Fiscal Policy in 2009 – A Review

12/21/2009

Federal Budget Policy, Spending Transparency, Revenue & Spending, Government Performance, Government Matters

Federal fiscal policy has been front and center throughout 2009 as the Obama administration and Congress have gone to extraordinary lengths to bring the country's economy back from the brink of disaster. It seems like every week, we saw a crucial vote or major policy proposal released. A massive Wall Street bailout, an economic stimulus effort with unprecedented transparency provisions, an attempted reform of the financial regulatory system, a new presidential effort to reform the contracting system, significant gains in proper enforcement of the tax code, and a Congress that continued to fail at passing appropriations and tax bills in a timely manner have made for a pretty exciting, if not chaotic, year. Below is a review of some of the major developments in federal fiscal policy in 2009 from an OMB Watch perspective.

American Recovery and Reinvestment Act (Recovery Act)

Congress Passes Stimulus Law
When President Barack Obama signed into law a $787 billion economic stimulus package on Feb. 17, he also approved an unprecedented set of transparency and oversight provisions. The law called for the establishment of a Recovery Accountability and Transparency Board to oversee the disbursement of more than $500 billion in federal cash outlays and a website (Recovery.gov) to publicly track the spending.

With states reeling from budget shortfalls, the Recovery Act funds were timed to stop many layoffs within states and help states address needs of people who were facing economic hardship. Funds for Medicaid, unemployment assistance, and other direct assistance went out the door quickly. Once states submitted plans, the federal government also began distributing funds for the Education Stabilization Fund to states. With remarkable speed, federal agencies and states worked collaboratively to handle these new funds.

OMB Guidance Put in Place Quickly
Within one day of Obama signing the Recovery Act into law, the Office of Management and Budget (OMB) released 62 pages of initial guidance to agencies on how to implement the law. On April 3, OMB updated the guidance and finalized it on June 22. Thus, within four months, OMB was able to develop a government-wide plan for implementing the Recovery Act, impressive by any standard. While speed and completeness were applauded, there were numerous concerns about the content of the guidance. The February version of the guidance did not provide for centralized reporting, and only provided for two tiers – with only the prime recipient and their sub-recipients reporting on use of Recovery Act funds. Critics maintained that without centralized reporting, it would be difficult to aggregate data about spending. Additionally, without the ultimate recipient reporting on how the money was being used, the public would be missing vital information. While the final guidance still lacks true multi-tier reporting, it does provide a useful framework for reporting to a central data collection service, called FederalReporting.gov. The design of the system is also scalable to ultimately have all recipients of Recovery Act funds, including multi-tier sub-recipients, report directly to the federal government – something OMB Watch advocated for in early 2009.

Data Quality Issues
The release of the first round of Recovery Act data on Oct. 30 marked the first time that recipients of federal funding have been required to report to the federal government on their use of the funds in a timely and transparent manner and the first time that sub-recipients reported such information. This represented an important milestone in government transparency and accountability. However, poor data quality, Recovery.gov's limited functionality for analysis, and an unclear definition of "full-time equivalent," which is the standard for reporting jobs saved or created under the Recovery Act, hindered the promise of this new era of fiscal transparency – at least for this first round of recipient reporting. The Recovery Board and OMB are rumored to making improvements to the reporting structure and to the guidance for future quarterly reports from recipients. Recipients of Recovery Act funds are required to report on a quarterly basis on the use of their funds; the next round of recipient reports will be made available on Jan. 30.


Budget and Appropriations

Congress Finally Passes FY 2009 Appropriations Almost Six Months Late
After a couple of days of voting down Republican-offered amendments, the Senate finally agreed to end debate on a $410 billion omnibus spending bill for FY 2009. After the 62-35 vote, the Senate ended the FY 2009 appropriations process by a voice vote in early March (President Obama quickly signed to bill into law the next day). The bill funded government for the next six months. Congress only acted on three appropriations bills in FY 2009 (Defense, Homeland Security, and Veterans Affairs), covering the rest under a continuing resolution (a temporary extension of current funding levels). Democrats in Congress felt they could not resolve their differences with former President Bush and opted in December 2008 to continue funding the government under the continuing resolution until he left office. Work on completing appropriations legislation resumed in earnest during the week of Feb. 23, and Obama signed the final bill on March 6.

FY 2010 Appropriations Still Unfinished
Although the House passed all of its fiscal year 2010 appropriations bills on time, the Senate was not able to do so. With the beginning of the fiscal year rapidly approaching in September and eight out of twelve appropriations bills still unfinished, Congress was forced to pass not one, but two continuing resolutions, keeping the government running as legislators tried to finish all the appropriations bills. In early December 2009, as the second continuing resolution ran down, House and Senate appropriators agreed to a $446.8 billion omnibus bill, combining all the unfinished bills, save one – the bill funding the Department of Defense. Work on that appropriations bill is still ongoing but should be finished by the end of 2009.


Troubled Asset Relief Program (TARP)

COP and SIGTARP Push for More Transparency
For most of the past year, the Congressional Oversight Program (COP) and the Special Inspector General for TARP (SIGTARP), two government offices which are charged with conducting TARP oversight, have been pushing the Treasury Department to be more transparent in its TARP operations. In particular, both COP and SIGTARP recommended that institutions should be required to report regularly on their use of TARP funds, and SIGTARP even went as far as surveying individual TARP recipients. COP and SIGTARP used the results of the survey to show that more TARP transparency is feasible.

PPIP Conflict of Interest Problems
Despite being created over a year ago, TARP still has not been used to actually alleviate the strain of troubled assets at the heart of the near-collapse of the financial sector. The Obama administration rolled out a revamped Public-Private Investment Program (PPIP) the week of Oct. 5 – the program is designed to accomplish the original goals of TARP. However, the program still contains too little disclosure of conflicts of interest among those charged with implementing it.


Contracting

Defense Acquisition Reform
In May, the president signed the Weapon Systems Acquisition Reform Act of 2009 into law. The legislation's intent is to overhaul the Department of Defense's (DOD) acquisition process for major weapons systems. One provision establishes a high-level position within DOD, the Director of Independent Cost Assessment (DICA), to review weapons programs. Another provision requires program cancellation for excessively costly weapon systems, and extra certification of programs that begin to exceed cost estimates. However, Congress did not provide the DICA with a sufficiently wide jurisdiction of review, and the Secretary of Defense can override the cancellation of a program deemed "essential to national security." Because of these loopholes and restrictions, this otherwise well intentioned law will likely fall short of its intended goals.

Presidential Memo on Contracting Reform
In March, the White House released the Presidential Memorandum on Government Contracting that directed OMB to collaborate with federal agencies to review existing contracts in the short term and then to develop new guidance to help reform future government contracting. In late July, OMB released the first set of memos to agencies requiring review of current acquisition processes with the goal of reducing contract spending over the next few years. Within this first set of memos, agency heads are tasked with two assignments. The first is to review existing contracts and acquisition practices and develop a plan to save seven percent of baseline contract spending by the end of FY 2011. The second is to reduce by 10 percent the share of dollars obligated in FY 2010 under high-risk contract vehicles, such as noncompetitive, cost-reimbursement, time-and-materials, and labor-hour contracts.

In late October, OMB released a second set of memos addressing longer-range goals for agencies to improve contracting, including requiring agencies to develop strategic five-year plans. It will be several years before the results of these efforts can be evaluated, and while there are still restrictions on contracting transparency, the indication is that these policies will have a net positive effect on federal contracting.


Estate Tax

The debate over the estate tax has been a rollercoaster ride in 2009, and with the tax set to expire in January 2010, the stakes could not be higher. In the spring, Sens. Blanche Lincoln (D-AR) and Jon Kyl (R-AZ) successfully offered an amendment to the Senate budget resolution that would increase the exemption of the tax to include only those individuals with an estate worth $5 million or more ($10 million for a couple) and drop the rate from 45 percent to 35 percent. The conference committee did not include the Lincoln/Kyl language in the conference report and thus killed the measure. The estate tax issue remained silent until late in the fall when rumors began to surface about congressional designs. In early December, the House passed a permanent extension of the current estate tax, which taxes individuals with estates larger than $3.5 million ($7 million for a couple) at a 45 percent rate on all assets above the exemption. Despite this action in the House, the Senate has yet to take action on the estate tax. With only a few days left before Congress adjourns for the holidays, it is unclear if anything will end up passing the upper chamber.

If there is no Senate action, the tax will expire in 2010. It is set to return to the pre-Bush tax cuts level in 2011. This would be at an exemption level of $1 million ($2 million for couples) and a higher tax rate.


IRS Enforcement

IRS Ends Private Tax Collection
In March, the Internal Revenue Service (IRS) ended its use of private companies to collect the tax debts of citizens. This was a positive change in the collection policies of the IRS, as private collectors lacked the flexibility to work with individuals to create plans to pay taxes owed. Moreover, the program unnecessarily put taxpayers' sensitive personal information at risk and, according to government experts, was a waste of federal resources. OMB Watch had been a vocal critic of the IRS's private tax collection program and worked over the past three years to shift those resources to more efficient enforcement practices at the IRS.

IRS Gets More Funding
During the appropriations process this spring, Congress allocated increased funds to the IRS. Out of the $12.2 billion Congress allocated, $5.5 billion went to enforcement activities. This represented an increase of $386.7 million, or seven percent, over FY 2009 levels, and was equal to President Obama's request. This much-needed increase in IRS funding represents a reversal in the lethargic spending levels approved during the Bush administration. These additional funds, along with the aid of new tax treaties, will give a big boost to the IRS's efforts to track down tax cheats, both domestically and internationally.

The UBS Tax Settlement
In August, the Swiss government came to terms with U.S. demands that the Swiss bank UBS turn over information on U.S. clients suspected of tax avoidance. Along with revealing information about the identities of some 4,450 American UBS clients, the arrangement between the two governments included a new information exchange agreement. The agreement will allow the IRS and the Department of Justice (DOJ) to work with the Swiss government in prodding other Swiss financial institutions to disclose the identities of Americans suspected of hiding money in Swiss accounts. The agreement showed unexpected early results in tax enforcement at the IRS, as over 14,000 U.S. citizens came forward to take part in an IRS amnesty program to reveal hidden assets overseas.


Performance

After the government's first-ever Chief Performance Officer – Jeffrey Zients – was confirmed by the Senate in June, the Obama administration began its process of overhauling government performance systems. It was made clear throughout the first half of 2009 that the new administration was not happy with current performance measurement systems, including the Program Assessment Rating Tool (PART). OMB Director Peter Orszag and Zients both made public statements about changes to come with PART. However, as of this writing, OMB has not revised PART.

Further, in October, OMB released a memo to federal agencies that outlined a new initiative to bring a renewed emphasis and additional resources for program evaluation within agencies. The three-part plan included giving better access to agency program evaluations on the Internet that are both in progress and planned for the future; re-launching an interagency working group on evaluations; and a voluntary pilot program to provide additional resources to fund rigorous program evaluations or strengthen evaluation capacity within agencies. Although the initiative is not a comprehensive plan to reinvigorate performance measurement in the federal government, it is a positive first step toward creating real improvement in government performance.

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