Cash for Clunkers, Part 3
Why can't the government manage this program?

19 Aug 2009 in Regulatory Policy, Paperwork Burdens

News reports indicate that the federal government is failing to manage the Cash for Clunkers program so that car dealers can be promptly reimbursed.

We think we know why.

Washington Post staff writers Dana Hedgpeth and Peter Whoriskey report that car dealers are complaining that the National Highway Traffic Safety Administration is slow to pay claims submitted in the Cash for Clunkers program, formally known as the Consumer Assistance to Recycle and Save Program ("CARS"). They say NHTSA's parent, the Department of Transportation, is trying to catch up:

To deal with the issue, the National Highway Traffic Safety Administration said it is tripling the number of workers who are processing claims to 1,100 contract and federal employees...

In the roughly three weeks since the program officially began, 411,624 transactions, worth $1.7 billion, have been submitted, according to government numbers released Tuesday.

There are four competing (but not mutually exclusive) reasons why NHTSA is having problems:

1. The federal government as a whole is generally incapable of managing a program of this immediacy. The government normally is effective at processing claims and cutting checks. What makes the CARS program unique is the extraordinarily short lead time (30 days) the government had to write the rules, program the software, test the software, and train employees and hired contractors.
2. The federal government is capable of managing a program of this immediacy, but NHTSA can't because it is a regulatory agency unfamiliar with the mechanics of processing claims and cutting checks. The CARS program is an unusual one for NHTSA to be assigned. While it's true that this agency is expert in cars, it's not obvious it was going to be expert in CARS.
3. Congress and the Obama Administration seriously underestimated the volume of activity that the CARS program, which the government could not handle. Neither Congress nor the Administration appears to have anticipated the program's popularity. This is confirmed by the government's surprise that CARS nearly ran out of money during its first week. But it does not explain why NHTSA is slow to process dealers' claims for reimbursement.
4. The Obama Administration seriously underestimated the cost of managing the program. The Paperwork Reduction Act requires all federal agencies to seek and obtain prior approval from the Office of Management and Budget, in accordance with rules promulgated by OMB, to collect information from the public. As part of the submission and approval process, NHTSA was required to estimate the time it would take the public to perform the required tasks and the time it would take NHTSA to process claims. These estimates are required to be "objectively supported" -- that is, they cannot be simply made up or be the product of mere belief or speculation. 

In this post we discuss #4 -- whether the Administration seriously underestimated the program's paperwork burden, most notably in this case, its own burden to manage the program.

NHTSA submitted and obtained OMB approval for four Information Collection Requests, listed below. They cover each aspect of the CARS program:

1. Identifying and registering dealers choosing to participate in the program (ICR 2127-0657).
2. Documenting the validity of each market transaction between consumer and car dealer (ICR 2127-0660).
3. Documenting the disposal of vehicles turned in to dealers (ICR 2127-0658).
4. Evaluating the program (ICR 2127-0659).

• less than $1.2 million to set up the program and register 19,000 dealers;
• nothing to process claims submitted by these dealers on behalf of up to 250,000 consumers;
• less than $100,000 to process documentation from 125,000 salvage auction transactions and 250,000 disposal facility transactions; and
• $125,500 to perform a consumer survey for the purpose of program evaluation.

NHTSA Information Collection Requests in Support of the CARS Program
(excerpts)

1. OMB CONTROL NUMBER 2127-0657

2. OMB CONTROL NUMBER: 2127-0660

"Consumer Assistance to Recycle and Save Program - Dealer and Buyer Transaction Information"

The request to collect information sent forth today is necessary to ensure that dealers and buyers participating in the CARS Program understand and follow the criteria for eligible trade-in vehicles, which vehicles are eligible for purchase, dealers and buyers’ responsibilities under the Program and that legal consequences may result from providing false information about the transaction or providing false certifications. Each transaction covered by this collection of information involves two vehicles (one eligible used vehicle to be turned in, and one new vehicle to be purchased), one or more buyers, and one registered dealer.

...

NHTSA Form 1072: “'Summary of Sale or Lease and Certifications' filled out by the dealer and the buyer, describing the vehicles that are being turned in and sold, and information about the buyer. This paper form includes certifications signed by both the dealer and the buyer.

NHTSA Form 1071: Electronic version of NHTSA Form 1072. Dealers "will then put the NHTSA Form 1072 (paper form) into electronic format, and include it as an attachment when it [sic] sends the NHTSA Form 1071 to NHTSA.

Responses: 500,000.

NHTSA estimates that there will potentially be as many as 250,000 consumers participating in this program. This represents an average of $4000 in available incentive funds per customer derived from the $1 billion funding level. The $4000 estimate is a simple average of the two available incentive levels of $3500 and $4500. The agency does not know how many of these consumers will voluntarily choose to participate in the survey. Some portion, perhaps as many as 10%, will complete transactions prior to the July 24, 2009 date when the final rule is published and the reporting form becomes available online. Thus, NHTSA believes the maximum number who would participate is roughly 225,000. Participation rates in “captive audience” surveys are typically in the 75-85% range. We conservatively estimate a 75% participation rate or 168,750 completed surveys.

Information from Dealers - NHTSA estimates that there will be no more than 19,700 dealers that will respond to the collection of information and that there will be two persons (on average) at each dealership authorized to participate in the CARS Program, for a total number of 39,400 dealer authorized employees. However, dealer participation in this aspect of the survey is confined to presenting the survey to consumers, scanning the completed form, and forwarding it with other information to a NHTSA website. We note that the industry is currently undergoing a restructuring due to the economic crisis and that the number of dealerships involved may shrink from the level we cite here.

Burden: 108,334 burden-hours.

Dealers - NHTSA estimates that it will take each dealership 17 minutes to fill out and certify the paper form, NHTSA Form 1072, “Summary of Sale or Lease and Certifications” and 5 minutes to fill out the NHTSA Form 1071 (electronic form). This will be a total of 22 minutes for both forms.

Buyers– Each buyer will fill out and certify only the paper form, NHTSA Form 1072 “Summary of Sale or Lease and Certifications.” Each buyer will also show proof of registration and insurance of the trade-in vehicle for a one-year period. NHTSA estimates that it will take each buyer 11 minutes to do so.

Cost to the government:

NHTSA’s cost for this collection of information involves electronic record retention for a five year period.  We estimate that this information can be stored on NHTSA’s existing hardware, but are not certain how to separate out the costs of retaining the records of the 250,000 transactions for five years.  We estimate the amount of storage space necessary to store these two forms is 8.5 gigabytes.

...

NHTSA has no plans to publish the results of this collection of information.

3. OMB CONTROL NUMBER 2127-0658

"CARS Program - Disposal Facility and Salvage Auction Information"

The request to collect information sent forth today is necessary to ensure that trade-in vehicles surrendered by dealers are handled in a manner consistent with the CARS Act, and ultimately disposed of. Dealers would be transferring trade-in vehicles to salvage auctions or directly to disposal facilities. Salvage auctions will transfer the trade-in vehicles to disposal facilities. Disposal facilities must (with the exception of eligible spare parts taken from the trade-in vehicle) ensure that the trade-in vehicle is “crushed or shredded.”

This collection of information is necessary to be sure that each required transaction element is supported with documentation, a certification, or electronic verification.

The CARS Act requires NHTSA to ensure that each trade-in vehicle will not be used again as an automobile in the United States or in any other country, and (with the exception of eligible spare parts) to ensure the vehicle will be “crushed or shredded.” We will collect one certification per vehicle from each disposal facility. And we estimate that in half of the transactions, dealers will choose to use a salvage auction. In those cases, the auctions will also complete a certification.

 Responses: 3,750,000 [sic; should be 375,000]

NHTSA estimates that there are 5,000 salvage auctions and disposal facilities that will be participating in the CARS program. However, because it is anticipated that there will be 250,000 used vehicles that will be turned in for the CARS Program, disposal facilities will handle a total of 250,000 transactions.

Salvage Auctions - NHTSA estimates that half the time, the dealers will make arrangements with salvage auctions to deal with the turned-in vehicles.  This will be a total of 125,000 transactions (1/2 of 250,000).

Disposal Facilities – Ultimately, all turned-in vehicles must be turned in to disposal facilities.  For this reason, NHTSA estimates that disposal facilities will deal with a total of 250,000 vehicles, resulting in 250,000 transactions.

Burden:

Salvage Auctions – When handling a turned-in vehicle, the salvage auction must fill out NHTSA Form 1074 - “Salvage Auction Certification Form.”  NHTSA estimates that it will take each salvage auction 5 minutes to fill out the form.  NHTSA has already estimated that there will be 125,000 transactions handled by salvage auctions.  Therefore, this collection of information will result in a burden of 625,000 minutes (125,000 transactions times 5 minutes) on salvage auctions or 10,416 hours. 

Disposal Facilities -  When handling a turned-in vehicle, the disposal facility must fill out NHTSA Form 1075 - “Disposal Facility Certification Form.”  NHTSA estimates that it will take each disposal facility 5 minutes to fill out this form.  This is a total of 250,000 times 5 minutes to fill out the form or 1,250,000 minutes. 

1,250,000 minutes divided by 60 equals 20,832 hours.

Estimated Total Burden:

Total Burden – 10,416 (salvage auctions) hours plus 20,832 hours (disposal facilities) results in a total of 31,248 hours (for salvage auctions and disposal facilities). 

Cost to the federal government:

The estimate of the cost to the Federal government is based on retaining the information on the “Disposal Facility Certification Form” and “Salvage Auction Certification Form.”  Information about 250,000 transactions by disposal facilities and 125,000 transactions by salvage auctions will be retained.  This is a total of 375,000 transactions at two pages per transaction, or a total of 750,000 pages.

It will cost NHTSA $15,000 to store this data for a year.  For enforcement purposes, NHTSA intends to store this data for 5 years, for a total of $75,000. 

4. OMB CONTROL NUMBER 2127-0659

"Survey of Consumer Response to CARS Initiative"

The information collected will be used by NHTSA and the Department, its agents, and other government enforcement personnel to accomplish the statutory requirements of the CARS Act of 2009 and regulations implemented pursuant to the Act. In accordance with the Act, the Department will report to Congress the impact the program has had on consumer vehicle choice and its subsequent impacts on fuel economy, fuel consumption, greenhouse gas production, employment, and other impacts on the economy.

The information collected will be used to identify changes in consumer’s behavior in response to the financial incentives provided by this program.

The Act mandates NHTSA to determine the impact of this program on fuel consumption, greenhouse gas emissions, and other economic considerations.  This cannot be accomplished without this information collection.

NHTSA estimates that there will potentially be as many as 250,000 consumers participating in this program. This represents an average of $4000 in available incentive funds per customer derived from the $1 billion funding level. The $4000 estimate is a simple average of the two available incentive levels of $3500 and $4500. The agency does not know how many of these consumers will voluntarily choose to participate in the survey. Some portion, perhaps as many as 10%, will complete transactions prior to the July 24, 2009 date when the final rule is published and the reporting form becomes available online. Thus, NHTSA believes the maximum number who would participate is roughly 225,000. Participation rates in “captive audience” surveys are typically in the 75-85% range. We conservatively estimate a 75% participation rate or 168,750 completed surveys.

Burden: 9,375 burden-hours.

NHTSA estimates that there will be no more than 19,700 dealers that will respond to the collection of information and that there will be two persons (on average) at each dealership authorized to participate in the CARS Program, for a total number of 39,400 dealer authorized employees. However, dealer participation in this aspect of the survey is confined to presenting the survey to consumers, scanning the completed form, and forwarding it with other information to a NHTSA website. We note that the industry is currently undergoing a restructuring due to the economic crisis and that the number of dealerships involved may shrink from the level we cite here.

NHTSA estimates that the average consumer will spend 2 minutes answering the 3 questions included in the survey (NHTSA Form 1075).

Dealers - NHTSA estimates that it will take each dealership 1 minute to facilitate this survey (NHTSA Form 1075) by providing it to the consumer and by adding it to the package of documents that will be scanned into the NHTSA website.

Consumers – NHTSA estimates that the total time burden on consumers for this voluntary survey will be 5,625 hours. This represents an average of 2 minutes per survey for the 168,750 consumers who may choose to participate. 

Dealers – Dealers will provide the survey form to consumers and scan it to the NHTSA website regardless of whether the consumer chooses to participate. Therefore, NHTSA estimates the total burden for dealers would be 3,750 hours, or 1 minute /transaction for the 225,000 transactions that are estimated to occur after July 24, 2009.

Costs to the federal government:

The Federal government will incur costs to create a data base from the survey forms and to cross-reference this data base with the other information collected for each transaction. This will require one data entry clerk, one document analyst, and 2 operations managers. The system will be built using the ORACLE software application. The total cost to the Federal government of collecting and processing this survey is estimated to be $125,500.

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