THE COST OF “FREE MONEY”
If you give me $1.61, I’ll give you $1.00 and we’ll call that dollar “free money”! Sound like a good deal to you? – Would you take that deal? That is the “bargain” our local governments are striking every day for us with the federal government. Mayor Scott Smith in Mesa, Arizona is a prime example and classic advocate of local officials buying into this deception of federal “free money” in exchange for (1) higher taxes; (2) federal control of local government; and (3) federal control of our schools. If we buy in (lucky us) we get 63% of our money back (a $1.00 for every $1.61 we paid in taxes). Mayor Smith and numerous other mayors recently spoke on national television (at the National Mayor’s Convention) proclaiming the necessity to get federal funding (i.e., free money) for their sacred cow of government block grants. It is the old saw that if we don’t get it (free money) some one else will. The problem is that we had to pay $1.61 to get the free $1.00 back.
When the federal government creates, finances and of course oversees federally funded projects it is acting in a capacity similar to a general contractor, but with more expenses. Bureaucrats have to be on the federal payroll to come up with ideas for projects to fund, and then they design the projects and draw up their competitive grant parameters, and draft bills for Congress to fund them. Then of course there are the attorneys to draft grant/funding contracts for local government applicants to comply with when they apply for our “free money”. There’s another public expense. The local governments have bureaucrats, engineers and attorneys on the local payroll to find the federally proposed projects for funding and then design a project that fits in the federally dictated parameters so it can apply for the “free money.” Never mind whether it is really the type of project the local government really needs or if the project will truly full fill the community needs – it’s “free money!”
Then, buried in this free money bureaucracy, there is the small federal army of personnel that have to receive, evaluate and decide which of the submitted project applications the federal government wants to fund and who will benefit (from a compliance as well as a political standpoint) by funding those projects. Not the most efficient criteria standard for funding public projects. After the projects are awarded, the bureaucracy remains involved throughout the project as sort of a general contractor or inspector to ensure the “free money” is well spent and the tax dollars aren’t “wasted”. Depending on the type of project, there may be follow up bureaucracy employees to evaluate and report to Congress how successfully the project was implemented.
Our government is in effect our designer, seller, buyer and general contractor. Allowing for the costs incurred by the government to provide free money grants including the expenses incurred by the designer (feds), seller (feds), buyer (feds/local gov’t.), and general contractor (feds & local gov’t.), still falls short of the total costs of our “free money”. For example, if it is a government loan (instead of a grant) it will cost more. This means no one knows the total cost of our “free money,” but I’ll give it a go. Be patient and bear with me in this voyage into our costs to find out how we get less than 2/3 of our own “free money” back.
According to the Independent Government Estimate Preparation Guide (TRADEOC PHAMPHLET 715-6 July 2000) the amount that can be attributed to the costs for a general contractor’s overhead is 15% with a burden of 30% that is associated with employee benefits for a total of 45% of the amount of a federal contract. It has been my experience over the last 20 years of my involvement with federal government contracts that the norm for the average cost allowed for burden has been 27%. So, if we consider the government cost analysis in in light of my experience and the federal TRADEOC PHAMPHLET an average of 37% (27% for burden plus 10% for overhead) would be a very conservative cost estimate for the cost to the federal government for administering federal contract services.
This does not count the cost for the various federal agencies to come up with or evaluate a proposed local project that they deem appropriate for federal funding or the cost of preparing for contracts that will never happen. For the sake of argument let’s assume that the cost for evaluating and/or creating a locally proposed project for federal funding is 5% of the cost of the project. If the project is one proposed by a local government for funding municipal, county or state building or road projects there is probably another direct local cost of 5% for the investigation, engineering, document preparation and accruing approval for submission of the project. That’s 10% for projects with a local genesis. But for this exercise we will leave it at 5%. Given commercial engineering costs that is a conservative estimate.
After a “grant” or award of funding for our “free money” is made, both the federal and local governments still have project oversight responsibility in the same vein as general contractors and inspectors for the administration of the contract to ensure its compliance with the terms and specifications for the project. This oversight responsibility and attendant costs could last for 6 months or 6 years. To simplify this estimate we’ll consider this cost as included in the overhead and burden costs for the project.
Another significant cost factor for accepting “free” federal money is the fact that for every dollar we spend, 42 cents are borrowed at an interest rate that currently ranges from 1% to 3% over 30 year bond financing. This rate will increase now that China has reduced its holdings of U.S. treasury bills by 97%, from $210.4 billion to $5.69 billion (http://cnsnews.com/news/article/china-has-divested-97-percent-its-holdin) and is rapidly reducing its holdings of American bonds. The amount of interest paid over the term of our bonds is 33% of the amount financed if financed at 2%. So one third of the 42% of the amount borrowed will be an additional cost to funding federal projects. This equals 14% of the cost for the “free” federal money for federally funded projects.
To recap our cost for “free money” – it costs us, because of the expenses of the federal government, 34% of a grant/contract for overhead and burden; there’s at least a 5% cost for the bureaucracy to create/develop the project; a cost of 5% for local governments to compete for the “free money’ grants; and another 14% in interest for financing the project. This adds up to 61% of the cost of every federally funded project. Therefore, for our “free money” we pay 161% to get the 100% required to actually do the project. All we see reported in the news is a federal government grant for a million dollars, but we are paying at least $1,610,000.00 for that project.
We end up with a total cost of $1.61 for each $1.00 of “free federal money” we get for local projects. That means we get back 63% of our tax dollars to pay for a “free money” project. What a scam. Politicians have survived for decades by selling us this charade and scam just as 19th century elixir sales men used to for their elixir that will cure all our ills. “Free money” is the federal funding elixir. This cost of providing these federally invented projects, which are often created for the benefit of providing “pork” for local campaign contributors, is never reported. Why should the taxes paid by the tax payers of Mississippi be obligated to pay for a bridge to cross a 20 foot wide creek in Minnesota, or pave a stretch of sidewalk or local road in California, much less a study of shrimp on a tread mill? If the local residents of those communities thought those projects were really necessary, they would have already funded them and since it’s their money, costs would be held to a minimum.
Admittedly this is a crude estimate of our total cost when the federal government funds local projects, but if anything this estimate falls short of the total cost. It does not include such expenses as the cost for the IRS to collect and disperse tax dollars to the agencies for projects, the cost of the Federal Reserve and Treasury to create each federal bond sale or auction and comply with their federal, SEC and other regulations for financing the bonds to fund the projects, or the additional costs to local communities and contractors for federal regulatory compliance (i.e., higher wages, more paperwork, etc.), especially when federal funds are involved.
The federal bureaucracy exerts enormous resources in justifying its existence and the expenditure of our federal tax dollars. It doesn’t matter that federal funding is provided for projects beyond the scope of the constitutionally limited function for the “general welfare” or a federal national purpose such as national defense, but rather is for local projects that, if local people really thought were necessary, would have already funded. But then that’s how Congressional Pork works. Remember every time a local politician says he just got us a $1,000,000.00 in federal funding it just cost us at least $1,610,000.00! If our open and transparent government would let us know all our costs, it would not surprise me if our cost is $2.00 for ever $1.00 we get back. And we should vote for them? Stability will return when we return to our founding principle that local concerns should be taken care of locally – by the local community or government.