Government, Inc.

By Clyde Linsley

February 1, 1995

The 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
Corporation for Public Broadcasting
Legal Services Corp.
National Consumer Cooperative Bank
National Park Foundation
Securities Investor Protection Corp.
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.

By Clyde Linsley

February 1, 1995