Jan. 29 (Bloomberg) -- U.S. Senator Kit Bond shifted in his chair at a 2005 congressional hearing, poised with a question on national security. He turned to Treasury Secretary John Snow, who was seated at a witness table.
Was Snow sure, asked Bond, a Missouri Republican, that a Treasury Department computer on order for $8.9 million would help detect terrorist money laundering?
“Yes, absolutely,” Snow said.
A year later, in July 2006, the U.S. Treasury Department abandoned the project. The computer didn’t work. The department had spent $14.7 million -- a 65 percent increase above the original budget -- for nothing.
There was a final ignominy: Under the terms of the contract, Electronic Data Systems Corp., the vendor, collected a bonus of $638,126.
As the federal government’s $700 billion bailout of banks sputters, there’s an object lesson for the new administration of President Barack Obama: Federal departments, including Treasury itself, routinely squander tens of billions of dollars a year in taxpayer money as they farm out public business to private corporations.
Obama, like presidents before him, said during his bid for the White House that he wanted to curtail waste in government. With contracting, he faces a mismanaged system that accounts for almost 40 cents of every federal dollar spent outside of mandatory obligations such as Social Security and Medicare.
When compared with all federal contracting, just a fraction of U.S. spending waste comes from so-called earmarks, which elected officials often criticize as the unnecessary pet projects of politicians.
The “Bridge to Nowhere” in Alaska, for example, had a price tag of $398 million. By contrast, the government spent $368.4 billion on all contracts in 2008, and Republican Oklahoma Senator Tom Coburn estimates that about $100 billion of that was wasted.
U.S. spending on 3.7 million contracts in 2008 represented an increase of 76 percent over 2000 levels.
“We have a broken, broken system that rewards incompetence,” says Coburn, 60, who has been examining purchasing breakdowns since his election to Congress in 2005. “We need to totally change contracting.”
Bureaucrats, not elected officials, run the U.S. purchasing system, well out of public sight. And their bosses keep the spending secret by not releasing complete contract files to the public.
Just as taxpayers can’t find out how the Treasury and the Federal Reserve used the first half of the bank bailout, Americans are often denied access to public records that provide details on how hundreds of billions of taxpayer dollars are spent in contracts.
Bloomberg News filed Freedom of Information Act requests with the Treasury Department, the Commerce Department and the Fed asking for documents on the bailout and routine contracts.
As of Jan. 12, seven months after receiving the first request, the three agencies had provided incomplete documents with blacked-out words or nothing at all.
In many cases, bureaucrats are motivated to give millions of dollars in bonuses to contractors no matter how poorly a company performs because generosity with taxpayer money may help them land better-paying jobs after they leave the government.
Contractors on dozens of jobs at federal departments collected more than $8 billion in what federal auditors said were unwarranted bonuses from 1999 to 2005.
In 2007, military radio maker Harris Corp. developed a hand-held computer for the 2010 census that failed to work in tests in a California heat wave. Still, the Commerce Department’s Census Bureau awarded Harris $14.2 million in bonuses in a contract that increased to $798 million from $600 million, according to federal investigators.
“Contracting is a total mess,” says John Lehman, who fought procurement waste as secretary of the Navy from 1981 to 1987 partly by banning costly contract changes once work was under way, according to Navy records.
“I don’t think in the history of the country it’s been as bad as it is today,” says Lehman, 66, now chairman of J.F. Lehman & Co., a New York-based private equity firm. “You have a system where no one is in charge and no one is held accountable.”
Obama’s spending plan will create new federal contracts as the government pours money into education, public works and expanded technology.
Most Cabinet secretaries don’t probe for waste in contracts on their own and don’t push procurement subordinates to police work that’s farmed out.
That lack of accountability holds true even when projects make up significant chunks of their budgets, says Todd Zinser, inspector general at the Commerce Department.
Federal departments have long since abandoned the intended purpose of cost-plus, and bureaucrats who run contracts routinely award bonuses for almost everything, even when a program fails completely, Lehman says.
“There’s too much gold plating and little accountability with most programs being done on a cost-plus basis,” he says. “We’re paying through the nose.”
KPMG LLP of New York, the fourth-largest accounting firm by revenue, paid $456 million in 2005 to settle a Justice Department complaint that it had sold phony tax shelters to wealthy clients, wrongly diverting $2.5 billion that should have gone to Treasury.
That wasn’t the only time KPMG has been accused of cheating the government. In 2006, a year after the tax shelter case, KPMG and three other consulting companies paid $25.7 million to settle federal civil lawsuits accusing them of overbilling the Treasury Department and various agencies for travel. KPMG didn’t admit or deny wrongdoing.
Still, the [Treasury] department continued to award contracts to KPMG. Treasury spokeswoman Courtney Forsell says agency contracting meets federal rules. KPMG spokesman Daniel Ginsburg declined to comment.
Mostly, the contracting system goes wrong through spending waste and not lawbreaking. When the Census Bureau hired Harris Corp. in 2006 to provide a hand-held computer for the 2010 nationwide survey of Americans, the agency heralded the $600 million contract as a milestone in census modernization.
Census director Louis Kincannon said the computer would cut down on paper by allowing canvassers to electronically survey households that didn’t return census forms.
“We are revolutionizing the census,” he said in a press release on March 30, 2006.
In June, three months after the contract was signed, Coburn peered down at Kincannon at a congressional hearing and asked what would happen if the computers didn’t work.
“They will work,” Kincannon said. “You might as well ask me what happens if the Postal Service refuses to deliver the census form.”
They didn’t work.
“I had people quit on me,” she says. “It was definitely frustrating.”
Today, the revolution is largely a bust. Last April, the Census Bureau said it would go back to pen and paper for canvassing and use the computers only to verify addresses of households.
The project has cost $798 million -- about $200 million more than the original estimate. In a big gaffe, both the government and Harris had miscalculated the cost of a help desk for canvassers. Harris and the agency had originally budgeted $5 million.
The price has since jumped to $220 million, a 44-fold increase, according to government records.
Perhaps worst of all, Coburn says, was that Harris collected $14.2 million in bonuses.
“It’s ridiculous,” he says. “They didn’t even perform competently. You could do what they tried to do on a cell phone.”
At a congressional hearing last April, Representative Alan Mollohan, a West Virginia Democrat, questioned Commerce Secretary Carlos Gutierrez about the reason for the payout.
Gutierrez said officials handling the census contract appeared to have let Harris get away with unacceptable work.
[Many examples here, with hundreds of billions wasted, worth reading the whole report]
“This situation is beyond troubling,” says Senator Thomas Carper, a Democrat from Delaware. “More than ever, taxpayers need to know that their hard-earned money is being used wisely. The financial strain on everyone is daunting. I just shake my head when taxpayer money is wasted like this.”
Bloomberg exposes the extend of corruption in US government
I am glad to see so many disturbing reports coming from Bloomberg and showing how independent and professional they are. Here are some quotes from a report published on the 30th of Jan 2009 [emphasis mine]: