If you were the federal government bureaucrat who is responsible for selecting an information technology (IT) company for a major computer software development project, would you select the same company that was responsible for producing the Healthcare.gov debacle?
Perhaps “debacle” is too light a word. Reason‘s Peter Suderman describes a just-issued report by the Department of Health and Human Services’ (HHS) Inspector General on that massive failure from a little over a year ago:
A new report from the Inspector General (IG) for the Department of Health and Human Services (HHS) reveals that contract managers at the Centers for Medicare and Medicaid Services (CMS) failed to take basic measures to ensure that contracts for HealthCare.gov went to reliable firms, didn’t draw up required risk mitigation plans, and agreed to multiple contracts that left taxpayers to pay for any cost overruns incurred by the work.
The HHS IG is both thorough and damning. Investigators looked at 60 different CMS contracts for the online health insurance portal as well as surrounding documentation. The IG also conducted interviews with “high level HHS and CMS staff” about how they planned the contracting process—or what little planning there was, anyway.
According to the report, CMS did “not conduct thorough past performance reviews of potential contractors,” including CGI Federal, the main contractor for the essential components of the federal exchange.
Before going any further, please re-read that last sentence, because that management failure on the part of the Department of Health and Human Services’ bureaucrats responsible for overseeing the development of the Healthcare.gov web site and all of its supporting IT systems is the key to understand what can only be described as a brand new management failure on the part of the bureaucrats who run the Internal Revenue Service. The Daily Caller‘s Richard Pollack breaks the story:
Seven months after federal officials fired CGI Federal for its botched work on Obamacare website Healthcare.gov, the IRS awarded the same company a $4.5 million IT contract for its new Obamacare tax program.
CGI is a $10.5 billion Montreal-based company that has forever been etched into the public’s mind as the company behind the bungled Obamacare main website.
After facing a year of embarrassing failures, federal officials finally pulled the plug on the company and terminated CGI’s contract in January 2014.
Yet on Aug. 11, seven months later, IRS officials signed a new contract with CGI to provide “critical functions” and “management support” for its Obamacare tax program, according to the Federal Procurement Data System, a federal government procurement database.
Pollack’s report also describes the company’s failures to develop functional IT systems in both Vermont and Massachusetts, as well as in the province of Ontario, Canada.
In the case of the Healthcare.gov debacle, the failure of the federal government’s bureaucrats to provide any effective oversight of CGI Federal’s work led to a $149 million overrun of the $58 million government contract that the company was awarded, costing taxpayers $207 million. And that was just on the contract for overseeing the project!
In all, the federal government awarded six major separate contracts to develop the Healthcare.gov web site and the various computer systems and software that were meant to support the implementation of the Affordable Care Act, the awarded value of which totaled $464 million. The HHS’ Inspector General indicates that the actual bill for all six of these contracts exceeds $824 million.
So why on earth is the IRS handing out a new multimillion dollar IT development contract to the company that is directly responsible for such massive failures in so recent years?
In 2013, the Washington Post profiled CGI Federal and its business model as follows:
CGI Federal is a wholly owned subsidiary of the Canadian firm CGI Group, which was founded in Quebec City in 1976 by a pair or 26-year-olds named Serge Godin and Andre Imbeau. (CGI stands for “Conseillers en Gestion et Informatique” in French, which roughly translates to “Information Systems and Management Consultants”). Growing through scores of acquisitions, and providing outsourced IT services to massive companies such as Bell Canada and Quebec’s provincial pension plan, CGI’s business model depends on embedding itself deeply within an institution.
“The ultimate aim is to establish relations so intimate with the client that decoupling becomes almost impossible,” read one profile of the company.
In other words, the company depends upon establishing crony relationships with their target customers: the bureaucrats who award federal government contracts, whom they entice into gifting sweetheart deals to the company. In fact, here’s how the Washington Post describes the company’s CEO’s comments regarding their work on the Affordable Care Act’s IT systems in the third quarter of 2013, just before their failures with Healthcare.gov exploded into public view:
That said, they’ve learned quickly, and see the U.S. federal government as their area of biggest growth. CGI Federal’s health-care practice has grown 90 percent year over year, largely due to the Healthcare.gov project. And for a contractor, ballooning projects are a good thing. “In the Federal Government business, we continue to see more extensions and ceiling increases on our existing work, while we further leverage our position on contract vehicles,” said CEO Michael Roach on their latest earnings call. Those “contract vehicles” now amount to $200 billion, which Roach later referred to as a “hunting license.”
“Accordingly, we continue to view U.S. Federal Government as a significant growth opportunity,” Roach continued.
As the IRS’ newly awarded contract demonstrates, having produced such massive failures hasn’t prevented them from exploiting their crony relationships to gain new business. That’s not their fault — instead, it is the judgment of the IRS’ managers that has failed the American people.
It’s just a shame that today’s IRS leadership continues to fail the test of accountability, a failure made all the worse because they have established no effective system of oversight to right their ongoing wrongs.
As California Senate boss, Darrell Steinberg compiled quite a record of abuse and waste. In 2012, for example, he killed the California Channel’s live broadcast of hearings on four ballot measures dealing with taxes and spending, depriving voters of vital information. He compounded this censorship by claiming: “I pride myself on being open and transparent.” He wasn’t. Steinberg was also the author of Proposition 63, a 2004 measure that levied a surtax of 1 percent on multimillionaires, ostensibly to fund mental-health services. The measure raised some $7.4 billion but with “virtually no oversight or accountability” as to how the money would be spent, as UC law professor Barry Krisberg observed, so it was like “putting money on the stump and running.” The Sacramento Bee wondered if the billions had been “shoved down a rat hole never to been seen again?” That indeed seems to be the case. Steinberg is now termed out, but his successor Kevin de Leon shows every sign of being the same as the old boss.
Last year his handlers spent $50,000 on a lavish “Inauguration” and put it up on YouTube. As Don Thompson noted in the San Jose Mercury News, the event used “language usually reserved for presidents and governors.” The Sacramento Bee observed that this “wasn’t a party for the people.” Rather, “this was the Special Interests Ball.” The glitzy fest came during a year when two senators were charged in federal corruption cases and another sentenced to jail for perjury.
The new Senate boss shows no inclination to tackle the waste, fraud, and abuse that abounds in California government. He has set forth no plan to trim California’s bloated bureaucracies, nor to reduce Californians’ heavy tax burden, which now includes a new tax on gasoline. So taxpayers may be worse off than under the old boss.
President Barack Obama will give his 2015 State of the Union Address to the United States Congress today. From a budget standpoint, here is a brief rundown of the major topics that the President will cover in his address.
Bloomberg reports that:
President Barack Obama will ask Congress for as much as $68 billion more than current budget limits in fiscal 2016, according to two people familiar with the administration’s proposal.
That $68 billion would be on top of the baseline amount of spending for the federal government’s 2016 fiscal year of $4.011 trillion that President Obama had previously agreed to spend in 2016 as part of the Bipartisan Budget Act of 2013 and would represent roughly a 1.6 percent increase over the total amount the U.S. government’s planned expenditures for the year, and about 7 percent over just the discretionary portion of the federal budget.
President Obama proposes to equally split the new spending between defense and non-defense spending, most notably to support his recent proposal to make the first two years of classes at the nation’s community colleges tuition-free, even though it would carry a high cost of a minimum of $80 billion over 10 years, of which at least $60 billion would be paid by the federal government.
The Congressional Budget Office’s 2014 projections of federal spending and revenues indicate that it will not be until 2020 that the federal government’s revenues would finally exceed President Obama’s proposed spending for 2016 ($4.079 billion).
That mismatch is one reason why President Obama is also expected to propose massive tax hikes:
The president’s plan would raise $320 billion over the next decade, while adding new provisions cutting taxes by $175 billion over the same period. The revenue generated would also cover an initiative Mr. Obama announced this month, offering some students two years of tuition-free community college, which the White House has said would cost $60 billion over 10 years.
The centerpiece of the plan, described by administration officials on the condition of anonymity ahead of the president’s speech, would eliminate what Mr. Obama’s advisers call the “trust-fund loophole,” a provision governing inherited assets that shields hundreds of billions of dollars from taxation each year. The plan would also increase the top capital-gains tax rate, to 28 percent from 23.8 percent, for couples with incomes above $500,000 annually.
Those changes and a new fee on banks with assets over $50 billion would be used to finance a set of tax breaks for middle-income earners, including a $500 credit for families in which both spouses work; increased child care and education credits; and incentives to save for retirement.
The “trust-fund loophole” was created back in 2010 by the then Democratic-party controlled Congress and signed into law by President Obama on December 17, 2010. It applies to property, such as shares of stock or real estate like homes or farmland, that is passed down from one generation to the next, where the value of the assets has increased dramatically over time, potentially exposing the people inheriting the assets to massive capital gains taxes. The “loophole” works by allowing the original purchase price of the assets to be “stepped-up” or reset to be equal to the current day’s fair market value of the property at the time of the owner’s death, which reduces the apparent amount of the capital gain on it. Not to mention the related taxes on capital gains, the tax rates for which President Obama also proposes to increase substantially.
The Farm CPA’s Paul Neiffer explains how President Obama’s proposal to close this particular loophole can potentially impact the people who inherit property that has been passed down in their family for generations, starting with a description of how the law has worked since 2010:
For example, assume Farmer John owns 1,000 acres of ground that he purchased in 1960 for $100,000. That ground is now worth $10 million. When Farmer John passes away, his heirs will be able to sell the ground for $10 million and pay no income tax.
Under President Obama’s proposal, Farmer John’s heirs would still have an income tax basis of $100,000. In addition, President Obama wants to increase the top capital gains tax rate to 28%. Let’s assume that Farmer John owes the 40% estate tax on all $10 million of value. In addition, let’s assume that Farmer John lives in Washington state with a top estate rate of 19% which lops off another $1.9 million, however, this would reduce the federal estate tax liability by $760,000. We now have total estate taxes of about $5.14 million.
The heirs all live in California and elect to sell the farmland for $10 million. This results in about $2.8 million of federal tax plus about $1.3 million of California tax. Let’s call it $4 million. the bottom line is $5.14 million of estate taxes and $4 million of income taxes. On $10 million, the heirs net about $900,000 or less than 10%. This is President Obama’s definition of a “trust fund” loophole.
Note that the proposed closing of the “trust fund loophole” doesn’t even take inflation into account. And it applies only to assets that have appreciated in value—there’s no tax credit to cover inherited assets that have lost their value over time. Nor does it consider whether the people inheriting the assets can afford to pay the estate taxes out of pocket, where if they cannot, that fact alone might force them into selling the assets, triggering the even larger tax bill described by this worst case, but very real, scenario.
That’s an excessive amount of pain for a proposal that doesn’t even make much of a dent in the nation’s projected deficits, which would still be set to continue into the far future, perpetually adding to the nation’s debt.
It occurs to us that the biggest problem that is inherent in having allowed the federal government’s spending to swell to the gargantuan levels as President Obama has proposed in each year preceding and during his tenure in office is that the things the federal government has to do to keep up the illusion that it can afford to spend that much becomes worse and worse for the people who are destined inherit the bill. Which if President Obama’s proposed loophole closing is any indication, will be an ever increasing share of the American population.
As we have noted, government never hesitates to waste money on projects of dubious utility. For example, commuters can get along quite well without California’s $68 billion high-speed rail boondoggle. The state does not need two massive tunnels under the Sacramento–San Joaquin Delta, but the governor wants to spend $25 billion the project. Likewise, the old eastern span of the Bay Bridge did suffer structural damage in the Loma Prieta earthquake, but in normal conditions it worked well for Bay Area commuters. Local government wanted the new one for aesthetic reasons. Politicians were not disturbed when it came in $5 billion over budget and 10 years late. On the other hand, nobody disputes that state government should operate the judicial system, but as Patrick McGreevy and Maura Dolan show in the Los Angeles Times, that too is riddled with waste.
The reporters cite state auditor Elaine Howle’s claim that the state’s San Francisco–based Judicial Council and Administrative Office of the Courts (AOC) have been on something of a binge, to the tune of $30 million. Martin Hoshino, hired in 2014 to administer the Judicial Council, bags $227,000 a year. As the reporters observe, “the governor earns $177,000 a year, less than the justices he appoints to serve on the California Supreme Court and less than is earned by some county court administrators.” Further, eight of the—count ‘em—nine office directors bag more than the governor’s salary. In California’s executive branch, the average salary is $62,000, and in four large trial courts it is $71,000. In the Judicial Council and AOC, the average salary is $82,000, bigger than both by a wide margin, and the system also pays the employee’s share of retirement contributions. And the waste does not stop there.
As Alexei Koseff shows in the Sacramento Bee, the judicial system maintains a fleet of 66 vehicles that have “not been justified as necessary.” And the AOC spent about $386 million on behalf of trial courts over the last four fiscal years using the trial courts’ local appropriations when, according to the auditor, those payments could have come from its own state appropriations. So the Alliance of California Judges has a strong case that that the Judicial Council is an “over-bloated bureaucracy” which operates, according to Judge Maryanne Gillard, with “no check or balance on the current system.”
Just before November 2014′s elections, we warned that a number of school bond issues that were appearing on voter ballots in the state of California were being advanced under false pretenses.
Here, local governments and school boards were advocating that voters approve the school bond issues because they would fund needed improvements to public education and school facilities. By and large, California’s voters bought their local politicians and bureaucrats’ sales job and passed the bond measures, which allowed the local governments and school departments to borrow large amounts of money that would be paid back through temporarily higher tax collections from the voters who approved them.
But California law doesn’t require the state’s politicians and bureaucrats to spend the money they collect through such ballot measures for the purposes they say the measures are for.
That lesson is being driven home now thanks to an op-ed by Steve Malanga that recently appeared in the Wall Street Journal. Malanga finds that the only things being improved are the lavish pensions of government bureaucrats.
California Gov. Jerry Brown sold a $6 billion tax increase to voters in 2012 by promising that nearly half of the money would go to bolster public schools. Critics argued that much of the new revenue would wind up in California’s severely underfunded teacher pension system. They were right.
Last June Mr. Brown signed legislation that will require school districts to increase funding for teachers’ pensions from less than $1 billion this year in school year 2014-15, which started in September, to $3.7 billion by 2021, gobbling up much of the new tax money. With the state’s general government pension fund, Calpers, also demanding more money, California taxpayer advocate Joel Fox recently observed that no matter what local politicians tell voters, when you see tax increases, “think pensions.”
Malanga goes on to reveal that this situation is not limited to California. He reveals that similarly motivated government bureaucrats, looking to put their own interests ahead of those of the people, are taking similar actions in other states, such as Pennsylvania, West Virginia, and Illinois.
But perhaps the most telling thing about their actions is that they have no intention of reining in their borrowing and taxing to sustain the pensions of public employees.
Burdened by so much debt, taxpayers in some places are unlikely to see relief soon. When California passed its 2012 tax increases, Gov. Brown and legislators promised voters the new rates would expire in 2018. But school pension costs will keep increasing through 2021 and then remain at that elevated level for another 25 years to pay off $74 billion in unfunded teacher liabilities. Public union leaders and sympathetic legislators are already trying to figure out how to convince voters to extend the 2012 tax increases and approve “who knows what else” in new levies, says taxpayer advocate Mr. Fox. It’s a reminder that in some places the long struggle to pay off massive government pension debt is just starting.
Taxpayers considering these kinds of measures should note that government bureaucrats are increasingly becoming a massive liability.
Covered California, the Golden State’s wholly owned subsidiary of Obamacare, has been cancelling the coverage when people report changes in their income, changing their eligibility for tax credits. This problem exposes people to severe tax penalties but Covered California bosses blame it on their $454 million computer system. On the other hand, those turning 65 and going on Medicare find it practically impossible to cancel their Covered California deal. Covered California bosses blame this on the $454 million computer system, but it is probably a ruse to inflate the number of people Covered California can claim are enrolled. This kind of incompetence, waste and abuse are hard to top but as Emily Bazar of the Center for Health Reporting observes, Covered California appears to have pulled it off.
Bazar has been receiving notices from an “untold number” of consumers asking what coverage they qualify for, “if any.” She cites the case of Los Angeles writer Juniper Ekman, who dutifully applied during the first enrollment period with her husband and two-year old daughter. They began getting letters from Covered California, five or eight at time. Some letters said they did not qualify for tax credits. Then, last September, “I received 18 notices from Covered California in one day. Fourteen say we’re covered and four say we’re not. Which one should I believe?” No clear answer emerged, and Ekman is not alone. As Bazar notes, one Bay Area consumer received 40 notices in less than a month and in another case, “four people in the same household received four different eligibility decisions in the same notice.”
Covered California boss Dana Howard blamed the problem on the computer system. “This is the same system that has cost nearly half a billion dollars so far,” writes Bazar. The system may have helped “multitudes” apply for health insurance but “it also is responsible for countless glitches and widespread consumer misery.” That misery is inherent in the Obamacare system. Congress had to pass it for people to find out. If you don’t like the plan, you have to keep it.
“The California High-Speed Rail Authority expects that millions among the traveling public will want to ride its sleek, 220-mph bullet trains between the Bay Area and the Los Angeles Basin when the system starts running in the early 2020s,” explains Tim Sheehan in the Fresno Bee. But when the project, launched with a 2008 bond measure, finally broke ground on January 6, no eager travelers showed up, and that was by design. The groundbreaking was “an invitation-only affair for about 1,200 dignitaries and guests,” including governor Jerry Brown, a day after he was sworn in for his, count ‘em, fourth term. This arrangement makes perfect sense, given the dynamics of the project.
As Sheehan noted, politicians peddled it as a fast new route from the San Francisco Bay Area to Los Angeles, California’s major population centers. But the groundbreaking took place in Fresno, not a major population center. That is a confession that the bullet train is more about spending money to shore up the fortunes of politicians than any attempt to provide modern transportation. That explains the “more than $3 billion in federal stimulus and transportation money” noted by Sheehan. The state rail authority must spend its federal money by September 30, 2017. The rail authority has some $6 billion, which amounts to only 20 percent of the $31 billion for the first operational segment between Merced and Burbank, and less than 10 percent of the $68 billion for the San Francisco to Los Angeles route. So much more spending is in store. As Sheehan also observes, rail bosses only own 101 of 525 pieces of property for the first segment, and still need 539 parcels for the second. As we noted, federal agencies such as the U.S. Surface Transportation Board are helping the cause by ruling that the bullet train trumps California’s Environmental Quality Act (CEQA).
This confirms that environmental concerns count for nothing when politicians want to spend money, particularly on a project like this. If built, the bullet train will provide slower service at higher cost than air travel. Not many Californians are panting for that. So it’s only right that no eager commuters attended the groundbreaking, only “dignitaries and guests.” This project is the ruling class playing with its train set.
Now that the U.S. Senate is under new management, Congress is in a position to begin reining in the federal government’s spending to a greater degree than was possible in its previous session. Writing at RealClearMarkets, Jeffrey Dorfman offers three easy and painless ways that the new Congress might first exercise greater fiscal discipline:
First, Republicans should go for the low-hanging fruit, the easiest spending to eliminate: unspent balances. There are still $80 billion in unspent stimulus funds and another $20 billion in unspent funds that Congress appropriated at least three years ago for other purposes. While some of these funds will likely never be spent, they are still authorized by Congress so the money could walk out the door at any time. Repealing the authorization would save somewhere between the full $100 billion and nothing, but it also has added symbolism even if the true savings is small. Plus, it is hard to see too much opposition to this cut.
Second, Republicans should begin a process of selling vacant federal office buildings. Right now, we are spending $25 billion per year on maintenance and upkeep for buildings the government is not even using. Selling them would save that $25 billion plus bring in revenue equal to whatever the sale price is. It might take a little while, and some buildings are probably worth keeping, but let’s get started. Again, this seems like an easy early victory toward downsizing government, increasing efficiency, and saving money to reduce the deficit. Local governments could even start to collect property taxes on the buildings once the federal government sells them. Everyone wins.
After those easy fiscal boosts, Congress should begin to eliminate all the federal programs that play favorites in our economy instead of working to help all sectors and people. This would include both industry- and place-specific programs. Examples would be programs such as the Rural Business Program Account which subsidizes rural small businesses. We have a Small Business Administration already, we don’t need a duplicate agency that does the same thing but only in rural areas (where the SBA also operates).
The infamous earmarks would also fall into this category as they are the ultimate example of federal spending designed to benefit only a targeted beneficiary. Green energy loans and subsidies would be prime examples of programs trying to pick winners that should be eliminated. The more such special interest programs are cut, the more we could save.
Dorfman goes on to offer other candidates for restraining spending, but these are the easy ones that might be described as “no-brainers“, which means that we could find out soon just how much intelligence is actually at work in the new congressional leadership compared to the previous one that completely refused to consider even these simple reforms.
As part of his $25 billion plan for California’s water system, governor Jerry Brown wants to build two tunnels under the Sacramento-San Joaquin River Delta. Each tunnel would be 40 feet high, 35 miles long, and together they would cost nearly $17 billion. Backers of the plan would do well to consider the pitfalls of a smaller tunnel underneath downtown Seattle. According to the Washington State department of transportation, the dig will allow replacement of the State Route 99 Alaskan Way Viaduct, move two miles of the highway underground, and “clear the way for new public space along Seattle’s downtown waterfront.” New public space sounds good, but Reid Wilson of the Washington Post outlines some of the pitfalls.
Launched in 2009 at a cost of $2.8 billion, the Seattle project was slated for completion in 2015, but that is not going to happen. For one thing, “Bertha,” a 2,000-ton boring machine created specifically for the project, hasn’t worked for an entire year. The machine, Wilson notes, “isn’t able to reverse itself” and will have to be hauled out for repairs by tunneling down from above. This could push the completion date to 2017, but local officials estimate that 70 percent of the money has already been spent.
According to Wilson, even backers of the project are comparing it to Boston’s Central Artery/Tunnel project, also known as the Big Dig, “that took two decades to build at a cost nearly 10 times initial projections.” That cost would be $14.8 billion and the project spanned, count’ em, six U.S. presidents and seven Massachusetts governors. That massive waste caused no hesitation to the Seattle diggers, and neither project appears to have given governor Brown any second thoughts on his far more extensive tunnels. If subject to the same cost overruns as the Boston Big Dig, they would saddle taxpayers with $170 billion. Closer to home, the new span of the Bay Bridge came in $5 billion over cost and ten years late, but raised no caution with the governor.
Government tunnel vision remains blind to massive waste, fraud, incompetence, and even environmental objections, which abound with Brown’s Big Dig. Government tunnel vision sees only the prospects of spending, the rewarding of political backers, and a glowing legacy down the road. Government tunnel vision is like Bertha, the boring machine that “can’t reverse itself.” So more grandiose and wasteful government is in store for 2015 and beyond.
At the end of 2014, the Committee for a Responsible Federal Budget (CRFB) put together 14 charts to describe the budget of the U.S. government. We’re just going to look at the first two, in reverse order, since they tell the big story about the consequences of federal overspending the way it needs to be told.
The first chart shows each of the federal government’s annual budget deficits from 2002 through 2014, with projections to 2025:
In just 10 years time, even if there are no major fiscal crises or recessions that could unpredictably inflate the federal government’s annual budget deficits above projected levels, it is very likely that they will increase to exceed the all-time record deficit recorded during 2009.
As you might expect, those deficits will add up each year, with the result having major consequences for the growth of the national debt.
The nice thing about the way the CFRB visualizes the Congressional Budget Office’s projected data is that it shows both the CBO’s “extended baseline” projection, which is based on how the federal government would spend money under the law as it currently stands (the way U.S. politicians have “promised” they will), and the “alternative fiscal scenario”, which represents how much the federal government’s annual deficits and the growth of the national debt will be if U.S. politicians actually spend money they way they actually do.
And that doesn’t even include new spending, such as President Obama’s proposal to make the first two years’ worth of community-college class tuition “free” to high school graduates. That particular proposal carries a price tag of at least $60 billion and amounts to little more than a bailout of failed K-12 government education programs, since the typical classes that a community college student takes in his or her first two years amounts to little more than a remedial education program of subjects that they failed to learn in high school but were allowed to graduate anyway.
In the end, it’s the sort of poorly considered spending by politicians seeking to boost their personal popularity that will only crank up the nation’s budget deficits and national debt with very little benefit to show in return.
Which coincidentally, is how we got the growing problems of annual federal budget deficits and national debt that we have in the first place!