Book Exclusive: 'DC Confidential' on Congress's Financial Finagling
Washington really does work - if you believe in magic. Our elected leaders may be singularly unable to make our pressing problems disappear. But they are downright wizards of legislative and fiscal finagling to fob off responsibility and blame. So writes David Schoenbrod in his new book, “DC Confidential: Inside the Five Tricks of Washington.” A former leader of the Natural Resources Defense Council who now teaches at New York Law School, Schoenbrod shows how both parties create the appearance of effective governance while actually mortgaging the future. In this excerpt, he offers a case study.
Maximizing the Credit, Minimizing the Blame
On June 30, 2010, transportation officials closed Seattle’s South Park Bridge because it was on the verge of collapse and beyond repair. The bridge had received a grade of four out of a hundred on the Federal Highway Administration’s safety scale, far worse than the fifty-out-of-a- hundred grade given to a bridge in Minneapolis whose collapse in 2007 killed thirteen people.
Spanning the Duwarmish River, the Seattle bridge had linked South Park, a working-class neighborhood, with a Boeing plant and other large workplaces on the opposite side of the river. No longer could Boeing employees pop across the bridge to eat in South Park during their half-hour lunch break. The shortest alternative route required traveling an extra five miles in urban traffic. “It’s going to kill us,” said Chong Lee, the owner of one of the lunch spots.
On the bridge’s final day of operation, the residents of South Park mourned their loss. Thousands of them, led by Native American drummers and followed by bagpipers, walked across the bridge one last time. At the foot of the bridge stood a couple with handmade signs reading, “Rest in peace dear old bridge, you’ll be greatly missed.”
The loss of the bridge also harmed people far beyond South Park. The bridge had been crossed every day by twenty thousand cars and trucks plus the buses on three urban routes. The trucks had carried ten million tons of freight per year.
Even with emergency funding from every level of government, it took four years to replace the bridge. These years of disruption were unnecessary. Transportation officials had known for years that the bridge was beyond repair and repeatedly sought money to build a replacement before it had to be closed. Only five months before the bridge closure, federal officials rejected a proposal to fund a replacement, allocating funds to other projects instead.
The old South Park Bridge was in sad shape, and so, too, is our nation’s overall transportation system. One in nine of the nation’s 607,380 bridges are structurally deficient, according to the (not-altogether-dis-interested) American Society of Civil Engineers, and it finds roads and mass transit to be in even-worse shape.
Yet, only a half century ago, the federal government paid for building and maintaining a highway system that was the envy of the world. In 1956, Congress imposed a three-cents-a-gallon tax on gasoline to finance the Highway Trust Fund, which would pay for building and maintaining the Interstate Highway System and some of the lesser highways connecting it to homes, factories, and farms. Three cents might not sound like much, but back then a gallon of gas cost only about twenty-three cents, tax included. As the years went by, Congress increased the gas tax to keep up with inflation and changing needs, and in 1982 it started using the trust fund to pay for mass transit as well. In 1993, when the price of a gallon of gasoline was $1.16, Congress increased the gas tax to 18.4 cents per gallon.
Since then, Republicans in Congress, with significant support from Democrats, have refused to increase the gas tax. At the same time, inflation has reduced the buying power of the tax on a gallon by 39 percent. Moreover, with cars and trucks getting more miles per gallon, drivers pay tax on fewer gallons while causing much the same wear and tear on the roads. As a result, the Highway Trust Fund pays a smaller share of the cost of providing decent roads, bridges, and mass transit. Bad transportation hurts the economy, which is why the usually tax-shy Chamber of Commerce urged Congress to increase the gas tax in 2013. Congress didn’t act.
Of course, increasing the federal gas tax isn’t the only way to increase funding for transportation. States and localities provide three-quarters of the funds for highways. Congress was not, however, about to say that the states should be the source of any additional transportation funding. With the money gauge on the Highway Trust Fund pointing toward empty by the summer of 2014, federal officials would have to stop authorizing any new projects after September. That threatened to idle the contractors that were paid by the Highway Trust Fund and their employees. If that happened, many corporations and unions would have used their money and manpower to unseat members of Congress in the 2014 elections. That prospect, unlike broken bridges for constituents, stirred Congress to act.
On July 31, 2014, Democrats and Republicans in the House and Senate joined in passing, by wide margins, a statute that kept the contractors and their employees working, but without increasing the gas tax. Signed into law eight days later by President Barack Obama, the Highway and Transportation Funding Act of 2014 put $10.8 billion into the fund to pay for projects from October 2014 through May 2015. Spending at that rate is too slow to fix our broken transportation system. Fixing just the fifteen structurally deficient bridges on one interstate highway (I-95) as it runs through one city (Philadelphia) would, according to former Pennsylvania governor Ed Rendell, cost $7 billion. However, the $10.8 billion saved the legislators from the wrath of the contractors and unions during the 2014 elections.
From here on in, the plot thickened, but it’s not important to recall all of its twists and turns. Just note the various kinds of blame that members of Congress have ducked, and continue to duck, as the plot unfolds. There have been two so far: they ducked the blame that would have come their way had they (1) increased the gas tax or (2) inflicted losses on construction contractors and layoffs on their employees.
Legislators, of course, had to get the $10.8 billion from somewhere and in this, too, they ducked blame: they ducked the blame that would have come from (3) having the government borrow it. To avoid being accused of adding to the deficit and the national debt, they claimed to have generated additional revenue. How they got away with this claim is really bizarre, so take a deep breath and read the next sentence slowly. Legislators temporarily eased a law that requires businesses to put aside enough money to honor their promises to their employees to pay them fixed-benefit pensions a after they retire. Because putting money into a pensions fund counts as an expense in calculating a corporation’s profits, cutting payments to the fund increases corporate profits and therefore increases the current revenue the federal government earns from the tax on corporate profits. Largely because of this increased revenue, the Congressional Budget Office concluded that the Highway and Transportation Funding Act of 2014 would not add to the budget deficit for the coming ten-year period.
This change in the pension law delighted corporations because it meant they would have more profits to keep even after paying taxes. “It means more cash for us,” stated International Paper’s chief financial officer Carol Roberts.
Congress had thus seemingly produced more money without increasing the tax rate on corporate profits. So members of Congress thereby also ducked blame for (4) increasing the tax rate on corporate profits.
Congress did not, however, produce something for nothing. Businesses will have to make up for their temporarily reduced pension contributions by increasing contributions years from now, which will then reduce the taxes they pay. So Congress did not increase tax revenues long term but rather arranged to collect future taxes early. To make up for this advance, Congress will have to raise taxes or cut spending later on. The legislators, in effect, borrowed the money but finagled to keep the borrowing off the official books. For that reason, reporters and editorial writers working for newspapers as diverse as the New York Times, the Wall Street Journal, and the Washington Post called the statute’s funding mechanism a “gimmick.”
The gimmick increased the risk that some businesses would not be able to pay the pensions that they had promised employees. Congress had in 1974 required companies promising defined-benefit pensions to their employees to make minimum payments to their pension funds to ensure the employees would get the promised pensions. Even with that 1974 law, however, some companies still stiffed their employees. As a worker who baked Wonder Bread in Hostess’s Lenexa, Kansas, plant explained:
In July of 2011 we received a letter from the company. It said that the $3+ per hour that we . . . contribute to the pension was going to be “borrowed” by the company until they could be profitable again. Then they would pay it all back. . . . This money will never be paid back. The company filed for bankruptcy and the judge ruled that the $3+ per hour was a debt the company couldn’t repay.
Hostess Brands, which produced Twinkies, Ding Dongs, and other confections along with Wonder Bread at thirty-three plants across the country, used the pension money for corporate expenses including compensation for executives. When the company went bankrupt, it owed huge sums to the pension funds for its 18,500 employees.
This outrage at Hostess suggests that Congress should have strengthened the 1974 law to protect pensions, but it instead weakened it by resorting to its transportation-funding gimmick. This has put many people at risk. According to Milliman, a leading pension consulting firm, just before Congress passed the gimmick, the hundred largest pension plans operated by individual corporations were underfunded to the tune of $257 billion. This figure does not include the shortfalls with any of the twenty-seven thousand smaller pension plans. The transportation-funding gimmick weakened pension plans that cover thirty-two million workers.
In the course of debating the 2014 transportation statute, a few members of Congress warned that it was leaving members of future Congresses to impose the tax increases and spending cuts needed to fund the $10.8 billion in current transportation spending and that it also put pensions at risk. Yet, no legislator responded to these concerns. The lengthy congressional report on the statute also failed to do so.
Because Congress had in 1974 established the Pension Benefit Guaranty Corporation “to insure the defined-benefit pensions of working Americans,” it might seem that legislators need not have addressed whether they put pensions at risk with the transportation-spending gimmick. The PBGC collects insurance premiums from employers with defined-benefit pension plan, puts the money collected into a fund, and uses the fund to pay pensions to retirees if their former employer’s pension plan goes broke. Yet, the PBGC’s maximum guarantee for an employee is less than $13,000 per year, meaning that the transportation-funding gimmick does in fact endanger employees.
Worse still, according to Joshua Gotbaum, the PBGC’s director appointed by President Obama, speaking two months before Congress passed the transportation-spending gimmick, “Congress has continued to set PBGC premiums and has done so in ways that . . . [underfund] PBGC.” As a result, according to a footnote buried deep in its November 2014 annual report, the corporation lacks “the resources to fully satisfy PBGC’s long-term obligations.” The PBGC as a whole had a net worth of minus $62 billion. In underfunding the corporation, members of Congress also ducked blame for (5) charging employers premiums adequate amounts to insure the pensions they promised. This is a relatively small instance of the Debt Guarantee Trick.
The PBGC’s lack of cash raises the question of what would happen if in a crisis it can’t pay even its meager guaranteed pension. Its 2014 annual report states, “The U.S. Government is not liable for any obligation or liability incurred by the PBGC.” That is what Congress has said, but if you believe that, “I have a bridge to sell you,” as the saying goes. Congress similarly disclaimed liability for the debts of government-sponsored mortgage firms Fannie Mae and Freddie Mac, but paid their debts anyway. We the taxpayers will foot the bill if the PBGC goes broke. However, by taking the position that the taxpayers will not have to pay, members of Congress also ducked the blame for (6) the potential costs of bailing out the PBGC.
Meanwhile, Congress uses the PBGC to fudge its budget accounting by including the corporation in the federal government’s books on the basis of its current cash in inflows and outflows. This means that, according to Professor Howell E. Jackson, the PBGC seemed to have made “a positive contribution to the federal budget (reducing deficits) over the past five years,” even though it would likely produce an immense long-term loss to the public.
In sum, members of Congress maneuvered to duck many kinds of blame:
- blame for increasing the gas tax â?¨
- blame for losses and layoffs in transportation construction â?¨
- blame for borrowing more money, and thus blame for adding to the deficit and the national debt â?¨
- blame for raising the tax rate on corporate profits â?¨
- blame for charging employers premiums an adequate amount to insure the pensions they promised â?¨
- blame for the potential costs of bailing out the PBGC â?¨
Essentially, members of Congress twisted and turned to avoid blame without regard to the ultimate impact on the people.
Moreover, having escaped responsibility for the burdens required to raise the money for transportation, legislators also didn’t feel pressure to focus the money on the projects that would do the most good for voters—projects such as replacing the South Park Bridge before it had to be closed. This they have pervasively failed to do.
At every step in the South Park Bridge story, members of Congress structured policy to maximize their credit and minimize their blame. For them, it was “every man for himself, and the devil take the hindmost.” We the People are the victims.
