Benjamin Franklin had it wrong. Death and taxes aren’t the only certainties in this world. Another is federal government cost over-runs, which seem to get more certain, and more egregious, every year.
The latest example comes courtesy of Fannie Mae, the mortgage giant that helped inflate the housing bubble that led to the 2008 financial market collapse. Since the housing crash, it has been in a conservatorship run by the Federal Housing Finance Agency.
As the Washington Examiner‘s Joe Lawler has reported, an independent auditor of the FHFA recently found that Fannie Mae has incurred vast spending over-runs in erecting its new Washington, D.C., headquarters.
The original budget for the project was nearly $800 million over 10 years. But mounting construction costs have increased that by more than 50 percent. Fannie Mae is inviting criticism with spending on apparent extravagances including glass bridges, spiral staircases and “town centers.”
The mounting costs are one problem; another is that, according to the inspector general’s report, no one at the FHFA seems to have been aware of the higher cost estimates.
This is a classic example of the inefficiency and waste that are a defining feature of the federal government. Under the terms of its conservatorship, all of Fannie’s profits go straight to the Treasury Department, which, as the IG report noted, doesn’t give it much incentive to spend wisely.
Cost over-runs on major federal projects are nothing new. Projects are authorized based on cost estimates that frequently rise (and almost never decline) as the projects unfold.
In fact, according to one study, a majority of government infrastructure projects throughout U.S. history had major cost overruns. Consider the much-maligned healthcare.gov website, the cost of which grew from just under half a billion dollars to $824 million.
Why does this cost inflation happen? Part of the problem is that project planners low-ball cost estimates in order to get projects approved. This is especially true of contractors who know that low bids will help them win contracts.
But a bigger problem is that, unlike in the private sector, federal agencies do not have to earn profits, so there’s no specific incentive to control costs. In the private sector, cost over-runs may mean a company must abandon a project or even go out of business. But federal government cost over-runs usually lead to an infusion of more taxpayer funds.
The public has become accustomed to hearing about $640 toilet seats and government employees who do little but rake in six-figure salaries without fear of losing their jobs. A report last December found that the federal government had awarded $3.1 billion-worth of vacation time to employees placed on administrative leave.
These types of stories of waste erode the public’s confidence in government. A 2014 Gallup poll found that Americans believe the federal government wastes 51 cents on the dollar. No wonder then that in 2015, the federal government was named the nation’s top problem for the second straight year.
This scandal underscores the need for more transparency in how the government awards contracts, and for ensuring that cost estimates are reasonable based on similar previous projects.
But the federal government shouldn’t be so involved in the mortgage market in the first place. The private sector should be allowed to do more, as should state and local governments, where studies show cost over-runs are smaller.
That the nation’s largest financier of home mortgages can’t efficiently complete a simple construction project may be the clearest sign yet that it’s time for the federal government to get out of the housing business.
