Lockbox Government



ast year, the Clinton administration unveiled a proposal to protect the Social Security and Medicare trust funds as baby boomers retire in the coming decades. Over the next 15 years, Congress would set aside $3 trillion in general revenues to pay down debt and increase trust fund assets.

The Clinton plan is an ambitious attempt to shape spending decisions by the next seven Congresses. Borrowing a term more commonly used by bankers, Clinton said his law would create "a true lockbox." Through changes to budgeting laws, the $3 trillion would be segregated so that future Congresses couldn't use it for other purposes.

Clinton's proposal is the most recent and dramatic illustration of a broad new trend: lockbox government. Around the world, policy-makers are finding innovative ways to protect public programs from pressure for continued cutbacks to government spending. Key activities-and whole agencies-are being excluded from normal budget processes and given the protection of long-term funding guarantees.

Lockboxing sometimes disguises itself as government reinvention. In fact, it's quite different. Reinventors believed that government could "work better and cost less." Proponents of lockboxing think they know better. They've seen the real costs of retrenchment: a weakened civil service, eroding infrastructure and diminished capacity to undertake long-term planning. Lockboxing doesn't just try to manage budget cuts and downsizing. It tries to avoid them in the first place.

The problem is that there is something anti-democratic about reforms that limit the ability of future legislatures to allocate scarce budget dollars. Creating financially free-standing agencies could also weaken legislative oversight. And there may be unfairness in the process of deciding which parts of government should get lockbox protection.

On the other hand, lockboxing might be the only way to ensure that critical federal functions get the attention they deserve. Cash-strapped governments around the globe have an unhealthy tendency to give short-term interests top priority. Lockboxing is an imperfect way of ensuring that long-term interests-such as development of critical infrastructure-get appropriate treatment.

Few REGO Reductions

For many governments, the 1990s were the decade of reinvention. The reinventing government, or REGO, movement went by different names in different countries, but always emphasized the themes outlined by David Osborne and Ted Gaebler in their 1992 book, Reinventing Government (Addison Wesley): reduction of red tape, accountability for results rather than compliance with procedures, and greater reliance on markets for provision of services.

Reinventors had something else in common: They rejected the idea that budget deficits demanded a reduction in government services. Osborne and Gaebler complained that politicians were fixated on "the same old options: fewer services or higher taxes." They argued that REGO would produce "dramatic increases" in efficiency that would avert service reductions or tax hikes.

Osborne and Gaebler weren't the first to claim that there was a "third choice" for governments. Ten years earlier, the Grace Commission said it could finance the Reagan-era defense buildup by reducing inefficiency in the federal government. But the reform effort failed. Critics complained that the commission had concocted "fantasy figures." Commission members blamed Congress for failing to act on their proposals.

REGO seemed more promising. Osborne pointed to other national governments that had achieved dramatic savings. He claimed that the United Kingdom had reduced its civil service by one-third while "dramatically improving performance." New Zealand was said to be doing more with half the staff. The Clinton administration took note, launching a reform effort-the National Performance Review-that would make the United States government "work better and cost less."

The Clinton administration's faith in the power of REGO to save money became clear in 1994, when it launched the new Violent Crime Reduction Trust Fund. The administration said that the $30 billion fund, intended to pay for new law enforcement and crime prevention programs, would be financed by eliminating 252,000 positions in the federal civil service. The President promised that the reduction didn't imply "cutting other services"-only eliminating "unnecessary layers of management and nonessential staff."

The promise was never realized. Although the size of the federal workforce dropped sharply, most of the reductions came in the Defense Department as a result of cutbacks in military capabilities after the end of the Cold War. In other words, the government was saving money the old-fashioned way-by doing much less. The General Accounting Office found that the personnel cuts had also eroded capabilities in non-Defense departments.

The administration's 1996 proposal to establish performance-based organizations (PBOs) within the federal government was a second statement of faith in the power of REGO. Administration spokesmen said that the PBO plan had "huge potential," noting that the British government had used a similar reform to cut its civil service by one-third. Osborne suggested that the plan could produce savings of $25 billion a year-enough to fund a battery of new education programs.

Again, the promise wasn't realized. In four years, only two PBOs have been established-the Education Department's Office of Student Financial Assistance in 1998 and the Patent and Trademark Office in November 1999. Other efforts to start PBOs have been stymied by bureaucratic, union and congressional resistance.

In fact, there never was good reason to think the PBO plan would have produced the promised savings. In Britain and New Zealand, the government workforce was cut mainly by privatizing industries or reclassifying employees. The cost of running core government departments did not decline dramatically.

In the United States and other countries, REGO failed to provide much protection against increasing pressure to cut budgets. In a 1999 study, Paul Light of the Brookings Institution (a Government Executive columnist) concluded that ongoing efforts to downsize agencies and cut budgets had worsened the "quiet crisis" documented more than a decade earlier by a special commission on the public service. The Canadian and British governments also acknowledged problems in recruitment and retention of public servants.

The damage to human resources was matched by decaying infrastructure. Throughout the 1990s, governments tried to avoid politically sensitive cuts to essential services by reducing capital investment and operations and maintenance spending instead. In the United States, Canada and Britain, government investment-measured as a share of total spending-dropped to 40-year lows in the late 1990s.

Compounding these problems was a weakened capacity to undertake long-range planning as dollars became scarce, budget battles became more intense, and the outcomes of those battles less certain. In 1993, Vice President Al Gore suggested that Congress should adopt a two-year budgeting cycle and reduce appropriations earmarks so departments could plan more effectively. In reality, budget cycles became shorter: In only one of the last five years has the appropriations process been completed by the start of the fiscal year. Appropriations earmarks have proliferated as congressional leaders try to build majorities for contentious spending bills. This year, the biennial budgeting idea has won support from several key lawmakers, including House Speaker Dennis Hastert, R-Ill., but it still faces stiff opposition from some members of Congress.

Building Firewalls

Faced with the hard realities of retrenchment-a weakened civil service, eroding infrastructure and increased uncertainty-the federal government has begun to move beyond REGO. Rather than absorbing continuing budget turmoil, policy-makers are looking for creative ways to avoid it in the first place. They are opting out of traditional budget processes and building lockboxes instead.

The Violent Crime Reduction Trust Fund was a harbinger of things to come-but not for the reasons cited by reinventors. The fund was an effective method of constraining budget decisions over several Congresses. The 1994 law mandated a transfer of general revenues into the fund for six years, imposed conditions on how money in the fund could be spent, and excluded that spending from budget enforcement rules.

The violent crime fund was the first in a series of "firewalls" designed to protect spending in specific policy areas. New rules to restrict transfers from defense to non-defense discretionary spending were adopted by Congress in 1996 and were also included in the 1997 Balanced Budget Act. The 1998 Transportation Equity Act for the 21st Century (TEA-21) created a third firewall to protect federal highway and transit spending. The TEA-21 firewall actually mandated a minimum expenditure of $198 billion over six years, and provided for the spending level to rise along with increases in fuel tax revenues.

By 1999, proposals to establish many more policy firewalls had been floated. The Clinton administration wanted a new Children and Education Trust Fund to fence off $156 billion in additional spending. (The proposal has since been adopted by the Gore presidential campaign.) Sen. Patrick Moynihan, D-N.Y., proposed new guarantees for spending on medical education. Rep. Ron Klink, D-Pa., sought "explicit and stable funding" for programs that promote access to telecommunications services. And Rep. Don Young, R-Alaska, gained bipartisan support for his effort to build a firewall around programs financed out of the Land and Water Conservation Fund.

These efforts to break out of the traditional appropriations process are part of a long-term trend. The proportion of federal revenues earmarked for special or trust funds has increased substantially in recent years. At the same time, congressional discretion over the use of money collected in those funds has declined. GAO reports that the number of federal accounts with permanent appropriations authority almost doubled from 1987 to 1996.

The trend isn't limited to the United States. For years, the British Treasury resisted efforts to earmark revenues for specific purposes, arguing that earmarking limited its flexibility in budgeting. Recently, however, it's been losing the battle. Bowing to pressure from a tax-weary public, the Labour government has made a habit of promising that revenues raised from new taxes will be preserved for specific purposes. The erosion of Treasury influence is most obvious in the field of transportation policy. The Labour government says that revenue from new tolls and fuel taxes will be "ring-fenced" for improvements in roads and public transportation.

The Canadian government has found an even better way of making expenditure commitments on key policies: one-time endowments to independent organizations. In the last three years, it has transferred $7.3 billion to support longer-term spending by non-governmental agencies.

Agencies Opt Out

Policy firewalls typically protect spending in broad areas. In many countries, governments have also developed narrower, agency-specific lockboxes. Agency heads have been encouraged in these efforts by their clients, employees and legislators-who may disagree on many things, but agree on the need to protect agency funding.

Congress included a guarantee of future funding for the Food and Drug Administration in the 1992 Prescription Drug User Fee Act. The law allowed FDA to collect user fees from the pharmaceutical companies the agency regulates. Because of the new fees, FDA's budget increased by about 15 percent between 1992 and 1997, allowing the addition of almost 700 extra staff.

Proposed performance-based organizations have also attempted to buffer themselves against pressures on discretionary spending. The Patent and Trademark Office has tried to tighten control over fees collected for its services, which have increased substantially since 1990. Last year, Congress used $116 million of PTO's fee revenue to support other government programs. The House Judiciary Committee-echoing complaints from PTO, its clients and union representatives-says the temptation to divert PTO fees "has proved increasingly irresistible."

For several years, PTO's supporters pushed for a law to convert the agency into a government corporation-a step that would include better protection against diversion of fees. The PTO Efficiency Act adopted last November doesn't create such a corporation, but it does increase PTO's budget autonomy. It includes a provision allowing PTO to "exercise independent control" of its budget. Kim Muller of the International Trademark Association says he hopes this provision will "take PTO off the books of the Department of Commerce and help to block efforts to transfer the agency's money to unrelated programs." The law also gives PTO the power to retain all user fees it collects.

Supporters of another proposed PBO, the Federal Aviation Administration, have made similar attempts to opt out of the budget process. The agency, which operates the nation's air traffic control system and oversees an airport improvement grant program, is primarily funded through the Aviation Trust Fund, which draws most of its revenue from passenger ticket taxes. The fund received $10.1 billion in revenue in 1999, but only $8.2 billion was spent on aviation programs.

Critics say the diversion of trust fund revenues is contributing to an imminent crisis in air transport. In 1997, the National Civil Aviation Review Commission said that skyways would "succumb to gridlock" unless Congress changed "crippling budget rules" that prevent FAA from using money in the trust fund. The commission said that money collected in a revamped fund should be automatically appropriated to FAA, and that the agency should be exempted from discretionary spending caps-steps that would eliminate the need to "compete for funding with other modes of transportation and other government programs."

Several key legislators share the commission's concerns. Last October, the House aviation subcommittee suggested that inadequate spending was "the overriding reason" for the dramatic increase in flight cancellations and delays in 1999. Transportation Committee Chairman Bud Shuster, R-Pa., lobbied for new budget rules that would "put an end to the stealing of trust fund dollars." The new restrictions are included in the Aviation Investment and Reform Act for the 21st Century (AIR-21), approved by Congress in March.

A third proposed PBO-the St. Lawrence Seaway Development Corporation-also wants to change its mode of financing. The organization maintains locks on the St. Lawrence River and is financed through an annual appropriation from the Harbor Maintenance Trust Fund. The corporation has argued that it should be financed through an automatic annual transfer from the fund based on the volume of Seaway traffic.

Private Financing

Governments have found a third way of protecting critical expenditures: private financing of capital-intensive projects. Private financing is usually promoted as a technique for tapping the expertise of the private sector in building and managing infrastructure. However, it also serves a second purpose-forcing governments to make long-term commitments to spending on major assets.

Under private financing, businesses take over the traditional government role in financing, building and operating major assets. Cash-strapped governments don't need to make large initial investments in those assets or pay for ongoing operations and maintenance. Instead, governments make long-term contracts-often 20 or 30 years-to purchase services from the private sector.

Although private financing is most popular with state and local governments, the approach has also captured interest at the federal level. The Defense Department plans to privatize 1,700 of its utility systems and make long-term agreements to buy services from the new private operators of those utilities. DoD has also started pilot projects to determine whether private financing can be used to improve military housing. At its Fort Meade project, the department expects to make $2.1 billion in payments under a 50-year lease. In 1998, the Energy Department signed a contract that will oblige BNFL Inc. to invest $4 billion in construction of a tank waste remediation facility at Hanford, Wash. DOE made a 20-year commitment to pay BNFL a fixed unit price for processing waste at the new facility.

Some observers argue that such long-term commitments may shield the cost of keeping up federal facilities from the vagaries of the budget process. A 1998 study by the National Research Council concluded that agencies too often respond to budgetary pressures by stinting on operations and maintenance. (The backlog of maintenance for U.S. government facilities is estimated at tens of billions of dollars.) Lease payments-which are calculated to include O&M expenses-can't be skipped. Similarly, long-term agreements may provide a check against the tendency to cut new investment during periods of budgetary stress.

A Canadian report suggests private financing is an exercise of "political will" that overcomes the legislature's reluctance to make multi-year commitments on infrastructure spending. The British government has committed itself to 250 privately financed ventures, with annual payments that will exceed $5.5 billion by 2012.

The Best We Can Do?

Reinvention was supposed to give us a government that was lean and agile. Lockboxing may be giving us something else: governments that are actually less flexible, as "discretionary" spending becomes less and less discretionary.

For some critics, imposing these constraints on future governments may seem undemocratic. Removing agencies from the regular appropriations process may also rob legislators of an opportunity to hold agency officials accountable for policy decisions. If functions are spun off to private organizations, oversight could be weakened further. Important budget and operational information may no longer be available to legislators or the public.

Lockboxing can also distort spending priorities. Agencies are more likely to be protected from budget pressures if they can collect large fees from their clients, and if those clients have the political clout needed to create lockboxes. Functions with poorer and weaker constituencies may then bear the brunt of budget-cutting efforts.

Parts of government that don't produce concrete, easily measured outputs may also be at risk. Some critics suggest that an undue emphasis on private financing can skew investment to projects with easily priced benefits-such as transportation infrastructure-and away from projects that produce more distant and less certain benefits, such as education programs. Parts of government that produce no direct public services-such as policy offices-are also vulnerable.

Advocates of lockboxing say these complaints are exaggerated. They argue that the boards governing many new agencies actually promote accountability by giving clients a stronger voice. Legislation can also provide assurances that important agency information will remain publicly available.

The most powerful argument in favor of lockboxing is pragmatic. Critics of traditional budgeting arrangements argue that politicians can be myopic, with a habit of solving short-term budget problems by sacrificing long-term investment needs. Lockboxing strategies may ensure that critical infrastructure gets the attention it deserves during periods of budgetary stress.

A similar argument has already been used in many countries to justify the creation of independent central banks. Governments surrendered discretion over monetary policy because they could not resist the temptation to spur short-term growth at the expense of long-term price stability. Alan Blinder, a former vice chairman of the Federal Reserve Board, recently argued that the same logic could be applied to other parts of government as well.

This reasoning can't justify all recent experiments in lockboxing. It doesn't excuse attempts to opt out of traditional budgeting where there is no clear evidence of failure to make sensible long-term decisions. In some cases, however, lockboxing might be the right strategy: not exactly a model of democratic governance, but the best we can do in the circumstances.

Alasdair Roberts is an associate professor in the School of Policy Studies at Queen's University in Ontario, Canada. In 1999-2000, he is a fellow at the Woodrow Wilson International Center for Scholars in Washington.