years have been, states are nowhere close to doing what they need to do in order to address their long-term problems. 

Professor Shaiken mentioned studies that find public-sector employee pay is comparable to private sector pay. Here is one such study. And here is another.

Here is Andrew Biggs and Jason Richwine from yesterday’s Wall Street Journal on why these studies are flawed. To wit: a) they typically don’t account for health benefits, b) they fail to accurately compare the value of guaranteed 8 percent returns in public pensions with 4 percent guaranteed returns in private 401(k)s, and c) they do not take account of greater job security among public sector workers. Here is a link to Biggs and Richwine’s analysis. Here is Veronique de Rugy on the matter. Here is Megan McArdle. Here is a New York Times graphic that focuses just on Wisconsin employees (counting only cash compensation, the median Wisconsin public employee–who is typically more-educated–earns 22 percent more than the median Wisconsin private employee).

Here is a paper that assesses the empirical link between public sector unionism and government spending.

When the Long Run Shows Up Today

A spate of recent articles regarding the fiscal situation of states and localities have lumped together their current fiscal problems, stemming largely from the recession, with longer-term issues relating to debt, pension obligations, and retiree health costs, to create the mistaken impression that drastic and immediate measures are needed to avoid an imminent fiscal meltdown.

That is the beginning of a new report by Iris Lav and Elizabeth McNichol of the Center on Budget and Policy Priorities. 

A lot of people in policy circles like to draw a distinction between the short and the long run.  For some, the idea is that the long run is when we should deal with fiscal problems, but in the short run, we can’t afford not to spend. In my view, this allows people to appear sober-minded about the long-run fiscal problems of the states while endorsing more reckless decisions today. 

This is an old idea (“in the long run we are all dead,” said Keynes, dismissively).  But I think it has become increasingly dangerous.  Politicians have every incentive in the world to think about today and very little incentive to worry about tomorrow (and according to the GAO, the states’ long-run problems are quite significant, requiring spending cuts or revenue increases of 12.3 percent, sustained for the next 50 years).

A few months back, I wrote a paper examining the factors that contributed to large state budget gaps during the Great Recession (I actually used CBPP’s data on the size of the gaps). Among other things, I found that the size of a state’s gap in FY2010 was positively related to per capita spending growth over the 2 decades that preceded the recession. I take this as some evidence that the short and the long-run are pretty tightly-connected and a failure to focus on fiscal problems in the short run can manifest itself in pretty serious problems over the long haul.