The advantages and disadvantages of various possible changes to federal programs are presented in the preceding chapters of this report. But in considering whether to close a Cabinet department—and if so, which of its programs to terminate, move unchanged to a new department or agency, or move in a reduced, altered, or combined form—lawmakers would face a number of questions beyond those directly relating to the programs’ merits. This section discusses three. First, if a program was moved, what would be the transition costs and the long-term costs or benefits? Second, if a program was terminated, to what extent would it be replaced by efforts by the private sector or by state or local governments? And third, what steps would be legally required to terminate a program, and what types of termination costs would be incurred?
Costs and Benefits of Moving a Program
Programs may be moved from one administrative home to another for reasons other than the pursuit of budgetary savings. Indeed, the four Cabinet departments created since the 1970s—Energy in 1977, Education in 1980, Veterans Affairs in 1989, and Homeland Security in 2002—were formed primarily to facilitate coordination and communication within the government or to provide greater prominence to certain activities or policy areas.
Whatever policymakers’ motivations for moving a program, doing so would probably entail significant transition costs in the short run and might increase or decrease costs in the long run. The transition costs would include physical moving expenses, rental payments on offices at two locations until the lease on the original space expired, and costs to integrate administrative systems for acquisitions, asset management, human resources, budgeting and planning, and financial management. Costs that are less visible in budgets could be incurred as well; moving could disrupt an agency’s operations, for instance, or lead to conflicts and coordination problems because of differences in organizational culture. The creation of the Department of Homeland Security serves as an example of the challenges that arise from integrating many existing governmental units. Ten years after the department’s creation, a former commandant of the Coast Guard (which had been transferred from the Transportation Department to DHS) noted that budget presentations by various departmental agencies reflected the different appropriation structures that they had used before the department existed, making it “difficult to clearly differentiate, for example, between personnel costs, operations and maintenance costs, information technology costs, and capital investment.”
In the long run, spending on a transferred program would be determined by the amount of appropriations it receives (for a discretionary program) or eligibility rules and formulas (for a mandatory program)—but the cost of achieving a given level of program outputs could go up or down as a result of a transfer. Costs for administrative support activities could decrease if a transferred program was administered more efficiently—with fewer people or less office space, for example—in its new home. In addition, costs for direct program activities, such as interactions with beneficiaries, could decrease if the transfer allowed a reduction in efforts that were redundant or at cross-purposes with those of other programs. The Government Accountability Office has issued a series of reports on “fragmentation, overlap, and duplication” in federal programs, noting, for example, that the Small Business Administration and the Departments of Commerce, Housing and Urban Development, and Agriculture collectively administer 80 economic development programs, including 21 that focus on supporting efforts of entrepreneurs. However, overlap among programs is not necessarily inefficient, and simply reducing spending on overlapping programs may reduce the total output of the programs—for example, total benefits to recipients, in the case of grant programs. Lawmakers might or might not view that result as desirable. Further, administrative and program costs of a transferred program per unit of output could be higher if the administrative structure in the new location was more unwieldy, if the cultures of different operating units were difficult to combine, or if waste, fraud, or abuse increased because management capacity was overtaxed.
The benefits and costs of shifting a program might depend on the agency or department selected as its new home. Two relevant factors are the compatibility of organizational cultures and the availability of suitable infrastructure, such as field offices and data systems. The choice of a new administrative home may not be clear-cut. For example, the Defense Department would seem to be an appropriate new home for the defense-related activities currently conducted by the Energy Department, but the separation of responsibility for nuclear weapons themselves and for the systems and personnel that would deliver those weapons has been a feature of federal policy since 1946. As another example, making the Internal Revenue Service (IRS) the new home for the Education Department’s student financial aid programs would also present both advantages and disadvantages. On the one hand, the IRS already collects financial data from households (much of the same data that the Free Application for Federal Student Aid requires, in fact) and both collects and disburses funds. On the other hand, a significant fraction of students and families who want financial aid might be unwilling to submit additional financial information to the IRS. The advantages and disadvantages would need to be weighed and compared with those of moving the financial aid programs elsewhere—for instance, to the Department of Health and Human Services, which was originally the Department of Health, Education, and Welfare.
Responses by the Private Sector and State and Local Governments
If the federal government eliminated or significantly reduced one or more federal programs, the private sector and state and local governments might increase their own activities in the affected areas. However, the extent and nature of those responses would differ substantially across programs. In many cases, the responses of the private sector and of state and local governments would replace only a small share of the eliminated federal benefits or services, primarily because of differences in priorities and constraints on resources.
The Private Sector. The nature of the goods or services previously provided by a terminated federal program would greatly affect the extent to which the private sector would step in to replace that program. In cases in which a program’s goods and services were primarily commercial, in the sense that others would voluntarily pay enough to cover the cost of producing them, the private sector might fully replace the federal role. One example is electricity generation. Generating facilities owned by the Tennessee Valley Authority or by the various power marketing administrations in the Energy Department could be transferred or sold to private firms or to the states. However, selling assets that generate income would not necessarily improve the government’s long-term financial position, although it would generally improve the budget deficit in the years when sales occurred.
Conversely, in cases in which users (or some users) would not voluntarily pay enough to cover the cost of producing a program’s goods and services, the private sector would be unlikely to fill the federal role if the program was eliminated. Some such cases involve goods or services that are produced most efficiently by a single provider and then can be shared by many consumers at little incremental cost—the collection and dissemination of data of broad public interest, for example. A private firm might not find it worthwhile to conduct the surveys underlying the consumer price index if it could not restrict the results to those who paid for access. Also, such information would be most efficiently collected by a single entity, rather than competing ones, so if that entity was private, policy issues regarding regulation of monopolists would arise.
Other cases in which the private sector would probably not fill the role of a terminated federal activity involve goods or services whose value depends on the government’s sovereign power. For example, no one would pay for a license from one private provider to use a portion of the electromagnetic spectrum if a second private provider could issue the same license to someone else.
Still other cases in which it could be hard for the private sector to fully replace federal programs involve activities that serve noncommercial purposes along with commercial purposes. Consider federal insurance products, such as the flood insurance offered by the Department of Homeland Security and the crop insurance sold by the Agriculture Department. The flood insurance program includes a substantial effort to map flood risks, which would be costly for private insurers to continue; indeed, they might be less willing to offer flood insurance in the absence of that effort. Federal crop insurance is heavily subsidized, serving not only to reduce the variability in farm producers’ incomes but also to raise those incomes, on average. How large a market would exist for private crop insurance in the absence of the federal coverage is unclear—and because such insurance would not be subsidized, it would not raise average incomes.
In some cases in which federal programs mix commercial and noncommercial purposes, the private sector would probably replace part of a federal program if it was terminated. Student loans are an example. The federal government’s sovereign powers allow it to enforce loan contracts in ways that private lenders cannot; for instance, it can garnish the income tax refunds of a borrower who defaults. Private lenders therefore concentrate on students whose risk of default is thought to be lower, such as those attending law or medical schools. If the federal loan programs were eliminated, the private lenders would expand the scope of their lending, but they probably would not serve all students who would have borrowed from federal loan programs.
State and Local Governments. Eliminating a department while restructuring, scaling back, or abolishing its programs might prompt stronger responses from state and local governments than from the private sector, because the bulk of federal spending is associated with programs that seek to achieve noncommercial purposes rather than commercial purposes. In particular, some state and local governments might want to provide benefits or services within their jurisdictions that were formerly provided by federal programs. Several factors would probably determine the extent to which state and local governments replaced the federal role.
First, the greater the local, as opposed to national, benefits of federally funded activities, the more that state and local governments would tend to replace lost federal funding. In contrast, state and local governments would do less to replace reduced or terminated programs that had primarily provided benefits beyond their boundaries. For instance, programs that fund basic research, such as the research conducted at the Energy Department’s national laboratories, provide benefits that fall outside any particular state.
Second, state and local governments would probably do more to replace lost federal funding in program areas that already had substantial involvement by those governments than in areas that did not. Examples of areas where state and local governments currently play large roles include primary and secondary education and transportation infrastructure.
Third, state and local governments would step into roles being vacated by federal programs more vigorously when their own fiscal situations were stronger than when they were weaker. State and local governments would face their own trade-offs in deciding whether to offset forgone federal benefits or services, and if so, how to reduce spending elsewhere or raise additional taxes or other revenues. (Similar choices among policy priorities arise when state and local governments receive federal block grants with few restrictions on the use of the funds.) Those trade-offs could be particularly difficult for state and local governments that had previously received federal grants that significantly redistributed income to their jurisdictions from elsewhere in the country. Another challenge is that most states have balanced-budget requirements, which would make it particularly hard for them to replace federal programs whose spending increases during economic downturns, because such downturns reduce state revenues.
Fourth, state and local governments whose policy preferences regarding certain benefits and services were more closely aligned with the preferences of the federal government would tend to replace a larger share of any step-down in federal support. Having the preferences of state and local governments play a larger role in determining policies would allow those governments to design programs differently, which could be more efficient when the benefits and costs of a program were confined to individual states or when experimentation and variation from state to state yielded valuable information for the nation as a whole. Conversely, it could be less efficient when the decisions made in one jurisdiction had significant consequences elsewhere. Moreover, greater flexibility in designing programs at the state level could undermine a federal objective of uniform standards for all states.
Legality of Program Termination
Eliminating a federal program would involve a complex set of policy choices but generally would not pose insuperable legal obstacles. The Congress could terminate some programs simply by not appropriating funds for them. To end other programs, the Congress would have to modify related laws. In either case, costs would continue for existing contracts and other legal requirements, and certain new costs would be incurred, such as the cost of paying for accrued annual leave and unemployment benefits to federal employees whose work had ended.
Constitutional Requirements. Only a few programs fulfill one of the federal government’s constitutional requirements, but terminating such a program could violate the Constitution, unless the Constitution was amended or the requirement was assigned to another entity. For instance, the Constitution requires that the government conduct a decennial census; eliminating the Department of Commerce would require the federal government to make alternative plans to meet that requirement.
A second kind of constitutional obstacle involves the effect that eliminating certain federal programs could have on the protection of constitutional rights. For example, the Sixth Amendment guarantees the accused in a criminal prosecution the right “to have the Assistance of Counsel for his defence,” which courts have subsequently interpreted to require the provision of counsel to the indigent. Eliminating the public defender program could therefore lead to violations of the Sixth Amendment.
Requirements of International Treaties and Agreements. Some federal programs are responsible for implementing obligations under treaties or agreements that the United States has entered into with other countries. International treaties typically have weak legal enforcement mechanisms or none at all; however, eliminating programs that fulfill treaty obligations could have consequences for U.S. citizens. For example, a determination by the World Trade Organization that the United States had failed to comply with its treaty obligations could result in the imposition of tariffs by other governments against U.S. exports.
Statutory Requirements. Most spending programs could be eliminated by modifying one or more laws, such as those that directly established and financed the programs. Terminating some federal activities, however, would require changes to other programs with which they interact. To eliminate the Bureau of Labor Statistics, for instance, lawmakers would need either to reassign the responsibility for calculating certain statistics, such as the consumer price index, or to amend the tax code and federal programs that are currently indexed to those statistics.
Contractual Requirements. The Congress could eliminate programs involving contracts that imposed requirements on the federal government, but doing so would probably entail costs for canceling or renegotiating the contracts or for litigating or settling lawsuits for breach of contract. In some cases, the federal government might be able to achieve savings by terminating a contract or otherwise renegotiating with the other parties to the contract, though it would probably avoid only a fraction of the remaining costs owed under the contract. In other cases, including legal settlements that the government had already made, the costs would probably be unavoidable. In the 1980s, for example, the Department of Energy entered into contracts with utilities to dispose of their nuclear waste, but it missed the 1998 deadline for accepting such waste. The federal government has entered into settlement agreements requiring that it reimburse dozens of those utilities; the reimbursements would have to be made even if the Department of Energy was closed.
Tort Liability. Some federal programs have generated legal obligations that the government cannot easily dismiss without incurring tort liability. For example, eliminating the Department of Energy’s cleanup efforts at sites contaminated by the production of nuclear weapons could lead to liability for environmental damage. Some of the liability (and litigation) costs might be avoided if lawmakers changed the relevant environmental laws and immunized the federal government from lawsuits.