GovernmentExecutive.com

he on-again off-again proposal to create a federal corporation to manage the

nation's air-traffic control system is officially on again. Vice President Gore

said so on Dec. 19.

"Cutting back to basics means stop trying to run businesses by bureaucratic

rules," Gore said as he described the Administration's proposal for reducing federal spending. "We plan to make air-traffic control a corporation [and to

do] the same thing with mortgage insurance. We'll consider a long list of other

government functions that could be incorporated or that we could simply purchase

from the private sector more cheaply and more efficiently."

Following Gore to the microphone, Secretary of Transportation Federico Pena

said that creating an air-traffic control corporation would move about 40,000

people off the federal payroll, cutting his department's workforce nearly in

half.

Those 40,000 people he said, "will now be wholly financed by the fees that

the airline industry pays. So that's a tremendous relief to the general fund."

As government-reform arguments go, this one sounds pretty good --

superficially, at least. (It's rarely mentioned that the best candidates for

incorporation -- operations that, like air-traffic control, have their own

funding sources -- take their revenues as well as their expenses with them when

they go off budget.) Similar arguments have been used for more than 60 years, as

dozens of quasi-governmental organizations, including corporations, authorities

and boards, have been established in response to knotty managerial problems.

Such organizations operate outside the traditional hierarchy of the executive

branch, often with special powers and exemptions from civil service and other government procedures and often with their own dedicated funding sources.

The popularity of such organizations has been growing, and the trend seems

likely to continue. "There's a very good chance that there will be a

proliferation of government corporations, given the budget dilemma," says Don

Bumgardner, who is leading a study of such organizations for the General

Accounting Office.

Corporations often emerge as a way of solving a problem or providing a new

service without doing the unthinkable -- creating a new federal agency. At

times, however, these organizations are hard to distinguish from traditional

government organizations. For example, when the Clinton Administration wanted

to found an organization to increase volunteerism, it created the Corporation

for National and Community Service -- an ordinary government agency in virtually

every respect except its name.

Freeing an organization from bureaucratic rules is also frequently cited as

justification for turning it into a corporation. Pena noted that the Federal

Aviation Administration, which currently runs air-traffic control, has "a

procurement system that doesn't allow us to bring on new technology on a timely

basis to keep up with a technologically advanced aviation industry that we

govern every second of the day." In the new corporation, he said, "the billions of dollars of waste that we have seen over the last 10 years in an

inefficient procurement system will be eliminated. The corporation will be able

to use the same kind of procurement rules that any private company can use, and

bring on that technology much more cheaply [and] efficiently."

Turning government agencies into corporations is also seen as a way to shake

them up and make them more entrepreneurial, as advocated in the Clinton

Administration's National Performance Review. Housing and Urban Development

Secretary Henry Cisneros said the new, corporate Federal Housing Administration

would be "a reinvigorated FHA, with new flexibility as a government-owned

corporation."

The Clinton Administration, faced with the difficult self-imposed task of

"reinventing government," has embraced quasi-governmental approaches, as have

some outside experts.

In addition to the Air-traffic control Corporation and

the corporate Federal Housing Administration, proposals for four other

quasi-governmental organizations were being discussed in 1994. Three of them

involved spinning off existing government agencies: the Presidio Trust, a former

army base now managed by the National Park Service; the Bonneville Power

Administration (now part of the Energy Department); and the Naval Petroleum and

Oil Shale Reserves, which the Administration more recently proposed privatizing

entirely. A sixth, being floated in the House of Representatives last session, was to create a brand-new entity called the National Infrastructure

Corp. It would make loans and equity investments to assist states and private

companies in developing infrastructure projects.

The movement to incorporate the management of various public functions

worries some longtime students of government. They say corporations are not as

accountable to the public as regular government agencies and can expose

taxpayers to unnecessary financial liabilities. Harold Seidman, a student of

quasi-governmental institutions since the time of Harry Truman, complains that

"the U.S. government is going quasi. We have a new system where we privatize

profits and socialize losses."

Administrative Twilight Zone

Quasi-governmental organizations re-insure home mortgages, protect investors

from losses due to the failures of their securities brokerages, operate and

maintain the St. Lawrence Seaway, insure private pension funds and run intercity

passenger railroads, among many other functions.

Some government corporations have almost all the same rights as corporations

in the private sector (except, of course, the right to fail). Others are little more than independent federal agencies with glorified titles. Some

aren't even independent: The St. Lawrence Seaway Development Corp. is nestled in

the Department of Transportation, the Commodity Credit Corp. is part of the

Department of Agriculture, and the Government National Mortgage Association

(Ginnie Mae) is part of HUD. But all of them exist in an administrative

twilight zone, with one foot in the federal government and the other in the

private sector.

It is difficult to say exactly how many government corporations exist,

because the federal government itself has never defined the term. (The

Government Corporation Control Act defines "government corporation" simply by

listing the agencies covered by the act -- currently 22 of them.) Experts who

study government corporations for such organizations as GAO, the Congressional

Research Service (CRS) and the National Academy of Public Administration (NAPA)

have their own lists, all of which are different lengths and all of which

include entitles not covered by the Corporation Control Act. Ronald C. Moe of

CRS says the discrepancies are to be expected. "In the absence of a general

incorporation act, where we establish criteria that have to be met in order to

be a corporation," he says, "you're going to have different lists."

With quasi-federal organizations, as with snowflakes, no two are identical.

They come in three basic models: public-ownership, or "wholly-owned," corporations (in which the government holds all the equity); mixed-ownership

corporations (in which the government holds only some of the equity); and

government sponsored enterprises (which are not owned by the government but are

backed in some fashion by the Treasury). In addition, there are seemingly

endless variations on these themes.

There's the Resolution Trust Corp., created in 1989 to clean up the flotsam

and jetsam of the savings and loan debacle. It's supposed to be a

"mixed-ownership" corporation, but private ownership has never made it into the

mix. The corporation has always been funded through the appropriations process.

Indeed, it's difficult to imagine who would want to own a piece of the RTC.

The Tennessee Valley Authority, the granddaddy of quasi-governmental

organizations, is considered a wholly owned government corporation and is run

entirely by its three-member presidentially appointed board. The TVA's primary

business activities -- power generation and distribution -- are financed by user

charges. It has its own personnel system, tied to the federal pay system and

pay caps, but its 20,000 or so employees receive performance bonuses, and a few

of its executives earn more than $ 200,000 a year.

Why is TVA a wholly owned government corporation while the Bonneville Power

Administration, which performs many of the same functions, is not?

Simple: TVA's charter says it is a corporation and Bonneville, at least at present, has

no such charter.

There are also organizations that look suspiciously like government

corporations or government-sponsored enterprises, but technically are not. The

U.S. Postal Service is one example. Its enabling legislation describes the

Postal Service as "an independent establishment of the executive branch" and

specifically rejects the designation of government corporation. Yet it has a

publicly appointed Board of Governors, can set its own rates (with approval of

the Postal Rate Commission) and is required to live off its income. The board

appoints, and can remove, the Postmaster General.

Some organizations whose officials insist they are not quasi-governmental in

nature receive federal appropriations as if they were. The legislation

establishing the Corporation for Public Broadcasting, for example, declares it

to be a "nonprofit corporation . . . which will not be an agency or

establishment of the United States Government." But its 10-member board is

appointed by the President, its funding is included in the federal budget, and

it is accountable to Congress. And the Legal Services Corp., while described in

its charter as a "private, nonmembership, nonprofit corporation," is funded

through congressional appropriations, and its officers' pay is tied loosely to

the federal Executive Schedule.

The situation is confusing, but does it constitute a governmental problem?

Does it really matter if a number of governmental functions are performed by

institutions whose place on the organizational chart is not entirely clear?

Should we be concerned that the Corporation for Public Broadcasting considers

itself to be more like the Ford Foundation than like the Department of

Agriculture?

Yes, yes and yes. The size and scope of the quasi government has created

several problems that are likely to become more serious as federal programs

disappear and federal spending diminishes.

The Accountability Problem

Quasi-governmental organizations, insulated as they are from many of the

pressures exerted on executive branch agencies, are largely unaccountable. If

the public doesn't like the way the regular government does things, there's

always Election Day. No such remedy exists for quasi-federal enterprises;

indeed, that's one of the reasons politicians create them.

Many quasi-governmental entities have boards of directors, which generally

include presidential (and often congressional) appointees, but their rights and privileges are not the same as those exercised by board members of a private

corporation. Government corporations may not remove board members, for example,

since the composition of such boards is established by law.

In fact, government corporations generally can pick whatever legal status

best suits their purpose, says Seidman, who is a fellow at both NAPA and the

Johns Hopkins Center for the Study of American Government. He cites a 1977

incident in which HUD Secretary Patricia R. Harris instructed Fannie Mae to

increase its mortgage purchases in the inner cities. Fannie Mae replied that as

private agency, its principal obligation was to its stockholders, who would

object to its investing in riskier properties.

But when the Reagan Administration, a few years later, attempted to strip

away some of Fannie Mae's special privileges, such as its tax exemptions and its

line of credit with the Treasury, the association changed its tune. "Congress

established Fannie Mae to run efficiently as an agency, not as a fully private

company," it responded. Without those special relationships, it said, the

agency wouldn't be able to survive.

The chameleon-like ability of these corporations to change form or status to

adapt to a new context makes oversight difficult. "We know that there have been

thousands of depository institutions that have failed, yet it's frequently difficult to know what regulators thought of these institutions before they

failed," says James Barth, finance professor at Auburn University and author of

The Great Savings and Loan Debacle (American Enterprise Institute, 1992). "We

have to look at how [federal corporations] are rating these institutions, and

yet they guard that information as if it's top secret. The resulting cost has

to be borne by taxpayers."

The Flexibility Argument

Government activities are often spun off into quasi-governmental

organizations in order to permit greater flexibility in such areas as

procurement, personnel and accounting. Problems with the FAA's

multibillion-dollar advanced automation project, for instance, have been cited

as justification for taking air-traffic control out of the Transportation

Department. Intended to replace an antiquated system with a state-of-the-art

one, the project has had a history of cost overruns in the pursuit of technology

that was outdated before it could be implemented.

Both the National Performance Review and the report of the National

Commission to Ensure a Strong Competitive Airline Industry cited the FAA's

reliance on federal procurement and personnel rules as a major cause of its problems in implementing a state-of-the-art system for air-traffic control.

The NPR report noted that air-traffic control "is subject to federal budget,

procurement and personnel rules designed to prevent mismanagement and the misuse

of funds. The rules, however, prevent the system from reacting quickly to

events, such as buying the most up-to-date technology."

"If air-traffic control were more user-directed, there would be greater

ability to set priorities as demanded by the users," says a spokesman for the

Air Transport Association, which represents commercial airlines. He cites the

USAir crash at Charlotte, N.C., last September as an example of the problems

caused by strict procurement rules. He says the tragedy might have been averted

if the Federal Aviation Administration had been using Doppler radar technology,

which is capable of detecting microbursts -- sudden, often violent, downbursts

of air that can quickly reduce an aircraft's speed, causing it to drop. The

technology has been available years. But, he says, because the agency was

unable to buy off-the-shelf technology, "airports only now are bringing on line

the Doppler technology capable of dealing with microbursts."

Other observers are less certain where the blame lies, however. The

government's procurement rules, while complicated, are not all that different

from those used in the private sector, they argue. And the rules can be amended, if necessary, without requiring that an agency be removed from the

executive branch and set up on its own. In fact, procurement-reform legislation

passed last fall encourages agencies to buy off-the-shelf products whenever

possible.

"A lot of things get blamed on procurement policy," says CRS's Moe.

"Probably a lot of it's correct, but a lot of it's also an excuse. You just

have to work harder at it."

Furthermore, freedom from government administrative procedures does not

guarantee that an organization will operate more efficiently. For example, the

Senate Governmental Affairs Subcommittee on Federal Services, Post Office and

Civil Service discovered in 1990 that the RTC had paid huge fees to its

contractors -- who often were the same national audit firms that were being sued

in connection with the S&L disasters RTC was attempting to untangle.

"They started from scratch," says a subcommittee staffer, "and ended up

devising a system that was just as ripe for fraud, waste and abuse as the

government procurement system." In fact, had the RTC been bound by federal

procurement regulations, with their rigid conflict-of-interest prohibitions, the

problems probably would not have occurred. Not all government corporations are exempt from following government

procurement and personnel rules. The Commodity Credit Corp., for example, is

staffed with career employees from the U.S. Department of Agriculture.

Moe cautions against giving an agency's procurement difficulties too much

weight in determining whether it should be recreated as a quasi government

organization. "Procurement is only one of 15 or so activities of management,"

he says. "Because it involves money, and it's in the area where government and

private industry interface, it has a high risk. But still, it's only one

aspect."

The Financing Problem

The ultimate government corporation would operate with little or no federal

appropriations, funded by its own constituents. Not many organizations actually

meet this exalted standard, however. The RTC, for example, seems to have been

made a government corporation merely to draw public attention away from the

monumental proportions of the S&L bailout by moving the expense off-budget.

The new Corporation for National Service, to cite another example, will have

no significant source of user-derived income and will, in fact, spend hundreds of millions of Treasury dollars in setting up programs and awarding stipends to

volunteers.

Even supposedly self-supporting programs often have hidden costs that, if not

watched closely, can add to the federal deficit. Consider Amtrak -- officially,

the National Railroad Passenger Corp. Created in 1970 to take over a function

that the nation's major freight-hauling railroads had abandoned -- high-cost,

labor-intensive passenger service -- Amtrak was envisioned as a transitional

organization that would gradually bring passenger rail service back to

profitability. Once it was profitable, the company might be converted into a

private-sector firm (like the Consolidated Rail Corp., which was formed to

rejuvenate the Penn Central and other freight railroads) or sold off to private

firms.

Amtrak never got there, and hardly anyone thinks it will in the foreseeable

future. Although its operating subsidies have been declining, the corporation's

need for capital assistance to replace and upgrade its aging equipment is

becoming acute.

Fannie Mae, on the other hand, after some rocky early years during the Great

Depression, has been extraordinarily successful. Since 1981, it has prospered

in a big way. Last year it generated $ 300 billion in volume and netted $ 1.87 billion -- or $ 6.82 for each of its 272 million outstanding shares.

Although Fannie Mae is privately owned and off-budget, it benefits from its

special almost-federal status. A December Wall Street Journal article reported

that Houston securities firms were pitching high-risk mortgage derivatives to

unsuspecting small towns, schools and local banks using scripts that read, for

example, "You are aware that Fannie Maes are backed by the full faith and credit

of the United States government, aren't you? Then you're comfortable with the

safety of these securities, aren't you?"

Because Fannie Mae is federally chartered, investors could be excused for

believing that the federal government would move to forestall its bankruptcy.

Technically, the government has no such obligation. But having bailed out the

Chrysler Corp., it would be hard put to refuse to aid the corporation on which

the nation's mortgage industry depends -- especially since it created the

corporation in the first place. In a sense, Fannie Mae's special status

constitutes an unwritten, unspoken federal guarantee -- even in the event of

flagrant mismanagement.

Like many government enterprises, Fannie Mae is exempt from government

personnel rules, including civil service pay scales. It has, consequently,

tended to reward its top management more generously than does the government. When CEO David O. Maxwell retired from the association in 1992, after 10 years

of service, he received a $ 19.6 million lump-sum pension.

In fact, placing an existing government service in the hands of a quasi

government organization may even lead to greater fiscal problems for the

Treasury. Air-traffic control, for example, is funded largely through a 10

percent tax on airline tickets. At present, these funds are used as the basis

for many FAA appropriations, but they are actually deposited into the general

treasury, where they are credited against the federal deficit. If air-traffic

control leaves the federal budget, so will the income from the ticket tax.

The "Good Government" Problem

Every decision of government creates winners and losers. When a governmental

decision is delegated to a quasi-governmental institution, the losers are

effectively denied recourse. They may vote out of office the people who

delegated the decision, but they can't vote out the corporation to which the

decision is delegated.

That's one reason the general aviation community has always opposed turning

air-traffic control over to a corporation -- an idea that has been floating around for years. "An air-traffic control corporation would be run under

majority control of 15 to 20 airline companies, but would be funded mostly by

ticket taxes and user fees paid by air passengers, shippers and aircraft

operators," wrote Phil Boyer, president of the Aircraft Owners and Pilots

Association, in a letter to The Wall Street Journal.

"Where would the interests of those 'paying customers' be served?" Boyer

continued. "Today, they are overseen by Congress, the people's elected

representatives. And since the air traffic system is the eyes and ears of the

FAA's regulatory functions and safety enforcement, do the airline companies

propose to undertake a share of their own regulatory and enforcement oversight?

The result will be an expensive and disruptive parallel bureaucracy to which

government and Congress abdicate their responsibilities to enforce regulation

and protect the public interest."

The questions that could logically be asked of any quasi-governmental

organization are: "Is this properly a function of government? If so, why have

we turned it over to the private sector? And if not, why is the government

involved in it?"

The Corporation for National Service, Seidman says, "has no basis for being a

corporation at all. Calling it a corporation doesn't make it a corporation." A Federal Services Subcommittee staffer notes that the corporation doesn't

differ materially from other independent agencies such as the National Endowment

for the Humanities. "They are 98 percent dependent on annual appropriations,"

he says. "If you're going to need annual appropriations, then what benefit is

it to the citizens and taxpayers that you call yourself a corporation?"

Redundancy is another "good-government" problem posed by the quasi

government, and it has significant fiscal consequences. "We don't need separate

offices like the RTC, FDIC and the Comptroller of the Currency regulating

depository institutions," says author Barth. "It's absurd to have that sort of

duplication. We could easily go from four to three, or two, if not one.

Needless to say, each of these agencies wishes to retain its jurisdiction.

People don't like to give up their jobs, but it happens everyday in the private

sector."

In 1945, in an effort to get a handle on the already-growing number of

quasi-governmental organizations, Congress enacted the Government Corporation

Control Act. The law imposed some obligations on the corporations it covered

but left many organizations out from under its umbrella.

Twenty-two of today's government corporations are covered under the act,

which has different requirements for mixed-ownership and wholly-owned organizations. For example, corporations owned wholly by the government -- such

as TVA and the Overseas Private Investment Corp. -- are required to submit their

budgets to OMB, while mixed-ownership corporations such as the Federal Home Loan

Banks are not. Both types of organizations are subject to audit by the

Comptroller General.

New additions to the quasi government often have not fallen under the law's

jurisdiction because the law doesn't establish criteria for determining when

such organizations are covered. An agency is covered by the act only if it is

specifically mentioned therein, or if Congress, in establishing the agency,

subjected it to the law's jurisdiction.

Gathering Information

Before the situation can be rectified, however, decision makers need to

understand the scope of the problem.

Steps are being taken. Last April, Sen. David Pryor, D-Ark., then chairman

of the Federal Services Subcommittee, asked GAO to survey the vast and largely

unchartered world of the federal corporation and government-sponsored

enterprise. "We in the Congress are all too often faced with one facet of the problem and

do not have a context to address these larger questions," Pryor wrote in his

request. "As it is likely that additional proposals for creating government

corporations will be presented in the near future, as well as the obvious

requirement to continue exercising oversight over the existing ones, I think

this is a timely and important request."

Pryor, of course, is no longer subcommittee chairman, and it remains to be

seen whether the new Republican Congress -- with its dedication to privatization

-- will share his reservations about federal corporations. It's worth noting,

however, that delegating a governmental function to a government corporation is

not the same thing as privatizing it.

GAO plans to issue two reports early this year. The first will summarize the

six recent proposals to create new government corporations. The second will

analyze the degree to which the various existing corporations are subject to

procurement and other rules affecting federal agencies. GAO's Bumgardner says

it will ask questions like, "What evidence, if any, exists that government

corporations' statutory exemptions have resulted in greater efficiency? Have

innovative practices resulted from these exemptions? If so, can they be

transferred across the federal government?" It may be wishful thinking to hope someone would then take this information

and use it to make some tough decisions. Whoever takes on that thankless job

will face a barrage of objections and special pleadings. He or she would be

performing a useful service but would also make some powerful, implacable

enemies.

In a way, it sounds rather like a job for a federal corporation.

A Mixed Bag

The list below includes organizations enumerated in the Government

Corporation Control Act as well as others that traditionally are considered

government corporations or have many of the characteristics of government

corporations. These range from the U.S. Postal Service, which is officially an

independent government agency but must subsist on its own revenues, to the Legal

Services Corp., which is officially a private organization but is funded mostly

by taxpayers.

Listed in Government Corporation Control Act

Wholly Owned

Commodity Credit Corporation

Corp. for Nat'l and Community Service

Export-Import Bank of the United States

Federal Crop Insurance Corp.

Federal Housing Administration Fund

Federal Prison Industries Inc.

Gov't National Mortgage Association

Overseas Private Investment Corp.

Pennsylvania Ave. Development Corp.

Pension Benefit Guaranty Corp.

Rural Telephone Bank

St. Lawrence Seaway Devel. Corp.

Tennessee Valley Authority

U.S. [Uranium] Enrichment Corp.

Mixed Ownership

Amtrak (Nat'l Railroad Passenger Corp.)

Farm Credit Banks

Federal Deposit Insurance Corp.

Federal Home Loan Banks

National Credit Union Administration Central Liquidity Facility

Resolution Funding Corp.

Resolution Trust Corp.

The Financing Corp.

Not listed in the act

Private

Corporation for Public Broadcasting

Legal Services Corp.

National Consumer Cooperative Bank

National Park Foundation

Securities Investor Protection Corp.

Other

African Development Foundation

Community Development Financial Institutions Fund *

Farm Credit System Insurance Corp.

Federal Financing Bank

Inter-American Foundation

Neighborhood Reinvestment Corp.

U.S. Postal Service

VA Non-Profit Research Corps.

* created in September 1994; not yet operating.

Sources: Government Corporation Control Act, National Academy of Public

Administration, Congressional Research Service, General Accounting Office.