The Ultimate Price

If this sounds like an elaborate fantasy dreamed up by White House management hawks, it is. But now the Bush administration is moving ahead with legislation designed to make it a reality. The two-part proposal would bill agency programs for all the resources they use-including support services, capital assets and environmental cleanup-and make them pay the full pension and health care costs of their employees Like activity-based costing, the proposal's premise is that agencies would be better managed if the full cost of running their programs was clear. But the plan also holds program managers accountable for their costs by changing budget rules that advocates say have long obscured the full cost of federal activities. Most agency programs aren't billed for the capital assets and support services they use. These overhead costs are paid through separate budget accounts at the department level or by another agency, such as the Treasury Department.

Because program budgets don't pay for all resources, the argument goes, program managers have an incentive to over-use capital and support services.

The Bush proposal would fund programs for the full cost of their operations, meaning departments would no longer receive separate appropriations for support services and capital assets. To track how agencies use these resources, the plan would create a fund at each department that program managers would use to buy what they need, according to administration officials familiar with the plan. Managers could then buy support services from the government or the private sector through the funds.

The Office of Management and Budget is still refining this proposal, but a related measure was submitted to Congress as part of the administration's Managerial Flexibility Act last fall. This proposal would make agencies pay the employer's share of pension costs for employees in the Civil Service Retirement System and the health benefit costs of all their retirees. Right now, Congress automatically funds these benefits, but the legislation would make agencies foot the bill. OMB directed agencies to include these costs in their fiscal 2003 budgets, which added $9 billion in discretionary spending to the administration's overall budget request.

If enacted, the proposals would have far-reaching effects on everything from how agencies buy new buildings to how they conduct job competitions with the private sector. Under OMB Circular A-76, public-private job competitions are decided mostly by cost-the team with the lowest bid generally wins. Since agencies typically cannot account for the full cost of their programs, A-76 rules require agency competitors to add an automatic 12 percent to their bids. By showing a program's overhead costs, the Bush proposal would make this step unnecessary, says Angela Styles, administrator of OMB's Office of Federal Procurement Policy.

"A large part of the reason for the A-76 Circular is to figure out what it costs you to perform a particular function," Styles says. "If you take the second step in our proposal, it moves other costs, environmental cleanup, capital assets, etc. to the agencies, so they are accounting for them within the appropriate program."

Property management would change as well. Federal budget rules call for full, upfront funding of capital projects. This can make it difficult for small agencies to win congressional approval for major capital acquisitions because these projects cause a big spike in their budgets. The Bush proposal would make it easier by creating capital acquisition funds at each department. If an agency wanted a new capital project, such as a computer network, Congress could allow the agency to borrow money through its capital acquisition fund to purchase it. Agency programs would then make payments back to the fund, based on their use of the network each year.

But the measure could present challenges for agencies that own extensive property. For example, suppose Congress appropriated $30 million for a new medical center for the Veterans Affairs Department. Under current practices, VA's budget would simply increase by $30 million. For managers in the field, the center would be a "free gift," says Jake Gallun, director of VA's investment and enterprise development service. Under the Bush proposal, a VA capital acquisition fund would borrow $30 million for the center that would be gradually paid off by the VA programs that used it.

Assigning these costs to programs would make them appear more expensive, which has already raised the ire of federal unions, who argue the proposal is nothing more than a bookkeeping shell game designed to put federal employees at a disadvantage in job competitions. Congress could protest if pet programs begin to look too pricey, or if the proposal disrupts the traditional funding prerogatives of congressional committees. "It really lets managers manage and presumes some decrease in congressional micromanaging," says one government official. For this reason, congressional aides think the biggest challenge to the proposal will be convincing Congress to go along.