Brian M. Riedl

6. Funding Fictitious Colleges and Students

In 2002, the Department of Education received an application to certify the student loan participa­tion of the Y-Hica Institute in London, England. After approving the certification, the department received and approved student loan applications from three YHica students and disbursed $55,000.

The Education Department administrators over­looked one problem: Neither the YHica Institute nor the three students who received the $55,000 existed. The fictitious college and students were created (on paper) by congressional investigators to test the Department of Educations verification pro­cedures. All of the documents were faked, right down to naming one of the fictional loan student applicants 'Susan M. Collins,' after the Senator requesting the investigation.

Such carelessness helps to explain why federal student loan programs routinely receive poor man­agement reviews from government auditors. At last count, $21.8 billion worth of student loans are in default, and too many cases of fraud are left undetec­ted. Tracking students across federal programs, verifying loan application data with IRS income data, and implementing controls to prevent the dis­bursement of loans to fraudulent applicants could save taxpayers billions of dollars.

7. Manipulating Data to Encourage Spending

The Army Corps of Engineers spends $5 billion annually constructing dams and other water projects. Yet, in a massive conflict of interest, it is also charged with evaluating the science and eco­nomics of each proposed water project. The Corps strategic vision calls on managers to increase their budgets as rapidly as possible, which requires approving as many proposed projects as possible. Consequently, the Corps has repeatedly been accused of deliberately manipulating its economic studies to justify unworthy projects.

Investigations by the GAO, The Washington Post, and several private organizations have found that Corps studies routinely contain dozens of basic arithmetic errors, computer errors, and ridiculous economic assumptions that artificially inflate the benefits of water projects by as much as 300 per­cent. In one case, a studys authors inflated a projects benefits by using a 2.5 percent interest rate that dated back to 1954. In many cases in which the Corps calculated that a project would be a net benefit, arithmetic corrections revealed that the costs would be many times greater than the bene­fits.[16] By that point, of course, the unnecessary and wasteful project is often underway and cannot be stopped.

These errors appear to reflect more deception than sloppiness. A Washington Post investigation uncovered managers ordering analysts to get cre­ative,' to 'look for ways to get to yes as fast as pos­sible,' and 'not to take no for an answer.' After a public outcry, in 2002, the Corps suspended work on 150 projects to review the economics used to justify them. However, given the combination of Congresss thirst for pork-barrel projects and the Corps built-in incentives to approve projects that will increase its budget, real reforms seem unlikely.

8. State Abuse of Medicaid Funding Formulas

Significant waste, fraud, and abuse pervade Medicaid, which provides health services to 44 million low-income Americans. While states run their own Medicaid programs, the federal govern­ment reimburses an average of 57 percent of each state's costs.

This system gives states an incentive to overre­port their Medicaid expenditures in order to receive larger federal reimbursements. Not sur­prisingly, the GAO has identified state schemes that shift money between state accounts to create an illusion of higher Medicaid expenditures. Simi­larly, some states have spent their federal Medicaid dollars on non-Medicaid purposes. Tight state budgets like those experienced by most states today have increased the pressure to use such deceptive tactics.

The GAO and the HHS Inspector General have also uncovered some states practice of recovering improper payments, retaining the funds, and then spending them on unrelated programsa practice that costs the federal government well over $2 bil­lion per year. Congress could enact legislation to prohibit these actions more effectively.

Minor reforms enacted by HHS in 2001 and 2002 are expected to save Medicaid $70 billion over the next decade. A small sample of financing schemes uncovered in a few states suggests that, if Congress acts, even larger savings are available.[18]

9. Earned Income Tax Credit Overpayments

The earned income tax credit (EITC) provides $31 billion in refundable tax credits to 19 million low-income families. The IRS estimates that $8.5 billion to $9.9 billion of this amountnearly one-thirdis wasted in overpayments.

The complexity of the EITC law leads to many of these mistakes. Calculating the credits is more complex than calculating regular income taxes. While the credit amount depends on the number of children in a household, the tax code does not clearly define how a child qualifies for the credit. In addition, fraud and underreporting of income are common, and the IRS lacks the resources to verify the qualifications of all EITC claimants.

Efforts are being made to address this prob­lem, but Congress can do more by requiring bet­ter verification of incomes and by clearly defining the standards by which a child qualifies for the EITC.

10. Redundancy Piled on Redundancy

Governments layering of new programs on top of old ones inherently creates duplication. Having sev­eral agencies perform similar duties is wasteful and confuses program beneficiaries who must navigate each programs distinct rules and requirements.

Some overlap is inevitable because some agen­cies are defined by whom they serve (e.g., veterans, Native Americans, urbanites, and rural families), while others are defined by what they provide (e.g., housing, education, health care, and economic development). When these agencies constituencies overlap, each relevant agency will often have its own program. With 342 separate economic devel­opment programs, the federal government needs to make consolidation a priority.

http://www.heritage.org/Research/Budget/bg1840.cfm?renderforprint=1