In 1974, Congress created the Congressional Budget Office (CBO) to provide a nonpartisan independent analysis of budgetary and economic issues.  CBO provides cost estimates of legislation determines the impact on federal spending for at least five years and up to 10 years from enactment.

However, CBO does not always look at the complete picture when scoring the overall cost of a bill.  In a speech before the American Enterprise Institute on March 15, 2006, former House Speaker Newt Gingrich cited the need for process reform, stating that the models used by CBO “ignore the economic growth, efficiencies, and cost savings that result from implementing innovative and transformational policies.”  Speaker Gingrich went on to say that while billions are spent on government programs that are “financial black holes,” CBO “will not properly score legislation that would actually reap dramatic improvements – both financially and socially.” 

As an example of this short-sighted approach, Speaker Gingrich cited how CBO scored S. 1418, the Wired for Health Care Quality Act, a bill introduced in the 109th Congress to provide funding for a nationwide interoperable health information technology system to improve the quality and reduce the costs of health care.  The purpose of the legislation was to reduce health care costs by eliminating inefficiency, medical errors, inappropriate care and incomplete information, while guiding medical decisions based on information available at the time and place of care through the use of the nationwide interoperable health information technology system. 

CBO scored the cost of the bill to be $652 million from 2006 through 2010; it did not incorporate any macroeconomic savings in its analysis and said nothing about the anticipated savings that would be achieved.  As Speaker Gingrich put it, “as a result of the score, the upfront costs for providing health information technology funding appear enormously high and therefore may unnecessarily discourage Congress’ support.” 

On July 25, 2011, CNN.com reported on the use of CBO’s scoring mechanism by Senate Majority Leader Harry Reid (D-Nev.) during the debt ceiling debate.  Leader Reid’s numbers anticipated military spending to continue at current or higher levels to support the wars in Iraq and Afghanistan, regardless of the fact that the wars in those countries were already winding down and the money in the original estimates would not be spent over the long term.  As former CBO Director Douglas Holtz-Eakin stated in the article, “The way the CBO baseline is calculated is real simple, you take what is on the books and extrapolate at the rate of inflation.”    

CBO’s maintains that nearly all legislation it considers would have negligible macroeconomic effects, and its budget estimates contain its “best judgment” about how the economy and the budget will evolve under current law.  CBO does not use dynamic scoring, which predicts behavioral reactions to changes in fiscal policy, when developing its estimates or include anticipated savings that would be achieved by proposed legislation, claiming such estimates are not “feasible.”  But without such anticipated savings, Congress receives an incomplete cost/benefit analysis of legislation.  This is particularly harmful to management improvement legislation that may have an upfront cost, even though long-term savings will occur.  

Several management initiatives, including energy savings performance contracting (ESPC) and recovery audit contracting (RAC), would be better served by reforming CBO’s analysis process.

Currently, off-balance sheet transactions are assets or liabilities that do not show up on the organization’s balance sheet, but are either deferred or contingent, and could have a material impact on the budget.  Because the potential savings or liabilities of these transactions are not immediately apparent, they are not considered in CBO’s cost estimates.  This is particularly important when considering savings incurred for ESPC transactions. 

For example, the installation of light emitting diode (LED) products would clearly achieve energy savings at federal facilities.  The contractor purchases, installs, and maintains the LED products for a set period of time.  Once installation is complete, the contractor transfers ownership of the product to the agency.  The contractor and the agency share the financial savings at an agreed-upon percentage for a specified period of time, after which the agency retains 100 percent of the savings.

Another cost-saving measure similar to off-balance-sheet transactions is the recovery audit contracting (RAC) program.  For example, private RAC auditors identify improper payments (overpayments and underpayments) by the Centers for Medicare and Medicaid Services (CMS) to health care providers.  The private sector auditors bear the up-front and overhead costs of the program (such as start-up costs and infrastructure), but do not charge the federal government for the administration of the program.  Instead, auditors receive compensation from a percentage of their identified improper payments once these are fully recovered.  RACs also operated through other federal agencies.

There is no administrative cost to the government for the program, and considerable savings have been achieved.  At CMS, nearly $3 billion has been recovered during the RAC’s first four years of nationwide operation.  These savings would not have been reflected in a CBO score for the program.

It is time for Congress and CBO to reevaluate the formula for computing costs of legislation to include dynamic scoring and projections of anticipated savings.