This paper asks whether labor and support service costs can be charged uniformly and appropriately to programs so that:

• resources used by each program can be compared with the results achieved; and
• there is no bias in favor of using one input over another because it is subsidized.

Discussion

Federal programs are not uniformly and appropriately charged for all of the resources they use so that their full cost can be compared with the results achieved. In most cases, this is because some of the cost is paid at the Bureau or Departmental level, or by a central agency such as the Department of the Treasury. These costs, although they are included in the budget, are paid from accounts that are not associated with the program. The kinds and amounts of resources that are provided centrally vary idiosyncratically from one program to another.

• In some Departments and agencies, salaries and expenses are charged to the programs' budget accounts. In others, they are charged to a central account under the control of the Secretary. In still others, some salaries and expenses are centrally funded and others are charged to the programs' budget accounts.

• Although the cost of pensions for the military and for civilian workers hired after 1984 are fully accrued and paid by agencies to the military and civilian retirement funds, agencies are charged only a fraction of the accruing cost of pensions for workers hired before 1984 who are part of the Civil Service Retirement System (CSRS). Agencies are not charged any of the accruing cost of civilian retiree health benefits; military retiree health benefits are charged to the Department of Defense on a cash basis rather than an accrual basis. As a consequence, agencies are now charged about $17 billion less for workers' benefits than the cost accruing to the Government

• In addition to their program activities -- which provide goods, services, grants, transfers, or credit to the public in order to carry out the agency's mission -- agencies engage in support activities, which provide goods and services to the agency's own programs and sometimes to programs in other agencies. Support activities are wide-ranging,⁽¹⁾ and in many cases are financed by their own direct appropriations and provided without charge to the programs in their own agency and even in other agencies. Others are provided for a price by agency franchise, working capital, or other revolving funds, but even when a price is charged, it may not cover the full cost of the goods and services provided to programs -- in part because the support activities themselves are not charged for the full cost of the resources they use or get some financing from direct appropriations, and in part because their prices may include cross-subsidies and other pricing strategies to expand their volume of business.

This issue paper and the one on Capital Acquisition Funds, taken together, sketch out the Budgeting for Results Initiative, proposed on page 44 of the FY 1999 Budget. The Initiative would allocate funding to program budget accounts to cover charges for the full amount of resources used. Program managers would then be accountable for using these resources efficiently to achieve results.

For labor and support services costs, the following changes would be made. Salaries and expenses would be charged to the budget accounts of operating programs, or in the case of grant and transfer programs, identified in separate program-and-activity lines of a departmental salaries and expenses budget account. Legislation would be developed to charge agencies/programs for the full accruing cost of CSRS and small retiree pension systems, and for the accruing cost of retiree health benefits (which is not now accrued in the budget, although the accrued cost is required in financial statements). Veterans disability benefits might also be accrued in parallel with workers' compensation. Support services would be required to be financed via revolving funds, as many now are. An objective would be to make such funds increasingly self-supporting and competitive -- with each other and with the private sector. Appropriations to the agency head or Chief Financial Officer would finance support for Departmental oversight and perhaps core systems.

Pros:

• Budgeting would be more transparent, with uniform cost comparisons among programs, and would facilitate allocation of resources to the programs that are most efficient and/or most successful in achieving results.

• Program managers would have control over total program resources and would have both the freedom and the responsibility to manage them efficiently and effectively.

• The free or subsidized resources that idiosyncratically bias choices toward excessive use of labor, capital, or support services would no longer create such biases.

• Program managers would have consumer bargaining power for the quantity, quality, timeliness, and cost of services required.

• This is the most efficient way for the Government to acquire services.

• Budget allocations will change, and programs will appear more expensive than they are now as central subsidies are removed.

• More extensive use of revolving funds for support services will require additional financial systems support and financial management expertise.

• Support operations would have to be planned with service demand fluctuation in mind, e.g., with a portion of employees without permanent tenure, some rented space and equipment, and contracting out for some services.

Definition of Self-sufficiency

Self-sufficiency for support services is a general goal of the Initiative, but the criteria for achieving it can be more or less stringent.

• Appropriations for Departmental oversight could cover a larger or smaller array of functions for which the Secretary would be permitted to select the most appropriate support providers. Alternatively, appropriations could be given to the Chief Financial Officer (who now supervises many or most support services) or other officials to finance some core services.

• Support funds could be permitted to build reserves to finance a deficit or to borrow from Treasury for that purpose.

• Support funds could be permitted to request appropriations to capitalize new ventures or to borrow from Treasury for that purpose.

• Support funds could be required to charge at least full variable cost and to break even on each line of business or permitted to cross-subsidize so long as they are self-sufficient in the aggregate.

Budgeting for Results:  In preparing the budget, the Administration
had, for the first time, agency strategic plans, annual performance
plans, and performance measures to help decide how to allocate
resources. In general, however, the budget structure and charging
practices do not make it easy to match costs with a specific program.
First, the budget does not charge all of a program's resources to that
program; instead, the budget subsidizes programs by paying for certain
activities centrally. Second, not all budget accounts are as well-
aligned as they might be with the programs they finance. As a result, in
some cases, the quality of budgeting, management, and resource
acquisition all suffer.
    Good budgeting is predicated on the ability to compare costs and
benefits, at least roughly, across all programs every year. In some
cases, current practices distort such comparisons. Good management
requires that managers focus on, and are held accountable for, getting
the best results for the resources they have. Managers should be free to
allocate resources as they see fit, and to obtain competitive,
performance-oriented procurement.
    To better integrate budgeting with performance planning and reporting,
as GPRA envisions, OMB will work with agencies to review their budget
account structures and, in consultation with the Budget Officers
Advisory Council and the CFO Council, develop legislation to enable
agencies to charge programs' accounts uniformly and comprehensively for
the resources they use. As these proposals take shape, OMB will consult
with the Congressional Budget Office, the General Accounting Office, and
congressional committees on next steps.

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