Going on a Cash Diet

Anyone who has ever gone on a diet knows you need a plan to succeed. Simply saying you’re going to lose 20 pounds is a recipe for failure. Success depends on putting in place concrete steps, changing hard-wired habits and developing better ones—easier said than done.

The same principles apply to wrestling with a more than $3.5 trillion federal budget, a $1.3 trillion federal deficit and a $15 trillion national debt—all in desperate need of downsizing. Agencies and federal managers are used to doing more with less resources depending on the fiscal and political realities confronting them, but this time is different. There’s no denying the numbers on the scale any more: the government is officially morbidly obese when it comes to spending. And that is translating into smaller portions for agencies in fiscal 2012 and beyond to restore the country’s fiscal health.

“The key leaders in this have to be part of the conversation; they have to set the vision,” says Catherine Nelson, a senior vice president at the consulting firm Booz Allen Hamilton. “They have to understand it will be hard and make the hard choices.”

Making hard choices when it comes to reining in the federal budget has not been easy for Congress or the past two administrations. During the last decade, the Sept. 11 attacks and two wars created a whole new department (Homeland Security) and ratcheted up defense spending. In fiscal 2011 alone, the government subsisted on eight continuing resolutions, and budget battles reached epic proportions. Congress and the Obama administration managed to agree on legislation at the end of December to fund the government through the end of fiscal 2012—an achievement overshadowed by the heated debate over extending the payroll tax holiday.

The fiscal 2012 budget includes $7 billion less in discretionary funding than fiscal 2011 levels and $98 billion less than the president’s request. Weighing those numbers against the $15.1 trillion national debt, the cuts can seem meager, although not for those federal managers whose programs took a hit. Or if one considers that mandatory spending—which includes Social Security, Medicare, Medicaid and federal employees’ benefits—constitutes two-thirds of the federal budget, dwarfing the amount of discretionary funding that keeps most agencies and their programs afloat. So far, lawmakers and the administration have failed to successfully tackle entitlement spending, making discretionary funding more vulnerable than ever. 

But managers shouldn’t view the prospect of budget cuts primarily as a glass half empty. Budget-cutting offers a real opportunity to improve government if managers and leaders think strategically about where to put their diminished resources, observers say. “The dire budget situation also may present a rare opportunity for leaders to make changes that weren’t politically palatable before or even possible during normal times,” said a fall 2011 report from the nonprofit Partnership for Public Service. “The situation presents a chance to rethink and restructure agency operations to serve the public more effectively.” That process cannot happen in a vacuum, however. “Budget people have limited knowledge across lines,” says Nelson. “The planning that has to happen has to happen pre-budget. Planning has to cross organizational lines and be focused on the [agency’s] mission.” Agency leaders need to set those expectations before the annual appropriations process begins and ensure collaboration and communication occur regularly in every direction of the management hierarchy.

Government leaders and federal managers really don’t have much else in the way of sensible alternatives at this point. The debate over federal spending will continue well into the decade whether or not automatic, across-the-board cuts take effect beginning in 2013. “You can always count on Americans to do the right thing—after they’ve tried everything else,” British Prime Minister Winston Churchill famously said. House Budget Committee Chairman Paul Ryan, R-Wis., mentioned that quote during a December event sponsored by the Peterson-Pew Committee on Budget Reform and applied it to the government’s current economic predicament. “We know what it looks like if we don’t get this right,” Ryan said before quoting Churchill. “Europe.”

Budget Politics

When it comes to smaller budgets, rarely does one size fit all, which is why the specter of automatic, across-the-board spending cuts are troubling to many. The joint select committee on deficit reduction could not agree on $1.2 trillion in savings before its self-imposed Nov. 23, 2011, deadline, triggering sequestration, which is set to kick off in 2013. The appropriations process also is not very strategic and in many cases, is heavily influenced by politics, which complicates everything.

“Over time, it has become more and more of a political game,” Charles O. Rossotti says of the budget process.
Now a senior adviser at the Carlyle Group, Rossotti led the Internal Revenue Service in the 1990s when the agency underwent a significant restructuring and streamlining process that included budget cuts. “The politicization is driving down into every detail.” And the politics, whether from the White House or Congress, can make it difficult for federal managers who are responsible for budgets to do their jobs effectively. “You’ve got to look at it as, my job is to make the best of what I’ve been given,” he says. Managers approach budget-cutting with a strategic eye on the overall mission, but ultimately it’s up to the political leadership to decide where the ax falls.

Ted Sniffin, a senior vice president at Booz Allen Hamilton, also talked of how politics can affect decisions to cut programs or leave inefficient ones in place. Sniffin, who works with Defense Department clients, said he participated in a project three years ago in which his team identified areas where the department could consolidate functions and save millions of dollars. Defense officials agreed with the recommendations, but told Sniffin they couldn’t implement them because it was too hard politically. The climate has changed since then-Defense Secretary Robert Gates announced his departmentwide efficiency initiative in 2010, and his successor, Leon Panetta, picked up that mantle. Sniffin says the Defense officials he has worked with view saving taxpayer money and doing things more efficiently “as a patriotic duty.” But politics and patriotism, or even
pragmatism, don’t always fit together.

If sequestration actually occurs (some lawmakers are calling for a repeal of the automatic cuts), then the ax will land on the entire government, with Defense absorbing half those cuts over the next decade. The Pentagon already must chop $450 billion from its budget over the next 10 years, and many, including Panetta, believe an additional $500 billion in cuts would have a disastrous effect on the department and national security.

President Obama will unveil his fiscal 2013 budget proposal soon and most expect it to be lean, especially in the area of defense spending. As far as fiscal 2012 is concerned, however, Defense emerged as a winner in the budget competition. The department’s discretionary funding for fiscal 2012 is $518.1 billion, an increase of $5.1 billion over fiscal 2011. That figure also includes a 1.6 percent pay raise for service members this year, which the Congressional Budget Office estimates will cost $1.2 billion. The Veterans Affairs Department, whose mission and workload will spike as a result of the end of the Iraq war, also got a boost in its fiscal 2012 appropriations. The department received $58 billion in discretionary spending, an increase of $2.1 billion over 2011.

Many agencies though took budget hits this year, including the Environmental Protection Agency, Federal Emergency Management Agency, Homeland Security and the State Department. The IRS saw its 2012 budget decrease by 3 percent over fiscal 2011. “When do we get to the point where we are no longer cutting fat, and we are cutting bone?” says Ken McDaniels, an IRS employee in New York and conference chairman for the Federal Managers Association. He argued that budget-
cutting does not make agencies or programs more effective. “You can’t keep saying you are going to eliminate waste,” he says. “First of all, there is always waste; the idea that you are going to eliminate all the waste is just silly.”

Jonathan Stehle, president of the American Association for Budget and Program Analysis and an employee at the Government Accountability Office, agrees that “efficiency only goes so far.” Stehle says the career civil service “can find you a way to save any penny you want,” but it’s the political leaders who make the final call. 

Some lawmakers, however, don’t take that view. In fact, they blame federal managers for mismanaging scarce appropriations. During the last congressional session, Rep. Marsha Blackburn, R-Tenn., introduced legislation that would freeze agencies’ budgets for fiscal 2013 and 2014 at the fiscal 2012 cap in the 2011 Budget Control Act. “The bill I have introduced will hold Washington bureaucrats more accountable for the decisions they make with the taxpayers’ hard-earned money,” Blackburn said in September 2011 when she introduced the legislation, which she estimates will save $27 billion.  

View From the Inside

So what does all this mean to budget managers? It’s not just a numbers game anymore. “No longer are budgets the dollar number,” Stehle says. “It’s the performance data.” Budget managers have to integrate budget data with program performance analysis, which is vastly more complicated than, say, indiscriminately slashing 5 percent of one’s budget. In other words, a dieter can count calories and still drop weight, but that doesn’t necessarily mean she’s eating right.

Stehle’s group, along with management consulting and auditing firm Grant Thornton LLP, surveyed 261 federal budget professionals last year on an array of topics, including budget and performance integration, resource constraints, and congressional issues. Forty-four percent of respondents mentioned linking the budget to their agency’s strategic plan as a key element of an effective budget formulation process. But only 35 percent reported that integrated information was used only once a quarter, while 34 percent said once a year. Ten percent reported that such information was never used. “It is difficult to see how performance information could be making an impact on the daily operations of agencies when 79 percent of them are preparing and using this data only once a quarter or less,” the study noted. One survey participant said, “This is probably the most important, little-used information in government.” Related to this point, when asked where they would focus cuts, 72 percent of respondents chose “activities with low priority” while 43 percent picked “programs with poor performance.”

Job satisfaction among survey respondents was high, but they also noted difficulties with operating under continuing resolutions, preparing and using integrated data, and complying with a 2011 mandate from the Office of Management  and Budget to reduce fiscal 2013 budgets by 5 percent. When asked why complying with OMB’s mandate was tough, 52 percent of survey respondents said, “Everything we do is important.” The report’s authors questioned that sentiment. “We also wonder whether ‘everything we do is important’ is what the respondents believe or what they were told,” they said.

The Bottom Line

As to where the ax will fall, everything is vulnerable as the government heads into fiscal 2013. Training and travel budgets often are the first areas slashed. The current budget environment, however, requires an overhaul, not just a nip here and a tuck there. Reducing personnel, either through layoffs, furloughs or attrition, is never a popular downsizing technique, but it’s very possible that some agencies have to resort to those tactics if Congress and the administration can’t seriously tackle spending, particularly entitlement spending. Many agencies are offering buyouts and early outs to employees as a way to save on personnel expenses, but it’s not clear whether that strategy will be enough. President Obama has proposed a
0.5 percent pay raise for federal workers in 2013, which his administration estimates will save $28 billion during the next decade. 

Congress continues to consider moving all federal agencies to a multiyear appropriations process to spare them the pain of continuing resolutions and shutdown threats, but also to help them improve program oversight and better allocate scant resources. But 2012 is an election year, and while government spending crops up as a campaign election issue, it’s competing for attention among the nation’s many other challenges. In this era, there are few issues as important as government’s fiscal health. Unfortunately, there are even fewer leaders offering serious, thoughtful
solutions to helping government regain its financial footing.