Gold Rush

s soon as President Clinton announced earlier this year that he would submit a balanced budget for fiscal 1999, lawmakers and administration officials began talking of spending expected future surpluses on health care initiatives, new roads, tax cuts, and paying down the national debt. But if leaders of federal agencies and managers of government programs think they're going to see any of the money, they should think again.

Guaranteeing that the surpluses actually occur means that agencies will continue to operate under the strict limits on discretionary spending that they have lived with throughout the 1990s. Indeed, as soon as President Clinton announced he would balance the budget next year, Republican leaders tried to one-up him by suggesting rescissions in 1998 spending in order to reach balance by the end of this year.

At the same time, the public's demand for federal services and the backlog of investments needed to bring the government fully into the information age continue to grow. What are agencies to do? Increasingly, with the help of Congress, they are turning to sources of funding outside the regular appropriations process.

The General Accounting Office reported late last year that agency collections of user fees to fund operations have grown steadily since the early 1980s. Such fees amounted to about 12 percent of all federal revenues collected in fiscal 1996-more than twice the amount collected from excise taxes, estate and gift taxes, and customs duties combined. GAO's survey of 27 agencies that relied on fee revenues for 20 percent or more of their funding showed these agencies maintained or increased their reliance on fee income over a recent five-year period.

Several regulatory agencies have substantially increased their reliance on fees in recent years. For example:

• The Federal Communications Commission received less than 1 percent of its budget authority from user fees in fiscal 1991, but such fees made up 73 percent of its funding by fiscal 1996.
• In 1991, the Federal Trade Commission received 18 percent of its budget from user charges. After fee increases were instituted in 1993, this grew to 69 percent by 1996.
• At the Securities and Exchange Commission, reliance on fees increased from 19 percent of the agency's budget in 1991 to 70 percent in 1996.
• The Customs Service's reliance on fees increased from 41 percent of budget authority in 1991 to 71 percent in 1996.
• The Agriculture Department's Animal and Plant Health Inspection Service received less than 9 percent of its budget in fees at the beginning of the decade, but relied on fees for 31 percent of its funding in 1996.

Tapping New Sources

The idea of charging users for the government services they receive has been around for a long time. Office of Management and Budget Circular A-25, issued in 1959, sets the policy for all federal activities that convey special benefits to recipients beyond those the general public receives. Its objectives are to ensure that such activities are self-sustaining, that the charges for services are equal to or greater than the costs of providing them, and that the private sector is able to compete with government in providing comparable services.

The government collects fees from a wide variety of sources, including the sale of postage stamps and electricity, admission fees to national parks, premiums for deposit insurance, and rents and royalties for the right to extract oil from the publicly owned Outer Continental Shelf. In fiscal 1997, OMB estimated total revenues, called "offsetting collections," at about $205 billion. About $57 billion of that came from postage stamp sales and other postal-related fees.

The Clinton administration is actively seeking to replace appropriations with user fees at a wide variety of agencies. As agency leaders prepared their fiscal 1999 budget proposals, OMB Director Franklin Raines sent them a memo encouraging them to pay for new initiatives by charging user fees instead of requesting bigger budgets.

Agencies responded with $22.9 billion in proposed new fees from 1999 to 2003. USDA's Food Safety and Inspection Service is proposing to charge meat, poultry and egg processors fees to cover all the direct costs of in-plant inspections. The Health Care Financing Administration wants to charge health-care providers seeking to participate in Medicare an enrollment fee and a subsequent renewal fee every five years. And the Coast Guard plans to make commercial cargo carriers pay for navigational assistance.

If recent history is a guide, Congress will approve many of these proposals. Last year, several fee hikes were included in the deficit reduction package passed in July, and others made their way into individual appropriations acts.

The idea of basing budgets at least partly on fees has won bipartisan support because it means that the cost of programs is borne mostly by the people who actually benefit from them. Forcing federal agencies to rely on fees also gives them a bottom line to manage and an incentive to hold costs down.

At the same time, the growing use of alternative funding sources raises several questions. What costs should be considered in setting fees? Is Congress willing to give agencies sufficient leeway in managing funds that come from fees or other alternative funding sources? Should appropriations committees on Capitol Hill be left out of the loop in funding important federal initiatives?

Recent experiences with setting fees for immigration-related services and launching an initiative to fight health-care fraud show how Congress, the Clinton administration and federal managers are dealing with these issues.

Cost of Immigration

The INS is required by law to charge fees for certain immigration adjudication and naturalization services. These fees, established in 1968, initially were deposited in the general fund of the Treasury, and Congress appropriated the money to pay for immigration services. The fees charged by INS were based on the average amount of time an INS employee needed to adjudicate an application. Other costs, such as those for records management and support services, were not considered in setting the fees.

Congress changed the ground rules in 1986, authorizing INS to collect fees covering the full costs of providing some of its services. More important, it allowed INS to retain the revenue to finance these services, thus eliminating the need for appropriated funds. Appropriations committees benefited by no longer having to count these costs toward their budget allocations, and INS was given more flexibility in administering its programs.

Now, every major INS program except the Border Patrol receives some funding from the fee accounts. Two years ago, when Congress and President Clinton reached an impasse on the budget and the government was shut down, INS employees funded by user fees continued on the job while colleagues whose salaries were paid from appropriated funds stayed home.

Before 1986, all of the agency's operations were funded from a single appropriations account. Since then, Congress has repeatedly added new accounts, resulting in literally thousands of agency funding allocations. A 1996 National Academy of Public Administration report concluded that INS field managers had trouble running their operations because Congress had carved the agency's budget into so many micro-categories.

Another problem is setting the fees themselves. On several occasions INS has been forced to seek substantial increases in fees when the number of immigrant applications grew much faster than anticipated.

In 1989, when Congress mandated that INS fees "more nearly reflect the current cost of providing the benefits," the agency increased the fee for an alien registration receipt card from $15 to $35. Two years later, fees were increased again by as much as 100 percent for several applications. In 1994, the INS revised its fee schedule yet again, but this time by much smaller amounts. It also recognized the need to improve the management of its fee accounts and the methods by which fee schedules were developed.

In 1995, the INS formed a study team and hired consultants to develop a more consistent and reliable cost accounting methodology. Congress added further complexity by transferring the costs of refugee and asylum applications and investigations, as well as resettlement programs funded by the INS, from appropriated funds to a fee account. This marked the first time that fees for processing certain INS benefits were used to cover the costs of other benefits for which fees are not charged.

The study team adopted an "activity-based costing" methodology designed to more accurately estimate the costs of providing immigration benefits. The result was better accounting practices but also another proposal for dramatically higher fees for certain types of applications. When the study results were first aired last August, immigrant constituent groups strongly opposed the idea of further large increases.

Nevertheless, in January, INS Commissioner Doris Meissner announced the agency was officially proposing to raise 30 different fees. Under the proposal, the cost of applying to become a citizen would rise from $95 to $225. The fee for becoming a legal resident would jump from $130 to $220. Replacing a green card would cost $110 instead of $75, and the fee for a work permit would rise from $70 to $100.

"INS is in a Catch-22 situation," Meissner said. "We want to improve our services, and we know our customers deserve better service, but in order to get there, we have to charge what it costs."

Meissner said INS would not implement the increases until:

• The agency's case backlog begins to subside and applicant waiting time is reduced. Some applications now take an average of two years to process.
• INS implements uniform use of a process by which applications are sent directly to the agency's service centers, so that district offices can focus on conducting interviews.
• New software is installed to ensure consistency in processing naturalization applications.

The broad use of fee-based services clearly adds to the administrative complexity of managing the INS. But NAPA argued in its 1996 report that the advantages of a funding source that is not subject to the normal limits on discretionary accounts are so great that the difficulties pale in comparison. The core problem with the fee accounts-as in managing other INS activities-is inspiring a level of trust in Congress that will allow the agency to receive sufficient flexibility to manage its funds.

Fighting Health Fraud

Even for operations that are not fee-based, Congress has shown an inclination recently to approve new funding mechanisms.

One such effort is the fight against fraud and waste in the Medicare and Medicaid programs. With costs for these two programs growing rapidly to about $180 billion per year, even a small percentage of claims incorrectly or inappropriately paid represents a large drain on both federal and state treasuries.

But until recently, funding for government investigations of health-care fraud had not kept pace with the growth of the government's health programs. According to one congressional estimate, Medicare spent 30 percent less per claim on fraud and abuse activities in 1996 than in 1989, despite strong evidence that illegal activities were on the rise. The inspector general at the Department of Health and Human Services actually was forced to close field offices in recent years due to funding limitations.

In 1995, the Clinton administration launched Operation Restore Trust, a comprehensive initiative designed to test several innovations in fighting health fraud. The HHS IG, the Health Care Financing Administration and the HHS Administration on Aging were the principal partners.

Congress found a novel way to fund the effort. In the 1996 Health Insurance Portability and Accountability Act, lawmakers set up a Health Care Fraud and Abuse Control Account, administered jointly by the HHS secretary and the attorney general.

Money that had flowed into the general fund of the Treasury from criminal fines, civil penalties, fines and forfeitures related to health fraud was redirected to the Medicare Part A Trust Fund. The law appropriated money from the fund to the newly created control account to pay for anti-fraud and abuse efforts at HHS, the Justice Department, and state and local agencies.

So far, the results have been impressive. According to HHS IG June Gibbs Brown, total fines, penalties, restitutions and settlements totaled $1.2 billion in 1997, five times the comparable figure for 1996 and three times greater than the previous record for recoveries. Criminal and civil prosecutions in 1997 were double those of the previous year and three times higher than the year before that. And the total cost of the anti-fraud effort is less than $200 million per year.

In fiscal 1997, Brown received a $61 million increase in funding as a result of the program, enabling her to open six additional field offices and increase staffing for health- care fraud and abuse control by 20 percent. Six more field offices are scheduled to open this year and staff is expected to double by the year 2000-all without increases in annual appropriations.

The law creating the innovative effort originated in the House Ways and Means Committee, which acted like the Appropriations Committee by mandating spending from the trust fund. By the time the Appropriations Committee staff found out, it was too late to lodge a protest. The committee was essentially "asleep at the switch," one of its staffers says.

The results of the health-care fraud-fighting effort show how an assured source of increased funding and better program coordination can pay handsome dividends. But Congress-especially the appropriations committees-must agree to less control in funding new initiatives.

A Growing Trend

The trend toward user fees and other funding mechanisms outside traditional appropriations is likely to continue because of a bipartisan belief that such revenues can lead to better service in an era of spending constraints. But several issues continue to be problematic.

One is the question of how fees are categorized-whether they go to the Treasury or to offset program costs. This question has become increasingly important since the 1990 Budget Enforcement Act set spending caps for federal agencies.

In some cases, fees are counted against program budget authority and outlays, and additional spending enabled by higher fee revenues does not count against discretionary spending caps. But programs whose fee revenues go to the Treasury's general fund have such revenues counted against the caps, making it harder to get funding increases.

One congressional staffer is trying to get approval for a new category of spending he calls "money makers," that is, programs in which an additional dollar of spending results in more than a dollar of savings or collections. To the extent such savings are scored by the Congressional Budget Office as revenue offsetting appropriations, they would not count against discretionary caps.

Another problem with innovative funding efforts is opposition from appropriators who object to losing control over program funding. Some agencies now are cutting deals that allow them to generate revenue while appropriators retain funding control. For example, HHS operates a Medicare "choice-plus" program with appropriated funds, but it is authorized to collect fees from program beneficiaries to offset appropriated funds.

If President Clinton and Congress balance the budget and the economy continues to grow, there may come a time when agencies are freed from discretionary spending caps. Then some of the pressure to tap novel revenues sources will ease. But until that time, user fees and other independent revenue sources are likely to remain attractive to besieged program managers and congressional appropriators alike.

Roger L. Sperry is a consultant in public management and former director of management studies for the National Academy of Public Administration.