When a Penny is Hard to Find

When President Obama signed into law the American Recovery and Reinvestment Act (ARRA aka “the stimulus plan”) earlier this year, it was hailed as a way to get much-needed projects off the ground, focus on strategic enablers from our nation’s long-term growth, and get people back to work.  Now nearly four months later most stimulus funds are held in federal escrow accounts waiting to be transferred to the States and other municipal agencies.

The problem is many public sector organizations either don’t want the funds politically or can’t afford the oversight and accounting required by the Act to accept the money.

Clearly as reported by CNN and MSNBC, some state governors have turned refusal of stimulus funds into a repudiation of the Obama administration’s fiscal policies, a bit of economic and political grandstanding that also garners national attention.  Alaska (led by former Vice Presidential nominee and governor Sara Palin), Louisiana, and South Carolina are among the “early rejectors” for taking stimulus funds.

(Read the MSNBC article from April: http://www.msnbc.msn.com/id/30265533/from/ET/)

Aside from the politics, however, is a growing realization among state officials that the Act does not represent a free handout.  On the contrary, state and municipal officials are realizing that the transparency Washington demands over the governance of the stimulus funds amounts to an unfunded mandate.  States suffering some of the highest regional and national rates of unemployment, California and Michigan in particular, are faced with the task of satisfying oversight requirements whose budgets alone spiral into the tens of millions of dollars at a time when state and county coffers are running lean and mean.

Herein lies the problem and the reason for much of the delay.  In most oversight and audit environments, the cost to manage vendors, report on status, testify before committees and other governance functions can range from 1% to 15% of the total amount required for any major program or initiative set.  Studies have shown that for the public sector these capitalized expenses can be much higher, but for the sake of argument and to defer to the better judgement of many public servants in our nation let’s assume that this amount is 1%.  This means for a state like Michigan expecting to receive nearly $20 billion in stimulus funds across all agencies and organizations, the cost for compliance to oversight requirements could be a minimum of $200 million.  For a state like California looking to receive closer to $50 billion, those costs are $500 million.

Early stimulus watchers proclaimed this a boon for many internal audit, accounting and consulting firms who would likely be contracted to perform these services or be contracted to back-fill public servants who would perform some of these functions internally.  What President Obama and Vice President Biden have realized, however, is that these funds need to move to the end game of building roads and bridges, modernizing the health care field, laying a world-class telecommunications structure, and enabling modern education (commonly referred to as the “four pillars” of the stimulus package).  In early March, 2009 state stimulus “czars” were summoned from across the nation to Washington and received new direction.  It would not be the intent of the Act to fund oversight and accounting activities to be in compliance with fund transfers for projects beyond extended unemployment benefits and for making state unemployment systems and processes robust to handle the spiking jobless claims.  No, it was determined that in order to receive federal funds each recipient organization would need to find out of their own coffers the required oversight budgets to drive stimulus program execution.  This left many government officials scratching their heads wondering where they would essentially find a penny to spend a dollar given to them.

And that penny is proving very difficult to find.

Quiet discussions across party lines quickly led to state Republican lawmakers in a unique position to block receipt of federal funds.  Reeling from the 2008 general election loss and increasing party defections (most recently Sen. Arlen Specter in the U.S. Senate from Pennsylvania), the stimulus czars reasoned that if funding for certain pre-existing programs that fit under the context of the “four pillars” of the stimulus program could be shifted to cover the oversight activities then the pre-existing programs could be executed with a smaller incremental local expenditure after receipt of Act dollars to perform them.  Unfortunately executing the “Sacramento Two-step” is not as easy as it sounds, it requires state lawmakers to actually work together to restructure acquisition and budget proposals in a relatively short period of time.  Given the most recent budget crisis in California and elsewhere, the probability that state lawmakers could actually perform such gymnastics drops with each passing day.

In the meantime, public citizens wait and wonder where the net effect of the Obama stimulus program will impact their lives, if their lawmakers and state officials can move forward on plans slowly gathering dust, and if the stimulus is a paper tiger designed to let us know that the cavalry is coming at full strength when their is but one, lone bugler leading the charge.

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1 Comment

Filed under Audit and Oversight, Operations, Risk Management

One response to “When a Penny is Hard to Find

  1. Mike M

    William,
    Thorough, thoughtful, timely and relevant at the executable level of ‘What’s happening in the wings while the show goes on’. The idea that this stimulus money would be ‘free’ or ‘without strings’ is at best, well intended, but naive on the recipient’s part and at the worst manipulative and controlling on the giver’s part.
    Stimulus money should be used to ‘stimulate’ commerce and business growth, not to be used as a control and to over-process an already burdened government program(s).
    I enjoyed the article, Thank you.

    Like

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