MyGovCost News & Blog

This column tracks government waste, fraud and abuse, and on rare occasions, so does government itself. For example, a new report from California State Auditor Elaine Howle finds that “Caltrans’ weak cost controls over field maintenance work orders create opportunities for fraud, waste, and abuse.” Caltrans division of maintenance, the report says, “paid $250,000 for development of a budget model for allocating field maintenance funding based on key indicators of maintenance need, however it abandoned it.” As the report notes, the model cited the need to “reduce more than 100 staff positions” in Los Angeles and “instead of trying to determine why the model produced such allocations, the maintenance division decided to abandon it.” It was all about protecting bureaucratic jobs. So how did Caltrans decide to spend the maintenance money?

“Instead of distributing money based on need,” explains Tony Bizjak in the Sacramento Bee, “field maintenance officials have been doing it based on each area’s previous spending patterns.” So it was all about spending money in a way that kept the cash flowing, not spending in a way that best addressed the actual needs, which are considerable. As we noted, many California roads are an obstacle course of potholes and the repair backlog is an estimated $78 billion for local roads and $59 billion for state highways.

“To prevent and detect fraud, waste, and abuse and to ensure costs are appropriate,” the State Auditor urges stronger controls over worker order costs, better review, and more documentation. The prospects for reform, however, are open to reasonable doubt. After all, Caltrans managed construction of the new span of the Bay Bridge, ten years late and $5 billion over budget. As a state senator, Mark DeSaulnier held hearings on the bridge’s construction and safety issues but ignored a whistleblower’s call for a criminal investigation. Now a congressman, DeSaulnier is on record that “it’s frustrating that there’s never been anyone in the management of the bridge who has been held accountable.” Taxpayers might remember that when government claims concern over waste, fraud and abuse.

With newspapers in decline, stories about government waste, fraud and abuse tend to get short shrift. One notable exception is Jon Ortiz of the Sacramento Bee, whose “State Worker” columns demonstrate how waste works. For example, California’s Board of Equalization, a tax agency, wanted to replace a door. The initial cost for that simple task was $3,000, a figure that may strike taxpayers as far too high. On the other hand, state project management, plan review, inspection and such bumped the cost by $14,000 to a grand total of $17,000. As Ortiz explains, “Those figures highlight how California’s state bureaucracy pumps up the cost of even the most simple projects,” and delivers “sub-par results.”

Ortiz finds that story in a new report by State Auditor Elaine Howle. She notes that the hourly rate for design, project management and construction management, “is much higher than the rates of private sector firms conducting similar work for the State.” For example, the Real Estate Services unit within the larger Department of General Services charges $182 per hour, a full $46 more than the $136 per hour average of private firms conducting similar work. As the report notes, the reasons for the difference remain unexplained.

State agencies prepared cost estimates for only 19 of the 25 projects the report reviewed and of those, “12 exceeded the division’s initial cost estimate.” The largest difference was on a veterans home in West Los Angeles, where project management spent “roughly $115 million more than its initial estimate of $118 million.” The report also charts time delays, such as nine years to restore the State Library and Courts building, nearly twice as long as the initial projection.

Ortiz found that Board of Equalization opted to forego the $17,000 door because of the high costs. So all the time state bureaucrats spent on the project, in effect, amounts to waste. As a general rule, when government is involved, projects cost more, take longer, and usually render sub-par results.

As we recently noted, injustices such as wrongful imprisonment, needless trial expenses and prosecutorial errors cost California taxpayers $282 million from 1989 to 2012. These costs are hardly the only problem in the criminal justice system, as Dan Walters of the Sacramento Bee observes.

Walters has been on the job since the 1970s and recalls that during Jerry Brown’s first stretch as governor, California’s prisons held some 20,000 inmates. When Brown became governor again three decades later, state prisons held 160,000 inmates. Spending on prisons was about $10 billion a year, as much, Walters notes, as California’s entire general fund budget during Brown’s first stint as governor.

While Brown was out of the governor’s office, California built 22 new prisons, but despite this construction spree state prison facilities remained overcrowded. Federal judges have demanded reductions and after some resistance, Jerry Brown proposed a “realignment” policy that dropped the number of inmates from 166,000 to 129,000. Walters, however, cautions those who think that the inmate reduction of 22 percent would also reduce state spending on “corrections.”

In the early going, costs dropped $1 billion but the realignment plan ate up the savings. In short order, “the state’s prison costs began to climb and have jumped by nearly $2 billion since 2012-13 – not counting an increase in what’s paid to counties, now $1.1 billion.” By Walters’ account, “true prison spending approaches $12 billion a year now, and the average spent on each state inmate has soared to more than $63,000 a year.” Contrast that with the $32,646 annual cost for a student at UC Berkeley, living in a campus residence.

Politicians and prison bosses strive to explain the rising costs but taxpayers might derive more benefit from Dan Walters’ summary of the matter: “Bottom line: inmates down 22 percent, costs up nearly 20 percent. Such a deal.” The lesson here is that judicial decrees, however nobly intentioned, carry no guarantee of success or savings. That invites speculation about the prospects for reform not only in prisons but all levels of government.

The question is answered by the reporting of the Daily Caller News Foundation‘s Kathryn Watson:

Uncle Sam’s financial statements are so bad the Government Accountability Office (GAO) flunked him for the 19th year in a row.

The Department of Defense, Department of Housing and Urban Development, and Department of Agriculture have books in such bad shape coupled with the country’s out of control debt and spending, that GAO “did not render an opinion on the federal government’s consolidated financial statements,” it said Monday.

The current U.S. Secretary of Defense, Ashton Carter, has been on the job for just over a year, the current Secretary of Housing and Urban Development, Julián Castro, has been on the job for nearly two years (since mid-2014), and the current Secretary of Agriculture is Tom Vilsack, who has been in office for over seven years.

But why is not having accurate financial statements a bad thing?

Aside from representing a failure of leadership, the poor record keeping of the financial condition of government departments means that they really don’t know what assets they have, so they are extremely likely to waste money on buying things for which they have no clear need. Beyond that, they also risk defaulting on payments due to those businesses with whom they do business, because they don’t know what bills they may have either paid or have coming due.

That latter situation opens the door to further waste because it creates an opportunity for criminals seeking to defraud the government for services or products they never provided nor delivered.

If the situation were more contained, it would be less of a concern. But with the situation so out of control for so long, it creates an additional risk for the U.S. government, because it increases the risk that it will default on its payments during periods of distress because it doesn’t have the same margin of safety it did when the national debt was lower. The U.S. Comptroller General, Gene Dodaro, explains:

“Growing debt held by the public, which is now about 74 percent of the Gross Domestic Product could limit the federal government’s flexibility to address new or unforeseen challenges, such as another economic downturn or a large-scale disaster.”

Taxpayers are familiar with waste in boondoggles such as California’s $68 billion bullet train project and the new span of the Bay Bridge with its cost overruns of $5 billion. Likewise, State Parks bureaucrats keep a hidden slush fund of $54 million and education bosses get lavish salaries and benefits unconnected to student achievement. Waste can also crop up in relatively unfamiliar places, as Foon Rhee notes in the Sacramento Bee.

Rhee has consulted Criminal Injustice: A Cost Analysis of Wrongful Convictions, Errors, and Failed Prosecutions in California’s Criminal Justice System, a “first-of-its-kind study” from the Opportunity Institute that attempts to tally “the dollars-and-cents price of injustice to California taxpayers.” Adjusted for inflation, these costs come to “at least $221 million from 1989 through 2012.” The total includes $80 million in incarceration expenses, $68 million in trial and appeal costs and $5 million for wrongful imprisonment for more than 600 people whose felony convictions were overturned. The grand total rises to $282 million when 85 exonerations from the Rampart police corruption scandal in Los Angeles are included.

According to the study, errors in homicides cost an average of $1.3 million per case and account for more than 50 percent of the costs. More mistakes occur in violent crimes, and the most costly errors involved prosecutorial misconduct. As the study notes, a decade ago a state commission aimed to reduce wrongful convictions but few of its recommendations were enacted. So as Foon Rhee recalls, “It’s been clear for years that more should be done to prevent these unjust prosecutions, which punish the innocent and let the guilty go free.” If legislators won’t respond to the pleas of the exonerated, Rhee concludes, “maybe angry taxpayers will get their attention.” By confirming that waste and injustice are chained together, the new Criminal Injustice study will help taxpayers make the case for long overdue reforms.

Lance Roberts is an investment advisor who also hosts a radio show in Houston, Texas. Recently, he had a Twitter exchange with Chicago Tribune columnist Steve Chapman, in which Steve asked the following question:

Does rising debt cause slow growth or does slow growth cause debt to rise?

Roberts’ response to the question makes for fascinating reading. After reviewing some basic macroeconomic theory developed by John Maynard Keynes on the role of government deficit spending in stimulating economic growth, he identifies a problem with how the government spends the money it borrows that leads to economic stagnation:

Keynes’ was correct in his theory. In order for government deficit spending to be effective, the “payback” from investments being made through debt must yield a higher rate of return than the debt used to fund it.

The problem is that government spending has shifted away from productive investments that create jobs (infrastructure and development) to primarily social welfare and debt service which has a negative rate of return. According to the Center On Budget & Policy Priorities nearly 75% of every tax dollar goes to non-productive spending.

Here is the real kicker, though. In 2014, the Federal Government spent $3.5 Trillion which was equivalent to 20% of the nation’s entire GDP. Of that total spending, $3.15 Trillion was financed by Federal revenues and $485 billion was financed through debt. In other words, it took almost all of the revenue received by the Government just to cover social welfare and service interest on the debt. In the financial markets, when you borrow from others to pay obligations you can’t afford it is known as a “Ponzi-scheme.”

But wait, there’s more! Roberts goes a step further to identify debt as the cause of slow economic growth, not its cure:

Debt, if used for productive investments, can be a solution to stimulating economic growth in the short-term. However, in the U.S., debt has been squandered on increase in social welfare programs and debt service which has an effective negative return on investment. Therefore, the larger the balance of debt becomes, the more economically destructive it is by diverting an ever growing amount of dollars away from productive investments to service payments.

The relevance of debt growth versus economic growth is all too evident as shown below. Since 1980, the overall increase in debt has surged to levels that currently usurp the entirety of economic growth. With economic growth rates now at the lowest levels on record, the growth in debt continues to divert more tax dollars away from productive investments into the service of debt and social welfare.

That’s a pretty strong argument for why today’s increases in government spending, which are almost entirely funded through borrowing, would have less and less of a positive impact on the economy compared when such policies were first adopted back in days of the Great Depression.

Back then, the government would borrow to fund projects like power producing dams on the Colorado and Tennessee rivers, or build interstate highways – things that can actually have a positive rate of return on the investment in them because they expand the potential for real world commerce.

Today, the government borrows billions of dollars to lend to students to obtain college educations that for many, represent an increasingly poorer return on the investment, where according to President Obama’s Fiscal Year 2015 budget, nearly one out of five people who took out subsidized student loans from the U.S. government will default on paying them back, which means that they weren’t able to earn enough money from the kind of real world jobs they could actually get after obtaining a college education or degree.

Overall, without taking its full costs of making such loans into account, including the full extent of defaults and delinquencies in payments, we estimate that the rate of return on the government’s student loan racket is about 0.1%. In reality, the U.S. government is not getting a boost from its student loan business – it is earning a negative rate of return on its investment.

The costs of that failure may be seen in the abnormally high rates at which welfare spending has continued since 2009, even after so many years of economic recovery following the official end of the last recession. Consequently, more government spending is going to nonproductive uses.

And then, the cycle repeats.

How much does your state or local government’s debt add to your personal share of government debt?

With so many different jurisdictions and debt-issuing governments, getting a precise answer to that can be extraordinarily difficult to determine, but thanks to the following map produced by the Tax Foundation, we can get you a somewhat reasonable estimate of how much extra debt you need to add to the results provided by the MyGovCost calculator to account for that additional share of all government debt issued within the U.S.

The Tax Foundation provides the following discussion of the five most indebted and least indebted states:

States with the highest amount of state and local debt per capita in the 2012 fiscal year (the most recent data available from the Census Bureau) were New York ($17,405 per person), Massachusetts ($14,517 per person), Alaska ($13,066 per person), Connecticut ($11,928 per person), and New Jersey ($11,623 per person).

On the other end of the spectrum, states with the lowest state and local debt per capita were Idaho ($3,930 per person), Wyoming ($4,191 per person), Arkansas ($4,742 per person), Mississippi ($4,891 per person), and Oklahoma ($4,944 per person).

The Tax Foundation cautions that the debt per capita figures shown in the map above are based upon the total amount of money that was borrowed through bonds issued by each state government and all local governments within each state, which was then divided by each state’s population to arrive at the per capita figures. These figures do not include other kinds of liabilities, such as pensions for state and local government employees, which would considerably inflate the indicated figures.

Government waste abounds in California but is not always easy to spot. Veteran observer Dan Walters of the Sacramento Bee suggests a hard look at “overlapping and utterly confusing governmental entities that cloud accountability.” His first example is the California Coastal Commission, by some accounts the most powerful land-use body in the nation, and which we have covered of late. Walters has observed that the Coastal Commission has been “interjecting itself in water quality issues miles from the coastal zone,” and thereby “intruding on the state water quality board,” yet another government body.

In similar style, Walters finds it “almost impossible to figure out which state agency is truly commanding California’s crusade against carbon emissions.” The Air Resources Board supposedly takes the lead, but government bodies claiming a piece of the action include: the Public Utilities Commission, the Energy Commission and the Department of Transportation. This creates, “a confusing array of impacts on consumers.” And consumers are also taxpayers.

The state Board of Equalization, created in the 19th century to oversee property tax assessments, has now expanded its jurisdiction to sales and gasoline taxes. The state Franchise Tax Board grabs income tax but its appeals go to the Board of Equalization. And, says Walters, “several other state agencies also collect taxes.”

The Bee columnist wonders, “Why do we have elected county superintendents of schools, plus elected county boards of education?” And as he notes, the elected state schools superintendent, who manages the state Department of Education, is subject to the decrees of the State Board of Education, appointed by the governor. Walters wonders who is accountable for the success or failure of public education, and finds this “a question that could be applied to much of state government.” Whether at the state or federal level, money plus bureaucracy does not add up to accountability for taxpayers.

How does life change when a government doesn’t have the money to pay the people who loaned it money?

The answer to the question is that life gets a lot harder, as the Associated Press’ Danica Coto reports in “Puerto Rico is cracking down on people who steal power, cheat on their taxes or don’t pay other bills as the U.S. island territory struggles to raise money to make bond payments”:

Amid the crisis, the Treasury Department is going after delinquent taxpayers like never before, even closing a business owned by the head of the Chamber of Commerce for non-payment of sales tax and temporarily shutting down Jose Enrique, a restaurant that had become a renowned culinary destination.

The island’s water utility has prevailed on the Justice Department to file criminal charges against people who have not paid their bills or have stolen service, a step only taken in drastic cases in the past. And a government agency that issues permits recently trumpeted the fact that it imposed a $34,000 fine against a company operating an electronic billboard without its permission….

Delinquent power bills have been piling up for years and are one of the reasons cited by the electrical utility for its financial woes. It recently announced that it will cut subsidized power at public housing units starting next month because of $31 million in outstanding bills.

That sounds a lot like what has been happening in Greece, doesn’t it? But it’s not – Puerto Rico is a territory of the United States. This story is taking place in America.

The people in power are going after money everywhere they think they can get it, and they are going after the working class and the poor because they have already taxed the rich, where they’ve even defined “rich” down to where the territory’s top 33% personal income tax rate applies to all taxable income above $62,750, whether married filing jointly or single. Although Puerto Rico’s residents are exempt from paying U.S. federal income taxes, we should recognize that the same 33% tax rate for single filers wouldn’t kick in until they earned at least $190,150 in income, and for couples filing jointly, the minimum taxable income threshold for a 33% rate is $231,450.

The U.S. territory’s most impoverished residents are upset that the people in power in Puerto Rico are now going after them too:

“It’s not right that they are targeting Puerto Rico’s working class,” Wilma Rivera, a 46-year-old mother of three, said as she watched power company workers inspect her meter for evidence of tampering. “We’re the ones paying for everyone else’s mess.”

Sooner or later, everyone pays when the government is bankrupt.

While millions around the world watched the Academy Awards on February 28, Brian Lamb of C-SPAN was hosting Thomas Schatz, president of Citizens Against Government Waste. The interview confirmed that when it comes to wasting taxpayers’ money, government bureaucrats are endlessly creative.

Lamb recalled the first Golden Fleece award in 1975, a project of the late Senator William Proxmire. He objected to the National Science Foundation squandering $84,000 to find out why people fall in love. In similar style, the Federal Aviation Administration spent $57,000 to study the physical measurements of 432 flight attendants.

More recently, the National Institutes of Health spent nearly $5 million on a “Help a Hipster” project that throws parties at bars to get hipsters to take a stand against tobacco companies. The Department of Agriculture spent $14 million on a catfish inspection office, a duplication of a catfish office operated by the FDA.

The U.S. Air Force contracted with NASCAR for $1.6 million, with expenditures including autograph sessions with a driver at an Air Force recruiting booth. The National Guard spent $14 million on bubble balls, and the Army issued a $50,000 grant to see if elephants would be suitable for sniffing out bombs. The interview also covered the M-I Abrams tanks, which as we noted the military does not want but as Lamb explained, “Congress says you are going to get them.”

In a clip from a January 22 interview, Lamb asked former Defense Secretary Robert Gates: “Has the Department of Defense ever been audited?” When it comes to formal accounting practices, Gates said, “the answer is no.” Gates claimed the Department “knows where all the money has gone” but with so many examples of waste, Schatz remained skeptical. “The Pentagon needs to be audited,” he said. “They need to justify every expenditure.”

It also emerged that the National Endowment for the Humanities spent $30,000 on a computer game about toxic rhetoric online. The National Endowment for the Arts shelled out $40,000 for a video game based on Walden, and the NEH kicked in $100,000 to finish the project. Schatz said the NEA and NEH were on “many lists” for elimination.

“Before they were established in 1963 did we have arts and humanities?” Schatz said. “Of course we did. We just didn’t have the government involved in spending about $180 million on each agency each year.”