[House Hearing, 106 Congress]
[From the U.S. Government Publishing Office]
OVERSIGHT OF HIGH-RISK GOVERNMENT PROGRAMS
=======================================================================
HEARING
before the
COMMITTEE ON THE BUDGET
HOUSE OF REPRESENTATIVES
ONE HUNDRED SIXTH CONGRESS
SECOND SESSION
__________
HEARING HELD IN WASHINGTON, DC, FEBRUARY 17, 2000
__________
Serial No. 106-9
Printed for the use of the Committee on the Budget
U.S. GOVERNMENT PRINTING OFFICE
62-664cc WASHINGTON : 2000
COMMITTEE ON THE BUDGET
JOHN R. KASICH, Ohio, Chairman
SAXBY CHAMBLISS, Georgia, JOHN M. SPRATT, Jr., South
Speaker's Designee Carolina,
CHRISTOPHER SHAYS, Connecticut Ranking Minority Member
WALLY HERGER, California JIM McDERMOTT, Washington,
BOB FRANKS, New Jersey Leadership Designee
NICK SMITH, Michigan LYNN N. RIVERS, Michigan
JIM NUSSLE, Iowa BENNIE G. THOMPSON, Mississippi
PETER HOEKSTRA, Michigan DAVID MINGE, Minnesota
GEORGE P. RADANOVICH, California KEN BENTSEN, Texas
CHARLES F. BASS, New Hampshire JIM DAVIS, Florida
GIL GUTKNECHT, Minnesota ROBERT A. WEYGAND, Rhode Island
VAN HILLEARY, Tennessee EVA M. CLAYTON, North Carolina
JOHN E. SUNUNU, New Hampshire DAVID E. PRICE, North Carolina
JOSEPH PITTS, Pennsylvania EDWARD J. MARKEY, Massachusetts
JOE KNOLLENBERG, Michigan GERALD D. KLECZKA, Wisconsin
MAC THORNBERRY, Texas BOB CLEMENT, Tennessee
JIM RYUN, Kansas JAMES P. MORAN, Virginia
MAC COLLINS, Georgia DARLENE HOOLEY, Oregon
ZACH WAMP, Tennessee KEN LUCAS, Kentucky
MARK GREEN, Wisconsin RUSH D. HOLT, New Jersey
ERNIE FLETCHER, Kentucky JOSEPH M. HOEFFEL III,
GARY MILLER, California Pennsylvania
PAUL RYAN, Wisconsin TAMMY BALDWIN, Wisconsin
PAT TOOMEY, Pennsylvania
Professional Staff
Wayne T. Struble, Staff Director
Thomas S. Kahn, Minority Staff Director and Chief Counsel
C O N T E N T S
Page
Hearing held in Washington, DC, February 17, 2000................ 1
Statement of:
David M. Walker, Comptroller General, United States General
Accounting Office.......................................... 4
Lorraine Lewis, Inspector General, U.S. Department of
Education.................................................. 80
Susan Gaffney, Inspector General, U.S. Department of Housing
and Urban Development...................................... 85
Donald Mancuso, Deputy Inspector General, U.S. Department of
Defense.................................................... 96
June Gibbs Brown, Inspector General, U.S. Department of
Health and Human Services.................................. 109
Prepared statement of:
Mr. Walker................................................... 15
Ms. Lewis.................................................... 81
Response to Congressman Hoekstra's question regarding
inventory tracing of computer materials (letter dated
March 6, 2000)......................................... 130
Ms. Gaffney.................................................. 87
Addendum to Ms. Gaffney's testimony (letter dated
February 23, 2000)..................................... 96
Mr. Mancuso.................................................. 99
Ms. Brown.................................................... 111
Prepared questions from Hon. Joe Knollenberg, a Representative in
Congress from the State of Michigan............................ 56
HUD inspector general table submitted by Hon. Edward J. Markey, a
Representative in Congress from the State of Massachusetts..... 132
OVERSIGHT OF HIGH-RISK GOVERNMENT PROGRAMS
----------
THURSDAY, FEBRUARY 17, 2000
House of Representatives,
Committee on the Budget,
Washington, DC.
The committee met, pursuant to notice, at 10:08 a.m. in
room 210, Cannon House Office Building, Hon. John R. Kasich
(chairman of the committee) presiding.
Present: Representatives Kasich, Chambliss, Nussle,
Hoekstra, Gutknecht, Sununu, Knollenberg, Thornberry, Miller,
Ryan, Toomey, Spratt, Rivers, Bentsen, Davis, Clayton, Price,
Markey, Clement, Moran, Lucas, and Holt.
Chairman Kasich. The committee will come to order, and we
are pleased today to have with us the Comptroller of the GAO
and a number of inspectors general.
I believe that this is going to start a series of hearings
where we will be looking at the management of the Government. I
told Mr. Spratt the other day--I really want everyone to
understand. I didn't want to do this because I am interested,
frankly, in any partisan gain or any fingerpointing from a
partisan point of view. Just so people know, this is starting
my 18th year in Congress, and the first 4 years I was here, I
really was involved in major reform of the Pentagon, including
the spare parts investigation and a number of other
investigations, payments of contractors, and the way they
billed. At that time, I made an awful lot of friends among the
Republican administration. And then I think as most people here
know, I worked with my great friend, Ron Dellums, to kill the
only major weapons system that was killed in the 20th century
by the Congress, and that was the B-2 bomber.
I am not interested in fingerpointing in any of this. I
just think that we have a very big Government, and it is a
Government that spends other people's money. And anytime you
are spending other people's money, you are never going to be
very cautious with it. It is just human nature. But I think it
is the obligation of Members of Congress to do everything they
can to make sure that we are as efficient as we can be.
I am fairly well convinced that what happens at the
Pentagon and the problems that we saw, as I talked to Dave
Walker, since when George Washington commanded the Continental
Army, and the Army sold food supplies to contractors that were
spoiled, there is always going to be waste, inefficiency, and
things that make you want to pull out your hair.
In fact, I think it was Forrestal who went over there to
try to change the Pentagon, and he jumped out of the window
before he finished--it was so difficult. And when you think
about all the people that attended to that building, including
people like David Packard, it is really a tremendous challenge.
And every once in a while you have got to get in there and beat
the bushes.
John, I don't know, this was a screw that was purchased in
1998 under that system where the DLA uses contractor catalogues
to make purchases. This is a 57-cent item for which the
Pentagon paid $75.60.
Now, I started talking about this in 1983, and in 1998, we
made a purchase like this. I am still sure that we are buying--
I actually saw a specification for a whistle and how to blow
that whistle. You emit a steady stream of air which makes the
ball go around which brings out a shrill sound. That is how we
buy whistles--we used to buy whistles in the Pentagon. I don't
know if we are still doing it like that, but I suspect that we
are.
We are going to look at four of the areas that we are
finding as high risk here today, and we hope we are going to
continue to pursue this. And we want to invite all the members
to participate. This is not just going to be one effort, I
hope, that will disappear.
We also have a website at the committee, and we have had
lots and lots of hits on it. But I think we are in the
neighborhood of several hundred items that we think the IGs
have viewed as very legitimate. And I would hope at some point
we could ask employees of the Federal Government to be able to
testify anonymously. We have to figure out a system to be able
to do that.
But I just really want everybody to know that this is not
designed to be a political exercise. This is designed to try to
honestly improve systems and learn. And when we take a look at
Medicare, for example, and we find out that there are 900--
think about this--900 million claims a year on Medicare, and
the Federal Government hands its checkbook to a bill payer and
says pay my bills, now you tell me of the 900 million claims
that are reported that there is any sense that we really are
getting our money's worth. There is a systemic problem in a
system where the consumer is so far removed from the
purchasing.
But enough from me. I hope that the members will find this
interesting. I look forward to hearing from Mr. Walker. I have
had a long relationship with the GAO. I can remember back
probably 15 years ago, 14 years ago, when Republicans were
attacking the General Accounting Office, and I went to the
floor and defended them because I had always felt as though the
GAO was willing to treat the lowest Member, newest Member of
Congress as effectively as they treat the Speaker of the House
or the Senate Majority Leader. And Mr. Walker is new in this
job, relatively new in this job, and I believe he has a
commitment to go back and shake up the GAO, because even
organizations like that get stale and tired.
It is very important that our investigators are robust and
that they are excited about their work, and I am very hopeful
that Mr. Walker is going to be able to breathe some new life
into this organization. He is a professional, I think a friend
of Connie Mack, and is from Atlanta, Georgia. So I am looking
forward to working with Mr. Walker for my remaining time in the
Congress, and I want to wish him the best of luck.
I would like to recognize Mr. Spratt for whatever comments
he may have.
Mr. Spratt. Thank you, Mr. Chairman. And to Mr. Walker, the
Comptroller General, and our other witnesses, welcome. We are
glad to have you participate in the hearing today, and we
appreciate the substantial amount of work you have done to
prepare for this.
This is an old staple. If there is one thing that Congress
doesn't do as well as it should--and there are probably many
things, oversight is one. It is clearly an area where we need
to do more work, and this committee itself should be doing it
along with the other committees which have that function and
jurisdiction.
While we are doing it, we ought to look at ourselves. To be
credible with the American people, to be fair to those whom we
are criticizing, and, in fact, to root out waste, fraud, and
abuse, we ought to look at our work product. We ought to look
at the some of the earmarks in the appropriation reports that
come out of here and ask ourselves if that is an efficient and
unwasteful way of doing business.
We should look at some of the rules and regulations we
prescribe for procurement. We should follow up on some of the
laws that we have written that haven't been fully implemented.
One is the chief financial officers law that requires the
Congress, which imposed that particular requirement on the
executive branch, to hold the feet to the fire of the different
departments to see that they do that right.
Your predecessor, Mr. Walker, was a big believer in that
and wanted to see each department develop what you might call
an annual financial report. And each department is supposed to
be doing that. It is not easy to do. You don't necessarily have
systematic consistency in all your financial reports, but I
think it is a worthy goal for the Federal Government annually
to be able to come up with an annual report, assets,
liabilities, income, outgo, exactly what you have done, and
accrued liabilities, accrued future liabilities.
One of the things we don't do well in any part of the
Government is variance analysis. Years ago we created something
called the Selected Acquisition Report in the Defense
Department. We tried to baseline performance, baseline
schedule, and baseline cost, and then measure against that
baseline over the life of the program.
That program has not evolved with time. It hasn't improved
with time. And we don't have good systems for tracking the
consistency of performance, scheduling, and cost in DOD, DOE,
and lots of Government departments, NASA, too, I am sure.
Just a couple of caveats, and then I think we need to start
the hearing because a lot of members will need to be getting
out of here, and the witnesses will, too.
First of all, we are talking about waste, fraud, and abuse.
A lot of what we are talking about is not fraud, and the
American people should understand that. It gets grouped under
that rubric, but, for example, Medicare. HHS has reported
substantial overpayments. They found more overpayments as a
result of improper payments as a result of the fact that we
have given them more money to be more vigilant and more
inquisitive about how they are being billed and what they are
actually paying.
A very, very small percentage of this is true fraud. Much
of it is simply improper billing, billing the wrong thing or in
some cases paying the wrong thing from the wrong account.
Secondly, there are a lot of things that get dredged up
that simply aren't true. A lot of the old canards about defense
procurement excesses turn out really to be exaggerations, they
weren't that true, and that is why nothing ever happens here.
We go off in pursuit of these red herrings that really turn out
not to be that valid after all.
Then, finally, as I said, we really ought to take a look at
ourselves and the extent to which we contribute to this problem
in the appropriations process and the authorization process
and, in fact, that we do oversight, but it is a lot of
jawboning that tends not to be followed up very effectively.
Once we get through pronouncing it, it is left in a report
somewhere.
Here is a report, for example, a majority staff report,
Committee on Government Operations, my committee, ``Managing
the Federal Government: A Decade of Decline,'' printed in 1993.
And it is full of apparent waste, fraud, and abuse. And I
daresay if we looked into this manual, we would find many of
the things cited here still being practiced today. Some have
been corrected. Some haven't been. And some, as I said, weren't
problems in the first place. They were simply cited as such
because of a lack of understanding.
We appreciate you witnesses coming today because we need to
tell the American taxpayers, they are not paying anything more
than necessary to get the Government they deserve. And we have
to maintain continual oversight to see that that is the case.
We sit sort of as a board of directors, and we appreciate the
assistance you are providing us today, and we look forward to
your testimony.
Thank you very much.
STATEMENT OF DAVID M. WALKER, COMPTROLLER GENERAL, UNITED
STATES GENERAL ACCOUNTING OFFICE
Mr. Walker. Thank you, Mr. Chairman and Mr. Spratt. Members
of the committee, it is a pleasure to be here.
Mr. Chairman, as you and I agreed by phone, I am going to
talk probably about 20 minutes because I want to give you some
meat including some specific examples in order to bring some of
these issues to life.
I very much appreciate the opportunity to be before you
this morning on behalf of the General Accounting Office to
discuss our views on targets of opportunity for you and other
Members of Congress to consider in order to maximize the
performance, ensure the economy, and assure the accountability
of the Federal Government for the benefit of the American
people.
This committee is to be commended for holding these
hearings and emphasizing that, surplus or no surplus, poor
performance, waste, and inefficiency in Government cannot be
ignored. No matter how large the projected surpluses may be,
they do not absolve the Government of its responsibility to
pursue fraud, waste, abuse, and inefficiency and to make
prudent use of taxpayer dollars.
We also have an obligation to modernize Government to more
effectively address the needs of our changing society. Many of
our current Federal programs--their goals, organizations, and
processes--were designed decades ago. Given this context, it
shouldn't be insulting nor threatening to any Federal program
or activity to question their relevance or fit in today's
world. In fact, it is wholly appropriate and prudent to do so.
This is especially important given the long-range budget
challenges we face stemming from our aging society and the
known approaching demographic tidal wave, which will hit.
The first chart, which is on my left, lists examples of
Federal programs and operations that, based upon our past work,
warrant reexamination for one of three major reasons: first, to
improve the economy and efficiency of existing Federal
operations; secondly, to reassess what the Government does;
and, thirdly, to redefine the beneficiaries of Federal
Government programs. These are illustrative. We have others.
But for time and space considerations, we wanted to focus on
these.
I will review several examples of these after I discuss our
high-risk series. Our high-risk series is noted on the right,
the results of our latest high-risk report which, as you know,
ladies and gentlemen is done every 2 years. Our latest report
came out in January of 1999.
Over the years, our work has shown that various functions
and programs critical to personal and national security,
ranging from Medicare and housing to tax administration and
weapons acquisitions, have been hampered by significant and
recurring financial and management program problems that expose
these activities to increased risk of fraud, waste, abuse, and
inefficiency.
Successfully addressing these problems offers the potential
to achieve major savings over time through improved services to
the public and hopefully will also serve to, in addition to
improving the economy, improve the public's respect for and
confidence in their Government over time.
In January 1999, GAO updated our high-risk series. The
latest update includes 26 programs that are vulnerable to
higher levels of fraud, waste, abuse, or other activities. Six
areas have been removed since we began our series in 1990 while
10 of the original areas remain on the list.
We have also recently issued a report identifying the range
and magnitude of improper payments, and as Mr. Spratt pointed
out, that does not necessarily mean fraud. And I will clarify
that later--improper payments from Federal programs based upon
agency estimates and their financial statements, many of which
relate to these high-risk areas.
In my written settlement, which is extensive--and I would
commend it to you and your staff--we discuss selected high-risk
and improper payment areas along with case examples from GAO
and inspector general reports to demonstrate how the underlying
management and program design problems can result in waste and
poor performance.
I would now like to discuss some examples to put a face on
some of these issues within the time allowed.
First, Medicare. With annual payments of about $200
billion, Medicare is one of the fastest-growing major social
programs in the Federal budget, and it is expected to almost
double in size in the next 10 years alone. Importantly, the
demographic tidal wave that I mentioned won't hit until 2011.
Medicare's problems really escalate after that.
Medicare finances health care services delivered by
hundreds of thousands of providers to tens of millions of
beneficiaries. This program has been a perpetually attractive
target for exploitation. People go where the money is,
requiring constant vigilance and increasingly sophisticated
approaches to protect the system from wrongdoing and abuse.
HHS has begun to identify improper payments, that is,
payments made in error. Based on the financial statements for
the $176 billion Medicare fee-for-service program, between the
years 1996 and 1998, the estimated total annual payments made
in error in this program dropped from $23.2 billion to $12.6
billion. But that is still a lot of money.
Sources of these errors included payments unsupported by
documentation, payments made for unnecessary medical
procedures, incorrectly coding billing for services, or
upcoding--trying to code for higher levels of services than
were actually provided--and payments for unallowable services.
The reductions in erroneous payments were largely attributable
to better claims documentation by providers rather than a
reduction in the other three categories. Moreover, this
estimate does not include all losses due to fraudulent schemes,
such as collusion, kickbacks, and false claims for services not
provided.
Problems with abuse in this system partially stem from the
program's oversight structure. HCFA delegates the review of
claims to its contractors, yet its oversight of these
contractors does not provide adequate assurance that claims are
properly paid.
In our written statement, we highlight the case of a major
Medicare contractor who settled a $140 million claim and pled
guilty to eight felony counts for, among other things, rushing
payments through the payment system by shutting off the
computer edits designed to avoid improper payments, allowing
Medicare to make payments for claims that should have been made
by private insurers--as you know, Medicare is a secondary
payer--and disconnecting toll-free phone lines used for
beneficiary inquiries and complaints.
Medicare has proven to be vulnerable to fraud by career
criminal and organized crime elements posing as health care
providers. These groups have created sham medical clinics or
other entities or used the names of legitimate providers to
bill for services either not provided or medically unnecessary.
For instance, the rent-a-patient scheme. In two South
Florida cases, recruiters organized thousands of beneficiaries
from, among other places, retirement communities and drove them
to area clinics for rote examinations and unnecessary testing
and treatment. Recruiters received a fee that they shared with
the beneficiaries. It could be referred to as a kickback. It
may have been knowing or unknowing. Beneficiaries understood
that they should go elsewhere if they needed a real doctor.
Several licensed physicians participated in the scheme in
which they signed medical records for services they neither
performed nor supervised. The clinics then billed Medicare,
Medicaid, and other private insurers for services either not
necessary or not performed. In one or two of the cases, the
clinics filed over $120 million in fraudulent Medicare claims
and $80 million was paid. The leaders of the ring were arrested
and sentenced to prison for health care fraud and are now
wearing wide-striped suits.
Other improper payments. Mr. Chairman----
Chairman Kasich. May I just interrupt you briefly there?
Mr. Walker. Yes, Mr. Chairman.
Chairman Kasich. My understanding is that the estimates we
have that involve improper billing, fraud, or whatever, does
not include these dummy practices, i.e., people who claim to be
doctors who are not doctors, who have patients--claim to have
patients where there are no patients. Is that correct?
Mr. Walker. It does not include all forms of fraud and
collusion, including some practices that you just articulated.
And I am sure that the IG for HHS, June Gibbs Brown, can give
you more detail on what their methodology does and does not
include. Thank you, Mr. Chairman.
Other improper payments. Many other Federal programs, in
addition to Medicare, are vulnerable to improper payments. The
Federal Government's fiscal year 1998 financial statement
reports from nine agencies alone estimated that improper
payments amounted to $19.1 billion. In addition to the Medicare
program, this estimate included improper payments from such
programs as Social Security, $1.2 billion; food stamps, $1.4
billion; housing subsidies, $857 million; and Supplemental
Security Income, $1.6 billion.
Importantly, the amount of improper payments is greater
than that disclosed thus far in agency financial statements. In
addition, audit reports from GAO and agency inspectors general
have identified other agencies that have made improper payments
but did not include estimates in their financial statements or
have yet to do so.
For instance, as you mentioned, Mr. Chairman, HHS has not
estimated improper payments for the Medicaid program which has
$108 billion in Federal outlays for fiscal year 1999. Our
recent work has concluded that the size and structure of this
program makes it inherently subject to exploitation.
Common Medicaid fraud and abuse schemes fall into three
broad groups; improper billing practices, misrepresentation of
professional qualifications and improper business practices
such as kickbacks, self-referrals or collusion. In one case,
two businesses netted $10 million in excess Medicaid payments
related to phony contracts with nursing homes to a shell
company.
Illicit diversion of Medicaid-covered prescription drugs
has also proven to be a persistent problem. Schemes include
pharmacists who routinely add drugs to legitimate prescriptions
and keep the extra amount for sale to others, and individuals
who provide recipients with controlled substances in exchange
for subsequent illicit use of their Medicaid recipient numbers.
We have recommended that OMB develop guidance for agencies
to help them estimate improper payments more systematically for
Federal programs and to prompt them to develop goals to address
these issues in their annual performance plans in consultation
with appropriate congressional oversight committees. OMB has
started to work with the agencies to develop guidance to assist
agencies in doing this. This needs to be a high priority, not
just within the executive branch but also for congressional
oversight.
HUD programs----
Chairman Kasich. Could I just stop you there with Medicaid?
Mr. Walker. Yes, Mr. Chairman.
Chairman Kasich. Is it fair to assume that the Medicaid
program really has not been reviewed? Is that correct?
Mr. Walker. It hasn't been as extensively reviewed as the
Medicare program, at least as it relates to some of these
estimation techniques, and more needs to be done in that area.
In 1994, we designed HUD programs as a high-risk area
because of our work and that of others, such as the HUD
inspector general. We identified four serious, longstanding
departmentwide management problems that, taken together, placed
the integrity and accountability of several major HUD programs
at high risk. These deficiencies included weak internal
controls, an ineffective organizational structure, an
insufficient mix of staff with the proper skills, and
inadequate information and financial management systems.
We concluded that while HUD had efforts underway to address
the numerous and severe problems that frankly have occurred
over years that have significant impact on program management,
billions of dollars across most of the agencies' major programs
continue to be at risk.
Our recent work demonstrates that HUD has made credible
progress in addressing a number of these challenges, but
significant challenges remain.
For instance, we noted in 1999 that inadequate monitoring
and problems with information and financial management systems
persist. HUD is likely to spend millions of dollars, miss
milestones, and still not meet its objective of developing and
fully deploying an innovative financial management system
because it has not yet finalized detailed plans of how to do
this.
In 1998, we have reported weaknesses in HUD's oversight of
its single-family inventory, which are properties acquired by
HUD and managed by contractors when borrowers default on
single-family mortgages insured by HUD. Our physical inspection
of selected properties identified serious problems with
vandalism, maintenance problems, and safety hazards that may
have decreased marketability, increased HUD's holding cost, and
in some instances threatened the health and safety of neighbors
and potential buyers.
In my written statement, we discuss the case of one
contractor responsible for 40 percent of HUD's workload whose
failures to adequately maintain these properties or make them
available for sale prompted to HUD to properly terminate that
contractor, ultimately leading to the contractor's bankruptcy
filing, at the same point in time it created a major void with
regard to the administration and oversight of these programs.
Since 1995, HUD has taken a number of actions to address
its management deficiencies, and it has made credible progress.
For example, the Department has improved its financial
reporting and received an unqualified opinion for the fiscal
year 1998 financial statements. In our 1999 high-risk series
update, we noted that HUD's Secretary and leadership team have
given a top priority to addressing the Department's management
deficiencies. A major factor in HUD's progress has been the
June 1997 2020 Management Reform Plan, which called for
reducing the number of programs, retraining staff, reorganizing
the field offices, consolidating processes and functions into
specialized centers, and modernizing and integrating
information and financial management systems.
While comprehensive plans to address such problems
represent a positive step forward, ultimately it is results
that count. We are monitoring HUD's progress, and it is too
soon to tell whether these reforms will be successfully
implemented in order to sufficiently address these problems in
conjunction with over the long term as well as our next high-
risk series update.
DOD management. Six of our current 26 high-risk areas
relate to longstanding DOD management problems. The
Department's size, culture, and organizational structure
present major management challenges.
While DOD is clearly number one in the world in fighting
and winning armed conflicts, it is a D-plus in the area of
economy and efficiency, although they are showing signs of
taking this much more seriously and have started to make some
progress.
With regard to financial management, no major part of DOD
is able to pass the test of an independent financial statement
audit. Many have trouble just putting together a financial
statement, much less having an audited financial statement. The
absence of integrated financial management systems has hampered
the agency's ability to prepare financial statements and engage
in sound day-to-day management practices.
The continuing financial management problems have real
consequences for program management and resource allocation.
For instance, DOD cannot properly account for billions of
dollars of basic transactions, leaving the agency vulnerable to
the misuse of appropriated funds.
For example, auditors reported that the Air Force depot
management activity, a component of one of the Department's
working capital funds, may have obligated $1.1 billion more
than it had available as of September 30, 1998. In addition,
DOD's records do not consistently reflect the number and
location of its inventories and weapons systems, increasing the
risk that inventory managers may request funds for items that
are already on hand. In addition, it may make it difficult in
order to be able to use items that are needed because they
don't know where they are when they are needed.
Contract management. DOD continues to overpay contractors.
While the full extent of overpayments is unknown, we do know
that between fiscal year 1994 and 1998, defense contractors
returned voluntarily $4.6 billion in overpayments, an average
of about $920 million a year. Surprisingly, under current law,
there is no requirement for contractors who have been overpaid
to notify the Government, much less to send the money back.
And, in fact, there aren't even any incentives for them to do
so or penalties if they don't.
Weapons system acquisitions. DOD spends over $80 billion
annually to research, develop, and acquire weapons systems.
Although DOD has many acquisition reform initiatives in
process, fundamental weapon system problems persist. These
systemic problems serve to reduce the system's performance and
waste taxpayer dollars.
The competition for funding when a program is launched
within DOD encourages aspiring DOD programs and their managers
and sponsors to include performance features that rely upon
immature technologies and overly ambitious cost and schedule
estimates. For example, the Comanche helicopter. That
development program is being restructured for the fifth time in
the last 10 years due to uncertain and changing requirements
and unattainable cost and schedule estimates. This latest
restructure/development plan still contains significant risks
of further cost overruns, schedule delays, and degraded
performance. Annual production costs are now projected to be
over $2 billion by the year 2008--$2 billion a year. This will
comprise about 64 percent of the army's aviation budget over
time.
Now, I can assure you this picture is not the Comanche
helicopter, but this is relevant to the next illustration I
would like to provide.
These problems also exist in noncombatant systems. For
example, the Army has procured thousands of high-mobility
trailers, which you see on my right, that are not usable or
suitable. It awarded this multiyear production contract without
first demonstrating that the design would meet its
requirements.
I wanted to bring a trailer and tow it up here and park it
outside for you to be able to see one of these. However, the
picture is going to have to do because it proved to be
inappropriate. We have thousands in storage. The trailers are
found to damage the trucks that tow them. Moreover, the Army
found that the trailer draw bar could break, causing the
trailer to overturn, disconnect, causing damage to property and
possibly to persons as well. Therefore, I did not think it
would be prudent for us to attempt to pull one up here.
Believe it or not, the Army has procured 6,700 of these at
a current price of over $10,000 each. Unfortunately, this is
the rule rather than the exception in connection with many DOD
acquistion programs.
Now, let me clarify here, Mr. Chairman and members. They
are going to be able to fix this. It is going to cost a
thousand bucks, or so to fix it, and it is going to take time,
and they want to procure another, you know, probably 18,000 of
these eventually. But this is a systemic problem. And one of
the major concerns that I have about procurement and
acquisitions, especially in DOD, is they do not follow proven
commercial best practices for acquisitions.
Now, I can understand that in a circumstance where we have
a credible national security threat. I do not understand that
at all in a circumstance where we don't. The current approach
results in systems, whether they be combatant or noncombatant,
not meeting performance requirements, significant delays, and
billions--billions--of wasted money that maybe should go to
defense but could be reallocated to more critical needs like
readiness and other areas, because we already know that we have
a tremendous squeeze coming on the defense budget based upon
known budget projections and restrictions on discretionary
spending.
Reducing and resolving risk in Federal programs. To be
fair, several Federal agencies have taken many of these high-
risk programs seriously and are making progress in addressing
them. Congress has also acted to provide oversight and needed
legislative changes in connection with a few of these issues.
However, more needs to be done by both the executive branch and
the Congress to accelerate progress in these areas. Many of
these problems have existed for years. They are deeply rooted,
complex, and persistent and sustained attention by both the
executive branch, including OMB, as well as the Congress will
be needed in order to achieve lasting improvement.
Some areas may, in fact, require targeted legislative
action or modest investment in information or financial systems
and human capital initiatives in order to achieve the savings
or increased performance.
Plans have been conceived to address many of these issues,
but the more difficult implementation task of translating these
plans into day-to-day management reality lies ahead for many of
these areas. Vigilant congressional oversight will be
absolutely critical to promoting and sustaining the high-level
focus that is necessary in order to resolve these problems.
High-risk areas and improper payment problems reflect
deeply rooted weaknesses in Federal financial and program
management systems and controls. The Government's financial
systems are often unable to perform the most basic bookkeeping
requirements for Federal entities, many of which are engaged in
financial transactions whose magnitude, complexity, and risk
exceeds those experienced by the largest global private sector
enterprises. After all, the United States is the largest, most
complex, most diverse entity on the face of the Earth bar none,
public or private sector.
The agency's inability to account for substantial
liabilities, assets, net costs, or improper payments were among
the factors that prevented us from being able to form an
opinion on the Government's consolidated financial statements
for the 2 years that we have been performing this audit. They
will also prevent us from rendering an opinion on the fiscal
year 1999 consolidated financial statements, and we are likely
not to be able to render an opinion on these statements until
several key issues are addressed, in particular DOD's financial
management systems.
I do not believe we will ever be able to express an opinion
without DOD getting its act together, and they project that
that will not happen until 2003 at the earliest, although they
are trying and they are making some progress.
Agencies have made uneven progress in obtaining clean
financial statement opinions; however, even where this
important milestone has been reached----
Chairman Kasich. Wait, wait.
Mr. Walker. Yes, Mr. Chairman.
Chairman Kasich. I don't want to miss--are you trying to
tell me that you can't audit the DOD books until 2003?
Mr. Walker. Let me clarify, Mr. Chairman. They are being
subject to audit. What I am saying is that we at GAO are the
auditors of the consolidated financial statements of the
Federal Government. At the present time, the inspector general
audits DOD, and then we review the work that they do in order
to determine the impact on our audit of the overall Government.
What I am saying is that the IG has not been able to
express an opinion on DOD, and unless and until they can do
that, we are not going to be able to express an opinion on the
overall Government. DOD doesn't believe they are going to be in
shape to achieve that objective until, at the earliest, 2003.
And so they are still being subject to audit; however, the
problems are so embedded, they are so systemic, and they are so
significant that the executive branch is estimating it is going
to take them at least 3 years to get to that point.
Mr. Spratt. Wouldn't you agree that DOD is subject to more
continual internal audit because of the Defense Contract Agency
than most other Government departments?
Mr. Walker. They have a number of oversight entities. They
have DCAA. They have the different service internal auditors,
if you will. They also have the overall inspector general for
DOD as well. And so it is not that they are not subject to
oversight.
Candidly, as I said before, Mr. Spratt, DOD is an A, number
one in the world in performance and results on the battlefield.
But, frankly, they didn't focus for decades on economy and
efficiency, and they are just now starting to really focus on
it. But there is a lot more that needs to be done there because
we are talking about a lot of money.
Agencies have made uneven progress in obtaining these clean
opinions. But even when this important milestone has been
reached--and as you know, 12 of the 24 major departments and
agencies received clean opinions on their 1998 financial
statements. The executive branch is hopeful that 18 will for
1999. I think that might be optimistic. But the fact of the
matter is, even when they reach this important milestone of
getting a clean opinion, that is not the end, because the
purpose of the CFO Act is to make sure that Government agencies
and their management have timely, accurate, useful information
to make informed management decisions day to day. And, in fact,
what has happened in the case of some of these agencies who
have gotten clean opinions, they have hired outside
contractors, spent millions of dollars in order to be in a
position to get a clean opinion on their financial statements,
months after the end of the year, and yet their systems are
such for them to manage their operations effectively during the
year. That is not what we should be doing here.
You know, getting a clean opinion is an important
milestone. We ought to do it. But that is not the end game. We
have got to focus on dealing with the fundamentals.
Mr. Chairman, the deep-seated nature of many of these high-
risk areas does not mean that they are immutable. In fact, we
have noted significant improvements in several areas. For
example, where a partnership approach is employed--by that I
mean where the Congress takes this seriously and where the
executive branch takes this seriously--progress can and has
been made. The U.S. Customs Service was removed from our high-
risk list last year due to consistent progress in addressing
major management and organizational weaknesses. Coupled with a
major reorganization, the agency has made major improvements in
its financial management and enforcement of the Nation's trade
laws. Sustained management commitment and congressional
oversight was essential for this progress.
In this regard, the agencies' initiatives received
important and consistent backing and reinforcement during this
period from the Results Caucus, commissioned by the House
leadership.
Mr. Chairman, if I can go briefly on the rest, I am going
to try to summarize the rest, that is high-risk, but I do want
to talk a little bit about these three categories. And I would
like to give you one example, if I can, of each of these
categories.
In addition to overseeing high-risk areas, numerous other
opportunities are available to focus congressional oversight
and improve Government efficiency, modernize operations, update
priorities, and target Federal payments and subsidies. Our
written statement has numerous examples. I am going to provide
one example of each major category.
With regard to improving economy and efficiency,
congressional reviews can focus on opportunities such as
consolidation or coordination of programs with similar
objectives and the reengineering and streamlining of Federal
processes. One example involves a Federal system to ensure the
safety and quality of our Nation's food system.
The current system is inefficient and outdated. It suffers
from overlapping and duplicative inspections, poor
coordination, inefficient allocation of resources, and
inadequate recovery of costs.
For example, the USDA Food Safety and Inspection Service is
responsible for the safety of meat pizzas--and there are ten
other Federal agencies that administer over 35 different laws
that include food safety. So USDA has meat pizzas, but FDA has
cheese pizza. And we have got a lot of players in the ball game
here, and I think all of us can probably agree that food safety
is important. It is important to all of us. But we need to go
about it in a way that is efficient and effective.
Given this environment, the Congress could consider
consolidating food safety agencies under the activities of a
single agency in order to have a uniform set of food safety
laws and enforcement activities.
The second area, reassessing what the Government does. It
is important to periodically reexamine whether current programs
and activities remain relevant, appropriate, and effective for
our changing society. Our work demonstrates that congressional
oversight could usefully address such fundamental questions as
whether changing conditions have rendered particular programs
obsolete or in need of major reform. After all, a lot of these
programs started decades ago when there was a bona fide need
that wasn't being met by the private sector or State and local
governments. But what has happened over the years is they get
in the baseline. So it is presumed that that need still exists,
and it is also presumed that they are effectively meeting that
need. In some cases, that is true, but not in all.
And I think now that we are entering the 21st century and
now that we have time and don't have to focus on annual
deficits, we don't have to focus on the Cold War, we have got
an opportunity to take a more comprehensive view and to
reassess what is the role of Government, what should it be, and
how can we best achieve what those desired objectives are.
The USDA Market Access Program is a case in point. This
program subsidizes a portion of U.S. agricultural products in
overseas markets. Despite changes made to the program between
1993 and 1998, serious questions remain over its results,
including whether subsidized promotions generate positive net
economic returns to the United States, increase exports that
would have not otherwise occurred, and supplement rather than
supplant private sector spending. Moreover, MAP promotions can
have significant unintended effects.
For example, a 1996 study of U.S. apple exports in the
United Kingdom and Singapore found that the U.S. market share
in export value increased in the United Kingdom, but that
foreign competitors actually gained a lot more than the United
States did in Singapore as a result of this program.
The last general topic: redefine who benefits from Federal
Government programs. To better reflect changing conditions and
target limited resources, Congress should periodically
reexamine the eligibility rules and formulas for Federal
subsidies to States, businesses, and individuals. As presently
designed, a variety of grants, tax expenditures, loans, and
loan guarantees provide subsidies to recipients who would have
undertaken the activity without Federal subsidy and thus avoid
bearing their fair share of risk and cost.
For example, repetitive flood loss is one of the major
factors contributing to the financial difficulties facing the
National Flood Insurance Program. Approximately 43,000
buildings currently insured under the National Flood Insurance
Program have been flooded on more than one occasion. These
repetitive losses account for 36 percent of all program claims
historically, about $200 million a year, even though the
repetitive loss structure makes up a very small portion of the
total insured population, only about 1 to 2 percent.
The cost of the program of these multiple-loss properties
over the years has been about $2 billion. The Congress and FEMA
could consider eliminating flood insurance and emphasizing
mitigation for certain repeatedly flooded properties, removing
what some argue is now an incentive to locate in harm's way.
Mr. Chairman, trying to sum up here, I am sure that this
list of Government performance and management problems is
sobering. There is much that remains to be done, but the task
is not overwhelming. This is an opportune time to reinvigorate
congressional oversight because we are relieved from the
burdens of annual deficits and, in addition, we don't have
certain external challenges such as the Cold War environment to
focus on. But to achieve positive and lasting results requires
sustained effort and commitment not only behalf of the
executive branch but also on behalf of the legislative branch.
As you know, making progress in this area can be a daunting
challenge that involves tough work over a sustained period of
time, and in many cases, quite frankly, it is not very sexy and
it doesn't grab a whole lot of headlines. But as was pointed
out previously, I think by Mr. Spratt, we collectively have a
fiduciary responsibility to make sure that the taxpayer dollars
are used efficiently and effectively. We ultimately have a
finite amount of resources, and we need to make sure that those
resources are targeted to get the maximum return on the
taxpayers' investment. And while we are rolling in dough right
now, at least we think we are based upon projected budget
surpluses, based upon our long-range budget simulations we show
we are going to be in the soup again because of escalating
costs associated with entitlement programs due to known
demographic trends. So we really need to reinvigorate
congressional oversight.
I commend you, Mr. Chairman, for holding these hearings and
reminding us of the importance of continued diligence regarding
performance, economy, and accountability of Government
programs. We look forward to continuing to work with you, and I
will mention--and I think it is important to say this--GAO is
on the front line every day in this area. And you are getting a
return on that investment. On average, GAO generates $20
billion in annual financial benefits or a return on your
investment and the taxpayers' investment of $57 for every $1
invested, number one in the world, bar none. And we look
forward to working with you and addressing these and other
issues.
Thank you, Mr. Chairman.
[The prepared statement of David Walker follows:]
Prepared Statement of David M. Walker, Comptroller General of the
United States
I appreciate the opportunity to be here this morning to discuss our
views on targets of opportunities that you and other Members of the
Congress can consider when addressing the budget and oversight
challenges before you. The Committee is to be commended for holding
these hearings and emphasizing that--surplus or no surplus--poor
performance, waste, and inefficiency cannot be ignored. No matter how
large the projected surpluses may be, they do not absolve the
government of its responsibility to make prudent use of taxpayer
dollars. Rather, the surplus provides an opportunity to rise out of the
1-, 3-, or 5-year budget horizons of recent deficit debates and to
focus on how to restore the public's trust and confidence in their
government.
After a decade of deficit reduction, we know there are pent-up
demands for using projected surpluses. However, if careful scrutiny is
given only to new spending or tax proposals, policymakers will have
missed a critical window to address known performance problems in
government. Left unresolved, these problems can expose Federal programs
and operations to unnecessary risk, excessive costs, and chronic
performance shortfalls. Resolving some of these problems offers the
potential to save billions of dollars and dramatically improve the
delivery of services to the American public. For instance, nine Federal
agencies estimated improper payments of $19.1 billion for fiscal year
1998 and we continue to highlight 26 major areas as being highly
vulnerable to fraud, waste, abuse, and mismanagement.
These persistent problems suggest that we cannot afford to be any
less vigilant in our attention to programs at high risk of fraud,
waste, abuse, and mismanagement in a time of surplus. In fact, it is
our obligation to safeguard benefits for those that deserve them by
preventing the diversion of scarce Federal resources for inappropriate,
unauthorized, or illegal purposes. The activities that GAO has
identified as high-risk areas warrant vigilant and persistent oversight
and attention by executive agencies and the Congress alike. Significant
opportunities exist to reduce waste and improve the economy and
efficiency of Federal activities in other areas as well, as I will
discuss in my statement today.
Mr. Chairman, we also have an obligation to modernize government to
more effectively address the needs of a changing society. As we enter a
new century, we have been reminded about how much things change. Yet
many of our programs--their goals, organizations, and processes--were
designed long ago. Given this context, it shouldn't be insulting or
threatening to any Federal program or activity to question its
relevance or ``fit'' in today's world. In fact, it is wholly
appropriate and prudent to do so.
Examining the legacy of existing activities and programs can yield
important benefits. First, we can provide for much needed flexibility
to address looming cost pressures and emerging needs by weeding out
wasteful and inefficient programs that have proven to be outdated and
no longer relevant to our changing society. As the baby boom retires,
enhancing budgetary flexibility will be even more critical as the
projected growth of Social Security and health care outlays threaten to
crowd out other priorities. Second, we can update and modernize those
activities that remain relevant by improving their targeting and
efficiency through such actions as redesigning formulas, enhancing cost
sharing by beneficiaries, consolidating facilities and programs, and
streamlining and reengineering operations and activities.
All of our work reaffirms that with billions of dollars at risk and
notwithstanding our current budget surplus environment, the Congress
and Federal agencies need to devote sustained attention to oversight
and reexamination of existing programs and activities to improve the
performance of government and reduce the potential for fraud, waste,
abuse, and mismanagement. Let me hasten to add that Federal agencies
have taken the high-risk areas seriously and are making progress in
addressing them, and the Congress has also acted to provide oversight
and needed legislative changes. However, more needs to be done by
executive agencies and the Congress to accelerate progress. Many of
these problems are deeply rooted and complex. Although plans have been
conceived to address many of these issues, the more difficult
implementation task of successfully translating those plans into day-
to-day management reality lies ahead for many of these areas. Vigilant
congressional oversight will be absolutely critical to promoting and
sustaining a high level focus on these problems and support for
appropriate actions to address them.
Mr. Chairman, I don't need to tell you that sorting through
existing programs is a serious, if often unglamorous, task that is
nonetheless vital. This task is made particularly difficult because
existing programs and commitments are ``in the base'' in budgetary
terms and can have an advantage over new initiatives and demands.
In my testimony today I draw on the full breadth of GAO work to
highlight numerous examples of significant performance problems in
Federal agencies and programs, each drawn from the key findings and
issues developed in our audits and evaluations.\1\ To facilitate our
discussion, the examples are organized around the following four broad
themes:
---------------------------------------------------------------------------
\1\ Many of the examples discussed in this testimony were developed
as part of our annual effort to describe the budgetary implications of
our work. See Budget Issues: Budgetary Implications of Selected GAO
Work for Fiscal Year 2000 (GAO/OCG-99-26, Apr. 16, 1999). We expect to
update and issue this product to this Committee and others next month
and are currently working with the Congressional Budget Office and the
Joint Committee on Taxation to develop estimates of budget savings or
revenue gains for these and other examples.
---------------------------------------------------------------------------
Attack activities at risk of fraud, waste, abuse, and
mismanagement: focus on minimizing risks and costs associated with the
delivery of major Federal programs and activities.
Improve the economy and efficiency of Federal operations:
capture opportunities to reduce costs through restructuring and
streamlining Federal activities.
Reassess what the Federal Government does: reconsider
whether to terminate or revise outdated programs or services provided.
Redefine the beneficiaries of Federal Government programs:
reconsider who is eligible for, pays for, and/or benefits from a
particular program to maximize Federal investments.
Attacking Activities at Risk of Fraud, Waste, Abuse, and Mismanagement
Mr. Chairman, in selecting priorities for oversight, major
attention should be given to addressing the vulnerability of many
critical Federal programs and operations to the risk of fraud, waste,
abuse, and mismanagement. Over the years, our work has shown that
central functions and programs critical to personal and national
security, ranging from Medicare to weapons acquisitions, have been
hampered by daunting financial and program management problems. These
problems result in persistent exposure of these activities to waste and
abuse.
These weaknesses have real consequences with large stakes that are
important and visible to many Americans. Some of the problems involve
the waste or improper use of scarce Federal resources: Federal funds
are diverted from their intended uses or beneficiaries, revenues owed
are not effectively identified or collected, or excessive inventories
and procurement costs drive Federal costs higher than they need to be
for some areas. Other problems compromise the ability of the Federal
Government to deliver critically needed services: systemic information
management weaknesses undermine the nation's ability to modernize our
technology for tax processing, airline safety, and weather forecasting;
and systemic procurement problems hamper the development of weapons
systems and the cleanup of hazardous wastes at DOE sites. Perhaps of
greatest importance is the impact of these problems on our ability to
safeguard critical assets and operations from theft and misuse, whether
it is critical national security information or private tax return
information.
Areas at High Risk and Programs Vulnerable to Improper Payments
In January 1999, we reported on specific Federal activities and
functions that are particularly vulnerable to fraud, waste, abuse, and
mismanagement--an update to a series on high-risk activities begun in
the last decade and provided at the start of each new Congress.\2\
Since 1990, six of our high-risk designations have been removed as a
result of sustained, tangible improvements by the affected agencies; at
the time of our last update, however, 26 high-risk areas remained, as
shown in table 1. We have also recently reported on estimates of the
range and magnitude of improper payments within specific Federal
programs--several of which have also been identified as high-risk
areas--as disclosed in agency financial statements reports.
---------------------------------------------------------------------------
\2\ GAO has issued update reports on the status of high-risk areas
every other year since 1993. Our latest report was High-Risk Series: An
Update (GAO/HR-99-1, Jan. 1999).
TABLE 1.--1999 HIGH-RISK AREAS AND THE YEAR DESIGNATED*
------------------------------------------------------------------------
High-risk area Year
------------------------------------------------------------------------
Reducing Inordinate Program Management Risks
Medicare................................................... 1990
Supplemental Security Income............................... 1997
Internal Revenue Service (IRS) Tax Filing Fraud............ 1995
Department of Defense (DOD) Infrastructure Management...... 1997
Department of Housing and Urban Development (HUD) Programs. 1994
Student Financial Aid Programs............................. 1990
Farm Loan Programs......................................... 1990
Asset Forfeiture Programs.................................. 1990
The 2000 Census............................................ 1997
Managing Large Procurement Operations More Efficiently
DOD Inventory Management................................... 1990
DOD Weapon Systems Acquisition............................. 1990
DOD Contract Management.................................... 1992
Department of Energy Contract Management................... 1990
Superfund Contract Management.............................. 1990
National Aeronautical and Space Administration Contract 1990
Management................................................
Ensuring Major Technology Investments Improve Services
Air Traffic Control Modernization.......................... 1995
Tax Systems Modernization.................................. 1995
National Weather Service Modernization..................... 1995
DOD Systems Development and Modernization Efforts.......... 1995
Providing Basic Financial Accountability
DOD Financial Management................................... 1995
Forest Service Financial Management........................ 1999
Federal Aviation Administration Financial Management....... 1999
IRS Financial Management................................... 1995
IRS Receivables............................................ 1990
Resolving Serious Information Security Weaknesses.............. 1997
------------------------------------------------------------------------
*Note: Our most recent update to the high-risk list in January 1999 also
included ``Addressing the Urgent Year 2000 Computing Challenge.''
Given the progress that has been made on this issue, we have not
included it in this summary table. See Year 2000 Computing Challenge:
Leadership and Partnerships Result in Limited Rollover Disruptions
(GAO/T-AIMD-00-70, Jan. 27, 2000).
The high-risk areas shown in Table 1 as well as other improper
payments reflect serious and continuing problems with financial,
information, and program management across many Federal functions and
agencies. Collectively, these areas affect almost all of the
government's annual $1.7 trillion in revenue and span critical
government programs and operations from benefit programs to large
lending operations, major military and civilian agency contracting, and
defense infrastructure. Lasting solutions to these problems offer the
potential to save billions of dollars, dramatically improve services to
the public, and strengthen confidence in the accountability and
performance of the national government.
In these areas, more needs to be done to achieve real and sustained
improvements. GAO has made many recommendations to address and correct
these problems. However, these problems will take time to fully resolve
because they reflect deep-rooted, difficult problems in very large
programs and organizations. Real improvements in performance and
management will require persistent and sustained attention, and some
areas may in fact need targeted and well-chosen investments in systems
and human capital in order to achieve recurring savings.
I will now turn to a discussion of selected areas, which illustrate
the problems facing us, and the need for increased and sustained
congressional oversight and management attention.
Medicare
With annual payments of about $200 billion, Medicare is one of the
fastest growing major social programs in the Federal budget and is
projected to almost double its size in the next 10 years alone. With
responsibility for financing health care delivered by hundreds of
thousands of providers on behalf of tens of millions of beneficiaries,
Medicare is inherently vulnerable to fraud, waste, and abuse. The
program has proven to be a perpetually attractive target for
exploitation, requiring constant vigilance and increasingly
sophisticated approaches to protect the system from wrongdoing and
abuse.
The Department of Health and Human Services (HHS) has begun to
identify improper payments in its financial statements for the $176
billion Medicare Fee-for-Service program. Spotlighting the program's
payment of claims has led to a number of actions to help prevent
improper payments. Between fiscal years 1996 and 1998, the estimated
total of payments made in error in this program dropped from $23.2
billion to $12.6 billion. The reductions in erroneous payments were
attributable largely to better claims documentation by providers rather
than a reduction in improper billing practices. The HHS Inspector
General's methodology was not designed to identify or measure the full
extent of fraud and abuse in the Medicare program or to detect all
fraudulent schemes such as kickbacks or false claims for services not
provided.\3\
---------------------------------------------------------------------------
\3\ Medicare: Methodology to Identify and Measure Improper Payments
in the Medicare Program Does Not Include All Fraud (GAO/AIMD-00-69R,
Feb. 4, 2000).
---------------------------------------------------------------------------
Problems with abuse partly stem from the program's oversight
structure. The Health Care Financing Administration (HCFA) delegates
the review of claims to its contractors, yet its oversight of these
contractors does not provide assurance that claims are paid
appropriately. HCFA's contractors have allowed Medicare to pay claims
that should have been paid by other insurers and have engaged in other
prohibited practices such as falsifying claims and reports to HCFA.
Medicare Contractor Problems
In 1998, a major Medicare contractor settled a claim for $140
million and pled guilty to eight felony counts because it was alleged
to have
allowed Medicare claims payments that should have been
paid by private insurance,
destroyed Medicare claims that should have been submitted
by another contractor,
periodically disconnected the required toll-free phone
lines used for beneficiary inquiries,
automatically paid claims under $50, without checking
whether services were uncovered or unnecessary,
rushed claims through its processing system, shutting off
computer edits designed to screen claims, and
deleted, instead of suspending for review, claims with
incorrect claim numbers
HCFA has taken steps to address management problems, but they
remain hampered by financial management and information systems
weaknesses. Moreover, the agency is limited by statute from increasing
competition among contractors to enhance performance. For instance, the
agency cannot choose nonhealth insurance companies to process
outpatient physician and other practitioners' claims and is constrained
to using contractors nominated by providers to process inpatient
hospital and other institutional provider claims.
Medicare has also proven to be vulnerable to fraud by career
criminal and organized crime groups posing as health care providers.\4\
These groups created sham medical clinics or other entities or used the
names of legitimate providers to bill for services not provided or not
medically necessary.
---------------------------------------------------------------------------
\4\ Health Care: Fraud Schemes Committed by Career Criminals and
Organized Criminal Groups and Impact on Consumers and Legitimate Health
Care Providers (GAO/OSI-00-1R, Oct. 5, 1999).
---------------------------------------------------------------------------
Medicare Fraud: ``Rent-a-Patient'' Scheme
In two South Florida cases, recruiters organized thousands of
beneficiaries from, among other places, retirement communities and
drove them to area clinics for rote examinations and unnecessary
testing and treatment. Recruiters received a fee that they shared with
each beneficiary. Beneficiaries understood that they should go
elsewhere if they needed a ``real doctor.'' Several licensed physicians
participated in the scheme, in which they signed medical records for
services they neither performed nor supervised. The clinics then billed
Medicare and Medicaid or private insurance for services either not
necessary or not performed. In one of the two cases, the clinics filed
over $120 million in fraudulent Medicare claims and $1.5 million in
fraudulent Medicaid claims.
Besides managing the fee-for-service program, HCFA has been
grappling with the challenge of implementing the new managed care
program--Medicare+Choice. Although the new program is premised on
providing expanded choice to consumers, HCFA cannot ensure that the
information provided to beneficiaries is timely, accurate, complete, or
comparable or that beneficiaries receive the benefits to which they are
entitled. For instance, one plan provided a drug benefit substantially
less generous than what the plan had originally agreed to furnish,
denying about 130,000 Medicare beneficiaries part of the benefit that
Medicare paid for under the contract.
Strengthening business practices, controls, and oversight can
mitigate program risks. Numerous initiatives are underway that promise
to make progress. For instance, the HHS Inspector General and other
Federal and state agencies have banded together to fight fraud in five
states in an effort called Operation Restore Trust. After the first
year of operation, the effort yielded more than $40 million in
recoveries of payments for claims that were not allowed under Medicare
rules, as well as convictions for fraud, imposition of civil monetary
penalties, and the exclusion of providers from the program. Over the
long term, techniques developed by Operation Restore Trust will be
applied in all 50 states. Moreover, 1996 legislation provided HCFA with
increased funding for program safeguard activities, such as pre- and
post-review of medical claims and fraud investigation units. These
activities historically return more than $10 in savings for each dollar
spent. Clearly more needs to be done, but HCFA's use of financial
statements and performance targets shows how appropriate management
attention can help in measuring the extent and addressing the causes of
improper payments.
Related program design problems further complicate Medicare service
delivery and make costs more difficult to control. The following are
two illustrations.
Medicare payments for medical equipment and supplies may
not reflect market prices when providers' costs for some procedures,
equipment, and supplies have declined over time due to competition and
increased efficiency. For example, Medicare payments for such items as
walkers, catheters, and glucose test strips are based on supplier
charges allowed in 1986 and 1987; prices for these items have dropped
significantly since that time. The agency also does not have an
effective system to know the specific products it is paying for. HCFA
requires suppliers to identify on Medicare claims HCFA billing codes--
most of which cover a broad range of products of various types,
qualities, and market prices--rather than the specific items billed.
For example, one Medicare billing code is used for more than 200
different urological catheters, even though some of these catheters
sell at a fraction of the price of others billed under the same
code.\5\ We have recommended that HCFA require suppliers to identify
specific items by including universal product numbers on claims forms.
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\5\ Medicare: Need to Overhaul Costly Payment System for Medical
Equipment and Supplies (GAO/HEHS-98-102, May 12, 1998).
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Efforts to control Medicare home health care spending need
to be designed such that payment levels are adequate and that
appropriate benefits are being provided. Between 1990 and 1997,
Medicare spending for home health care rose at an annual rate of 25.2
percent, making it one of Medicare's fastest growing benefits. By 1997,
home health care consumed about $1 of every $11 of Medicare outlays, or
about $17.8 billion. To begin to control spending, the Balanced Budget
Act of 1997 mandated a prospective payment system (PPS), which will be
implemented on October 1, 2000. The PPS will pay a fixed, predetermined
rate for each 60-day episode of care. The rate will be varied by a
case-mix adjustment method that aims to adequately pay for patients
with high services needs, yet not overpay for others with lower needs.
Designing this mechanism requires detailed information, some of which
is not yet available, about services and beneficiary characteristics.
Currently, there are large unexplained variations in patients' needs
and services provided. Until necessary information on home health
standards is available and the large variations in home health use are
better understood, placing limits on the profits that agencies can earn
under the new PPS will prevent Medicare from paying excessively for
services delivered to beneficiaries. If the PPS rate is set too high
relative to the actual cost of providing services, a profit limit would
prevent a windfall from occurring for some home health agencies.\6\
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\6\ Medicare: Better Information Can Help Insure that Refinements
to BBA Reforms Lead to Appropriate Payments (GAO/T-HEHS-00-14, Oct. 1,
1999).
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Supplemental Security Income
Supplemental Security Income (SSI) is the largest cash assistance
program for the poor. In 1998, about 6.5 million SSI recipients
received more than $29 billion in benefits. Concern about the SSI
program's vulnerability to fraud, waste, abuse, and mismanagement has
increased congressional interest in ensuring that the SSI program
focuses on individuals who have limited resources with which to meet
their needs and that, to the extent possible, individuals rely on their
own resources before turning to the SSI program for support.
Since its inception in 1974, the SSI program has been fraught with
problems. These enduring management challenges--including program
abuses and mismanagement, increasing SSI overpayments, and an inability
to recover outstanding debt--continue. In fiscal year 1998 current and
former recipients owed the Social Security Administration (SSA) more
than $3.3 billion--including over $1 billion in newly detected
overpayments for that year. Prior experience suggests that SSA is
likely to recover about 15 percent of all outstanding overpayments. As
we reported in prior work, SSI represents less than 8 percent of SSA's
program expenditures but 37 percent of the calls to the fraud hotline
and 24 percent of fraud convictions.
SSI Fraud and Abuse Problems
SSA has estimated that overpayments to recipients in
nursing homes may exceed $100 million per year.
In 1998, we reported that about $648 million in SSI
overpayments occurred because clients did not disclose their earnings
or financial account information.
In 1996 SSI erroneously paid $5 million to 3,000 current
and former prisoners in 13 county and local jails because the
incarceration was not reported to SSA.
Between 1990 and 1994, about 3,500 SSI recipients admitted
transferring ownership of resources such as cars, cash, houses, and
land valued at an estimated $74 million in order to qualify for
benefits.
Medical providers suspected of defrauding health insurance
companies, Medicare, or Medicaid furnished a portion of the supporting
medical evidence for 6 percent of 208,000 SSI disabled recipients in
six states that we examined.
SSA has taken steps to improve the financial integrity of the SSI
system. For instance, to identify illegal use of benefits by prisoners,
incentive payments have been provided to correctional institutions for
information on inmate benefits. In December 1999, the Foster Care
Independence Act of 1999 was enacted and now provides SSA with several
additional tools to improve program performance and integrity. These
tools include the authority to obtain applicant income and resource
information from financial institutions, access state databases for
essential eligibility information, impose a period of ineligibility for
applicants who transfer assets in order to qualify for SSI benefits,
and use credit bureaus, private collection agencies, interest levies,
and other means to recover delinquent debt. The act's provisions
respond to many of our prior recommendations.
To a large extent, many of the problems facing the SSI program are
the result of more than 20 years of inattention to payment controls.
Although many of the changes enacted by the Congress or implemented
internally by SSA should result in improvements, additional changes
will be necessary to reduce the vulnerability of the program to waste,
fraud, abuse, and mismanagement. Much of the problem has its source in
an organizational culture that treats the SSI welfare program much the
same way as its ``earned benefit'' programs, disability insurance and
old age and survivors insurance. As a result, program staff have
focused more on quickly processing claims than on controlling program
expenditures and verifying eligibility. For instance, the agency's work
credit measurement system rewards cases processed, not verification of
eligibility and attention to fraud and abuse. Continued congressional
oversight and top management commitment will be necessary to ensure
that the agency diligently implements the new tools provided for in the
Foster Care Independence Act of 1999. The agency has been proven
reluctant to use some tools provided by the Congress in the past; for
example, they received authority to do tax refund offsets in 1984 to
recover overpayments but just started using it in 1998.
SSA should also continue to work with the Congress in addressing
other vulnerable areas not directly addressed in the legislation. For
example, SSA should move forward in developing options for addressing
complex SSI living arrangement and in-kind support and maintenance
policies, which our prior work has found to be a major source of SSI
overpayments. Consistent with our recent report recommendation, SSA
should also intensify its efforts to identify and track suspicious
medical providers and other middlemen who abuse the SSI program. This
information could help SSA identify claims that should receive
increased scrutiny and better target its investigations of current
beneficiaries to determine if they should be removed from the program.
Other Improper Payments
Mr. Chairman, many other Federal programs in addition to Medicare
and SSI are vulnerable to improper payments. I would like to highlight
for you today a recent report we issued which addresses a number of
specific programmatic weaknesses brought to light in our high-risk
series and in agency financial statement audits.\7\ We noted that
fiscal year 1998 financial statement reports from nine agencies
reported estimated improper payments of $19.1 billion--including $14.9
billion in improperly paid expenses and an additional $4.2 billion of
receivables that these agencies expect to collect. These estimates
related to 17 Federal programs that expended $870 billion. The programs
and related improper payment estimates include the following.
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\7\ Financial Management: Increased Attention Needed to Prevent
Billions in Improper Payments (GAO/AIMD-00-10, Oct. 1999).
---------------------------------------------------------------------------
Medicare Fee-for-Service ($12.6 billion),
Supplemental Security Income ($1.6 billion),
Food Stamps ($1.4 billion),
Old Age and Survivors Insurance ($1.2 billion),
Disability Insurance ($941 million),
Housing subsidies ($857 million), and
Veterans Benefits, Unemployment Insurance, and others
($514 million).
GAO and agency inspectors general have identified many instances of
fraud and internal control deficiencies which can lead to improper
payments among these and other programs. Improper payments can arise
from erroneous payments to beneficiaries as well as fraudulent or
abusive practices by providers of services.
Improper Payment Problems
HUD assisted housing--A minister conspired with a real estate agent
to defraud Federal housing officials. The minister made false
statements in applying for a $5.4 million HUD-insured mortgage for
Bethel Village, a failed project of a religious affiliation to build an
assisted living retirement development. The false statements included a
letter, with the forged signature of the affiliation general secretary,
that was sent to Federal housing officials guaranteeing $750,000 in
conventional funding for the project in order to obtain FHA mortgage
insurance for the loan. (Source: Department of Housing and Urban
Development, Office of Inspector General Semiannual Report to the
Congress, Apr. 1, 1999-Sept. 30, 1999)
Food Stamps--147 out of 230 statistically selected Food Stamp
participants whose Social Security numbers appeared in more than one
state received food stamp benefits in more than one state
simultaneously. This resulted in food stamp overissuances of $43,000
for this group. In another case, from 1993 through 1998, a Cleveland,
Ohio, grocer organized the illegal redemption of $8.6 million in food
stamps for himself and other Cleveland area grocers. (Source: U.S.
Department of Agriculture, Office of Inspector General Semiannual
Report to the Congress, Apr. 1, 1999-Sept. 30, 1999)
Veterans benefits--The spouse of a veteran, who had been collecting
disability benefits for injuries sustained during his military service,
failed to report her husband's death in 1983. VA benefits continued to
be sent in the husband's name for more than 15 years. The widow
converted more than $243,000 of her deceased husband's benefit payments
for her own use. VA computer records discovered this case eventually.
(Source: Department of Veterans Affairs, Office of the Inspector
General, Semiannual Report to the Congress, Apr. 1, 1999-Sept. 30,
1999)
Social security benefits--A husband and wife embezzled Social
Security benefits intended for the wife's deceased parents whose deaths
were not reported to the Social Security Administration. Benefits of
$100,357 continued to be paid into the deceased couple's bank account.
After their deaths, the daughter and her husband assumed the identities
of the deceased parents and continued to access the funds for their own
uses. (Source: Social Security Administration, Office of the Inspector
General, Report to the Congress Oct. 1, 1998-Sept. 30, 1999, as
incorporated in the Social Security Accountability Report for Fiscal
Year 1999)
While financial statement disclosures draw attention to the need to
address this problem, the amount of improper payments is greater than
that disclosed thus far in agency financial statements. Audit reports
from GAO and agency inspectors general have identified other agencies
that have made improper payments but did not include estimates in their
financial statements. For the Earned Income Tax Credit (EITC) program,
in fiscal year 1998 when IRS examined a subset of returns with
suspected EITC errors, it found that over two-thirds were invalid. This
subset was not generalizable to all EITC claimants and IRS' financial
statements did not contain any estimate of EITC error rates for the
universe of returns claiming the credit.
In some cases, information is insufficient to provide systematic
estimates of improper payments for other important programs. For
instance, HHS has not estimated improper payments for the Medicaid
program, which had $108 billion in Federal outlays for fiscal year
1999. However, in recent work, we have concluded that the size and
structure of this program makes it inherently vulnerable to
exploitation. As a third-party payer, Medicaid reimburses for services
provided by others and cannot, as a practical matter, police each claim
for reimbursement. The program relies on providers, some of whom have
incentives to exploit third-party payers like Medicaid, and program
administrators, who are sometimes reluctant to impose controls
perceived as burdensome for fear of discouraging provider
participation. Common Medicaid fraud and abuse schemes fall into three
broad groups: improper billing practices, misrepresentations of
professional qualifications, and improper business practices such as
kickbacks, self-referrals, or collusion.
Medicaid Fraud and Abuse Problems
Billing Fraud--A psychiatrist operated a ``psychotherapy mill''
where parents were enticed to enroll their children in ``free''
enrichment programs such as after-school tutoring, field trips, and
supervised recreation in exchange for their children's Medicaid
numbers. The psychiatrist then billed Medicaid for services not
provided. In concert with another doctor, Medicaid was fraudulently
charged $421,000. The defendants pled guilty, paid fines and
restitution, and received probation. (Source: Georgia State Health Care
Fraud Control Unit)
Misrepresentation--A woman who never attended, graduated, or
received a degree from a nursing school, presented a false nursing
license to several nursing homes that employed her for at least 5
years. Her substandard care prompted an investigation, which led to her
conviction of felony Medicaid fraud and other charges. She was
sentenced to probation and either restitution or community service.
(Source: Ohio Attorney General's Health Care Fraud Section)
Business practices fraud--Claims submitted by two businessmen
netted $10 million in excess Medicaid payments related to phony
contracts with nursing homes to a shell company. They were both
imprisoned and fined, and the pair agreed to restitution of $6 million
to the state Medicaid program. (Source: Georgia State Health Care Fraud
Control Unit)
Illicit diversion of Medicaid covered prescription drugs has proven
to be a chronic problem. Such diversion can involve pharmacists who
routinely add drugs to legitimate prescriptions and keep the extra for
sale to others; individuals who provide recipients with abusable drugs
in exchange for subsequent illicit use of their Medicaid recipient
numbers; and clinics that provide inappropriate prescriptions to
Medicaid recipients who trade them for cash or merchandise or have them
filled and then sell the drugs themselves on the street. The Congress
could encourage HHS to increase its efforts as a partner with states to
ensure that states' efforts to prevent and detect fraud in the Medicaid
program are as effective as possible.\8\
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\8\ Medicaid: Federal and State Leadership Needed to Control Fraud
and Abuse (GAO/T-HEHS-00-30, Nov. 9, 1999).
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Medicaid Prescription Drug Fraud Problems
A criminal ring that included a doctor and others bilked the New
Jersey Medicaid program out of hundreds of thousands of dollars. One
scheme involved (1) doctors who wrote bogus prescriptions to Medicaid
recipients in exchange for cash payments, (2) other recipients who
served as the drug ``buyers,'' purchasing drugs using their own or
false Medicaid cards and then selling them back to the ring, and (3)
``runners'' who brought the pills to a stash house for ``packagers''
who boxed the pills for resale to pharmacists in New York and New
Jersey. The pharmacists would then use the repackaged pills to restock
inventory. Sales of the drugs in New York yielded the ring $30,000 or
more in cash on a single trip. This case was the first health care
fraud case prosecuted under New Jersey's racketeering statute--one of a
number of steps the state has taken to prevent fraud against Medicaid,
Medicare, and private insurance.
With billions of dollars at risk, agencies need to continually and
closely safeguard resources entrusted to them and assign a high
priority to reducing improper payments. The incidence of improper
payments can be reduced by strengthening business practices and
developing targets or goals for mitigating the problem. A first step
for some agencies involves the development of reliable estimates and
reporting of the nature and extent of improper payments. Without this
fundamental knowledge, agencies cannot be fully informed about their
magnitude or trends, nor can they systematically pinpoint or target
mitigation strategies. We noted in this report that it was through the
discipline of annual audited financial statements and the development
of performance goals--key components of the management reforms prompted
by the Chief Financial Officers Act and the Government Performance and
Results Act--that some agencies are taking steps to mitigate the risk
of improper payments.
HUD Programs
In 1994, we designated HUD programs as a high-risk area because our
work, and that of others, such as the HUD Inspector General, had
identified four serious, longstanding, departmentwide management
problems that, taken together, placed the integrity and accountability
of HUD's programs at high risk. These deficiencies included weak
internal controls, an ineffective organizational structure, an
insufficient mix of staff with the proper skills, and inadequate
information and financial management systems. We concluded that, while
HUD had efforts underway to address the numerous and severe problems
impacting program management, billions of dollars across most of the
agency's programs were at risk.
Since 1995, we have reported that HUD has taken a number of actions
to address its management deficiencies and has made credible progress
toward improving its management. For example, the department improved
its financial reporting to the extent that its Inspector General was
able to provide qualified opinions on its financial statements for
fiscal years 1996 and 1997 and an unqualified opinion for fiscal year
1998. In 1999, we noted that HUD's Secretary and leadership team have
given top priority to addressing the department's management
deficiencies. A major contributor to HUD's progress was the June 1997
2020 Management Reform Plan, which called for reducing the number of
programs, retraining staff, reorganizing the field offices,
consolidating processes and functions into specialized centers, and
modernizing and integrating information and financial management
systems. However, in 1999 we also noted that internal control
weaknesses--such as inadequate monitoring of contractors, developers,
and other agents implementing HUD programs--and problems with
information and financial management systems--such as inaccurate and
untimely data--persisted. And, we reported it was too soon to tell
whether HUD's reforms to address organizational and staff problems
would resolve the major deficiencies that others and we had identified.
Since then, we have undertaken a number of assignments to examine
HUD's efforts to improve its programs. For example, we have reported
that HUD is likely to spend millions of dollars, miss milestones, and
still not meet its objective of developing and fully deploying an
integrated financial management system because it had not yet finalized
detailed project plans or cost and schedule estimates for this effort.
Also, both our office and HUD's Office of the Inspector General have
reported weaknesses in HUD's oversight of its single-family inventory,
which are properties acquired by HUD when borrowers default on single-
family mortgages insured by HUD. In 1998, we reported that HUD did not
have adequate systems in place to oversee contractors who were
responsible for managing its inventory of properties.\9\ Our physical
inspection of selected properties identified serious problems including
vandalism, maintenance problems, and safety hazards that may have
decreased marketability, increased HUD's holding costs and, in some
cases, threatened the health and safety of neighbors and potential
buyers.
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\9\ Single-Family Housing: Improvements Needed in HUD's Oversight
of Property Management Contractors (GAO/RCED-98-65, Mar. 27, 1998).
---------------------------------------------------------------------------
HUD's inventory of properties grew from about 39,000 in 1998 to
about 50,000 properties in 1999. In 1999, HUD implemented a new
approach to managing its acquired properties, under which contractors
assumed full responsibility for the inventory. HUD awarded contracts to
these contractors totaling $927 million over 5 years and divided the
country into 16 contract areas. One contractor, InTown Management
Group, received 7 of the 16 contracts covering 28 states and comprising
about 11,000 homes--in other words, almost 40 percent of the total
workload.
Because InTown failed to adequately maintain properties or make
them available for sale, HUD was forced to terminate all seven of
InTown's contracts before the end of 1999. InTown filed for bankruptcy,
while owing money to many of its subcontractors and these
subcontractors now have filed liens against properties that InTown was
responsible for managing and marketing. According to an official in
HUD's Single-Family Housing Office, HUD has decided to pay off some of
the liens. HUD also has awarded contracts to dispose of properties in
22 of the 28 states InTown had responsibility for. According to the
Single-Family Housing Official, HUD issued a request for bids to obtain
contractors for the remaining six states and expects to award these
contracts by April 2000. We are presently reviewing the status of the
contracts and HUD's inventory of acquired properties. We will report
the results of our work this spring.
DOD Management
Six of our 26 high-risk areas relate to longstanding DOD management
problems. The department's size, the complexity of its mission, and the
far-flung breadth and scope of its operations present major management
challenges in a number of areas.
Despite recent steps to improve financial management, DOD continues
to face serious weaknesses. These weaknesses undermine DOD's ability to
manage an estimated $280 billion budget and $1 trillion in assets. No
major part of DOD is able to pass the test of an independent financial
statement audit. These continuing financial management problems have
real consequences for program management and resource allocation. For
instance, DOD's records do not consistently reflect the number or
location of its inventories and weapons systems. Auditors reported that
DOD's records for F-4 engines and service craft were unreliable and
that on-hand inventory quantities differed by 23 percent from inventory
records at selected locations. These problems increase the risk that
inventory managers may request funds for items that may already be on
hand.
DOD cannot properly account for billions of dollars of basic
transactions, leaving the agency vulnerable to the misuse of
appropriated funds. DOD has not been able to reconcile its records with
Treasury's records--with a $9.6 billion difference at the end of fiscal
year 1998. Auditors reported that the Air Force Depot Management
Activity--a component of one of the department's working capital
funds--may have obligated $1.1 billion more than it had available as of
September 30, 1998. Also at the end of fiscal year 1998, $4.3 billion
in expired budget authority was cancelled, another possible consequence
of this inability to track obligations and expenditures.
Financial management weaknesses are reflected in DOD's procurement
process where the agency spends more than $100 billion a year
contracting for goods and services. DOD continues to overpay
contractors, although the full extent of overpayments is not known.
However, we do know that from fiscal year 1994 through 1998, defense
contractors returned about $4.6 billion in overpayments, an average of
about $920 million a year. According to the Defense Finance and
Accounting Services' Columbus Center, contractors returned about $670
million in fiscal year 1999.
DOD Contracting Problems
In a July 1999, study at 13 contractor locations, we found that
these contractors took about a year, on average, before refunding
overpayments of $56.2 million. Four of the 13 contractors were
retaining overpayments totaling about $1.1 million, which they
subsequently refunded due to our work. Under current law, however,
there is no requirement for contractors who have been overpaid to
notify the government of overpayments or return overpayments prior to
the government issuing a written demand for their return. In response
to recommendations we made, DOD said it would amend the regulations and
contract payment clauses to add a requirement that contractors notify
the contracting officer when overpayments are discovered.
We have identified DOD's management of inventories (spare and
repair parts, clothing, medical supplies, and other items to support
the operating forces) as a high-risk area because levels of inventory
were too high and management systems and procedures were ineffective.
Ensuring the accuracy of inventory requirements, providing adequate
visibility over operating materials and supplies, and reducing the
vulnerability of in-transit inventory to waste, fraud and abuse remain
areas of concern. The Congress has enacted legislation that requires
DOD to implement best commercial practices in its acquisition and
distribution of inventory items, and the Secretary of Defense has
identified reengineered business practices as a key component of the
Defense Reform Initiative. While these actions hold promise for the
future, our recent work indicates that general areas of concern still
exist.
DOD Inventory Problems
In November 1999, we reported that the Air Force did not always
cancel purchases that exceeded current operating requirements. The Air
Force canceled contracts for $5.5 million of the $162.4 million excess
inventory that we reviewed--including such things as thermal insulation
tiles for the B-2 aircraft and turbine nozzles for the F-110 engine--
but it could have canceled more. For example, a requirement for a rotor
blade used on the T-33 engine protected over 4 years of supply, thus
preventing an additional 13,192 blades from being considered for
cancellation.
Lastly, DOD's weapons systems acquisitions exhibit pervasive
problems that lead to wasteful and ineffective systems. The agency
spends over $80 billion annually to research, develop, and acquire
weapon systems. Although DOD has many acquisition reform initiatives in
process, key weapon system problems persist arising from (1)
questionable requirements and solutions that are not the most cost-
effective; (2) unrealistic cost, schedule, and performance estimates;
(3) questionable program affordability; and (4) the use of high-risk
acquisition strategies. Weapon systems acquisitions remains a high-risk
area, as indicated by some of the following examples from our work in
the last year.
DOD Weapons Acquisitions Problems
The Navy and Air Force plan to acquire 4,200 of the antiarmor Joint
Standoff Weapon--a medium-range aircraft-delivered missile for
attacking tanks and other armored vehicles--even though it is not
effective against moving targets. The Air Force and Navy are
implementing acquisition reform measures in the development of the
Joint Air-to-Surface Standoff Missile that may not achieve their full
cost and schedule benefits because of the services' historical practice
of moving to the next stage of development prematurely.
The Army's Comanche Helicopter development program is being
restructured for the fifth time in 10 years, due to uncertain and
changing requirements and unattainable cost and schedule estimates.
This latest restructured development plan still contains significant
risks of further cost overruns, schedule delays, and degraded
performance.
The Army procured 6,550 High Mobility Trailers that are not useable
or suitable because it awarded a multiyear production contract without
first demonstrating that the design would meet its requirements.
Although the number of armored targets (e.g., tanks) in current
Defense plans is 80 percent less than in 1990, the military services
plan to spend $17 billion to acquire more new and improved antiarmor
weapons. This would be in addition to the billions spent since the end
of the Cold War to maintain and improve their large inventory of 40
different types of weapons for attacking tanks and other armored
vehicles.
These are common examples that are the predictable consequences of
the acquisition environment. The competition for funding when a program
is launched encourages aspiring DOD program managers to include
performance features that rely on immature technologies. In this
environment, risks in the form of ambitious technology advancements and
tight cost and schedule estimates are accepted as necessary for a
successful program start. Problems or indications that the estimates
are decaying do not help sustain programs in later years, and thus
admission of them is implicitly discouraged. There are few rewards for
discovering and recognizing potential problems early in program
development. Acquisition reforms underway by DOD have the potential for
improving weapon system outcomes and DOD's leadership is genuinely
committed to making a difference in the status quo. However, lasting
improvements in program outcomes will not come until the incentives
that drive the process are changed. Such changes will have to come in
the form of the decisions made on individual programs.
Student Financial Aid
The Department of Education is responsible for collecting more than
$150 billion in outstanding student loans. Its data systems track about
93 million student loans and 15 million grants. In fiscal year 1998
more than 8.5 million students received more than $48 billion in
Federal student financial aid through programs administered by the
department.
By their very nature these programs are vulnerable to waste, fraud,
abuse, and mismanagement. Not only do they target a high-risk
population, but also the programs have been designed to operate
separately with different rules, processes, and data systems. Further
adding to the vulnerability of these programs is the number of
participants--not just millions of students and thousands of schools,
but also thousands of lenders, guaranty agencies, third-party
servicers, and contractors. The Federal Government bears most of the
risk when students default on loans. Moreover, mismanagement by the
Department of Education exacerbated the potential for abuses--weak
gatekeeping allowed proprietary trade schools with poor educational
programs and high student default rates to remain in the program.
Student Loan Problems
The Education Office of Inspector General reported that, between
July 1, 1994, and December 31, 1996, 708 borrowers had loans totaling
$3.89 million discharged because guaranty agencies received a notice of
their death. These borrowers were reported to have subsequently earned
wages. For example, in 1997, 367 of these borrowers earned reported
wages up to $30,000, 191 borrowers between $30,000 and $50,000, and 150
borrowers more than $50,000.
One borrower had student loans of $8,517 forgiven because the
guaranty agency determined, based on certification by the borrower's
doctor, that he was totally and permanently disabled for work or
school. There was no requirement for the agency to verify the
borrower's disability or employment status with the state's employment
agency. However, about 6 months later, the borrower received the first
of four additional student loans totaling $9565.
Between 1996 and 1999, an individual allegedly submitted 37
applications falsely claiming enrollment at four schools in Mexico,
while he was on Federal supervised release. (He had previously been
convicted of defrauding the education program of $160,000 by falsely
claiming attendance at a foreign medical school.) The 37 applications,
which he allegedly submitted to four guaranty agencies, resulted in the
disbursement of $319,680. (Source: U.S. Department of Education, Office
of Inspector General Semiannual Report to the Congress, No. 39, Apr. 1,
1999-Sept. 30, 1999)
Proprietary school owners mailed forged documents to loan servicing
agencies in an effort to fraudulently reduce their school's student
loan default rate to remain in the Federal Family Education Loan (FFEL)
Program. The owners pleaded guilty to mail fraud, student financial aid
fraud, money laundering and obstruction of justice. The 3-year scheme
defrauded the Department of Education out of $846,000 while the school
avoided its eligibility from being terminated. (Source: U.S. Department
of Education, Office of Inspector General Semiannual Report to
Congress, No. 38, Oct. 1, 1998-Mar. 31, 1999)
Progress has been made. The department has made strides to improve
its management of the program and has worked to effectively screen out
schools with bad default records. Prior to the 1998 Higher Education
Act amendments, students underreporting their income in applying for
student aid had a better chance of never being caught. Over 300
students receiving Pell grants underreported their adjusted gross
income by over $100,000 each. Fortunately, the 1998 amendments directed
Education and IRS to cooperate in verifying student income, but the
effectiveness of this provision will be largely dependent on how well
the two agencies work together. The default rate has declined from a
high of 22.4 percent in fiscal year 1990 to 8.8 percent in fiscal year
1997. Nonetheless, in fiscal year 1997 the Federal Government paid out
$3.3 billion in defaulted loans.
The Department of Education lacks the financial information
necessary to effectively budget for and manage its student aid programs
and needs to work on improving the accuracy and completeness of its
grant payments system. In addition, its lack of an integrated
information management system means officials often lack accurate,
complete, and timely data to manage and oversee aid programs.
Superfund Management
GAO continues to have three concerns with agencies' management of
the Superfund hazardous waste cleanup program. First, some agencies do
not have a strategy for allocating resources according to risk. Since
the Department of Energy (DOE) does not require facilities to compete
for cleanup dollars, it may fund cleanups addressing a lower risk at
one facility while a higher risk site at another facility goes
unfunded. Another agency, the Bureau of Land Management (BLM), does not
have a complete inventory of sites or a cleanup strategy in place and
as a result potential hazards may expose the public to needless risks.
For instance, BLM was not aware of one hazardous site until a child
wandered onto the abandoned manufacturing site, came into contact with
a contaminated rock, and fell ill.
Second, although the Environmental Protection Agency (EPA) has
succeeded in getting responsible parties to pay for 70 percent of
Superfund long-term cleanups, it has been less successful in recovering
its full costs from parties when it conducts the cleanup. Figure 1
shows the problem.
Figure 1: EPA Could Lose the Chance to Recover Billions It Has Spent on
Superfund (Dollars in billions)
Source: GAO's presentation of data from EPA.
At the end of fiscal year 1998, EPA had agreements to recover only
$2.4 billion, about 22 percent, of about $11 billion it had spent on
the Superfund program.\10\ EPA's method for calculating indirect costs
caused it to lose the chance to recover $1.9 billion of the $11 billion
in settlement agreements already reached. This problem could lose the
agency up to an additional $1.3 billion in recoveries in cases under
negotiation. EPA has updated the methodology for calculating and
recovering indirect costs but has yet to implement it. The agency
estimates that, with this new methodology, it could recover nearly half
of the indirect costs that it currently excludes from settlements under
negotiation.
---------------------------------------------------------------------------
\10\ EPA had spent another $5 billion that it considers
unrecoverable for reasons such as the lack of a financially viable
party to cover the costs.
---------------------------------------------------------------------------
Finally, EPA also needs to improve its contract management. The
agency does not always negotiate the best contract price for the
government. Although EPA is now using more independent estimating
methodologies to help it negotiate contract prices than in the past,
some of its regional staff still lacked the necessary cost estimating
experience and training to help them negotiate best prices. In
addition, EPA has more contract capacity in place than work available
for the contractors. For example, EPA was reluctant to close out one
contractor with high program support costs due to excess staff and
facilities, even though it did not have sufficient cleanup work for the
contractor. EPA has not effectively limited contractors' costs for
program support, such as rent and managers' salaries. In April 1999, we
reported that such costs ranged from 16 to 76 percent of total cleanup
costs for new contracts, exceeding EPA's target of 11 percent. The
agency is beginning to take additional steps to address this problem.
Reducing and Resolving Risk in Federal Programs
High-risk areas and improper payment problems reflect deeply rooted
weaknesses in Federal financial and program management, as well as more
fundamental tensions associated with conflicting statutory goals and
complex program delivery systems and mechanisms. The government's
financial systems are all too often unable to perform the most
rudimentary bookkeeping for Federal entities, many of which are engaged
in financial transactions whose magnitude, complexity, and risk exceeds
those of large private companies. Weaknesses in underlying financial
systems make agencies vulnerable by undermining their ability to
safeguard assets, account for appropriated resources, or measure the
costs of their activities. The agencies' inability to account for
substantial liabilities, assets, net costs, or improper payments were
among the factors that prevented us from being able to form an opinion
on the U.S. government's consolidated financial statements for the 2
years that we have been performing this audit.\11\ The lack of reliable
financial information limits the capacity to even understand the
dimensions of the risks the government faces--the first step in
pinpointing strategies to mitigate problems. Agency efforts to
implement the Chief Financial Officers (CFO) Act are prompting steady
improvements, but, as shown in table 2, many Federal agencies were
still unable to obtain a clean audit opinion on their financial
statements in fiscal year 1998.
---------------------------------------------------------------------------
\11\ Financial Audit: 1998 Financial Report of the United States
Government (GAO/AIMD-99-130, Mar. 31, 1999).
TABLE 2.--AUDIT OPINIONS FOR THE 24 CFO AGENCIES' FISCAL YEAR 1998
FINANCIAL STATEMENTS
------------------------------------------------------------------------
Opinons Agencies
------------------------------------------------------------------------
Unqualified audit opinions: The Department of Housing
financial statements are reliable in and Urban Development
all material respects. Department of the
Interior
Department of Labor
Department of State
Environmental
Protection Agency
Federal Emergency
Management Agency
General Services
Administration
National Aeronautics
and Space Administration
National Science
Foundation
Nuclear Regulatory
Commission
Small Business
Administration
Social Security
Administration
------------------------------------------------------------------------
Qualified audit opinions: Except for Department of Health
some item(s), which are mentioned in and Human Services
the auditor's report, the financial Department of Energy
statements are reliable in all Department of the
material respects. Treasury
Department of Veterans
Affairs
------------------------------------------------------------------------
Disclaimers: The auditor does not know Department of
if the financial statements are Agriculture
reliable in all material respects. Department of Defense
Department of
Education
Department of Justice
Department of
Transportation
U.S. Agency for
International Development
------------------------------------------------------------------------
Other:................................. Department of Commerce
received an unqualified
opinion on its balance sheet
and a disclaimer on its other
financial statements.
Office of Personnel
Management's Retirement
Program, Life Insurance
Program, and Health Benefits
Insurance Program received
unqualified opinions; the
Revolving Funds and the
Salaries and Expenses Accounts
received disclaimers.
------------------------------------------------------------------------
Source: Individual agency reports on results of audits of fiscal year
1998 financial statements, as of October 1999.
While audited financial statements are essential to identify
serious financial management problems and to ensure, and provide an
annual public scorecard on accountability, an unqualified audit opinion
is not an end in itself. The CFO Act is focused on providing accurate,
timely, and relevant financial information needed for management
decisionmaking and accountability, on a systematic basis, throughout
the year. Efforts to obtain reliable year-end data that are not backed
up by fundamental improvements in underlying financial management
systems and operations that ensure the routine production of accurate,
timely, and relevant data to support ongoing program management and
accountability will not achieve the intended results of the CFO Act
over the long-term.
For example, after several years of concerted effort by IRS and
GAO, for fiscal year 1997 we were able to conclude for the first time
that IRS' custodial financial statements, covering over $1.6 trillion
in tax revenue, were reliable. Prior to fiscal year 1997, weaknesses in
IRS' internal controls and financial management systems prevented it
from producing reliable year-end financial information. Our conclusion
that the fiscal year 1997 statements were reliable was accomplished
only after extensive use of ad hoc programming by IRS to extract data
from its systems, followed by numerous adjustments to these data
totaling tens of billions of dollars to produce final financial
statements.
Serious and chronic financial management problems will continue to
make agencies' programs and activities vulnerable to risk, waste, and
mismanagement. Accordingly, we have added financial management at
selected agencies to our high-risk list in recent years. Financial
management at DOD and IRS were both added in 1995. The U.S. Forest
Service and the Federal Aviation Administration (FAA) were added in
1999. These agencies face substantial challenges in producing reliable
financial statements and reports due to serious deficiencies in
financial systems and cost accounting. Although these agencies are
making progress in addressing their financial management weaknesses,
much remains to be done before full accountability can be achieved.
Full accountability includes not only obtaining a clean audit opinion
but also addressing internal control weaknesses which hamper their
ability to keep track of their assets, liabilities, revenues, and
expenses on an ongoing basis. For example, both Forest Service and FAA
need to implement systems that are capable of properly recording,
tracking, and depreciating property and equipment from acquisition to
disposition.
Pervasive deficiencies in oversight, monitoring, and information
systems by Federal agencies and by their agents in state and local
governments and in the private sector also contribute to high-risk
problems. In such areas as HUD's assisted housing programs and
Education's student loans, local providers had primarily based
eligibility on applicants' self-reported income, with little
independent verification. These weaknesses in verifying the eligibility
of beneficiaries have contributed to improper payments and are
reinforced by fragmented organizational responsibilities and persistent
human capital deficiencies. Organizational fragmentation, for instance,
inhibits the systems integration necessary to prevent the needless
duplicate entry of data in DOD's payment process that increases the
probability of errors. Persistent staff skills mismatches have
undermined HUD's capacity to effectively mitigate losses from
foreclosures on its properties, manage troubled assets and prevent
losses due to impending defaults on insured mortgages.
Resolving Federal management deficiencies is particularly important
due to the complex delivery systems used in most Federal programs. The
Federal Government often relies on a network of third parties--state
and local governments, nonprofit agencies and businesses--to implement
Federal goals. Third parties bring substantial advantages to the
implementation of Federal initiatives by engaging local interests and
resources. However, ``third party government'' poses challenges as
well, since Federal programs rely on the integrity, skill, and support
of independent agents with their own goals and constituencies.
Transferring the responsibility for the delivery of services to third
parties does not relieve Federal officials from being accountable for
their performance. Many of our high-risk and improper payment areas are
vulnerable due to the known challenges of Federal agency oversight of
third parties that play a critical role in program implementation,
including insurance contractors for Medicare; facilities management
contractors at DOE; banks and state guaranty agencies for student
loans; public housing authorities, mortgage lenders and contractors for
HUD's housing programs; or states for food stamps and Medicaid.
Federal executive agencies are critical actors, but they operate
within a broader statutory environment that can also play a role in
promoting or mitigating risk. The design and incentives associated with
Federal programs can often lay the groundwork for subsequent program
vulnerability and delivery problems, while improvements can protect
programs. For instance, the farm loan program reduced its delinquencies
from 41 to 28 percent of its outstanding loan principal in 1997, due
partly to earlier legislative changes prohibiting delinquent borrowers
from obtaining further loans. However, recent legislation easing these
reforms, along with deterioration in the farm economy, threaten to
reverse this trend. In another area, high student loan default rates
were brought down when legislation provided for risk sharing by
participating lending institutions and greater agency control over the
certification of schools for participation in the program. Conflicting
statutory goals can also complicate program administration; for
example, programs emphasizing speed of service--such as mandates placed
on IRS to process tax refunds within 45 days, or the urgency for the
Federal Emergency Management Administration to provide disaster relief
quickly--can confound the efforts of program administrators to reduce
improper payments.
Mr. Chairman, the deep-seated nature of many of these problems does
not mean they are immutable. In fact, we have noted substantial
improvements in many of these areas. The point I want to make is that
change is possible, but only with concerted and sustained attention of
both executive agencies and often the Congress itself. Persistent
improvements in information, systems, human capital, and program design
are typically essential for progress to be made. Congressional
oversight in particular is critical to stimulate and support the
initiatives of agencies to address these problems.
The experience of the U.S. Customs Service (Customs) in overcoming
its vulnerability to high risk is instructive. In 1991, we added
Customs to our high-risk list due to major weaknesses in its management
and organizational structure that diminished its ability to detect
trade violations on imported cargo; collect applicable duties, taxes,
and fees; control financial resources; and report on financial
operations. Since then, Customs has made considerable progress in
addressing its financial management weaknesses, receiving unqualified
audit opinions for the past three fiscal years. Coupled with a major
reorganization, Customs has also made major improvements in focusing on
enforcement efforts and measuring noncompliance with trade laws,
preventing or detecting any duplicate or excessive refunds, and
collecting delinquent receivables. Sustained management commitment was
essential for progress. It will be important for such management
commitment and congressional oversight to continue in order to prevent
these weaknesses from recurring. We will continue to monitor Customs'
efforts.
Improving the Economy and Efficiency of Federal Activities
Addressing high-risk areas promises to diminish the vulnerability
of Federal programs to fraud and abuse and reduce waste. In addition,
other opportunities are present to increase the economy and efficiency
of Federal programs and activities. Effective congressional oversight
can improve performance accountability and financial integrity of
existing programs by addressing the delivery strategies and structures
used to implement Federal programs. Such an initiative can pursue
opportunities for the consolidation or coordination of programs with
similar objectives; the reengineering and streamlining of Federal
processes; the application of market-based models and prices to
encourage the best use of Federal resources and the full collection of
owed revenues and debts; and the integration of performance measurement
with program management to identify more efficient and effective
approaches to achieve Federal objectives.
The following examples from our work provide illustrations of
programs and activities that could be considered for reform to address
costly and inefficient delivery approaches, fragmented and duplicative
organizational facilities and locations, or outmoded management
structures.
DOD's efforts at streamlining, consolidating, and possibly
privatizing infrastructure activities should continue to be encouraged.
For fiscal year 1998, DOD estimated that about $147 billion, or 58
percent of its budget, was spent for infrastructure requirements.
Recognizing that it must make better use of its scarce resources, DOD
announced the Defense Reform Initiative (DRI) in November 1997. Through
this program, DOD hoped to create a revolution in business affairs that
would streamline and substantially improve the economy and efficiency
of its business operations. A major thrust of the DRI was to reduce
unneeded infrastructure, primarily through a number of initiatives
designed to reduce the cost of DOD's operations and support activities.
Included in these initiatives were (1) demolishing and disposing 80
million square feet of excess space at military facilities, (2)
reducing the number of Defense Information System Agency major data
processing centers from 16 to 6, (3) reducing the number of Defense
Finance and Accounting Service operating locations from 19 to 11, (4)
closing unneeded research, development, and test facilities, and (5)
avoiding hundreds of millions of dollars in future capital expenditures
by privatizing utility systems (electric, natural gas, water, and
sewer) at military bases. The results of DOD's efforts in reducing
infrastructure are mixed, but continued progress on this initiative can
help DOD save significant amounts of operations and support money.\12\
---------------------------------------------------------------------------
\12\ Defense Reform Initiative: Organization, Status, and
Challenges (GAO/NSIAD-99-87, Apr. 21, 1999).
---------------------------------------------------------------------------
The Department of State maintains a physical presence--
embassies, consulates, and other offices in the capital and other
cities--in over 160 countries. About 18,000 direct-hire employees--over
6,400 from State and the rest from at least 27 other Federal agencies--
and over 35,000 locally hired and contract staff work overseas at a
total of more than 250 diplomatic posts. It costs over $200,000
annually to station an American overseas, which is about two times as
much as for Washington-based staff. In November 1999, the Overseas
Presence Advisory Panel, established by the Secretary of State to
review how the United States carries out its overseas activities,
concluded that there is no process in place to ``rightsize'' posts as
missions change. Although the panel did not specify the amount of
savings that could be achieved through streamlining posts, it expressed
the belief that the savings would be substantial and recommended the
formation of an interagency committee to review and restructure every
overseas post. State has not said how it will respond to the panel's
recommendations. Security and diplomacy requirements are directly
linked to the size of the overseas workforce, and the Congress should
be involved in any significant restructuring.\13\
---------------------------------------------------------------------------
\13\ State Department: Major Management Challenges and Program
Risks (GAO/T-NSIAD/AIMD-99-99, Mar. 4, 1999) and Overseas Presence:
Staffing at U.S. Diplomatic Posts (GAO/NSIAD-95-50FS, Dec. 28, 1994).
---------------------------------------------------------------------------
Since 1982, many panels, commissions, and task forces, and
several GAO studies have addressed how DOE could achieve operational
efficiencies in its research and development facilities.
Recommendations have included focusing unclear missions, aligning
laboratory activities with DOE goals, consolidating facilities, and
replacing cumbersome, inefficient management structures. In particular,
with the end of the Cold War, DOE may no longer need to maintain three
nuclear weapons laboratories. For example, Los Alamos officials have
estimated that consolidating the nuclear weapons functions of the
Lawrence Livermore facility into the Los Alamos Laboratory could save
about $200 million in annual operating costs. A DOE-chartered task
force--the 1995 Task Force on Alternative Futures for the Department of
Energy National Laboratories--reported that DOE's entire laboratory
system could be reduced productively by eliminating obsolete and
redundant missions and support infrastructure.\14\ Moreover,
substantial portions of the laboratory budgets are being spent on
infrastructure.
---------------------------------------------------------------------------
\14\ Department of Energy: Need to Address Longstanding Management
Weaknesses (GAO/T-RCED-99-255, July 13, 1999) and Department of Energy:
A Framework for Restructuring DOE and Its Missions (GAO/RCED-95-197,
Aug. 21, 1995).
---------------------------------------------------------------------------
Duplication and overlap in Federal land management could
be reduced and operations streamlined through a collaborative Federal
land management strategy. The four major Federal land management
agencies--the National Park Service, the Fish and Wildlife Service, and
BLM within the Department of Interior, and the Forest Service within
the U.S. Department of Agriculture (USDA)--have grown increasingly
similar over time, while Federal land management missions have become
more complex. Budgetary constraints and better understanding of natural
ecosystems, whose boundaries are often not consistent with existing
jurisdictional and administrative boundaries of the separate agencies,
demand that the agencies find ways to refocus, combine, or eliminate
certain functions, systems, programs, activities, and field locations.
To improve the efficiency and effectiveness of Federal land management,
the Congress might consider either reorganizing the current
organizational structures or streamlining these structures by
integrating and coordinating current functions and programs.\15\
---------------------------------------------------------------------------
\15\ Federal Land Management: Streamlining and Reorganization
Issues (GAO/T-RCED-96-209, June 27, 1996).
---------------------------------------------------------------------------
The Federal system to ensure the safety and quality of the
nation's food is inefficient and outdated. The current food safety
system suffers from overlapping and duplicative inspections, poor
coordination, and inefficient allocation of resources. For example
within USDA, the Food Safety and Inspection Service (FSIS) is
responsible for the safety of meat, poultry, and some eggs and egg
products, while the Food and Drug Administration (FDA) is responsible
for the safety of most other foods. FSIS, FDA, and 10 other Federal
agencies administer over 35 different laws that oversee food safety.
Given this environment, the Congress could consider consolidating
Federal food safety agencies and activities under a single food safety
inspection agency with a uniform set of food safety laws.\16\
---------------------------------------------------------------------------
\16\ Food Safety: U.S. Needs a Single Agency to Administer a
Unified, Risk-Based Inspection System (GAO/T-RCED-99-256, Aug. 4,
1999).
---------------------------------------------------------------------------
The USDA Farm Service Agency (FSA) should continue to
consolidate its county office field structure by closing more of its
small county offices. In response to the Agriculture Reorganization
Act, FSA has closed over 370 county offices and reduced its county
office staff by about 28 percent. However, FSA still has nearly 2,400
county offices, including 673 small county offices that have three or
fewer permanent full-time employees. These smaller offices generally
cannot take advantage of certain economies of scale. For example,
USDA's workload data indicate that small county offices spend about 46
percent of their time on such fixed administrative activities as
obtaining and managing office space and processing paperwork related to
payroll. In comparison, larger county offices spend only 32 percent of
their time on these administrative activities.\17\
---------------------------------------------------------------------------
\17\ Farm Service Agency: Characteristics of Small County Offices
(GAO/RCED-99-162, May 28, 1999).
---------------------------------------------------------------------------
USDA's Rural Utilities Service (RUS) finances the
construction, improvement, and repair of electrical,
telecommunications, and water and waste disposal systems through direct
loans and repayment guarantees on loans made by other lenders. Given
demographic changes, the operating environment of today's utilities
industry, and weaknesses in RUS loan management operations, the
Congress could reconsider the role of RUS in the development of the
utility infrastructure for the nation's rural areas. We have identified
various steps RUS could take to increase the effectiveness and reduce
the costs of its loan programs. From a financial standpoint, RUS has
successfully operated the telecommunications loan program, but the
agency has had, and continues to have, significant financial problems
with the electricity loan program. For example, during fiscal years
1992 through July 31, 1997, RUS wrote off the debt of four electricity
loan borrowers totaling more than $1.5 billion. Since then, the agency
has written off $0.3 billion and is in the process of writing off an
additional $3.0 billion, and it is probable that the agency will
continue to incur losses in the future.\18\
---------------------------------------------------------------------------
\18\ Rural Utilities Service: Opportunities to Operate Electricity
and Telecommunications Loan Programs More Effectively (GAO/RCED-98-42,
Jan. 21, 1998).
---------------------------------------------------------------------------
Closing, consolidating or privatizing Coast Guard training
and operating facilities could provide significant budgetary savings.
In fiscal year 1996, we reported that the Coast Guard could save $6
million by closing or consolidating over 20 small boat stations. Also
in 1996, we recommended that the Coast Guard consider other
alternatives--such as privatization--to operate its vessel traffic
service centers, which cost about $20 million in fiscal year 1999 to
operate. In fiscal year 1995, we recommended that the Coast Guard close
one of its large training centers in Petaluma, California, at a savings
of $9 million annually. The Coast Guard has faced, however, significant
opposition to closing facilities.\19\
---------------------------------------------------------------------------
\19\ Coast Guard: Review of Administrative and Support Functions
(GAO/RCED-99-62R, Mar. 10, 1999) and Coast Guard: Challenges for
Addressing Budget Constraints (GAO/RCED-97-110, May 14, 1997).
---------------------------------------------------------------------------
The Commissioned Corps of the Public Health Service (PHS)
was established in the late 1800's to provide medical care to sick and
injured merchant seamen. As a result of temporary service with the
armed forces during World Wars I and II, members of the Corps were
authorized to assume military ranks and receive military-like
compensation. Today, Corps officers continue to receive virtually the
same pay and benefits as military officers, including retirement
eligibility (at any age) after 20 years. However the functions of the
Corps have become essentially civilian in nature, and, in fact, some
civilian PHS employees carry out the same functions as Corps members.
Further, the Corps has not been incorporated into the armed forces
since 1952. Based on 1994 costs, when all of the components of
personnel costs--including basic pay and salaries; special pay,
allowances, and bonuses; retirement; health care; life insurance; and
Corps members' tax advantages--were considered, PHS personnel costs
could have been reduced by converting the Commissioned Corps to
civilian status.\20\
---------------------------------------------------------------------------
\20\ Federal Personnel: Issues on the Need for the Public Health
Service's Commissioned Corps (GAO/GGD-96-55, May 7, 1996).
---------------------------------------------------------------------------
The Department of Veterans Affairs (VA) owns 4,700
buildings and 18,000 acres of land, which it uses to operate 181 major
health care delivery locations. VA spends about $1 out of every $4 of
its $18.4 billion budget to operate, maintain, and improve its delivery
locations--in effect, the cost of its asset ownership. VA's delivery
locations operate in 106 health care markets, and in 40 of these
markets multiple VA facilities compete with each other to serve
veterans--for example, 4 major VA facilities are located in the Chicago
market. However, all VA delivery locations project a declining veteran
population base, and two-thirds expect declines greater than 33 percent
in the next 20 years. Without major restructuring over the next several
years, billions of dollars will be used to operate hundreds of unneeded
VA buildings. For example, a VA study projected annual savings ranging
from $132 million to $189 million by consolidating medical and
administrative services at its major delivery locations in the Chicago
area. VA needs to develop and implement realignment plans for all of
its health care markets, and the Congress could consider a variety of
options, such as greater reliance on community-based, integrated
networks of VA and non-VA providers, to meet the health care needs of
veterans in the most cost-effective manner.\21\
---------------------------------------------------------------------------
\21\ VA Health Care: Challenges Facing VA in Developing an Asset
Realignment Process (GAO/T-HEHS-99-173, July 22, 1999).
---------------------------------------------------------------------------
Reassessing What the Federal Government Does
Addressing high-risk activities and pursuing opportunities to
improve economy and efficiencies in government operations can yield
significant improvements and cost savings and, hence, should be
important targets for congressional oversight. However, it is also
important to periodically examine whether current programs and
activities remain relevant, appropriate and effective. Our work
suggests that congressional oversight could usefully address three
fundamental questions.
Has a program succeeded, or persistently failed in
accomplishing its intended objective(s)?
Have underlying conditions that prompted Federal
intervention changed such that original objectives are no longer valid?
Have cost estimates risen significantly above those
associated with the original objective(s), or have benefits fallen
substantially below original expectations?
The following examples are illustrative of programs and activities
that could be considered for reform, reduction, or termination because
of fundamental changes affecting original objectives and purposes.
DOD plans to develop and procure several aircraft,
including the F/A-18E/F, the F-22, and the multiservice Joint Strike
Fighter, to replace various types of tactical fighter and ground attack
aircraft. As the nation proceeds to the next century with the prospect
of a flat defense budget, DOD's plan to modernize its tactical aircraft
fleet will be a significant issue confronting the Congress. DOD's
planned investment in these aircraft, estimated by the Congressional
Budget Office to exceed $350 billion, is likely to be significantly
greater than probable future budgets. Moreover, questions have been
raised about the need for, and cost-benefit of, all these systems given
likely threats. The traditional practices of approving all requested
programs and then reducing procurement quantities within each program
lowers acquisition costs but exacerbates the problem of aging equipment
and associated operating and support costs. The Congress and DOD will
need to carefully consider tactical aircraft investment options to
ensure balance among bona fide national security needs based on
realistic threat assessments, the desires of individual services, and
what can be afforded given likely future budgets.\22\
---------------------------------------------------------------------------
\22\ Fiscal Year 2000 Budget: DOD's Procurement and RDT&E Programs
(GAO/NSIAD-99-233R, Sept. 23, 1999).
---------------------------------------------------------------------------
The Army plans to invest over $13 billion to develop and
procure the Crusader self-propelled howitzer and its resupply vehicle
to be used by the Army's rapidly deployable and forward-deployed
forces. The Crusader program has experienced a number of problems that
have delayed its development by 12 to 18 months, and a number of
technical uncertainties remain. The Army has recently proposed changes
to the Crusader artillery system to make it more affordable and
relevant to future war plans. The new program reduces the planned
procurement quantity, changes the armor, and cuts the system's weight
to about 90 tons. Such changes, however, will likely reduce some of the
Crusader's originally planned capabilities. Given the Crusader
program's high acquisition costs and uncertain capabilities and
requirements, other less costly alternatives--such as upgrading the
Army's current Paladin system or procuring the German PzH 2000 self-
propelled howitzer--could be investigated.\23\
---------------------------------------------------------------------------
\23\ Army Armored Systems: Meeting Crusader Requirements Will Be a
Technical Challenge (GAO/NSIAD-97-121, June 6, 1997).
---------------------------------------------------------------------------
The Army National Guard's combat structure, with 42 combat
brigades, exceeds projected requirements for two major regional
conflicts, according to war planners and DOD and Army studies. Although
the National Guard has state missions in addition to its Federal role,
a 1995 RAND study of the use of Guard forces for state missions
concluded that, even in a peak year, such missions would not require a
large portion of the Guard and should not be used as a basis for sizing
the Guard's force. However, DOD has not yet addressed critical issues
regarding the Guard's combat structure or eliminating any excess
forces. As a result, the combat structure is left in place but has no
valid war-fighting mission. Although the Army National Guard agreed to
reduce its forces by 17,000 through fiscal year 2000, it did not agree
to reduce overall force structure.\24\
---------------------------------------------------------------------------
\24\ Army National Guard: Planned Conversions Are a Positive Step,
But Unvalidated Combat Forces Remain (GAO/NSIAD-97-55BR, Jan. 29,
1997).
---------------------------------------------------------------------------
The need for the Selective Service System could be
reassessed. No one has been drafted in the United States since 1973 and
the advent of an all-volunteer force. Since 1980, males between the
ages of 18 and 26 have continued registering with the Selective Service
System for a potential draft in the event a national emergency occurs.
However, it would require congressional action to actually draft men
into the military, and a return to a military draft seems unlikely,
even under the current recruiting difficulties the military services
are facing. One reason for this is that the recruiting shortfalls
represent only a minute percentage of the over 13 million males of
draft age and it would be very difficult to ensure a fair and equitable
draft to cover such shortfalls. The likelihood of the United States
engaging in a manpower-intensive conflict in the future is very remote,
so alternative approaches to a draft could be devised to fill personnel
needs. It has been estimated that it would take a little more than 1
year and funding equal to about 1 year's appropriation to bring the
Selective Service System back from a ``deep standby'' status.\25\
---------------------------------------------------------------------------
\25\ Selective Service: Cost and Implications of Two Alternatives
to the Present System (GAO/NSIAD-97-225, Sept. 10, 1995).
---------------------------------------------------------------------------
The Uniformed Services University of the Health Sciences
(USUHS) is a medical school operated by DOD. Those who propose closing
the university assert that DOD's need for physicians could be met at a
lower cost using physicians educated at civilian medical schools under
the DOD scholarship program. USUHS is a more costly source of military
physicians on a per graduate basis when DOD's and total Federal costs
are considered. With DOD education and retention costs of about $3.3
million over the course of a physician's career, the cost of a USUHS
graduate is more than 2 times greater than the $1.5 million cost for a
DOD scholarship program graduate.\26\
---------------------------------------------------------------------------
\26\ Military Physicians: DOD's Medical School and Scholarship
Program (GAO/HEHS-95-244, Sept. 29, 1995).
---------------------------------------------------------------------------
The National Aeronautics and Space Administration (NASA)
has estimated that the annual cost to operate the International Space
Station (ISS) will average $1.3 billion, or $13 billion over a 10-year
mission life. However, this estimate does not include risks associated
with international partner commitments or other funding requirements,
such as (1) costs associated with necessary upgrades due to component
obsolescence, (2) end-of-mission costs to either extend or decommission
the ISS, and (3) a variety of support costs (space shuttle flights,
personnel, space communications, etc.) that are currently shown in
other portions of NASA's budget.\27\ Although assembly of the ISS is
well under way, congressional oversight is vital to ensure that NASA's
other priorities are not sacrificed in the agency's annual budget
request to primarily fund ISS operations.
---------------------------------------------------------------------------
\27\ Space Station: Cost to Operate After Assembly is Uncertain
(GAO/NSIAD-99-177, Aug. 6, 1999).
---------------------------------------------------------------------------
DOE has lacked an investment strategy to assure that
supercomputer acquisitions are fully justified and represent the best
use of funds among competing priorities. From fiscal years 1994 through
1997, DOE spent about $300 million to purchase 35 supercomputers and
about $526 million to operate them. Since fiscal year 1998, DOE has
spent an estimated $257 million to acquire additional supercomputers,
most associated with the Strategic Computing Initiative. However, DOE
used only about 59 percent of its available supercomputer capacity in
fiscal year 1997 and was missing opportunities to share supercomputer
resources. The largest supercomputers--those justified as needed to run
very large programs across hundreds or even thousands of processors--
were seriously underutilized. Less than 5 percent of the jobs run on
those supercomputers used more than one-half of the supercomputers'
available processors.\28\
---------------------------------------------------------------------------
\28\ Nuclear Weapons: DOE Needs to Improve Oversight of the $5
Billion Strategic Computing Initiative (GAO/RCED-99-195, June 28, 1999)
and Information Technology: Department of Energy Does Not Effectively
Manage its Supercomputers (GAO/RCED-98-208, July 17, 1998).
---------------------------------------------------------------------------
The USDA Market Access Program (MAP) subsidizes the
promotion of U.S. agricultural products in overseas markets. Despite
changes made to the program between 1993 and 1998, its results remain
uncertain. For example, our work has noted several unresolved
questions, including whether subsidized promotions generate positive
net economic returns, increase exports that would not have occurred
without the program, and supplement rather than supplant private sector
spending.\29\ Moreover, MAP promotions can have significant spinoff
effects. For example, a 1996 study of U.S. apple exports to the United
Kingdom and Singapore found that U.S. market share and export value
increased in the United Kingdom, but that foreign competitors mainly
benefited from MAP promotions in Singapore; Chilean and French apple
producers experienced increases in export shares 3 to 10 times greater
than U.S. producers. The Congress could reassess MAP and consider
terminating or significantly reducing the program.
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\29\ Agricultural Trade: Changes Made to Market Access Program, but
Questions Remain on Economic Impact (GAO/NSIAD-99-38, Apr. 5, 1999).
---------------------------------------------------------------------------
The Coast Guard needs to develop a realistic estimate of
needs based on the capabilities of its current fleet of ships and
aircraft for its Deepwater Project, the largest acquisition project in
the agency's history. The initial justification did not accurately or
fully depict the need to replace or modernize its fleet of deepwater
ships and aircraft. The agency's initial estimate that the project may
cost $9.8 billion, or about $500 million annually over 20 years, would
consume more than the agency now spends for all capital projects and
leave little funding for other critical capital needs.\30\
---------------------------------------------------------------------------
\30\ Coast Guard's Acquisition Management: Deepwater Project's
Justification and Affordability Need to Be Addressed More Thoroughly
(GAO/RCED-99-6, Oct. 26, 1998).
---------------------------------------------------------------------------
To improve Amtrak's financial performance and potentially
reduce Federal subsidies, the Congress must make fundamental choices
between expectations for intercity passenger rail service and the
Federal financial assistance that can be provided. These decisions
involve determining the appropriate scope of Amtrak's route network and
restructuring it accordingly, which could impact the need for financial
assistance. Like other intercity passenger rail systems outside the
United States, Amtrak receives substantial government support. Since
1971, the Federal Government has provided over $23 billion in operating
and capital assistance. Ridership in many areas is light: in 13 states,
fewer than 100 passengers, on average, boarded an Amtrak train on a
given day in 1997. A number of Amtrak's routes lost large sums of money
in 1997; of the 40 Amtrak routes, 13 routes each lost over $30 million
and 14 each lost more than $100 for every passenger. Overall in 1999,
Amtrak lost $907 million. In 1994, at the request of the administration
and later at the direction of the Congress, Amtrak pledged to eliminate
the need for Federal operating subsidies by the end of 2002. However,
Amtrak has made relatively little progress in reducing its need for
Federal operating subsidies; in fact, it must make nearly 4 times the
progress in the coming 3 years (through 2002) than it has made over the
previous 5 years. If Amtrak continues to require Federal operating
subsidies after 2002, the Amtrak Reform and Accountability Act of 1997
provides for the Congress to consider either restructuring or
liquidating the railroad.\31\
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\31\ Intercity Passenger Rail: Amtrak Faces Challenges in Improving
its Financial Condition (GAO/T-RCED-00-30, Oct. 28, 1999).
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Cargo preference laws require that certain government-
owned or -financed cargo shipped internationally be carried on U.S.-
flagged vessels. The laws were intended to guarantee a minimum amount
of business for the U.S.-flagged vessels that are crewed by U.S.
mariners, generally built in U.S. shipyards, and are encouraged to be
maintained and repaired in U.S. shipyards. The effect of cargo
preference laws has been mixed. Although the laws appear to have had a
substantial impact on the U.S. merchant marine industry by providing an
incentive for vessels to remain in the U.S. fleet, cargo preference
laws have increased the government's transportation costs because U.S.-
flagged vessels often charge higher rates to transport cargo than
foreign-flagged vessels. Cargo preference laws increased Federal
agencies' transportation costs by an estimated $578 million per year in
fiscal years 1989 through 1993 over the cost of using foreign-flagged
vessels.\32\
---------------------------------------------------------------------------
\32\ Maritime Industry: Cargo Preference Laws--Estimated Costs and
Effects (GAO/RCED-95-34, Nov. 30, 1994).
---------------------------------------------------------------------------
The Medicare Incentive Payment program was developed to
provide a bonus payment for Medicare services provided in areas
identified as having a shortage of primary care physicians. About 60
percent of the payments, about $65 million, was made to specialists;
two-thirds of those payments--and many of the substantial bonus
payments, such as $69,000 to a dermatologist and $57,000 to a
neurosurgeon--were made to specialists in urban areas, rather than to
primary care physicians in medically underserved areas. The bonus
payments do not appear to have a significant impact on physician
recruitment and retention, and recent beneficiary survey information
indicates that access problems arise for reasons other than the
unavailability of physicians.\33\
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\33\ Physician Shortage Areas: Medicare Incentive Payment Not an
Effective Approach to Improve Access (GAO/HEHS-99-36, Feb. 26, 1999).
---------------------------------------------------------------------------
The Government Printing Office (GPO), which receives over
$100 million in annual appropriations, effectively has a statutory
monopoly over printing for the Federal Government.\34\ GPO's monopoly-
like role in providing printing services perpetuates inefficiency
because it permits GPO to be insulated from market forces and does not
provide incentives to improve operations and processes that will ensure
quality services at competitive prices. Federal agencies could be given
the authority to make their own printing policies, requiring GPO to
compete with private sector printing service providers. If GPO is
unable to provide quality service at competitive prices, the need for
retaining a government printing office could then be reexamined.
---------------------------------------------------------------------------
\34\ Government Printing: Legal and Regulatory Framework Is
Outdated for New Technological Environment (GAO/NSIAD-94-157, Apr. 15,
1994).
---------------------------------------------------------------------------
Redefine Who Benefits From Federal Government Programs
The Congress originally defines the intended audience for any
program or service based on a certain perception of eligibility and/or
need. To better reflect changing conditions and target limited
resources, these definitions should be periodically reviewed and
revised. Our work has identified eligibility rules and subsidies to
states, businesses and individuals that are no longer needed or that
could be better targeted without changing the basic objectives of the
program. As presently designed, a variety of grants, tax expenditures,
loans and loan guarantees that provide subsidies to recipients who
would have undertaken the activity without Federal subsidy and thus
avoid bearing their fair share of risks and program finances. The
following examples illustrate programs and activities that could be
considered for reform, reduction, or termination because of changing
conditions and perceptions of need.
Many Federal grant programs with formula-based
distributions of funds to state and local governments are not well
targeted to jurisdictions with high programmatic needs but
comparatively low funding capacity. As a result, it is not uncommon
that program recipients in areas with greater wealth and relatively
lower needs enjoy a higher level of funding than that which is
available in harder pressed areas. For example, under the Community
Development Block Grant (CDBG), Greenwich, Connecticut received five
times more funding per person in poverty in 1995 than that provided to
Camden, New Jersey, even though Greenwich, with per capita income six
times greater than Camden, could more easily afford to fund its own
community development needs. Better targeting of formula-based grant
awards offers a strategy to bring down Federal outlays by concentrating
reductions in wealthier communities with comparatively fewer needs and
greater capacity to absorb cuts, while holding harmless harder pressed
areas that are most vulnerable. For programs such as Medicaid, Foster
Care, and Adoption Assistance, which base reimbursements on the per
capita income of the state, the minimum Federal share could be reduced
or the formula could be revised to better reflect relative need,
geographic differences in the cost of services, and state tax bases.
For other formula-based grant programs, such as Federal Aid Highways or
the CDBG, the formula could be revised to reflect the differential
fiscal capacities of states.\35\
---------------------------------------------------------------------------
\35\ Formula Grants: Effects of Adjusted Population Counts on
Federal Funding to States (GAO/HEHS-99-69, Feb. 26, 1999) and Federal
Grants: Design Improvements Could Help Federal Resources Go Further
(GAO/AIMD-97-7, Dec. 18, 1996).
---------------------------------------------------------------------------
The level and scope of the risks of the U.S. Export-Import
Bank's (Eximbank) programs could be reduced by placing a ceiling on the
maximum subsidy rate allowed, reducing or eliminating program
availability in high-risk markets, and offering less than 100-percent
risk protection. The Eximbank was created to facilitate exports of U.S.
goods and services and is to absorb risks that the private sector is
unwilling or unable to assume. Higher-risk markets constitute a
relatively small share of the Eximbank's total financing commitments
yet absorb a relatively large share of its subsidy costs. These changes
would have only a slight effect on the overall level of U.S. exports
supported with Eximbank financing. However, these options raise several
trade and foreign policy issues that decisionmakers would need to
address before making any changes in the Eximbank's programs.\36\
---------------------------------------------------------------------------
\36\ U.S. Export-Import Bank: Issues Raised by Recent Market
Developments and Foreign Competition (GAO/T-NSIAD-99-23, Oct. 7, 1999).
---------------------------------------------------------------------------
DOE and the private sector are involved in hundreds of
cost-shared projects aimed at developing a broad spectrum of cost-
effective, energy-efficiency technologies that protect the environment,
support the nation's economic competitiveness, and promote the
increased use of oil, gas, coal, nuclear, and renewable energy
resources. Generally, DOE does not require repayment of its investment
in technologies that are commercially successful. The potential for
repayment can be significant. For example, we reported in 1996 that if
only 50 percent of the funds planned for current projects were subject
to repayment, and if about 15 percent of research and development funds
result in commercialized technologies, then about $400 million could be
repaid to the Federal Government.\37\
---------------------------------------------------------------------------
\37\ Energy Research: Opportunities Exist to Recover Federal
Investment in Technology Development Projects (GAO/RCED-96-141, June
26, 1996).
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Three Federal power marketing administration's (PMAs)--
Southeastern, Southwestern, and Western--receive annual appropriations
to cover operating and maintenance expenses and, if applicable, the
capital investment in transmission assets. The fourth PMA, Bonneville
Power Administration, does not receive annual appropriations. Federal
law requires the PMAs to repay their appropriations as well as the
power-related appropriations expended by the operating agencies that
generate the Federal power. The PMAs are to set power rates at levels
that will allow them to repay these costs. However for several reasons,
the Federal Government currently is not recovering the full cost of its
power-related activities from the beneficiaries of Federal power. For
example, the Federal Government's financing of power-related activities
results in a net cost because the interest rates on outstanding
appropriated debt are lower than the rates Treasury incurs in providing
the financing. Second, as we reported previously, the PMAs' had not
been recovering the full costs of certain pension and other benefits
for Federal employees involved in power-related activities. Currently,
the PMAs are in varying stages of addressing this issue and DOE is
considering changing departmental policy to ensure that these costs are
recovered in the future. Third, the PMAs are able to sell power more
cheaply than other providers because they market power generated almost
exclusively at low-cost hydropower facilities, are not required to earn
a profit, and do not fully recover the government's costs in their
rates. For example, from 1990 through 1995, these three PMAs sold
wholesale power to their preference customers at average rates from 40
to 50 percent below the rates nonfederal utilities charged. If the PMAs
were authorized to charge market rates for power, some preference
customers, who now purchase power from the PMAs at rates that are less
than those available from other sources, would see their rates
increase. However, slightly more than two-thirds of these preference
customers would experience small or no rate increases--increases of
one-half cent per kilowatt hour or less--if the PMAs charged market
rates. Directing the PMAs to more fully recover power-related costs and
requiring them to sell their power at market rates would better ensure
the full recovery of the appropriated and other debt--which totaled
about $22 billion at the end of fiscal year 1997--that is recoverable
through the PMAs' power sales, as well as lead to more efficient
management of the taxpayers' assets.\38\
---------------------------------------------------------------------------
\38\ Federal Power: The Role of Power Marketing Administrations in
a Restructured Electricity Industry (GAO/T-RCED/AIMD-99-229, June 24,
1999) and Power Marketing Administrations: Cost Recovery, Financing,
and Comparison to Nonfederal Utilities (GAO/AIMD-96-145, Sept. 19,
1996).
---------------------------------------------------------------------------
Federal water programs to promote efficient use of finite
water resources for the nation's agricultural and rural water systems
have developed inconsistencies that may cause the programs to work at
cross-purposes. In the area of irrigation the multiplicity of programs
and approaches has allowed for inconsistencies and potentially
counterproductive outcomes. For example, under the Reclamation Reform
Act of 1982, as amended, some farmers have reorganized large farming
operations into multiple, smaller landholdings to be eligible to
receive additional federally subsidized water. Due to the vague
definition of the term ``farm,'' the 960-acre limit established by the
act has not stopped the flow of subsidized water to large holdings and
the Federal Government is not collecting revenues to which it is
entitled. Also, the use of federally subsidized water to produce
federally subsidized crops results in the government paying double
subsidies. The Department of the Interior estimated irrigation
subsidies used to produce subsidized crops in the 17 western states to
be about $203 million in 1986; the Bureau of Reclamation placed the
figure at $830 million.\39\
---------------------------------------------------------------------------
\39\ Rural Development: Patchwork of Federal Water and Sewer
Programs is Difficult to Use (GAO/RCED-95-160BR, Apr. 13, 1995) and
Water Subsidies: Basic Changes Needed to Avoid Abuse of the 960-Acre
Limit (GAO/RCED-90-6, Oct. 12, 1989).
---------------------------------------------------------------------------
The Mining Law of 1872 allows holders of economically
minable claims on Federal lands to obtain all rights and interests to
both the land and the hardrock minerals by patenting the claims for
$2.50 or $5.00 an acre--amounts that fall well short of today's market
value for such lands. Furthermore, miners do not pay royalties to the
government on hardrock minerals they extract from Federal lands. For
example, in 1990 hardrock minerals worth at least $1.2 billion were
extracted from Federal lands, while known and economically recoverable
reserves of hardrock minerals remaining on Federal lands were estimated
to be worth almost $65 billion. The Congress could consider revising
the law to require the payment of fair market value for a patent and to
impose royalty payments on hardrock minerals extracted from Federal
lands.\40\
---------------------------------------------------------------------------
\40\ Rural Development: Patchwork of Federal Water and Sewer
Programs is Difficult to Use (GAO/RCED-95-160BR, Apr. 13, 1995) and
Water Subsidies: Basic Changes Needed to Avoid Abuse of the 960-Acre
Limit (GAO/RCED-90-6, Oct. 12, 1989).
---------------------------------------------------------------------------
The Federal Emergency Management Agency's (FEMA) Public
Assistance Program helps pay state and local governments' costs of
repairing and replacing eligible public facilities and equipment
damaged by disasters. In a May 1996 report, we presented a number of
options identified by FEMA's regional program officials that, if
implemented, could reduce program costs. Among the options discussed
was eliminating eligibility for private nonprofit organizations, many
of which operate revenue-generating facilities such as utilities and
hospitals, and publicly owned recreational facilities, which generate a
portion of their operational revenue through user fees or admissions
charges. Many of these types of facilities could have alternate sources
of income sufficient to meet disaster-related costs.\41\
---------------------------------------------------------------------------
\41\ Disaster Assistance: Information on Federal Costs and
Approaches for Reducing Them (GAO/T-RCED-98-139, Mar. 26, 1998) and
Disaster Assistance: Improvements Needed in Determining Eligibility for
Public Assistance (GAO/RCED-96-113, May 23, 1996).
---------------------------------------------------------------------------
Repetitive flood loss is one of the major factors
contributing to the financial difficulties facing the National Flood
Insurance Program. The Congress and FEMA could consider eliminating
flood insurance and emphasizing mitigation for certain repeatedly
flooded properties, removing what some argue is now an incentive to
locate in harm's way. Approximately 43,000 buildings currently insured
under the National Flood Insurance Program have been flooded on more
than one occasion. These repetitive losses account for about 36 percent
of all program claims historically (currently about $200 million
annually) even though repetitive-loss structures make up a very small
portion of the total number of insured properties--at any one time
between 1 to 2 percent. The cost to the program of these multiple-loss
properties over the years has been about $2 billion.\42\
---------------------------------------------------------------------------
\42\ Flood Insurance: Information on Financial Aspects of the
National Flood Insurance Program (GAO/T-RCED-00-23, Oct. 27, 1999).
---------------------------------------------------------------------------
We have reported in the past on this nation's practice of
compensating veterans for medical conditions, such as diabetes, chronic
obstructive pulmonary disease, arteriosclerotic heart disease, and
multiple sclerosis, that were probably neither caused nor aggravated by
military service.\43\ In 1996, the Congressional Budget Office reported
that about 230,000 veterans were receiving about $1.1 billion in
disability compensation payments annually for diseases neither caused
nor aggravated by military service. Other foreign countries we reviewed
require that a disability be closely related to the performance of
military duty to qualify for disability benefits; no such link is
required in the United States. The Congress could reconsider whether
diseases neither caused nor aggravated by military service should be
compensated as service-connected disabilities.
---------------------------------------------------------------------------
\43\ Disabled Veterans Programs: U.S. Eligibility and Benefit Types
Compared to Five Other Countries (GAO/HRD-94-6, Nov. 24, 1993).
---------------------------------------------------------------------------
Pursuing Effective Oversight: The Challenge Ahead
Mr. Chairman, I am sure that this illustrative list of government
performance and management problems is sobering. There is much to be
done, but the task is not overwhelming. Given the demanding missions of
our government and the sheer size and complexity of Federal operations,
performance shortfalls should neither be surprising nor accepted. As my
testimony today suggests, significant opportunities exist to curb
fraud, waste, and abuse in a wide range of Federal activities and to
update the priorities and program operations of the Federal Government
in keeping with broader changes affecting our entire society and
economy.
This is an opportune time to refocus congressional oversight. Not
only are we free of the dominating concerns of the recent past--the
Cold War and annual deficits--but we are about to begin to see the
benefits of a wide-ranging reform agenda in the executive branch
prompted by a series of laws--including the Government Performance and
Results Act, the Chief Financial Officers Act, and the Clinger-Cohen
Act--enacted by the Congress. The concerns of the Congress that led to
the passage of those laws should now be directed toward a careful
reconsideration of how the Congress will take advantage of and leverage
the new information and perspectives coming from the executive branch
management reforms.
As agencies continue to make progress in implementing these
financial and performance management reforms, we can expect further
opportunities for congressional oversight to be revealed. The
information they provide can assist in identifying weaknesses and
illustrating programs and functions that are working well. Financial
statements, for instance, are beginning to report information on
improper payments, which is already helping to better target areas
needing priority congressional and management attention. As more
reliable financial information is developed and disclosed, new
information will be forthcoming to inform resource allocation and
oversight in other areas as well. For instance, audited information on
the extent of Federal liabilities for environmental cleanup should help
us better understand future cost pressures facing the budget and
improve the cost effectiveness and targeting of our cleanup efforts.
Similarly, the development of more reliable cost information should
help us better manage these costs and make more informed tradeoffs
among competing programs and strategies to address Federal objectives.
The evolution of performance management should also assist
oversight. The forthcoming publication of agency performance reports,
due in March of 2000, comparing actual levels of performance against
performance goals contained in agency plans, should help pinpoint both
performance shortfalls and successes. These reports should also prompt
inquiries to understand the factors responsible for performance
outcomes, permitting a more systematic understanding of the role played
by program design and management in influencing program results. The
performance reports will also help us better understand strengths and
weaknesses in agency performance information and data. Continued
improvement in agency data should facilitate a deeper and broader
assessment of the relative effectiveness of Federal strategies to
achieve important goals.
In this context, I would note that the Administration has
articulated an agenda in its fiscal year 2001 budget to improve
financial and performance management across a wide range of Federal
activities. Specifically, they have identified 24 priority management
objectives dealing with many of the problems discussed in this
statement. For instance, the Administration has included a goal
addressing the improper payments problem and has promised to provide
guidance to agencies on such issues as verifying eligibility criteria
and estimating the extent of improper payment problems. Proposals are
also advanced to strengthen the management capacities of HCFA and
implement reforms at HUD, among other agencies. Continued top-level
management attention to these issues is vital to making progress, as is
congressional oversight of these initiatives.
As you know Mr. Chairman, oversight of Federal programs and
activities can be a daunting challenge. While there may be some ``low
hanging fruit'' in the examples I have just discussed, real
improvements in performance and management will more likely call for a
disciplined and determined approach. Many of the examples I have
discussed come from longstanding weaknesses in management structures
and processes and will likely require sustained attention over an
extended period of time. Examining existing programs and operations
entails taking a hard look at programs that often have become deeply
engrained and carefully reconsidering the goals those programs were
intended to address as well as how those goals are implemented. It
involves sorting through the maze of Federal programs and activities
where multiple agencies often operate many different programs to
address often common or complimentary objectives. Addressing identified
problems will call for hard choices; although offering distinct
benefits, the choices will involve important stakes for many throughout
our system.
Effective congressional oversight can be a means not only to
identify where programs and activities should be terminated, but also
where carefully selected investments by Federal agencies in human
capital, technology, and financial and information management resources
can yield important dividends in the form of longer term cost savings
and improvements in performance. However, better information is needed
to permit decisionmakers to sort through claims and to distinguish the
infinite variety of ``wants'' from those investments that promise to
effectively address critical ``needs.'' Unfortunately, recent
experiences ranging from information technology projects to major
weapon systems illustrate that our return on such investments has been
disappointing. Poorly conceived projects based on incomplete or
inaccurate information and performance projections have led to projects
with huge cost overruns and limited performance improvements. Although
constructive change is occurring,\44\ our work demonstrates the need to
improve the basis for capital investments, in general, and information
technology investments, in particular.
---------------------------------------------------------------------------
\44\ Executive Guide: Leading Practices in Capital Decision-Making
(GAO/AIMD-99-32, Dec. 1999).
---------------------------------------------------------------------------
I again commend you, Mr. Chairman, for holding these hearings and
for reminding us all of the importance of continued diligence regarding
the performance and management of government programs. Prudent
stewardship of our nation's resources--whether in time of deficit or
surplus--is essential not only to meet today's needs but also
tomorrow's commitments and demands. Sustained congressional and
executive agency attention to improving management systems and controls
is vital to promoting proper stewardship of Federal resources and
preventing risks of fraud, waste, and abuse that undermine the public's
confidence in their government. Broadscale reexamination of Federal
Government priorities, programs, and activities is also vital to ensure
our capacity to meet current and emerging needs. We in GAO take very
seriously our responsibility to assist you in promoting and ensuring
accountability, integrity, and reliability throughout the government.
Chairman Kasich. Let me just ask initially, Mr. Walker,
what percentage of your written testimony is covered in your
oral testimony, would you say?
Mr. Walker. I would say obviously the written is a lot more
extensive. Maybe 15 percent.
Chairman Kasich. So we heard 15 percent, and we are all
kind of worn out here after listening to this, I would say.
[Laughter.]
Mr. Walker. I am sorry, Mr. Chairman.
Chairman Kasich. And we only heard 15 percent. But I have
been hearing this for 20 years. It is the same old stuff. It
just makes my blood boil.
But, I understand that sometimes people say, well, if you
look beneath the surface, you can find out that these things
are really not so. I can remember defense contractors
justifying $75 apiece for nails.
There is always a way to explain anything. It just really
gets to be--if it was my business and I had some employee that
was--if I had a business and I couldn't add up my books, what
do you think would happen? If I went to the bank and said I
would like to borrow some money and I couldn't show them my
books, I just plugged in numbers. I understand we are plugging
in numbers at DOD, Agriculture, Education, Justice,
Transportation, and AID. Correct?
Mr. Walker. That is correct.
Chairman Kasich. We just plug in numbers because we can't
make the numbers add up.
Mr. Walker. Yes, intragovernmental transactions,
transactions between agencies, there are real problems there.
Chairman Kasich. How do we get in a situation where we are
buying these trailers in DOD?
Mr. Walker. Quite frankly, Mr. Chairman, this is
illustrative of a bigger problem.
Chairman Kasich. Well, let's talk about that problem. How
are we buying a trailer that is not safe and that we don't
need?
Mr. Walker. Because DOD----
Chairman Kasich. Is there a Congressman up here that has it
built in his district?
Mr. Walker. I don't believe that is the issue, Mr.
Chairman.
Chairman Kasich. OK.
Mr. Walker. I mean, I think that DOD obviously has
identified the fact that it has a mobility need and that it
needed to do something to meet that need.
My understanding is that the problem that occurred here,
Mr. Chairman, is they did not adequately define and test their
specifications before they awarded the contract and put it into
production. So they defined what they wanted, but they didn't
test the feasibility of it. And then by the time these things
started rolling off the production line, they discovered they
had some problems.
And, quite frankly, I think, as I said before, I can
understand if we have to hurry up in the development of certain
systems because of a credible external threat to our national
security. However, we are in a very changed environment now.
The nature of the threats that face us are fundamentally
different than during the Cold War. And all too frequently DOD
is cutting corners when there is no legitimate reason to do so.
That results--that is waste. That is imprudent practice.
Now, we are doing work here on identifying commercial best
practices for systems development, whether they be weapons or
nondevelopment, which we are doing for the Congress, we are
going to bring forward, and I think the Congress needs to
seriously look at considering whether or not that DOD should be
required to follow commercial best practices unless there is a
clear, compelling national security threat to do otherwise.
Chairman Kasich. Now, my understanding is that little
trailer there, it doesn't stay hitched. Is that correct?
Mr. Walker. It either doesn't stay hitched, or if it does,
it causes damage to the towing vehicle.
Chairman Kasich. OK. And they are asking for more of these.
Is that right?
Mr. Walker. About 18,000.
Chairman Kasich. More of them.
Mr. Walker. That is correct, Mr. Chairman.
Chairman Kasich. Now, how can that be?
Mr. Walker. Well, because they plan to----
Chairman Kasich. Who is in charge? I mean, seriously, how
can that be?
Mr. Walker. Well, they are confident they can fix it, Mr.
Chairman, and my understanding is it is going to cost several
hundred, maybe $1,000 each. That frankly, unfortunately, is
part of the mentality. It is part of the mentality. It is part
of the culture. You know, let's get it while we can get it.
Let's get it while we think we can get the funding, and we will
worry about whether it works or we will worry about fixing it
later.
That is not how you run a business. That is not how you run
a Government.
Chairman Kasich. Where is it built? Do you know?
Mr. Walker. Where is it built?
Chairman Kasich. Where is it built, yes.
Mr. Walker. Oregon.
Chairman Kasich. Oregon.
Mr. Walker. That is where the contractor is. Is that where
the production facility is?
Mr. Hinton. It is not a contractor problem.
Mr. Walker. It is not a contractor problem. It is a design
specification problem, I believe. This is Butch Hinton who is
head of our national security.
Mr. Hinton. Mr. Chairman, this is an Army management
problem. When they started out with this program, they tried to
adapt the design to meet their needs without doing any testing.
They only had procurement dollars available, and they went
about their process by trying to make that work for them. And
when they got into it and started testing, that is when all--as
the Comptroller General has said, that is when the problems
began to----
Chairman Kasich. It looks like a trailer. I mean, it
doesn't look like it is a missile.
Mr. Hinton. It is a trailer. It just doesn't work for what
they were trying to hook it up to do.
Chairman Kasich. So our answer is order 18,000 more of
them.
Mr. Hinton. Well, we are going to keep an eye on that
because----
Chairman Kasich. Oh, man, I feel better. [Laughter.]
Mr. Hinton. We are going to keep an eye on that. We asked
the Army: Don't go forward until you can get this thing fixed.
Mr. Spratt. Let me interrupt here, because it is our
understanding the Army does not intend to order any more of
these trailers. Have you not been notified as to that?
Mr. Hinton. I have not been notified to that, Mr. Spratt.
In fact, when we concluded the work, they had plans for buying
another 18,000, and that was at the end of----
Mr. Spratt. Well, we were told that the remaining
requirement is 18,412 additional units and that the Army will
meet this requirement with a new trailer design, a new RFP.
Mr. Hinton. But I think, though, if they go through with a
new trailer design, that is different than what we were told
when we did our work. What we were told is that they were going
to go back and modify----
Chairman Kasich. When were you told this?
Mr. Hinton. This would be in the September, October time
frame of last calendar year.
Mr. Spratt. Well, we have been told that the Army has
established an integrated product team made up of
representatives from the users, the safety and maintenance,
program management, testing, procurement communities, the whole
shebang, to see that this trailer meets both the subsystem
requirements and the humvee trailer system requirements.
Now, who is the contractor for this?
Mr. Walker. While he is looking for that, Mr. Spratt, our
understanding was that they were not going to move forward
acquiring any more until they got their problem fixed. Now, you
may have more recent information, but I think----
Mr. Spratt. They told us that they are going to go with a
new design. They have already put together an integrated
product team to develop that design. They are not ordering any
more of this particular type of trailer.
Mr. Walker. But even if that is true, Mr. Spratt----
Chairman Kasich. Let me tell you, I am just--I mean, what
progress they have made on this. And I will bet you they are
not ordering any more because we had investigators out there
looking at them, and there was no way on God's green Earth that
they were going to think they were going to order any more and
get embarrassed on this. All right? So we don't have to talk
about the trailer.
How about these? I mean, it goes on and on and on and on.
Five changes in the Comanche helicopter, an unstable system.
And so they decided somewhere between September and February to
change their plans not to order 18,000 more. Why don't we give
them a medal? Do we have any medals around here we can pass out
to them?
The fact is that they were going to proceed on this, and
they stopped. Good. I am going to write them a note this
afternoon congratulating them. But the fact is--how many do
they have of these?
Mr. Hinton. About 6,700, I believe.
Chairman Kasich. Maybe they stopped.
Mr. Walker. Mr. Chairman, could I say one thing?
Chairman Kasich. Yes.
Mr. Hinton. They may well be doing what you said, Mr.
Spratt. You may have more recent information than we do----
Mr. Spratt. Do you know who the contractor is? I am just
curious.
Mr. Hinton. Yes, sir. The original one was Electrospace
Systems, Inc. in Richardson, Texas, which is now Raytheon E-
Systems, Inc. It subcontracted to the Silver Eagle
Manufacturing Company in Portland, Oregon.
Mr. Walker. But I think the point that we were trying to
make Mr. Spratt and Mr. Chairman, the basic way that the
process works, this is an example. And, yes, they are obviously
going to either fix this or they are going to go to new version
because this one doesn't work.
But the problem is: How did we get to this point? And what
systemic changes are going to be made to the process? No matter
what team they have, what practices will the team employ in
order to make sure that they are following commercial best
practices so this doesn't happen again. And that is really the
issue, because I am sure that they are not going to shoot
themselves, repeat the same injury. I think we can probably
reasonably agree to that. But they have got to fix the problem,
and the problem is the system and the incentives and the
accountability mechanisms in it.
Chairman Kasich. Let me ask you about--could you tell me
anything about a charcoal grill at the Air Force Academy's Otis
House?
Mr. Walker. I think you brought that to our attention, Mr.
Chairman. That is the $14,000 grill?
Chairman Kasich. $14,000 was spent to convert the charcoal
grill at the Air Force Academy's Otis House to natural gas,
according to the Air Force auditing agency. Another $40,000 was
designated for moving a bathroom wall at the house, the
residence for the Commandant of Cadets, so that the adjoining
bedroom's interior could be widened by one foot.
Is that kind of stuff still going on over there?
Mr. Walker. Well, Mr. Chairman, we haven't done a review of
that to be able to say whether it is still going on.
Chairman Kasich. Check it out for us, would you?
Let me ask you this question, seriously now. O&M, the
number of dollars put into operation and maintenance readiness
has gone from $55,000 per troop to $75,000 per troop. This is
constant dollars. You got me? $55,000 per person to $75,000 per
person in constant dollars. That is for readiness.
Readiness indicators are down. Aircraft mission-capable
rates are down about 10 percent. The Army recently declared two
of its ten division not mission ready.
How can we put $20,000 per troop in constant dollars into
readiness but readiness indicators are going down? Can you
explain that to me? Is that because we are not putting enough
dollars in, or is that because we are not managing it properly?
Mr. Hinton. Mr. Chairman, we need to delve into the whole
O&M issue here because a lot of the money which the Congress
approves for a lot of the readiness issues moves out to fund
other things such as real property maintenance needs and those
type of things. That is one part of the answer. It doesn't
really go to where some of it is needed because of other
competing priorities.
Over time, we have seen a lot of movement of the O&M funds
away from where the original request for those monies were
needed and then they actually got spent. And that in turn
drives that number up, and then it doesn't get to where some of
the true readiness needs are.
I do also believe that OPTEMPO has a play in that issue,
and it stretched some of the units to meet their priorities,
and hence you have some of those units who are not capable of
doing their missions.
Chairman Kasich. Mr. Spratt mentioned this issue of
earmarks. You should know I have never had an earmark or an
add-on in a defense bill or in any bill in the Congress in 18
years. Not one.
Mr. Spratt. Mr. Chairman.
Chairman Kasich. Let me just ask this question about the--
the gentleman will have his time in a second here, but I want
to ask about the earmarks. I know there was a study done that
indicated that the Congress had made a number of requests for
weapons systems, you know, that the Pentagon didn't really
want. Have you been able to review that lately, where are we on
that? In other words, if we are driving these costs through the
roof, have you been able to look at that, the number of weapons
systems or whatever that the Pentagon did not want that we
earmarked on both sides of the aisle that has created
inefficiencies?
Mr. Hinton. We have not done a comprehensive review of that
issue, Mr. Chairman. The only one of the programs that comes to
my mind is where we looked at the C-130 aircraft issue in terms
of the needs and the quantities there, and that is the only
program we have looked at. But we haven't looked across DOD on
that issue.
Mr. Walker. Mr. Chairman, this is an issue that as recently
as within the last week we have been talking about, as Mr.
Spratt pointed out properly. In some cases, the problem is in
the executive branch. Candidly, in some cases, the problem is
in the legislative branch. In some cases, there are items that
are appropriated for various reasons that aren't needed, and in
some cases, there are restructuring efforts that DOD is
desirous of undertaking that aren't undertaken. And that is
part of the checks and balances, and, there are various
considerations.
One example I would give you there is the base closure
issue. It is a very emotional issue. We have been through that
a couple of times already. DOD has said on more than one
occasion that they would like to go through some more of those,
that they think they are dedicating too much money maintaining
unneeded infrastructure.
But there is a difference between that and making it a
reality, and there are a lot of other considerations that have
to be addressed.
Chairman Kasich. Let me get off of Defense for a second and
talk about Education. I know that we passed in 1998 a data
match requirement where we were to actually check the student
applications and IRS data to make sure that people weren't
getting loans, Pell grants, or whatever that they weren't
entitled to. In 1998, they were to undertake a program to make
sure that we verified people's legitimate needs.
Where does that program stand 2 years later?
Mr. Walker. Well, first, Mr. Chairman, let me talk about
what we are trying to do in this area in general, and then I am
going to ask Vic Rezendes, who is the division head for that
area, to address your specific question.
There is a data matching problem beyond education. There is
a data matching problem in the entire Government. And one of
the things that we are doing is not only continuing to do work
on behalf of the Congress, we are actually pulling together
some people at the GAO to try to help some progress get made on
this throughout the Government in order to try to get some
results here.
Vic.
Mr. Rezendes. Basically, the issue is one of IRS'
comfortableness with opening up its records for data match, not
only with Federal agencies but particularly on the Department
of Education issue. Their primary concern is opening up this
and giving this to private contractors and other third parties.
I believe the IRS position is they would prefer to see
Congress authorize specific legislative authority for them to
deal with this.
Mr. Walker. So they are not making the progress because
they would rather be mandated.
Mr. Rezendes. Right. They are still negotiating. But I
think IRS' position is they prefer Congress to direct them to
do this.
Chairman Kasich. I thought we directed them to do it.
Mr. Rezendes. Through the Education Act, but they are
looking for a more generic fix in the statute for matches
throughout the Federal Government.
Mr. Walker. Mr. Chairman, the problem appears to be at the
IRS rather than at the Department of Education. It is the IRS
that is looking for some type of direction and some type of
comfort.
Chairman Kasich. Why don't you get us some language so that
we can move on this?
Mr. Walker. We will follow up on that.
Chairman Kasich. In other words, 2 years later, Education
says we--they are directed by the Congress to do a match, and
the IRS says we aren't going to do a match. So 2 years later,
there is no match going on. Is that it?
Mr. Rezendes. That is correct.
Chairman Kasich. Let me ask you about prescription drugs.
Medicaid accounts for 80 percent of all Federal spending on
prescription drugs. We don't know how much waste there is in
this program--is that correct?--because we don't aggressively
audit because it is a Federal and State program. Is that
correct?
Mr. Walker. We don't know the total amount.
Chairman Kasich. The State of New York reported that at
least 10 percent of the State's total Medicaid spending for
prescription drugs were losses. So 10 percent of all the money
spent on prescription drugs in New York was lost. They don't
know what happened to it, according to New York.
What can we learn as we move forward into a prescription
drug program for Medicare from what we have learned from
Medicaid, anything? Since we haven't audited it----
Mr. Walker. I think there are a number of things that we
have to keep in mind in conjunction with prescription drugs:
Number one, they are the fastest-growing component of
health care cost.
Number two, there is a bona fide need to look at access to
prescription drug coverage to the population, especially the
Medicare population, but there is a difference between access
to coverage and who pays for the coverage.
Number three, there is a possibility to engage in some
group purchasing and then pass those savings along on a cost-
neutral basis.
And, number four, if the Congress is going to do anything
on prescription drugs, for example, in Medicare, it should
target the financial assistance to those who truly need it.
But in addition to that, I think we need more transparency.
We need more incentives with regard to health care in general
and prescription drugs in particular, so that individuals are
more sensitive to the cost and can identify possible abuse
where drugs are being billed that haven't been received. Part
of that is challenging when you are dealing with the seniors
population, some of which could be well into their 80s and may
not be in the best position to be able to make some of those
judgments. But we have got to learn some of those lessons
before we move forward.
Chairman Kasich. What you are saying with the Medicare
system, this proliferation of payments--and I am going to try
to move on and give time to Mr. Spratt, because we have got a
long way to go today--is that you have a systemic problem. When
900 million claims are filed every year and I am not making the
purchases myself and somebody else is involved, you have got a
systemic problem when it comes to how you do health care.
Mr. Walker. There is a systemic problem, and it is much
bigger than Medicare, and Medicaid.
Chairman Kasich. Let me just ask a final question. First of
all, we order a lot of things, and we pass a lot of things, and
nothing happens in too many cases. How do we get on top of that
to make sure that things actually happen? I suppose there is no
substitute for the will of a member who just locks on and
doesn't let go. And, secondly, if you were to be in a position
of actually trying to force some of these things to happen, how
would you systematically go about focusing on each of these
areas so that either we can have proper congressional oversight
either to change things or to make sure that what we have
already passed is going to be implemented?
Mr. Walker. Well, first I think it is important for the
accountability community, meaning the GAO, the inspectors
general, and the others, to be able to coordinate their efforts
to make sure that we are focusing on the areas where there is
the greatest possibility for return, that we are not
duplicating efforts.
Secondly, I think it is important that OMB play a major
leadership role throughout the executive branch and spend more
time on management. OMB spends a lot of time on budget. They
are starting to spend more on management, but not nearly
enough.
Thirdly, I think the Congress needs to reinvigorate
oversight. I think the example of the Customs Service is a
positive example of where the executive branch took it
seriously, the Congress took it seriously, and we got it off
the high-risk list. And we got it off the high-risk list in a
couple of years.
So it is a matter of focus. It is a matter of efforts by
both the legislative and executive branch as well as the
accountability community.
Chairman Kasich. I wonder if you could send us a real good
analysis of what Customs did. What did Customs put in place?
They had to admit their problem. What were the steps that they
took? And maybe we can learn from Customs and that can be
helpful in terms of how these other governmental entities are
able to improve.
Mr. Spratt.
Mr. Spratt. Well, we gave them the money to buy a new
computer system. I went up to the terminal in Newark to see how
the Customs system tracked textile imports years ago, and they
were so bereft of contemporary computer systems that they were
literally using the computers that the import terminals
themselves maintained. They put their software on the
terminal's hardware just because it was better than anything
the Government was providing. And we provided them the money, a
substantial sum of money, for modernization and it is beginning
to pay dividends.
Mr. Walker. I think there are several issues here. You are
pointing out an important point. It was leadership, it was
focused, it was sustained commitment. But in some cases, in
order to solve some of these problems, you may have to make
some targeted investments--not in all but in some you may have
to--in order to be able to generate the savings.
Mr. Spratt. One of the investments you haven't mentioned is
people, not just investing in people but the sleeper problem in
the Federal Government, the thing you haven't discussed here
today, is how do we attract our share of the best and brightest
to work in the Federal Government. You can have systems; you
can have precepts and rules and regulations. If you don't have
bright people to run these systems, you are going to have
problems like these.
Mr. Walker. I really appreciate that. As you probably know,
I have a strong, longstanding interest in the area of human
capital, which is people.
The three biggest enablers to any enterprise, whether it be
the private sector, the not-for-profit sector or Government,
are people, process, and technology. And people represent the
most important element.
Mr. Spratt. It comes way ahead.
Mr. Walker. And the fact of the matter is I believe that on
our next high-risk list, there are probably going to be two
areas across Government that are going to be on that. One is
the Government's emerging human capital challenge. It has a
major problem in the area of people because the effects of
downsizing. We need to have the right people with the right
skills focusing on the right things for the future. We have got
succession planning problems, et cetera.
In addition, we have got a contracting problem. We have got
a lot of situations where a lot of functions in the executive
branch have been outsourced to third parties, but we don't have
the people with the skills to monitor and to manage cost and
quality. So we are on autopilot, and we are subject to abuse.
Those two areas are high risk, in my opinion. We haven't made
the final judgment, but I believe in all likelihood they are
going to be on there.
Mr. Spratt. Just to shift the focus a little bit and leaven
the atmosphere somewhat, aren't there some cases where we have
made improvements? Let's take the Department of Education, for
example. In the early 1990s, it is my understanding that the
student loan default rate was running well over 22 percent, and
today I believe, according to my information, it is 8.8
percent.
Do you have that information? Can you validate that? Is
that correct?
Mr. Walker. Mr. Chairman, Vic Rezendes--or Mr. Spratt. I am
sorry.
Mr. Rezendes. That is exactly correct. In fact, they have a
performance measure that they have included in their current
plans that caps it at about 10 percent. Obviously, I think
everybody would like to have the default rate at zero.
Mr. Spratt. Sure.
Mr. Rezendes. But the reality is the target population we
are providing loans to are people who basically find it
difficult to find commercial loans to go to college.
Mr. Spratt. And Secretary Riley has tried to implement, in
lieu of these student loans and really just to have another
measure, felt he could do it more efficiently, some direct
loans, loans made directly by the Department as opposed to
guaranteed loans.
Now, they tell us that the direct loans are saving money.
Can you validate that?
Mr. Walker. Mr. Chairman, we haven't done the work to be
able to express an opinion on that one way or the other.
Mr. Rezendes. The IG may when she testifies later.
Mr. Walker. The IG might be able to tell you something
more, but we----
Mr. Spratt. It has been a hard sell in Congress, but
according to the Department of Education, it has been a
successful program. They are actually making money. Where they
lose money on student loans, they are making money on direct
loans because the rate of interest they charge is higher than
the Government's cost of money and the cost of administration.
Mr. Walker. As I said, we haven't done the work on that,
but I will follow up on one of your comments which I think is
important. There has been progress in some of these areas, and
I tried to acknowledge that, as well as in our statement. And I
think it is important that not only we try to find out what is
wrong with Government and the fact that we should have zero
tolerance for fraud, waste, abuse, and mismanagement. It will
never be zero. In the largest, most complex, most diverse
entity on Earth, it will never be zero. But we should have zero
tolerance. We have got to focus on what we can do to accelerate
progress in these areas, and we have got to focus on dealing
with the systemic problems, the things that may not be that
sexy.
But, the taxpayer is going to get a lot bigger return on
their investment if we make sure they got the right people,
with the right technology, with the right performance
standards, with the right systems--a big return on investment.
Mr. Spratt. Well, I don't think any of us wants to leave
the impression or should leave the impression that this is a
totally bleak picture and that there is absolutely no response,
no improvement, that this is a constant drumbeat of bad news
and nobody ever does anything about it.
There are continuing problems and there will be bigger
problems because the Government gets bigger and the dollars get
bigger. Medicare is a good example. You said it would double in
cost. But a couple of years ago, we began giving the Department
of Health and Human Services more money to go into audit work,
field investigations, and things like this. And HHS tells us
that they have had significant, measurable results.
Based on a statistical sample, the IG at HHS estimates that
Medicare's net overpayments for fiscal year 1998 totaled about
$12.6 billion nationwide. Now, that is still a huge amount.
That is 7.1 percent of the total benefit payments. But in
fiscal year 1996, the estimate of overpayments was $23.2
billion, so the current estimate, based on the sample, is 45
percent less than it was 2 years ago, about $10 or $12 billion
better than it was just a couple of years ago because they have
begun to focus on it and we have begun to focus on it, too, and
put some of our money where our mouth is.
Mr. Walker. I think that is an example where progress has
and can be made. For example, we worked with the IG and the
Congress was focused on it as well. The Department was focused
on it. But I think there is an important footnote.
You are correct. It has come down, and it has come down
significantly. But most of that reduction has been in the
providers providing better documentation for their billing. We
haven't made nearly as much progress in improper payments due
to lack of medical necessity, incorrect coding, and the
coverage categories. But those are tougher to get to.
So, yes, we have made progress, but in some ways, we are
getting to the tougher part of the challenge now.
Mr. Spratt. Mr. Chairman, I don't want to jab at you, but
just in the gist of saying that none of us who has been here
any significant period of time is really pure, I seem to recall
that Mr. Kasich wanted to buy more B-1B bombers in lieu of B-2
bombers, about 20 more, when the Air Force said we need to stop
the program. Systems integration is a major problem. There was
a system called the ALQ-161. You couldn't turn on the defensive
systems and the offensive system at the same time. And I think
some major part of it was built in your constituency.
That is not to criticize you because we all come here as
advocates for what is happening in our own constituency, but it
is to say that many of us at one time or another are part of
the problem. And I am as guilty as anybody, so let me profess
my lack of purity on the record.
Chairman Kasich. Well, let me just say this: I never have
had an add-on, a highway project, the entire time that I have
been in this Congress.
Mr. Spratt. Yes.
Chairman Kasich. And the fact is back during the B-1
debate, the Air Force wanted more of those B-1s, and they
didn't get them. And that was the end of it. But the fact is
that if you look through the record of either highway projects
or your add-ons in the Armed Services Committee, or whatever
other thing, you can't find any that I have done. And that
doesn't mean that people who have had these things are somehow
wrong.
We are having a big debate right now, a Presidential
campaign about the issue of pork. Pork is a matter of whether
it is built in somebody else's district, not if it is built in
your district. But the problem is when Members in depot
caucuses or whatever, are working against the interests of the
Pentagon and forcing them to buy things that they don't want. I
have never engaged in that and----
Mr. Spratt. You need a system where you can represent your
own constituency, but the institution is strong enough so that
if it is not for the good of the country, then you don't
prevail.
Chairman Kasich. Right. And it is interesting, because of
the B-2, we were going to order 132 and we ended up buying 20
of them. And so we saved I don't know how many billions and
billions of dollars, and now it is kind of interesting that the
B-1 is a pretty effective part of our force.
Mr. Spratt. Let's be fair. The B-2 acquitted itself pretty
nicely in Kosovo and the Bosnian war, too, the Yugoslavia war.
That is a total aside, but I couldn't resist it. I am sorry.
Thank you, Mr. Chairman.
Chairman Kasich. Mr. Gutknecht is recognized.
Mr. Gutknecht. Thank you, Mr. Chairman. And I want to thank
you for this hearing and Mr. Walker and his entire team for
presenting to us today. To paraphrase I think what Patrick
Henry said a long time ago, the price of accountability is
eternal vigilance, and I hope that we will have more of these
hearings.
If my arithmetic is correct--and I am doing this on the
back of a napkin--we bought 6,700 of these trailers at a cost
of roughly $10,000 apiece. That is $67 million that has been
spent. Is that correct?
Mr. Walker. Somewhat over, but you are close.
Mr. Gutknecht. I think the real question here is: Was
anyone involved in this program demoted or lose their job?
Mr. Walker. I can't say that. We could try to find out. But
I will tell you this: I think history has shown that there is
not enough accountability for these types of mistakes.
Mr. Gutknecht. I think that is the issue, and that is where
I would hope that we would have an ongoing effort in this
committee and maybe target certain areas and go through them as
best we can to at least focus some attention on what is
happening.
Now, I am not saying that people necessarily should be
fired, but I will tell you this: I think in the private sector
whoever was in charge of that project would at least be
demoted, or there would be some kind of an action taken for
people who would go ahead with something like this.
You list on your chart--and you did not really get to it.
And I also serve on the Science Committee. I have been very
interested in this whole upgrade of the FAA system.
Now, as best I can determine, we have wasted billions of
dollars there in trying to come up with a whole new system, and
I think most travelers would be shocked to realize that in most
air traffic control centers, the air traffic controllers are
still looking at screens that were built in the late 1950s.
Do you have any more information? Are we making any
progress to finally get the FAA system upgraded? And, to the
best of your knowledge, how much money has been spent in that
effort?
Mr. Walker. Let me touch on an overview and then ask Keith
Fultz, who is head of that division, to address you.
IT is another area, when you are talking about development
and acquisition practices, that is a major problem in trying to
help do design specifications, in turning over too much
responsibility to the contractor without having an adequate
number of skilled people to be able to manage cost and quality.
This is one example of that, and I would like Keith Fultz to
address your question directly.
Mr. Fultz. To the best of our knowledge, the costs to date
for the air traffic control modernization program is
approaching $42 billion. In the late 1980s, the original
estimate was somewhere in the $8 to $9 billion range.
Mr. Gutknecht. So the original estimate was $9 billion, and
we have already spent $42 billion, and it still is not done.
Mr. Fultz. We still have some major challenges that need to
be addressed before the system is complete.
Mr. Gutknecht. Can I just switch to another quick topic?
Because I know my time is limited. You also mentioned the IRS
and receivables. You mentioned a number of things with the IRS,
at least in the chronology of high-risk designations.
We have had some discussion here in the Congress--and some
of us got beat up a bit last fall--about the earned income tax
credit, but there is quite a bit of evidence, at least as far
as I am told, that relates to--we all hate the word ``fraud,''
but apparently there is almost a business developing out there
of encouraging people to misrepresent what they may be eligible
for in the earned income tax credit.
Do you have any more information on that?
Mr. Walker. My understanding is that, based on some work
that we have done, there could be as high as about two-thirds,
I believe, of questionable activity in conjunction with EITC.
Mr. Gutknecht. Could you put that in numbers? What is that
ultimately costing us?
Mr. Walker. Jeff Steinhoff can address that.
Mr. Steinhoff. IRS focused on a sample of those returns
they thought might be suspect--$662 million worth of returns--
and found that $448 million were, in fact, invalid claims.
No one knows the full extent of this. It gets down to that
we do have a voluntary compliance system. IRS does have a 45-
day period to make a refund, and what you do not have are the
detective controls up front. You have got back-end checking.
So there were a number of instances found of people coming
across border towns, weren't even U.S. citizens, claiming the
credit. Under this particular credit, you don't have to pay any
taxes. You are just getting back money.
So, again, it is more of a pay-and-chase situation for the
IRS. They will pay it out, and then they will have to come back
and see if they can, in fact, recoup those monies.
Mr. Walker. I think it is important to note, however, that
the sample that they picked was not a valid sample.
Mr. Steinhoff. Right, right.
Mr. Walker. So, therefore, of the ones that they thought
might have a problem, it turns out two-thirds of them did have
a problem.
I think we have another issue with regard to the IRS, and
that is, obviously, they are now focused on being more customer
service oriented. At the same point in time, we have to be
careful that the pendulum doesn't swing too far at the IRS. And
we are very concerned that they still need to understand that
they have to assure compliance with the Nation's laws. And
there has to be an equilibrium there. There has to be an
appropriate balance in doing that.
Mr. Gutknecht. But, again, to the question of
accountability, A, were we able to recover any of that $640
million? And if so, how much? And then, secondly, were there
any repercussions to people who may have been involved in
perpetrating what sounds to me like fraud?
Mr. Walker. My understanding is no, they have not been able
to recover very much. I don't know about the issue of whether
or not the individuals have been prosecuted.
I will tell you this, that there are certain circumstances
in which where people have participated in schemes--I gave you
one example of a Medicare scheme where the beneficiary actually
got a kickback, and a decision was made for various reasons--
and I don't know all the details; you may want to ask June
Gibbs Brown--not to prosecute the beneficiaries.
So I think one of the things we have to ask ourselves is
what kind of transparency, what kind of accountability systems
are we going to have, because everybody likes accountability
until they are the ones being held accountable. But sooner or
later we have got to do that.
Mr. Steinhoff. The IRS is another area that really faces
major systems problems. You asked about FAA before. One of the
big challenges IRS faces now is the tax systems modernization.
So many times they don't have good day-to-day information with
which to manage, and they have spent large sums of money in the
past on modernizations that haven't worked.
Mr. Gutknecht. Well, on the FAA, coming back to that for a
minute--and I know my time has about expired here. It just
seems to me we need to get some kind of comparison with how the
private sector would do something like this.
When you think about it, essentially what the FAA does is
they route and control a relatively limited number of items
going from one place to the next. You compare that to what the
regional telephone companies do, for example, where they are
routing literally billions of pieces of information and doing
it instantly. You would think for $42 billion we could come up
with a system relatively quickly that would manage the system
much more efficiently than we do today. And somehow it seems to
me they don't reach out, as perhaps they should, to the private
sector for some expertise which is already out there.
Mr. Walker. And it is not just the FAA. One of the things
that I mentioned to you before that we are working on is we are
working on identifying commercial best practices for
acquisitions and for development, whether it be IT, whether it
be weapons systems, or whatever else. And you are right, there
is a lot to learn from the private sector, and we ought to not
only encourage, in some cases we ought to require that those
practices be followed, unless there is a clear and compelling
reason not to, such as a credible national security threat that
is a near-term threat.
Mr. Gutknecht. Well, Mr. Chairman, I don't want to be a
fault finder, and, you know, it is easy to make headlines and
demagogue some of this stuff. I do hope, though, that this will
not be the last of these hearings. I hope it will be the first.
I would hope that we will work with both the inspectors general
as well as the General Accounting Office and try to get to the
bottom of this and help some of these agencies develop systems
which are more accountable. We owe it to every taxpayer. When
you think about how hard some of the people that we work for
work every day to pay their taxes to the Federal Government, we
do have a moral obligation to make certain that they at least
get their money's worth. And there will always be a certain
amount of fraud and mismanagement in any entity, but it strikes
me that even with the improvements that may have been made in
some departments, we still have a huge problem, and we have got
to stay on it all the time.
Thank you, Mr. Chairman. I yield back.
Chairman Kasich. Mr. Davis.
Mr. Davis. Thank you, Mr. Chairman, for holding this
hearing.
I think it is important to acknowledge our role in this
problem, and let me start by describing what I think is
becoming an alarming trend, and that is the level of earmarking
that we are directly responsible for, Mr. Chairman. This just
happens to be the VA-HUD bill, and I am not going to take the
time to read through this, but let me just give you one
statistic that I think we all should be ashamed of. That is, in
the Labor-HHS bill that passed last year, which I voted against
as part of the omnibus, the level of earmarking in that bill
was twice as much as the year before. The year before, the
earmarking in that part of the bill was twice as much as the
year before.
That is adding up to real money, and it is unraveling what
fiscal discipline has gotten us to surpluses. And it is
something we all bear responsibility for and we all should be
alarmed about. Congress is engaging in a very disturbing trend
as far as earmarking is concerned.
I want to talk briefly about Medicare and Medicaid, and
also welcome our Comptroller General. It is great to have
another prominent Floridian engaged in such an important
responsibility.
Let me start by telling a story that I think we all should
remember. There was a fellow in Miami who was in the durable
medical equipment business. He was a former convicted drug
smuggler. He billed the State of Florida for $2 million in
Medicaid for something that was never provided to anyone. And
when they arrested him, he said the reason he was in the
business was that it was more profitable and less risky than
smuggling drugs.
Now, that is a true story, and it is an important lesson,
because we have created a system where there are enormous
temptations to people like him.
Now, the good news is that one of the lessons the State of
Florida drew from that was to develop a surety bond, a criminal
background check, and on-site inspections that have resulted in
significant savings in the Medicaid program in the State of
Florida at a relatively modest administrative cost.
A number of us supported legislation that adopted those
same changes for the Medicare program, which is equally
susceptible, and I am very disturbed to see in the inspector
general's report today from HHS that those changes that were
adopted in 1997 have still not been implemented.
I really think that is inexcusable, and I hope that we can
talk further about how we can get those fully implemented,
because it is a very simple example of a way to stop that from
happening again in the Medicare program.
Mr. Walker, I would like you to comment, if you could, on
some of the choices and tools that are available to us and
where we should be focusing our attention on further attacking
the problem. We have become heavily reliant on the False Claims
Act. There has been legislation up here to substantially weaken
that act. In reaction to that, the Attorney General has
developed a memo for U.S. Attorneys which I think was a very
prudent memo in terms of using this very, very powerful tool
effectively.
Incidentally, Mr. Chairman, this law was passed in response
to contractors' providing inappropriate materials to build
cannon balls during the Civil War. So this tool has been
available for a long time.
The inspector general of HHS testified last year in a
Senate hearing I participated in that one of the problems
particularly in the home health care area was that we were so
focused on administrative costs, as we all are, that we were
underfunding oversight over the home health care program.
One of the other questions that we ought to ask: Is there a
way to more actively involve consumers in policing this? As the
chairman alluded to, when you have got a third-party system, it
is quite difficult, but we have a lot of baby boomers who are
certainly capable of reading bills and understand that it is
their tax dollars that are lost when their aging relatives or
themselves are being billed inappropriately. And I certainly
hear from those folks.
On the criminal prosecution front, we all take great
pleasure in the level of criminal prosecutions, and in my home,
Tampa, we have had some of the major criminal prosecutions in
this country in Medicare fraud.
But I think we have to ask ourselves the question: What has
been the level of restitution in these cases? Has this been
something that has been good for the taxpayer, or has it just
been a way for us to feel good about putting bad guys in jail
and keeping them from doing it again?
Two other points. What other lessons can we draw from the
States? Mr. Walker, I happened to mention one in my home State,
Florida, about the surety bonds. Perhaps the States can help us
find some other ways to deal with this, particularly in the
Medicaid program where they are losing their tax dollars, too.
And, finally, with the advent of electronic commerce, since
so much of what we are talking about here is information
management, is the technology going to help us find ways to
better skin the cat here?
Mr. Walker. Well, first, Congressman, as Willie Sutton said
when he was asked why did he rob banks, he said, ``Because that
is where the money is.'' Now, if you look at what percentage of
our economy is dedicated to health care, you understand why
there is a lot of fraud and abuse associated with health care,
because that is where a lot of the money is.
The fact of the matter is I think Congress needs to focus
on a few programs or a few areas to try to be able to have
impact. For example, acquisition reform. We have talked about
the fact that we have fundamental acquisition reform problems,
whether it be FAA as it relates to its systems, or whether it
be DOD with regard to its acquisitions and other areas. That is
an area.
Repayment incentives. We talked about the fact that there
are a number of people that get overpaid. They are not even
required by the law to send the money back. In fact, we have
got a law on the books that says if there is not a prompt
payment, we have got to pay interest. On the other hand, if we
overpay, they don't have to pay it back. They don't have to
tell us that we have overpaid, and, in fact, when they send the
money back, they don't even have to pay interest or a penalty.
Now, that doesn't make a whole lot of sense. There is not a
level playing field there.
In addition, I think that we have to look at performance
measures. Under the Government Performance and Results Act, we
need to make sure that the departments and agencies are
focusing on performance plans that include these high-risk
areas and areas that need attention.
I think we need to increase visibility and transparency as
it relates to certain costs, such as health care costs, such
that people can have a better idea as to whether or not people
are billing for things that weren't provided or whether they
are billing for things twice.
So I think there are a number of things, but I think
ultimately it is focus. There is a lot. You can't do it all at
once. You need to focus on a few things. But I think that the
Customs experience has showed that if that happens--and,
frankly, the Y2K experience shows that if there is a focus by
the executive branch and the legislative branch on a key issue,
we can get results.
Mr. Davis. Thank you.
Chairman Kasich. Mr. Knollenberg.
Mr. Knollenberg. Mr. Chairman, if I might, I have a
unanimous consent request to submit some questions, not to the
current testifier, Mr. Walker, but rather to Ms. Gaffney, and I
must leave the area now. So if it would be appropriate, I would
like to have the courtesy of having that made available to me
so we can do that. And I will make sure that they get the
specific questions.
Thank you very much, Mr. Chairman. I appreciate it.
Chairman Kasich. Without objection.
[The questions of Congressman Joe Knollenberg follow:]
Prepared Questions From Hon. Joe Knollenberg, a Representative in
Congress From the State of Michigan
Questions for the Record for Susan M. Gaffney, Inspector General for
HUD
I want to mention a few examples of waste, fraud, and abuse right
in my own backyard of Detroit and get your comments on whether they are
symptomatic of larger concerns within the agency.
The examples I am going to cite are from a project called ``The
Villages at Parkside'' in Detroit, which has turned into the poster-
child for mismanagement and cost overruns.
The first concern I have is about the spiraling cost of this
project, which has been funded by HUD's HOPE VI initiative. Depending
upon whom you talk to, prices range from $217,000 per unit to $297,000
per unit. I don't need to tell you that this is a lot of money. In
fact, the renovation of a single unit cost more than many of the homes
in my district! But no one is sure because the books are in such poor
shape.
Federal auditors have said that the cost of these homes should be
no more than $150,000 apiece. Such costs may be unprecedented for the
HOPE VI program and, frankly, it is outrageous that the price tag may
be double due to the mismanagement by the Detroit Housing Commission
(DHC).
Further compounding this is the fact that many of the contractors
who have worked on the Villages at Parkside still have not been paid
for their services. I'm aware of a contractor who is now having serious
problems meeting their payroll because the Detroit Housing Commission
has misspent the funds and can't pay them. This contractor is not
alone-there are other contractors who are having payment problems with
this agency. This concerns me a great deal.
I'm also very concerned about the DHC's handling of the bid process
for the Villages at Parkside. I'm aware of a contractor who was told by
the agency that they could submit their bid proposal an hour late after
taking a wrong turn in driving it to the headquarters. The contractor
subsequently had their bid returned-unopened-and rejected because it
was submitted after the deadline. Aside from the fact that this
company's proposal turned out to be 10 percent less than the successful
bids, I think this raises serious concerns about the agency's
procurement process. Accepting a bid proposal is the most basic of
tasks and the Detroit Housing Commission can't even get it right.
The entire process for the Villages at Parkside has been a debacle.
From soliciting bids to paying contractors to cost overruns, this
project has been a complete disaster for the taxpayers from the
beginning.
I'm not the only one concerned about the mismanagement for the
Villages at Parkside, the Detroit Housing Commission, and HUD's
oversight of the local agency. The Detroit Free Press has published a
series of articles exposing this debacle, rampant mismanagement from
the locals, and the relaxed oversight from HUD.
In fact, the latest installment was published on February 16, 2000,
under the title, ``Housing Rehab Plans Crumbling'' (page B1). It
details how the Villages at Parkside are $7.5 million over budget and
the situation has been so badly mismanaged that the project must be
significantly scaled back.
I know the examples I just outlined are specific to Michigan and
that you may not be familiar with the particulars of these situations,
but I suspect they are symptomatic of larger problems.
Question 1: Do you have any reaction or comment to the examples I
have just raised?
Question 2: Does HUD have an oversight mechanism in place by which
it can remedy these situations? If so, what are they?
Question 3: Are these examples symptomatic of larger problems for
public housing? If so, please elaborate.
Question 4: In your opinion, will HUD's ``Management 20/20'' reform
plan alleviate or remedy such problems?
Question 5: In your opinion, will any program HUD administers
alleviate or remedy such problems?
Question 6: What can Congress do to ensure that such egregious
examples do not occur again?
Chairman Kasich. Mr. Sununu.
Mr. Sununu. Thank you, Mr. Chairman.
Thank you for being here, Mr. Walker. I want to focus on
the Department of Housing and talk about a number of the
problems that have been identified, perhaps some of the
progress that has been made in the particular areas of high
risk, and talk about what you may see as opportunities for
making more progress.
Let me begin by talking about a point you made with regard
to the 2020 program. One of the opportunities that they
identified for improving their performance was to reduce the
total number of programs. And although I sit on the VA-HUD
Subcommittee, I must admit I don't know exactly how many
programs they administer currently. If you could perhaps
enlighten us somewhat, what is the approximate number of
programs being managed within housing? Have they achieved their
goal of reducing the number of programs? And, finally, are
there any opportunities that you see that are very
straightforward where programs could be consolidated with
little or essentially no impact to the customer?
Mr. Walker. An introductory comment, and then I will ask
Keith Fultz to address some more details.
HUD has their 2020 plan, which is a framework that, if
properly implemented, will achieve positive results. And that
in and of itself is good, but we have got a ways to go before
we are going to get those results.
One of the things they need to do is they need to focus
more. They have too many things going on, and they need to make
sure that they have the right people with the right skills in
those areas.
Mr. Sununu. If I may interrupt, I want to talk more about
that--the personnel issue and focus within specific programs
are in some ways a separate question. If you could at least
begin by addressing the question of absolute number of programs
and, by definition, what impact this has on administrative
costs.
Mr. Fultz. Right. The number of programs they operate are
in the high 200s, and they have been going through a process of
reducing and consolidating, so it would be difficult to give a
precise number at this time. But the number clearly is into the
high----
Mr. Sununu. Has there been a reduction over the past 2 to 3
years?
Mr. Fultz. Yes, there has been. They have consolidated
activities, placed responsibility and accountability, which
they did not have, as the Comptroller General has mentioned
before, which is extremely important. When we first started to
look seriously at the management of HUD, which goes back into
the early 1980s and maybe even beyond, we found that staff had
no accountability or clear lines of responsibility. Managers
did not know what they were basically expected to do.
Mr. Sununu. In which areas of their current operations do
you see the greatest additional opportunity for consolidation?
Mr. Fultz. Well, when we first identified HUD as a high-
risk agency with the programs they were responsible for, they
had basically 81 field offices that were directly responsible
for managing all the various aspects of HUD. What they have
done, in accordance with their 2020 plan, is to take those
offices and functions and consolidate and centralize by
functional areas, like financial management, physical
inspection of the properties, accountability, into key central
offices that have responsibility for overseeing all of the HUD
programs, including Section 8. The entire operation of HUD is
going through a very tremendous change in centralizing and
consolidating.
Mr. Walker. But what else should they do?
Mr. Fultz. What else should they do? They need to do a
better job of inspecting their properties. They need to do a
better job----
Mr. Sununu. I am sorry to interrupt. What areas, what
opportunities are there for further program consolidation? I
mean, 250 programs, that is still stunning. Whether it has been
reduced from 280 to 250 or from 400 to 250, I think most
Members of Congress, let alone most Americans, would be
surprised to hear that the number is so high. There has to be
opportunity----
Mr. Fultz. There are opportunities, and we, in fact, are
looking at that right now, and that is one of the issues that
we will be addressing and will be part of our decision as to
whether or not the programs at HUD remain on the high-risk
list. I could provide some detailed information.
Mr. Sununu. If you could provide the committee with a
summary of the various programs broken down by HUD function, I
think that would give us a much clearer picture of where the
opportunities for performance improvement might lie.
Mr. Fultz. We will do that.
Mr. Sununu. If we could continue, talking a little bit more
about performance, and this sounds like an area where there has
been an attempt to improve, but it has been somewhat
ineffectual. It is my understanding that as part of the 2020
they have tried to implement a new procurement model. But it
really only ended up reviewing one procurement action out of
150 or so that were taken in 1999.
Why have they been so ineffective in reviewing procurement?
And I assume that those reviews are intended to avoid the kinds
of problems we heard about in DOD. Could you talk a little bit
about the procurement board and what needs to be done?
Mr. Fultz. It goes back to the issue of financial systems,
management systems, which were not fully integrated, and they
are addressing that in their procurement activity, and once
again, that is an area where they are working on it, and I
think the jury is still out as to how successful that will be.
Mr. Sununu. Have they set a goal for doing a little bit
better than 1 out of 150?
Mr. Fultz. They have improved their goal, yes, and they are
making performance measures----
Mr. Sununu. What is the goal? Do you know what the goal is?
Mr. Fultz. I frankly don't know what that goal is today,
but, again, as a result of the Performance and Review Act,
where agencies are required to place performance measures, is
an area that is helping HUD as well as other agencies in making
better and informed decisions. This will also provide the
Congress with the oversight data that you need to make
judgments about how well they are doing.
Mr. Sununu. I want to talk about personnel focus. Mr.
Walker began speaking about it briefly, and, unfortunately, it
is another area where performance has been, I think--has
represented a very ineffectual use of taxpayer dollars.
The community builder program. First, I think it was your
audit or set of interviews that showed that two-thirds of those
in the community builder program spend more than half their
time doing PR work, which is an enormous problem in and of
itself because clearly that means people are spending time on a
program or work that isn't part of the agency's core mission.
Second, this committee, in working with people from HUD,
has come to realize that most of the community builders don't
have any experience in the areas where they are supposed to be
working in the first place, that they don't have the background
in housing, and as a result even if they were working on
housing programs, really haven't served the taxpayers well.
Could you comment about those statistics, the interviews
that you did, and the weaknesses in this program?
Mr. Walker. Let me comment first, and then I will turn it
to Keith.
Clearly, we have said that community builders were focused
on the type of activities you were talking about, Mr. Sununu,
and clearly one of the things that HUD needs to do, it needs to
focus more resources on oversight. Community builders may or
may not be a good idea, but the bottom line is you have got a
finite amount of resources, and their basic need is to have
people focused on oversight.
Keith.
Mr. Fultz. That is correct, and the figures and statistics
that you stated are correct. And that was one of the major
issues that we addressed in our reports on HUD, the
organizational structure as well as their staff mix and the
training and development that they were providing their staff.
They just weren't operating and weren't training their staff
the way they needed to be doing.
Mr. Walker. And the kind of people that you need to do
oversight are fundamentally different than the type of people
you need to do community outreach. And that is part of the
skills, having the right kind of people focused on the right
thing with the right skills.
Mr. Sununu. My last question is about the FHA property
inventory, and I have heard some officials from HUD suggest
they are making quick progress here. But I see some alarming
statistics: an increase in the absolute inventory from 24,000
or 25,000 properties, to over 42,000, an increase in the number
of defaults, and an increase in the average loss on these
properties.
It appears to me that performance is deteriorating, that
the taxpayers are being put on a hook whose size is ever
increasing on a daily basis. Could you talk about that
deteriorating performance? And maybe point to which of these
statistics we should look at most closely in gauging any
improvement in the future as well.
Mr. Fultz. Yes, I will. You are correct. The number in the
inventory is increasing--in fact, it is approaching in the
40,000 number now, and that is up from the 24 figures that you
provided. The average cost to the Federal Government once these
properties are foreclosed, is about $30,000 per property. So
the inventory approximately at this time of which the
Government is susceptible to losing is two--I believe it is
$2.2 billion, and that program is under revision by HUD. They
have hired contractors to manage those. There have, in fact,
been problems with some of those contractors.
Mr. Sununu. This is the contractor that went bankrupt, had
half of the market----
Mr. Fultz. This is the----
Mr. Walker. Forty percent.
Mr. Fultz. Forty percent of the inventory which they were
handling, and they were doing a very poor job of managing and
marketing those properties, which would, in effect, result in
your suggestion that the Government could lose more money,
because if the properties aren't maintained, if they are not
secured, then they don't sell. And that is what we are facing.
That would be an area that I would be paying attnetion to,
and we are, in fact, reviewing that program as we speak.
Chairman Kasich. Mr. Holt is recognized.
Mr. Sununu. Thank you, Mr. Chairman.
Mr. Holt. Thank you, Mr. Chairman, and thank you, Mr.
Walker, for good testimony.
I would also like to thank the chairman for stating that
the goal of today's hearing is not to paint the agencies as the
enemy. I think it is important that we all understand that if
the Government is the enemy, then we, the people, are painting
ourselves as the enemy. And that is not the case.
There is, I think, a lot of responsibility, as Mr. Davis
pointed out, that rests right here in the Capitol as well, not
just to limit earmarking but in the way that we put together
our budget each year, too. I know Mr. Jack Lew has said that it
will take years for OMB to untangle all the budget gimmicks
that have been applied to appropriations for the various
agencies, and so I think there is a lot we have to do there.
Also, you have spoken, Mr. Walker, about the number of
occasions where repeated flood victims are bailed out. And you
refer in your testimony also to the mining law of 1872 that
requires miners to pay no royalties to the Government for hard
rock minerals extracted.
And one somewhat smaller but, I think, symptomatic case
that is not minor, has come to my attention through a study
that I asked the Government Committee to undertake. In Medicare
we are spending a great deal of money, I would say wasting a
great deal of money, because Medicare will reimburse injectible
versions of some medicines and not the tablet form.
Take the case of hemodialysis patients. Hemodialysis
patients must take calcium supplements. Medicare will not pay
for the tablet form, but they will pay for the much more
expensive injectable form, and as a result the Government is
spending $103 million a year, it appears unnecessary, and the
patients themselves are spending $30 million a year in
copayments. So there are some things that Congress does that
force the agencies to do what you are talking about today.
To return to some questions that were raised earlier, there
was some discussion about the earned income tax credit
payments. It is my understanding that Treasury says that all
tax credits, including EITC, account for only about 6 percent
of total tax avoidance. If the IRS were to hire more auditors,
would it be a good idea to devote those auditors to EITC and
other tax credits, or perhaps to corporate noncompliance or
other high-income noncompliance?
Mr. Walker. Let me mention first that I don't know when
that estimate was done, but I can tell you that one of the
concerns that we have is that the IRS is not focusing enough on
tax avoidance and tax compliance in the last couple of years.
But with regard to your specific question, Jeff.
Mr. Steinhoff. With respect to the earned income tax credit
cases, it gets back somewhat to a human capital issue if you
are speaking about shifting resources. Those people basically
have the skills to handle that type of case and could not
probably take on a more complex corporate case, which is much,
much different.
Mr. Holt. OK. Changing to a different subject, in the
Department of Education, there were some years back lots of
charges about the inefficiencies or downright fraud in the
student loan program. What can you say about default rates
today and about the performance of the Department of Education
in tightening controls there?
Mr. Walker. Well, default rates have gotten better. Vic.
Mr. Rezendes. Yes. The current default rate now is a little
over 8 percent. In the early 1990s, it was about 20 percent.
And Education has also been aggressive in recovering previous
default monies. I think just a couple years ago it was like $2
billion in cost recoveries.
Mr. Holt. And general comments about the efforts to tighten
up?
Mr. Rezendes. Yes. They are instituting processes and
checks in place. I think the big one is still the match with
the IRS, and that is still to be determined. We talked about
that earlier. And the difficulty there is IRS is looking for
legislative relief from the Congress to help out there.
Mr. Walker. It is an IRS problem.
Mr. Holt. Well, thank you. I see my time has expired. I
will just make the comment, by the way, that I have introduced
a legislative remedy for this Medicare kidney dialysis problem
that I referred to earlier.
Mr. Chairman, thank you.
Chairman Kasich. Thank you, Mr. Holt.
Mr. Thornberry.
Mr. Thornberry. Thank you, Mr. Chairman.
Mr. Walker, I particularly appreciate your emphasis on
trying to root out the systemic problems because there is no
way that we can legislate away mistakes or criminal behavior.
But in some ways, the most distressing idea to me is that the
Government moves sleepily along its path, nobody really in
control, wasting and abusing money left and right.
I want to try to understand, getting back to this one
example that you brought up on the trailers. As I understood
your testimony, the Army decides it needs a trailer, and
somebody comes up with the specifications for how big, how
wide, how deep, what kind of axle it has got to have, and then
it went out and bought some of these without testing to see
whether that would meet their needs. Is that essentially what
happened?
Mr. Walker. Right. It was a failure in testing. They did
not do adequate testing before it went into production.
Mr. Thornberry. They did some testing, but they didn't do
adequate testing.
Mr. Walker. Right, they didn't do enough before they
committed to production.
Mr. Thornberry. Was there some sort of a time pressure to
get these in the field right away because we were not going to
be able to transport battle equipment unless we had them out
there?
Mr. Hinton. No, sir. There was no pressure, no time lines.
What was at work here, sir, was you had a set amount of money
that you had in procurement dollars that needed to get
obligated on contract, and that kind of goes to the heart of
the systemic issue here. It is the competition of funds within
the Department.
Mr. Thornberry. So this is a ``spend it or lose it'' sort
of situation that we have heard about in the Federal Government
for years.
Mr. Hinton. Correct.
Mr. Thornberry. And that is why things like this occur. It
is not really a testing issue as much as it is----
Mr. Walker. Well, but they are related. They are related.
Because the concern is if you don't spend it, you are going to
lose it, and, therefore, you do shortcuts such that you can
then obligate the money.
Mr. Thornberry. To get the money out the door.
Mr. Walker. Correct. Obligated.
Mr. Thornberry. When you look at your commercial practices,
will you have suggestions for us on how we can move the
incentive the other way to spend the money smartly not just to
get it out the door?
Mr. Walker. We will have a number of commercial best
practices that will be in our report which we think will
provide a good foundation and some recommendations as to what
the Congress should consider and, frankly, the executive branch
should consider.
Mr. Thornberry. And dealing in part with this problem?
Mr. Hinton. Yes, sir. And it goes all the way across the
entire process, and we have broken the process down, like
quality assurance, testing and evaluation, requirements
determination, when do you insert technology as opposed to
rushing into production. And we have gone out and done best
practices work and are working with DOD to build that into some
of their acquisition guidance.
Mr. Thornberry. Do you happen to know whether there was a
commercial trailer available which could have met this need?
Mr. Hinton. There was not at the time a commercial trailer.
There was one that had been previously designed for another
military need and the Army attempted to adapt it to their
current need.
Mr. Thornberry. OK. I don't know if this is possible in
your best commercial practices work or not, but about as
distressing to me as the cost on some of these things is the
time it takes to get equipment deployed to the people who
really need it, particularly as rapidly as technology changes,
not with trailers but with nearly everything else we have got
with computer chips and stuff. And I hope that these better
practices can also shorten the time that it takes to----
Mr. Hinton. Yes, sir. That is one objective, and that is
what our research has shown, that if you change some of your
business practices, you can move things along much quicker,
less cost, and actually put yourself in the position to make
sure that what you are buying gets the job done.
Mr. Walker. Yes, improved quality and performance.
Mr. Hinton. Absolutely.
Mr. Thornberry. This is a basic question I guess I don't
understand, and it is not just Department of Defense. How can
there be, as I think your report said, something like $24
billion in unreconciled transactions? How can we send that much
money out the door and basically not know where it went? There
has got to be a purchase order, a contract associated with it,
or something. And I see with defense that a fair amount of
money goes without a valid contract attached to it, and all of
these--how can that happen? It is kind of like the chairman's
``How can this be?'' question.
Mr. Walker. Well, the problem is not necessarily where it
went, but who it gets charged to, and having the appropriate
documentation to support the expenditure in order to be able to
make that allocation. Jeff.
Mr. Steinhoff. DOD has a very complex accounting operation.
The Comptroller General mentioned before the lack of integrated
systems, the complexity of it. And what happens is a payment is
made. It then has to be matched up against an obligation. It is
not done automatically through a system, and you have very
complex accounting codes where you might have 100 or 120 digits
related to an item to account for it.
So, it gets into the wrong queue at some point in time and
it must be reconciled.
Mr. Thornberry. And you can't go back and figure out what
went wrong.
Mr. Steinhoff. It is very hard to do it.
Mr. Thornberry. I see.
Mr. Steinhoff. And your focus is on paying the next amount
and the next amount because you want to make your vendors
whole.
Mr. Walker. And on the Prompt Payment Act there are
actually penalties if we don't pay on time.
Mr. Thornberry. Well, is this one of those areas where we
need to make an investment to get them a new computer system or
a new software or something to be able to talk with one another
and not have 100 digits to sort through, to code a payment?
Mr. Walker. We need to have the design specs down before we
give money. I think one of the problems is that in some cases
there may need to be targeted investments, so, this may well be
one. But we need to make sure that they got the right kind of
plan in place so that they are going to prudently spend those
dollars before you just give the dollars.
Mr. Steinhoff. They have to really basically reengineer a
lot of their business processes, which they are now trying to
do in earnest. Maybe they can use electronic commerce, a swipe
card for instance to make payment, whereby you would pay for an
item and then it would automatically go to the accounting
records. You have to have an integration of the program and
accounting systems.
Technology would be a facilitator but that must be planned
out very well before you go ahead with it.
Mr. Walker. And you don't want to automate DoD's current
processes.
Mr. Thornberry. Right.
Mr. Walker. You need to reengineer the processes,
streamline the processes before you try to automate or else you
got two nightmares.
Mr. Thornberry. Let me ask you about one other area. I see
some references to a growing concern about fraud and DoD health
care. That is an area that a lot of folks in Congress have
spent a lot of time and concern about that it is not enough to
meet the needs or meet the promises that we have made in the
past, and the idea that there is deliberate fraud or waste is
very distressing.
Can you tell me what the size of the problem is and what
the nature of that problem is?
Mr. Walker. I don't know that I have an estimate. I will
ask Vic. I will tell you it is not just a matter of efficiency,
it is also a matter of who is getting the health care. And in
some cases, the health care is being provided to portions of
beneficiaries that it wasn't intended to be being provided to
because we have got excess capacity in the VA system that
people are trying to use up this capacity and justify what they
have.
I mean, for example, we have got infrastructure in VA that
is multiple times what they really need. We have got a lot of
duplication between different types of health care providers in
Government.
Mr. Rezendes. He is exactly right. Both in the DoD and in
the VA system there is excess capacity. Especially looking at
how the demographics of the military population has changed,
including those on active duty. Most of the people we are
providing medical coverage to are retirees, not active duty
people.
There are a number of efforts underway to get them into
more managed care, TRICARE and various other kinds of things.
And when you get into managed care you run into the same kinds
of fraud problems as you would in any kind of medical system.
Mr. Thornberry. So, is it worse than managed care in the
civilian sector? Is it about the same? Or do you----
Mr. Rezendes. I couldn't even guess.
Mr. Thornberry. OK. Thank you.
Chairman Kasich. Let me just say to the gentleman from
Texas, who I know has become increasingly frustrated with what
he has observed over in his other committee, that I think this
committee is going to proceed probably by breaking up into task
forces.
And what we will attempt to do is to have members on both
sides in a task force so that we can narrow down these issues
to find out which of these things are legitimate, which of
these things are hype. There is no question you are going to be
on the defense task force. If I had my way you would be
chairman of it, we will see.
But we hope to break this down so that we can carefully
scrutinize all of these areas and spend this year just staying
on top of things. It is a good role for the Budget Committee
now that we have balanced this budget and can be a center point
of these things.
I think next is Mr. Price, the gentleman from North
Carolina.
Mr. Price. Thank you, Mr. Chairman.
Mr. Walker, welcome. I want to commend you on your
testimony and on all the good work that lies behind it. I am
particularly glad to see you focusing on the issue of Medicare
fraud. As you know, that is of particular interest to the
committee and the Congress. And I think it is entirely
appropriate that you focus on the outrageous and often criminal
behavior that has defrauded beneficiaries of that program and
the American taxpayer.
We are struggling to fund Medicare. We are struggling to
extend Medicare's solvency. We are struggling to cover the
legitimate costs. And we need to struggle to expand Medicare
and improve Medicare and particularly to include prescription
drug coverage.
So, it is just deeply frustrating to find that funds have
been siphoned off through fraud. That is a profound disservice
to those who depend on that program and to the taxpaying public
and also to the providers. Because of the need to root out
fraud providers often have to be hassled to do more paperwork,
to provide more evidence,-- legitimate providers. And, of
course, that is another price we pay for the few who abuse this
program.
So, I appreciate your focus on that and I take some
encouragement at the progress we have made. Although I want to
turn to another department in my limited question time here, I
do want to make note of that 45 percent reduction in the
Medicare payment error rate. I want to ask you for the record,
if you will, to provide an answer, that is assuming some other
member doesn't raise the question. If you could, let us know to
what you attribute the dramatic reduction in the Medicare
payment error rate and also perhaps back up a bit and give us
an assessment of the claims processing controls; how they work,
which ones do work, which kinds of controls work in detecting
fraud and abuse, which controls are inadequate or are not worth
the effort that we put into them. Help us, if you will, with a
report on the techniques you are using there, the tactics you
are using and how, and what next steps you envision?
Let me turn to the Housing and Urban Development Department
for an oral response here, if I might, because here, too, we
have programs that our constituents depend on. I would ask you
especially about the Section 8 program. In my district many,
many people -- low-income people, disabled people -- depend on
that program. There are never enough Section 8 slots and that
is partly a matter of not having the certificates and partly a
matter of not having the participating properties. But we need
to, of course, make certain that that program is benefitting
the maximum number of people in need.
And, so, we want to make sure those dollars are being
properly spent and properly directed. And as you know, there
were some negative findings back in a GAO report in fiscal year
1998 about excess housing subsidy payments -- something like
$857 million, I think you found, out of an $18 billion total,
this, of course, is way too high.
I do understand though that HUD has moved to try to rectify
some of these problems and I would like to have your assessment
of the adequacy of those mechanisms and any progress or lack of
progress that you would want to comment on that we have made so
far.
In particular, we have the sample-based audits. They have
proceeded from or moved beyond the paper-only, sample-based
audits using dated Social Security information to a fully
automated data management system. There is this new real estate
assessment center which is matching up the Social Security and
the IRS data to determine tenant eligibility and
underreporting. And we have the tenant income verification
system within the REAC which is aimed at stopping fraud.
What kind of assessment would you give of the Department's
response to these earlier findings, particularly in this area
of Section 8 and tenant fraud?
Mr. Walker. A couple of things. First, that work on Section
8 actually was a combined effort, I believe, of GAO and the
Inspector General. Secondly, we currently have a review under
way of a number of different, of our outstanding
recommendations, with HUD and the status of where they stand
that cause them to be on high-risk.
For example, I have a draft letter that I probably plan to
send to Secretary Cuomo within the next few days that is based
on a meeting that I had with him within the last month that
summarizes all outstanding recommendations that GAO has with
HUD in order for them to make sure that they are focusing their
efforts.
And I would ask for Keith Fultz to comment on the Section 8
status.
Mr. Fultz. I would say that they have made substantial
progress. The area that I would be concerned about is the
internal controls and making sure that there are mechanisms for
reporting the income in this particular program. As you know,
it is 30 percent of the income and that is where the subsidy
kicks in. And I believe HUD and the Inspector General have done
some work in this area, has identified the internal controls
and how that reporting mechanism is working in the systems that
you described. It is still, in my opinion, in the early stages
of implementation and the results are yet to come.
Mr. Price. I appreciate that answer, and realize it is too
early to ask for a kind of comprehensive assessment of this.
But do the mechanisms seem to be well-designed to achieve the
desired result?
Mr. Fultz. From what we have looked at, yes, they are.
Mr. Price. Now, I think it is interesting that the HUD IG's
report that we are going to be hearing later today--and I
regret, too, Mr. Chairman, that I will not be around this
afternoon-- although it is quite lengthy and relentlessly
critical, really gives no very detailed account of this effort
at correcting these problems within the agency.
And since I won't be here this afternoon, I want to make
one comment about this. This IG's report is pretty negative,
and doesn't seem to give much attention to the more
constructive efforts that are underway and there is one phrase
that jumps out at me here. The IG at one point sarcastically
refers to the Secretary as ``Mr. Clean''. Now, Mr. Walker, does
that strike you as good professional practice? Would you do
that sort of thing in a report on an agency?
Mr. Walker. Well, I really wouldn't want to engage in a
peer review of a fellow accountability professional. I will say
this, we at GAO have certain core values: Accountability, which
is what we do; integrity, which is how we do it; and
reliability is how we want to be received. With regard to
integrity, we want to be professional, objective, fact-based,
nonpartisan, nonideological, fair and balanced. That means that
we understand we work for the Congress, we are a watchdog, we
want to find out where the problems are. And, on the other
hand, if progress is being made we want to acknowledge it and
we think that is important. Because the ultimate objective is
to get a positive result. And the ultimate objective is to
solve the problem for the benefit of the taxpayers and frankly
to try to help improve the public's confidence in and respect
for their Government. You would have to ask the Inspector
General.
Mr. Price. Is she in the room, Mr. Chairman? I don't want
to make an unfair comment. If she would like to explain why she
refers to the Secretary as ``Mr. Clean'' I would be happy to
hear the answer.
Chairman Kasich. Does the gentlelady want to take the
microphone? This is highly unusual. But go ahead, if you want
to respond, use that microphone, Ma'am.
Ms. Gaffney. I did not intend to refer to the Secretary as
``Mr. Clean''. You know the ``Mr. Clean'' that used to appear
on household detergent cleaners from Proctor and Gamble? It was
my understanding that that person, ``Mr. Clean'', showed up at
the celebration. I had no intention of referring to the
Secretary.
Mr. Price, on the question of the matching, it has been
about 9 years that we have been reporting this income
verification problem. This year, for the first time, we truly
see progress being made. That is in my statement.
Mr. Price. Where, in that statement, does that occur?
Chairman Kasich. I think the gentlelady is not under oath
here.
Mr. Price. For the record, if you could reference that?
Chairman Kasich. She is going to be here to testify but you
are going to have to go, so, we will make sure that if you have
your staff here and listen to what the gentlelady has to say.
But I remember ``Mr. Clean''. I think he came on in
commercials in between the ``Petty Coat Junction.'' [Laughter.]
OK. The gentleman from California is recognized.
Mr. Miller. Thank you, Mr. Chairman.
I have some questions for HUD. And we have had a lot of
words used today: inefficiencies, fraud, mistakes, criminal
behavior, Government is not the enemy, we should not attack
Government because we are the Government.
I want to preface my questions with a story. We have heard
a lot of stories. It was about two fellows that were general
contractors. One was probably 21, 22, the other was probably
40, 41. Back in 1970 and 1971, they were put on the approved
contractor's list for HUD where they could bid HUD programs in
the L.A. area. And they were bidding work in East L.A. and as
they started bidding work every time a bid would come up they
tended to be the low bidder. And they started to get a large
quantity of low-bid approvals from HUD and they were put on the
list accordingly. And they started to do the work and they were
doing good work and kept bidding RFPs, and there was quite a
few other contractors involved in that area. And they were
taking a lot of the work because they were bidding at a better
price than their competitors were.
I probably could say that this story would be called a
bureaucrat's worst nightmare come true and I think you will
find out why. All of a sudden one day the local director for
HUD called the partner in, who was in his early 40s, and told
him--and you understand how HUD work was broken down at that
time, you had to list the costs of each associated task, list
your overhead, and you had to list your profits separately. And
your profits generally were about 30 percent of the HUD bid at
that point.
The director told the one partner that if they wanted to
bid any more HUD work he would have to give the director a
third of the profits in cash prior to the contract being let.
Well, the older partner came back to the younger partner who
was in his early 20s and the younger fellow was the one doing
all the bidding and actually running the work in the field. And
the younger fellow, I guess he was naive, told the older fellow
that the director couldn't do that, that they were on the
approved bid list and they couldn't stop them from bidding on
Government work, which was, in essence, probably true.
The problem was from that day forward this same company
would bid RFPs for HUD, they would be low bidder but HUD always
found a mistake with the RFP. And it had to be restructured and
when the RFP was restructured this company was off bidding
another RFP and this RFP was out to bid to some other
contractors.
Well, that young contractor is a member of Congress sitting
before you today. So, you have to understand I look at HUD from
a different perspective. The only thing that could make this
nightmare worse is if I was Secretary of HUD. It would probably
be a little worse.
I have some questions. And I hope I have a little time to
do this. My concern with HUD is the money they are losing by
keeping large inventories of foreclosed FHA homes. Let me give
you a list of a few statistics and I think they are important.
And let me know if these numbers reflect a strong agency
performing well in a good economy.
Federal Housing Administration, FHA Mortgage Insurance paid
out 77,000 claims worth $6 billion in 1998. That cost is passed
on to consumers through higher premiums. In 1977, single family
homes stayed in the Federal inventory for an average of 5.4
months, in 1998, the average time in inventory was 6.6 months,
and last I checked it was still increasing.
In 1996, HUD had 25,000 single family properties in
inventory. In 1998, the inventory increased to 40,000 and as of
June 30, 1999, HUD had 50,000 properties in inventory. And that
inventory of 50,000 homes was in a market where every other
sector's inventory was almost zero.
I mean realtors were having a problem listing homes because
there were none available. The HUD single family inventory was
valued at $1.9 billion in 1996, and it increased to a value of
$3.3 billion in 1998. And 15 percent of HUD's properties are
held in inventory for more than 12 months. This is compared to
the industry average of 2 or 3 percent, where they have an
inventory of more than 12 months.
In 1996, average loss per property on HUD was $28,000. In
1998, the average loss had increased to $31,700, a 12 percent
increase; and as of June 30, 1999, the average loss number was
$32,470. You can multiply 50,000 properties in inventory by the
average loss of $32,470 and that is $1.6 billion.
This is not just a theoretical problem for my district and
many districts throughout the country. One city I represent has
over 200 properties that are boarded up that are considered HUD
inventory. Local officials are frustrated with excessive
amounts of boarded up properties and again my question was, do
these numbers reflect a strong agency performing well in a good
economy?
Mr. Walker. Not in conjunction with that program. I mean
the fact of the matter is that we have done work in this area,
the Inspector General, who will be here later to testify, has
done some more recent work. In order for the inventories to
increase in this type of economy, obviously that tells you
something about the condition of the properties, which comes
back to one of the issues that we talked about earlier, and
that is the need for more oversight, not just to focus on cost,
but to focus on other factors that cause this inventory to
rise.
And I don't know if Keith would have another comment.
Mr. Fultz. I think the Comptroller General is right. And to
the best of my knowledge the figures that you have described
are accurate. And HUD has a program which they are trying to
improve these issues and that is the market and management
contractor's program where they have hired contractors to
manage these properties. Frankly, the results of some of those
contracts have not been successful.
In fact, one, as we have mentioned earlier, held about 40
percent of their inventory and because of mismanagement and
financial difficulties declared bankruptcy. And those projects
or those homes are now back into the inventory. Many of those
homes are getting older, are deteriorating, and that is why we
have recommended the need to monitor and to inspect. And the
issues that you have talked about are absolutely correct.
Mr. Miller. How would you rate HUD's system of monitoring
grantees? Apparently some in HUD just continually monitor the
grantees that happen to be near their offices.
Mr. Walker. In this particular program D plus, C minus. But
you might want to ask the Inspector General.
Mr. Miller. Is that the lenient curve, too, probably right?
Mr. Walker. You mean we are on a curved system?
Mr. Miller. There is a curve there to give that.
Mr. Walker. Everything is relevant.
Mr. Miller. Another problem I have----
Chairman Kasich. Mr. Miller, we are going to have to move
on. The only reason is that we have got the IGs, who are going
to be here, and we have the HUD IG and we need to try to get to
them before we get too late. But I don't want to discourage
you.
Mr. Miller. Thank you, Mr. Chairman.
Chairman Kasich. OK.
The gentlelady from Michigan.
Ms. Rivers. Thank you, Mr. Chairman.
Thank you, Mr. Walker, I am very pleased to hear your
report today. I am pleased to hear the thoroughness with which
you have done your investigation; not as pleased to hear some
of the information that you are sharing with us.
I want to ask a series of questions that really goes in a
little different direction because one of the things we have
been discussing as a Budget Committee and that we are going to
discuss in the future is whether or not the elimination of
fraud, waste and abuse can be a legitimate factor in our budget
deliberations this year. In other words, whether or not the
existence of fraud, waste and abuse represents a justification
for lowering our discretionary spending caps.
And the thing that I am particularly interested in is
whether or not we can quantify the problems that you have out
there? And I ask that because I listened to you talk about
problems that could be categorized as internal oversight
procedural problems which may or may not create a loss. They
are a problem and they need to be rectified so that you can
keep track of what is going on but there may or may not be
money associated with that.
You talked about problems like the trailer where there were
some very bad decisions made. And some of that money could have
been saved but ultimately we would have had to have made an
expenditure no matter what. So, you can't simply look at the
cost of this and say all of that money could be captured or be
recovered.
And then you talked about other kinds of problems that
could be addressed through changes in personnel, through
mechanical changes, computer systems, whatever, which seemed to
suggest that we would have to spend some money in the short-run
to gain some money in the long-run.
So, given these different kinds of factors that exist, how
reliable can you be at attempting to quantify how much of this
money is recoverable as part of a budgetary process?
Mr. Walker. I don't think that you can generalize. The fact
is there are a number of different buckets here. There is
fraud, waste, abuse, mismanagement, inefficiency. However, some
of these represent items that will take a considerable amount
of time in order to be able to resolve. It will take a
partnership approach on behalf of the Legislative and Executive
Branch to be able to address. In some instances, but by no
means all, they might require target investments, but I do
think there is a lot that can be done, quite frankly, without
those targeted investments by dealing with some of these
systemic issues.
But dealing with some of these systemic issues, in many
cases, is going to take time.
Ms. Rivers. Well, then how--and I hate to put you on the
spot to speculate on our efficiency here, though everybody else
does--how effective do you think we could be as a body trying,
in the space of a 6-month budget process, to come up with a
reliable number that we can plug into the budget and say, yes,
we feel comfortable that this much money will be recovered in
the next budget year?
Mr. Walker. It would be extremely difficult. I mean the
fact is you might be able to come up with a number and we might
be able to help you come up with a number as to what the
potential savings opportunities are but then you are also
talking about within a horizon. If you are talking about a 1-
year horizon, that would be extremely difficult.
Ms. Rivers. OK. The other question I have is really a
strategic one which is the sort of idea that by lowering
overall spending we will have some sort of impact on specific
problems. And the analog I would point to is Medicare where we
made some changes in overall spending in an effort to get to
the fraud, waste and abuse in home health care and we ended up
taking a big bite out of programs where there was not fraud,
waste and abuse because it was the blunt instrument of an
overall cut.
What do you think the efficacy of simply making cuts in
overall budgets would have on dealing with specific problems? I
mean would we necessarily produce the results we want through
that kind of a strategy?
Mr. Walker. The inefficiencies and the potential for fraud,
waste, abuse and mismanagement vary across Government. And even
this last time, where there was an across-the-board cut, there
was discretion given as to where those cuts should be taken. I
think it is important to be able to target whatever cuts to the
areas where you think there is the most opportunity because the
efficiency varies. Fraud, waste, abuse, mismanagement varies.
And those decisions should vary.
Ms. Rivers. So, you are suggesting that if we really want
to have an impact on this problem we identify specific problems
and target budgetary cuts to those areas as opposed to
generalized cuts within agencies?
Mr. Walker. Ultimately you need to be able to target. How
you achieve that, there are several ways to do it, but
ultimately you need to achieve some targeting.
Ms. Rivers. OK. The last question that I have, I listened
with a certain bemusement to the discussion about the waste in
the Department of Defense, because I can recall just not very
long ago when we were finishing up last year's budget we were
having a very lively discussion right here at this table about
who was willing to spend more on defense. And we were busily
adding dollars in after the budget process had finished.
I have been here for 6 years. Each and every year Congress
has exceeded its beginning number on defense and added in
weapons system and dollars at the very end of the process. Do
you think that that behavior on the part of Congress has helped
or hurt the kinds of things you were discussing today relative
to the Department of Defense?
Mr. Walker. I think it has hurt. I think the fact is that
there has been too much focus on the top line, there has been
too much focus on symbolism, and we have not done enough work,
meaning the Executive Branch, as well as some cases, the
Legislative Branch, to focus on what type of return are we
getting on those investments? And where are there opportunities
to spend the money more wisely to be able to meet legitimate
needs.
Ms. Rivers. Great. Thank you.
Thank you, Mr. Chairman.
Chairman Kasich. Let me ask the members, if you have a
compelling question we will let you ask it. I just wonder if it
would be possible to move to the IGs?
Mr. Bentsen. Mr. Chairman, I would have been here earlier
but I had the Chairman of the Federal Reserve testifying before
the Banking Committee and I gave him preference.
Chairman Kasich. How did he do?
Mr. Bentsen. He did OK. Less forthcoming than this panel.
Chairman Kasich. I was just trying to get to the IGs but if
you have some questions, go ahead, you are recognized.
Mr. Bentsen. That would be great, Mr. Chairman, and I think
they are on the clock so I think they are getting covered.
First of all, I want to commend you for having these
hearings and the only thing I would add to it, Mr. Chairman, is
in addition to having GAO and the IGs up here, I think you
ought to haul the managers of the Departments up here and put
them on the hot seat. A number of us, came from the private
sector. I wasn't a lawyer or anything like that. But if a
department head had these kind of problems they would be hauled
before the board or the chairperson of the company and told to
explain their overruns. So, I would encourage you to do that.
Now, let me ask a couple of questions. I think fraud,
waste, and abuse is appalling in any respect and I have seen it
in my own private sector experience like the gentleman from
California and I will get into that in a second. But let me ask
you, Mr. Walker, to what extent--and Ms. Rivers touched on this
a little bit about congressional add-ons, things in the Defense
Department, things like helicopter carry ships and things like
that--but let me ask this, to what extent does congressional
action and inaction have impact on some of the issues you
address in here and let me be specific.
You talked about EPA, the Department of Energy and others
having trouble with Superfund collection of cleaning up sites.
How much does the inaction of Congress, certainly since I have
been here for 5 years and even 2 years prior to that, to pass
any sort of Superfund reform legislation to try and cut through
this mess have an impact on that? We, in fact, haven't even
reauthorized the Superfund tax program, I think, for the last 4
years. What impact does that have?
And then let me ask you about things like the VA buildings.
We heard about this a year or two ago. There were a number of
press reports on this. But I think if I read correctly there
was a great deal of congressional objection to closing down any
VA buildings that might be in their district.
And then let me ask you about the FHA and the IRS. With the
IRS there have been recent reports--a number of us pushed to
bring Mr. Rossotti in, the man from the private sector to run
the IRS, rather than having a tax lawyer in there running it--
he has now raised concerns about the bill that I cosponsored
and a number of us voted for, a Taxpayer Bill of Rights, saying
that we now don't have sufficient auditors to enforce the Tax
Code as it is. Are you finding problems in your work with that?
And then with respect to FHA and HUD, I was an investment
banker back in the 1980s and 1990s before I came to Congress.
And I did a transaction in Houston for a project, a multifamily
project that had been FHA insured. We took it out of FHA. It
was under the old coinsurance program. It was called, I think,
Colonial Arms, if I recall correctly. It first was financed at
$35 million, if I recall; then it was refinanced at over $40
million, when it was going belly up. And then it went belly up.
My client bought the project at auction for $7.6 million, as I
recall, where it just barely cashed-flowed at those numbers and
we privately financed it in the credit markets and the
taxpayers took a bath for the rest.
That was under the old coinsurance program that HUD
developed in the 1980s under Secretary Pierce, and if I recall
correctly it wasn't until the latter part of the 1980s or early
1990s that Congress finally stepped in and eliminated that
problem.
Now, with respect to FHA I have now heard two Secretaries
of HUD testify before the Banking Committee about the need to
reform FHA and restructure FHA much in the same way that the
GSEs are, Fannie and Freddie, to give them more flexibility.
Does your analysis indicate that if FHA was restructured along
the lines that Secretary Cisneros originally proposed, give
them more flexibility, that they would be able to address
things like the lag time on REO and the impact on their cost,
even though it is an overall profitable program. And I will
stop there.
Mr. Walker. Let me take a shot at trying to address some of
those. First, with regard to the question of the Legislative
Branch and what can the Legislative Branch do? First, I think
more oversight which is what this hearing is intended to
encourage. This is a beginning, not an end. There needs to be
more oversight. Secondly, sometimes the Legislative Branch gets
involved in micromanagement and that has clearly happened in
the case of Medicare. I mean it has prescribed solutions and it
has prohibited HCFA from being able to exercise management
responsibilities in certain areas where it makes sense.
With regard to VA, there is absolutely no question
whatsoever they have significant excess capacity. The question
is, how best to deal with that? And, therefore, should there be
a civil base closing type commission or something. And it is
not just VA. There is a lot of excess Federal facilities that
don't have anything to do with DoD. The world has changed.
Whether it be the State Department, whether it be the domestic
agencies, we don't need to physically be everywhere that we had
to be when we didn't have the type of communications and
technology that we do today. And we ought to look at that
especially with regard to costs, security threats, and other
things.
Mr. Bentsen. If I could just interject.
Mr. Walker. Yes.
Mr. Bentsen. FHA, as you know, on the Ginnie Mae program is
going to a centralized function like Fannie and Freddie, which
actually I have gotten complaints from some of the real estate
industry about it. I think it is going to work out better and I
think they will find that to be the case.
Mr. Walker. With regard to Commissioner Rossotti, who I
meet with every 3 to 4 months, because they have more than they
can say grace over. We are trying to have a constructive
engagement approach with them. And they do have an issue that
the pendulum swung too far. The pendulum has swung too far in
that they are very focused on customer service. They are not
focused enough on compliance. There is a happy medium in there
some place.
And, last, with regard to HUD, you know, additional
flexibility may help but there are a lot of other things they
need to do before you get to that point. I mean I think you
need to make sure that they have got their priorities, they
have got the people focused in the right area, they have got
the right kind of controls in place and then at that point in
time you might want to think about additional flexibility.
Mr. Bentsen. And with respect to EPA and the Superfund?
Mr. Walker. EPA and Superfund, Keith.
Mr. Fultz. I would suggest that what EPA needs to work
together with many of the other Federal agencies: they need to
make better decisions on the basis of priority and risk-based
decisions. We, as a nation, are facing cleanup costs in our
Federal facilities that DOE, EPA and other Federal agencies
manage approaching $300 billion. And we are finding even within
agencies, in fact, Mr. Spratt would be aware of the DOE
problem, they have not prioritized, they have not identified
and they haven't made risk-based decisions.
And what we mean is there are facilities that are being
cleaned up today at tremendous cost that might not be at as
much risk to the public safety and health as others. And these
agencies need to do a much better job of making risk-based
decisions.
Mr. Bentsen. I am going to get gaveled on this but do you
think the lack of--Congress has been talking about reforming
the Superfund law for the last 6 or 8 years and every year we
say, well, we can't get there--and do you think that has some
impact on the agency's ability to carry out the law when they
know that the sword of Congress is hanging above them on what
the rules are going to be or what they ought to be doing?
Mr. Fultz. I believe that the agency needs more direction
and more guidance. And I think that would be helpful. They have
administrative procedures which we recommended they need to
improve upon, but clearly direction would be helpful.
Mr. Bentsen. Thank you.
Mr. Walker. But they can make some progress, too, without
that direction.
Mr. Bentsen. Thank you, Mr. Chairman.
Chairman Kasich. Mr. Hoekstra.
Mr. Hoekstra. Thank you, Mr. Chairman.
We just had a question as to--I can't read that chart and
what is behind the trailer--but my question relates to in your
testimony on page five you identified Table I, which is the
1999 High-Risk Areas in the Year Designated. Does the
Department of Education now fall under a high-risk area?
Mr. Walker. There is one of the programs--the student loan
program. It is just the program. It is not the entire
department. Generally when we designate high-risk we designate
it based on programs or functions, rather than a department.
Mr. Hoekstra. How can I get your attention on the
Department of Education for an agency that gets $35 to $40
billion in discretionary funds, they manage a huge loan
portfolio. For 1998 their books were not auditable or that they
could not get a clean audit. We met with the auditors this
week. They said that the grade for this year would possibly be
a C- and perhaps as low as a D-, meaning that if they were a
publicly held company the trading of their stock would be
suspended or their market value would go down.
Yes, go ahead.
Mr. Walker. First, we are not the auditors for the
Department of Education. But there are some serious issues here
that have to be addressed. They are one of the agencies that
are lagging as far as the 24 major departments and agencies as
it relates to financial management challenges and the ability
to be able to get a clean opinion.
Jeff, do you have an opinion?
Mr. Hoekstra. They may be lagging and I know you are not
the auditors.
Mr. Walker. No.
Mr. Hoekstra. But reading the description of what you do is
to following the Federal dollar and in this case we are running
$85 to $100 billion through that agency and you can't follow
the dollars.
Mr. Walker. Well, let me address that directly for a second
and then I will let Jeff comment. First, 95 percent of the work
that GAO does is based upon congressional mandate, committee
requests and member requests. So, we don't really have a whole
lot of discretionary resources.
And, so, I am not exactly sure what we have going on right
now in Education but Jeff might be able to tell us with regard
to the financial side.
Mr. Hoekstra. And I think you have been helping us. And I
think we are going to--well, Lorraine Lewis is going to be
here--but I think also in the supplemental we are requesting a
significant funding for either GAO or another entity to do a
very in-depth analysis of what is going on within the
Department because with that kind of money going through that
Department and not having a clear flow or understanding where
the money is going. So, what, you don't have the discretionary
funds. It is our job to get you the discretionary funds to do a
thorough analysis because if the books can't be audited you are
just creating an environment that is ripe for waste, fraud, and
abuse.
So, did you want to add something?
Mr. Steinhoff. Yes. Basically this is an entity that just
doesn't have the basic financial systems in place. They did get
a clean audit opinion at one time but that was based on a
heroic effort. It is my understanding Education prepared 1,800
spreadsheets, combing through records and coming up with
numbers months after the year. Last year they issued their
financial report, 8.5 months after the legislative due date of
March 1.
They came out November 18. Education had a disclaimer of
opinion, serious accounting problems, serious control problems.
They are one of 21 of the 24 CFO Act agencies whose systems do
not comply with the Federal Financial Management Improvement
Act, an Act that was sponsored by one of your former
colleagues, Senator and Representative Hank Brown.
Senator Brown knew the importance of getting to the end
game of having the information day-to-day and having the
systems and that is what they lack today.
Mr. Hoekstra. Good. Thank you.
Chairman Kasich. Mr. Moran.
Mr. Moran. Thanks, Mr. Chairman. Actually, the Department
of Education, and even I think the inspector general has
another point on some of that I would say to my colleague, and
most importantly some other facts that I think they will put on
the record. I am not going to pursue it, but I think there is
another very valid point of view on some of your major concerns
there.
Mr. Hoekstra. They have had the opportunity to testify. And
I think the IG agreed that books weren't auditable for 1998.
Mr. Moran. Let me, I am not going to pursue that because we
can get into it with the Education IG.
I have to say, Mr. Chairman, the worst things about waste,
fraud and abuse is that it has been used as a sham by
budgeteers for decades now. I think the first time was in 1971
when we used, as a plug figure, we put a billion dollars I
think in as a line item in what was then an HEW budget because
we didn't want to eliminate marginal programs, and we didn't
want to say no to important constituency groups of program
managers. And now the Appropriations Committee always does the
Executive Branch one better and ups the figure. There is very
little follow-up to see whether any of these estimates really
have any substance to them.
And, generally, what does have substance to it are the
kinds of managerial and programmatic reforms and changes that
are necessary. The big-ticket items, of course, really, you
have to look to the Defense Department, and I don't know
whether Mr. Spratt agrees with me. I think theoretically he
would, but if we really want to stay big bucks, we wouldn't
have the Navy prepared for a land and air war, and we wouldn't
have the Army prepared for a sea and air war, and the Air Force
vice versa. There are a lot of traditional organizations that
could be made more efficient, but there are a lot of reasons we
don't do that.
Now that we have on-time delivery of inventory, you have to
ask the question whether we need all of the supply people.
Clearly, we don't. But the Congress is going to sustain them.
And those are the kinds of programmatic and political decisions
I think that are probably more relevant than some of the things
that we try to do in the way of exposure of so-called fraud and
abuse. It exists, but not anywhere near as much as we would
like the people sometimes to believe.
There are some things though, specifically, that I want to
ask you about. And at some point, I would really like a full
investigation of the enormous amount of trucks, and tanks, and
planes and even ships, although the ships aren't in the same
location, that just sit out there rotting, thousands of them,
particularly over in Europe, and I guess because we don't know
what to do with them. But we could sell them to some countries
that could use them, and they would hardly be threatening to
our military forces. But I am going to ask the IG, Defense,
about that.
What I am going to ask you about is a cross-cutting issue,
and I want the Chairman to listen to this because this is
something that is not going to come up. We went to the idea of
credit card purchasing. Great idea. And you can do off-the-
shelf purchasing, and you can use a Government credit card. But
do you know that the credit cards are still charging 2 to 2.5
percent transaction fee when we purchase this stuff for the
Government, even within Government sometimes? And we are
paying, in some cases, millions of dollars for a transaction
fee to a credit card company for a cost that is a few cents. It
costs them a few cents. When you buy something for $40 million,
the transaction fee isn't any greater than it is if you buy
something for $4, and yet we are charging 2 percent of whatever
that total amount is.
Now that is something that is a total waste. I think it is
fraudulent, and yet we continue to do it because we won't stand
up to Visa, and Mastercard and so on. And I would like to see
if there has been any thought given to that and whether we
might be able to--you know, that seems to be a pretty
legitimate way to save some taxpayer dollars. Wouldn't you
agree, Mr. Walker?
Mr. Walker. It sounds like it is something that needs to be
looked into and renegotiated. Let me also say for the record,
Mr. Moran, I think as of Tuesday, I may become one of your
constituents.
Mr. Moran. Terrific. Well, that is the greatest, that is
the best answer I could possibly have gotten, Mr. Walker.
[Laughter.]
I think I have heard enough from this witness. He is a
terrific witness. [Laughter.]
He is going to make a great constituent.
Chairman Kasich. Let me just pursue that a little bit. Are
any of you aware of what my friend from Virginia is saying? I
hope we are not giving them a piece of the action based on
our----
Mr. Walker. Well, we have not looked at it. I can, to my
knowledge, I can follow up. But as you know, many times the way
the credit card companies make money is they charge a
percentage of the cost, and it ranges anywhere from less than 1
percent to American Express charges a lot higher.
One would think, with the volume that is commanded by the
Federal Government, we ought to be able to get a pretty good
deal. And, in fact, for things like telephone service and long
distance service, we have gotten a great deal, and we are
renegotiating about every other year to improve on that.
Jeff.
Mr. Steinhoff. This is something we will look at much
further. But I know that in some cases, like for the travel
card, the Government earns money. We get a rebate.
Mr. Moran. Travel card is different.
Mr. Steinhoff. We get a rebate.
Mr. Moran. Travel card you have done it. You have done what
you need to do in the other areas. In some cases, where the,
for example, technology services, which I am familiar with. We
have got a lot of Government contractors. They are paying that
kind of money for the supplies that they charge, but what they
do is to just build it into the rates, and they charge the
Government. So the taxpayer winds up paying it. They say it is
a legitimate part of business, but it really is illegitimate
for credit card companies not to give us a more reasonable
rate, given the very high volumes of business. And the problem
is they are a virtual monopoly now. They fix their interest
costs, and we haven't stood up to them. It is something that I
wish that the GAO would do, and I would really appreciate the
comptroller general looking into it.
Chairman Kasich. Now, the gentleman is in the spirit of the
thing. I appreciate the gentleman's comments.
I want to just conclude Mr. Walker's testimony. I, first of
all, want to thank all of you. We have been meeting for a long
period of time, my staff, along with the GAO staff, trying to
get the right kind of research done. And then Mr. Walker and I
had a chance to meet. I want to compliment you. I think you
have done a great job. And I think it is not an easy job. And
it is particularly not an easy job when you come up here.
And one of the guys here on the staff showed me this report
that was done by John Conyers in 1992, ``Managing the Federal
Government: A Decade of Decline.'' And here we are in 2000, and
you folks probably keep investigating. And then at some point,
when you are not seeing anybody take it seriously, you say, why
should I keep doing this? I mean, that is human nature.
I am going to get my old bill out on bounty hunters. I
actually had a bill that passed the House a couple of times; in
fact, Pat Schroeder passed it, that said--look, you can put
anything in a law. They have got these performance programs in
the Federal Government and these reward programs, but they are,
in too many cases, in name alone.
And I have always believed that if you could document the
savings of money, a million dollars, you ought to get a chunk
of it as a Federal employee. And then you get into the problem
of how do you determine it. But in the clear-cut cases, it
would be terrific. I think the last thing that Federal
employees want are more plaques. Give them the money. Show me
the money, and I think we would have a lot more aggressive
activity in the public sector to try to be more creative and
imaginative.
But I want to thank you all. It is a hard job to be an
investigator. And the only thing I can tell you is I don't want
to contribute to the cynicism that there is another hearing on
this, and we don't get anything done. I am going to do the best
I can. And I am going to try to link up people who have a
genuine interest. I mean, you have a person like Miller and a
person like Bentsen who clearly have an interest in HUD and all
of its attendant programs. You have got Mr. Hoekstra, who I
think is a hero in what he has done in education, Jim. He
really put his shoulder to the wheel, and he has really tried
to be constructive in education. And we have got members here
like Mac Thornberry, who are tremendously interested in
Defense, along with a person like Mr. Shays.
We have a lot of people interested, and I just hope that we
can create a mechanism where we can focus and try to accomplish
a few things. If we can do that, then that will make your job
more meaningful, and it will make your job more satisfying. And
I just want you to know there are people here who care. And can
we wipe it all out? I don't think so. But can we make more
progress? I think the answer is that we can. And I don't
believe the purpose of this is really to demagogue anybody. It
is really designed to do what people expect us to do.
So I want to thank you for your testimony, Mr. Walker. I
look forward to you perhaps even becoming part of our team
here, that you can have some of your folks sit in with these
task forces that we are most likely to create, and let us see
what we can do. If we focus on five areas this year, I mean,
narrow areas, and get something done, then it will have been
positive.
So thank you for being here, and I would now like to have
the four IGs come to the table.
Mr. Walker. Thank you, Mr. Chairman.
Chairman Kasich. David, that was an excellent job. You did
an excellent job of testifying too. Thank you.
We are now going to hear from four IGs. We are going to
hear from June Gibbs.
If you would quickly take your seat. We are going to hear
from June Gibbs Brown, who is the inspector general at HHS; Mr.
Donald Mancuso--is it ``cuso'' or ``cooso''? I had a second
grade teacher----
Mr. Mancuso. Mancuso, Mr. Chairman.
Chairman Kasich. Wonderful. Wonderful.--who is the deputy
inspector general at the Department of Defense. We are also
going to hear from Susan Gaffney, who is the IG with HUD, who
we have already heard a little bit from and from Lorraine Pratt
Lewis, who is at the Department of Education.
I think what we ought to do is--now, when I look at this
panel, and I see three women and one man, since I now have two
little girls, there is a future in this business for them; is
that correct? [Laughter.]
OK. I like to see that. Anyway, why don't we start, any
idea how you want to--have you talked among yourselves?
Probably not. Why don't we start with Mrs. Lewis and work left
to right.
Here is what I would like. I hate to have you summarize,
but you are going to have to. But I also would like to have the
IGs involved with whatever mechanism we create here. We do not
want you cut out of this business either, and I assume you have
staff people that work underneath you. And let us just get a
little life in all of this stuff and see where we are, but we
want to have you included, just like we did the GAO.
STATEMENTS OF LORRAINE LEWIS, INSPECTOR GENERAL, U.S.
DEPARTMENT OF EDUCATION; SUSAN GAFFNEY, INSPECTOR GENERAL, U.S.
DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT; DONALD MANCUSO,
DEPUTY INSPECTOR GENERAL, U.S. DEPARTMENT OF DEFENSE; AND JUNE
GIBBS BROWN, INSPECTOR GENERAL, U.S. DEPARTMENT OF HEALTH AND
HUMAN SERVICES
STATEMENT OF LORRAINE LEWIS
Ms. Lewis. Thank you, Mr. Chairman, Mr. Spratt. Good to see
you again Mr. Hoekstra. I do have a longer statement for the
record, which I offer.
I will be discussing a few of the management challenges
that we identified in the letter to you and several other
members and Senators last December. Of course, a top priority
for the Department is its preparation and access to accurate
financial data. This information is critical for the Department
to make informed decisions, manage for results and ensure the
integrity of its operations.
Due to weaknesses in the Department's financial system, the
work performed on the fiscal year 1998 statements resulted in
reports containing disclaimers of opinion. The work on the
fiscal year 1999 departmentwide and SFA statements is
continuing. It appears at this point that the audit reports
will contain four qualified opinions and one disclaimer of
opinion.
There are many internal control weaknesses that were
reported in fiscal year 1998 and continue to be reported in
fiscal year 1999. However, the Department has developed
processes and utilized contractors to work around the
underlying systemic problems. As a result, the Department was
able to prepare this----
Chairman Kasich. Could I just ask you a question?
Ms. Lewis. Yes.
Chairman Kasich. You are a very knowledgeable person,
right? Why don't you just tell us. I mean, if you want to read
through that, that is fine. But if you want to say, ``Here, is
what I am kind of thinking about all of this.''
Ms. Lewis. All right.
Chairman Kasich. Just be casual about it.
Ms. Lewis. We will be reporting on or before March 1st,
which is the deadline, on the fiscal year 1999 statements. They
do show improvement for the Department. This is the very first
year that the Student Financial Assistance Office audit will be
conducted. Again, both audits at this point will appear to show
four qualified opinions and one disclaimer of opinion. This, I
believe, is the result of much dedicated work on the part of
the Department officials, the OIG auditors and, of course, our
independent professional contractor Ernst & Young.
Indeed, as you have previously noted, underreporting of
income by applicants for student aid and their parents remains
a problem. We believe this is a problem that costs the
taxpayers about $100 million or more each year. There was
discussion previously about the law 2 years ago, the amendment
to the Higher Education Act, which authorized the Secretary, in
consulting with the Treasury Department, to engage in a match,
a full-scale data match. It is, indeed, the case that this
match has not been implemented. There are continuing
discussions. It is my understanding, between OMB, Treasury, and
the IRS and the Education Department about this matter, that
the nominee for the Treasury Secretary, Mr. Summers, indicated
previously that the IRS's legal opinion is that that law which
amended an Education Act did not provide sufficient
authorization for the IRS to provide this data to the
Department of Education without the individual's consent.
We know the Treasury Department is doing a review of that
particular section, 6103 of the Internal Revenue Code, which I
believe is a report that is being mandated by Congress, and
that report may show their current thinking. Our position is,
if it does require additional legislative amendment in the
Title 26, we would hope that that could be accomplished
quickly. We view this as a front-end fix to a very serious
problem, which will create efficiencies throughout the system
in the long run.
Another report the IG Office has issued recently related to
the inappropriate death and disability discharges from student
loans. My longer statement refers to some of the numbers that
we found there. We did make some key recommendations to the
Department. In fact, it was the Department who asked us for
this audit because they saw a rise in these discharges. And we
did report on that in June of 1999.
The Department has issued guidance to the guarantee
agencies in terms of fixes. It now requires an original or a
certified copy of a death certificate in an application for a
discharge for death. And also on the disability side, it
requires the doctor to identify his or her State license
number, as well as a telephone number and provides additional
information on what the guarantee agencies can do to tighten up
this system.
I identified a number of other areas in my longer
statement, and in the letter I referred to earlier, and I would
be happy to discuss any and all of those issues.
Thank you.
[The prepared statement of Lorraine Lewis follows:]
Prepared Statement of Hon. Lorraine Lewis, Inspector General, U.S.
Department of Education
Good morning Mr. Chairman and members of the Committee. I am
pleased to testify before the Committee on the Budget on matters
relating to management challenges at the Department of Education.
On December 8, 1999, we provided to Congress an assessment of the
Department's significant management challenges. Many of these
challenges concern long-term issues that we are continuing to monitor.
The December 8 letter describes the work the Department is doing, or
needs to do, to meet these challenges. I have attached a copy of the
December 8 letter for the record.
financial management and internal controls
A top priority for the Department, and one of its most significant
challenges, is its preparation of and access to accurate financial
data. This information is critical for the Department to make informed
decisions, manage for results and ensure the integrity of its
operations. It is an area identified by the Department as a material
weakness in its fiscal year (FY) 1999 Federal Managers' Financial
Integrity Act (FMFIA) report.
Due to weaknesses in the Department's financial system, the work
performed on the Department's FY 1998 financial statements resulted in
reports containing disclaimers of opinion. The work on the FY 1999
Department-wide and Student Financial Assistance (SFA) financial
statements is continuing, but it appears that the audit reports will
contain four qualified opinions and one disclaimer of opinion.
Although significant internal control weaknesses carried over from
FY 1998, and will continue to be reported for FY 1999, the Department
has developed processes and utilized contractor support to work around
the underlying systemic problems. As a result, the Department was able
to prepare financial statements in a more timely manner and provide
sufficient support for amounts shown. This enabled the auditors to
complete their audit and render a qualified opinion on four statements,
but a disclaimer of opinion on the Department's and SFA's Statement of
Financing.
One of the significant weaknesses in its financial reporting
process relates to the Department's general ledger software package. To
address this issue, the Department is in the process of procuring a new
general ledger system intended to overcome many of the system
weaknesses preventing the preparation of timely financial statements.
However, until its new accounting system is operational, the Department
will have to continue its work around procedures.
During FY 1998 and again in FY 1999, the Department's
reconciliation procedures were not performed on a timely basis. In
addition, the identified reconciliation differences were not always
adequately explained, resolved and posted to the Department's general
ledger. Weaknesses in the Department's internal controls over the
reconciliation process prevented timely detection and correction of
errors in its underlying accounting records. Despite these underlying
control weaknesses, the auditors were able to conduct sufficient tests
of balances and transactions to enable them to express a qualified
opinion on four of the financial statements. The Department is in the
process of implementing new automated procedures to assist in the cash
reconciliation process and the reconciliation of other internal
accounting records. The Department also is performing more timely
reconciliations of its fund balance with Treasury.
When I testified before the Subcommittee on Oversight and
Investigations, Committee on Education and the Workforce on December 6,
1999, I stated that we would issue the audit reports for the FY 1999
financial statements of the Department and SFA by March 1, 2000. I
still plan to meet my commitment. We will continue to work with the
Department and Congress to improve the Department's financial
management.
irs data match and discharge of student loans
Another management challenge that we have identified is the under-
reporting of income by applicants for student aid (and their parents).
Our audit and investigative work has shown this is a problem that is
costing Federal taxpayers over a hundred million dollars annually in
overawards of Pell Grants and awards to ineligible persons.
In a 1997 audit report, we found that 3.7 million out of 9.1
million applicants for Federal student aid received Pell Grants during
the 1995-96 award year. For 2.3 million of these applicants, we
verified the adjusted gross income they reported on their financial aid
applications with income data maintained by the Internal Revenue
Service (IRS). Out of this sample, we reported that 102,000 students
received Pell Grant overawards totaling approximately $109 million.
This is a conservative amount because we were unable to verify the
reported income of parents of dependent students.
As recommended by our office, and supported by the Department, the
Higher Education Act (HEA) Amendments of 1998 included a provision
authorizing the Department, in cooperation with Treasury, to confirm
with the IRS the adjusted gross income, Federal income taxes paid,
filing status and exemptions reported by applicants (including parents)
on their Federal income tax returns for the purpose of verifying the
information reported on their student financial aid applications.
Currently, the Department is discussing the development of a test
match study with the IRS. The Department has indicated that it will
send samples of student aid applicant data to the IRS in March and June
2000. The IRS will match these data against its records and provide the
Department with statistical summaries evaluating the accuracy of the
applicant data.
It is our understanding that the Department will use the
statistical information provided by the IRS to identify the types of
students who are most likely to under-report their income. The
Department intends to use the information to better focus their
selection of student applicants for income verification at the school
level. The Department also intends to use the IRS information to better
evaluate the extent of income under-reporting and use the data in
support of its continuing effort to conduct a full-scale data match
with the IRS.
Although the HEA authorizes the Department to confirm student
applicant income with the IRS, the IRS has indicated that it cannot
disclose this information to the Department because such release is not
authorized by the Internal Revenue Code. Without specific authorization
in the Code, the IRS indicates that it must obtain written taxpayer
consent before individual income information may be released to the
Department. In an attempt to overcome these obstacles to full-scale
verification, the Department, Treasury and OMB are working together to
develop possible solutions, including legislative and administrative
changes.
Another concern in the SFA area is the inappropriate discharge of
student loans based on disability or death. The HEA provides for the
discharge of a student loan when the borrower becomes either totally
and permanently disabled or dies.
At the request of the Department, we conducted an audit of the
Department's controls over the discharge of student loans due to
disability or death. In June 1999, we reported that borrowers who
received disability discharges of over $73 million were earning wages
and borrowers who received disability discharges of nearly $11.5
million returned to school and received additional loans and grants.
Additionally, our review identified over $3.8 million in loans
discharged for borrowers who inappropriately received a death
discharge.
To help correct this abuse, we recommended that the Department take
several steps to enhance the current discharge determination
procedures, including revising the disability form to include, at a
minimum, the doctor's professional license number and office telephone
number and requiring certified copies of death certificates. In
response, the Department modified its disability form to incorporate
our recommendations and OMB approved the form. In addition, the
Department now requires that a death discharge be based only on an
original or certified copy of the death certificate.
Our office continues to pursue this matter and we are engaged in a
project to identify fraudulent disability and death loan discharges. In
order to identify fraudulent death discharges, we conducted a data
match with the Social Security Administration's Death Index to
determine persons who received loan discharges based upon death but who
do not appear in the Social Security records. Working with a sample of
these data and with information filed by those who obtained substantial
discharges from Sallie Mae and a guaranty agency, our investigators are
pursuing initial leads generated by the match. We intend to continue
this effort as more of the match data are analyzed. In the area of
disability discharge fraud, we are working with a number of guaranty
agencies to identify potential fraud cases and following up on leads
developed from the data. These projects involve coordination with a
number of other entities, including the Department's program office,
guaranty agencies, state agencies and Sallie Mae.
The OIG also is investigating a number of individuals for
disability and death discharge fraud. In one completed case, a
defendant was recently prosecuted and sentenced for obtaining the
discharge of five loans totaling $37,000, based upon false claims of
disability for mental illness. Two other indictments for false claims
of disability also are pending in OIG cases. In addition, our
investigative efforts to date have led to the reinstatement of over
$560,000 in student loans for borrowers who falsely claimed to be
totally and permanently disabled.
information systems and security controls
The Department has been successful in its efforts to ensure its
programs are Year 2000 (Y2K) compliant. This success was accomplished
through a concentrated effort on the part of the Department, including
technical assistance from our office. We contributed to the
Department's success by evaluating its progress, identifying high-risk
areas and providing information on the status of its major trading
partners. The Department's commitment resulted in there being no
interruption in its customer service and no loss of critical data from
its computer systems. We would like to see the Department undertake a
similar initiative in the area of security controls.
In December 1999, we issued a draft audit report on the
Department's security policies and plans for its 14 mission-critical
systems. The 14 systems include 11 SFA systems; the Department's
Central Automated Processing System (EDCAPS); the Department-wide
network (EDNET); and the Impact Aid System. Our review revealed that
the Department has significant control weaknesses including a lack of
security plans and reviews for six mission-critical systems, no process
to ensure resolution of identified security deficiencies and a lack of
technical security training for many employees responsible for
overseeing the Department's computer security. The Department has
informed us that it concurs with our findings.
Our draft findings indicate a weakness in the Department's
compliance with the security requirements of the Computer Security Act,
Paperwork Reduction Act and OMB Circular A-130. The Department also
identifies this area as a material weakness in its FY 1999 FMFIA
report. Currently, we are conducting a follow-up audit to determine the
adequacy of security reviews performed on eight mission-critical
systems to meet OMB A-130 requirements. Additionally, we are evaluating
the public, internal and privileged access vulnerabilities of the
Department's EDNET communication infrastructure. We plan additional
reviews of security controls for other systems in the future.
We also are participating with 16 Federal agencies in a President's
Council on Integrity and Efficiency (PCIE) effort to evaluate
compliance with Presidential Decision Directive (PDD) 63. PDD 63 calls
for a national effort to ensure the security of the interconnected
infrastructures of the United States. Our work focuses on the
Department's efforts to comply with the requirements of PDD 63.
Additionally, we have initiated an audit of the Department's disaster
recovery planning for its mission-critical systems.
In another information systems area, the Department continues to
explore ways to make its SFA program delivery systems electronic and
paperless. The Department's goal of paperless systems creates new
opportunities for efficiency, but requires effective controls to ensure
accountability, security and legal enforcement. A particular challenge
is the implementation of an electronic signature validation process
that meets the requirements of OMB's implementation guidance for the
Government Paperwork Elimination Act, which is expected to be released
in April 2000. To assist the Department, we will provide advice to SFA
on its current implementation of Personal Identification Numbers (PINs)
in its financial aid application process. Additionally, we are
researching the major components within a well-controlled Public Key
Infrastructure (PKI) environment to assist the Department in its future
PKI implementation efforts.
The Department also is working to implement three key requirements
of the Clinger-Cohen Act, which requires agencies to improve management
of information technology. These requirements include the
implementation of a capital planning and investment control process,
development of a sound and integrated information technology
architecture and an assessment of the information resource management
knowledge and skills of agency personnel. Although the Department has
not fully implemented the requirements of the Act, it is making
progress in addressing recommendations made by our office. The
Department recently produced a draft Capital Planning and Investment
Control Program and is working with a contractor to complete an
information technology architecture. The Department also is working to
complete a skills inventory to assess the existing skills of its
information technology employees.
results act
The Department's first performance report, required by the
Government Performance and Results Act, is due in March 2000. The
Results Act reporting requirement presents significant challenges for
the Department. These challenges include the supplemental funding role
of the Department, relative to state and local government entities, in
many education programs; the heavy dependence on third parties such as
lenders, guaranty agencies and state and local education agencies to
provide performance data; and priorities that compete with data
collection such as the desire to reduce regulatory burden and increase
flexibility in program implementation. These conditions will present
ongoing challenges for the Department in its data collection and
reporting efforts.
In a September 1998 audit report assessing the Department's
implementation of the Results Act, we recommended that the Department
establish controls over the analysis and reporting of data, establish
standards for reporting performance information and establish a formal
system for tracking indicators. Last year, the Department developed
draft data quality standards and conducted training on these standards.
The Department also plans to develop an electronic system for indicator
tracking.
At the request of the Department, we also reviewed the processes
used by State Education Agencies (SEAs) to collect and report data to
the Department. Our review focused on two of the Department's major
state formula grant programs--the Elementary and Secondary Education
Act Title I Program and the Perkins Vocational and Technical Education
Program.
Our January 2000 draft report documented the challenges of
collecting and processing required student data and provided insight
into state quality control procedures. We reported that the SEA process
of collecting data for the two formula grant programs is complex
because of the thousands of entities providing data. Each SEA also has
its own unique control structure and processes for the collection of
data.
To address the complexities of the data collecting and reporting
process under the Results Act, the Department is working with states to
reduce paperwork and to streamline the Federal education program
reporting system. The Department also is developing a pilot project
called the Integrated Performance and Benchmarking System, which is
designed to be an Internet-based system for harvesting data from states
about Federal program activities at the school and district level. The
Department is working with the Council of Chief State School Officers
on this project.
We will continue to assist the Department in its effort to improve
data quality under the Results Act. During the development of its
Strategic Plan, the Department agreed with our recommendation to
include in its performance report an assertion from Department program
managers regarding the reliability and validity of the data used for
performance measurement. The impact of this assertion requirement will
be addressed in the Department's upcoming performance report. We also
have been conducting a continuing assessment of the Department's
selection of performance indicators and its reporting process. Based on
this assessment and our review of the Department's first report, we
will provide the Department with recommendations for improvement for
the next reporting cycle.
compliance monitoring
With the increasing emphasis on accountability for results, it is
important to consider the implications of this change on program
oversight for the Department, State Education Agencies (SEAs), local
educational agencies (LEAs) and schools. Program oversight is essential
in the enforcement of program requirements, the development of
necessary program guidance and the evaluation of program modifications
during the legislative reauthorization process.
In a February 1999 report, we recommended that the Department
assume a greater role in ensuring elementary and secondary program
integrity. Specifically, we recommended that the Department integrate
on-site program reviews, audits, technical assistance, reporting and
evaluative studies. We also recommended that the Department's oversight
consider SEA analyses of LEA single audit findings and emphasize
corrective action follow-up.
With the increasing delegation of elementary and secondary program
oversight to SEAs and LEAs, our report also recommended that the
Department establish minimum standards for SEAs in monitoring the LEA
administration of these programs. Our recommended standards included a
requirement for SEAs to systematically analyze the results of LEA
audits and other oversight activities to identify trends in findings
and develop monitoring and technical assistance strategies to reduce
occurrences of similar problems.
The Department has taken steps to address some of these oversight
concerns. The Office of Elementary and Secondary Education has
established integrated review teams to perform coordinated, multi-
program reviews of the implementation of Federal education programs by
SEAs. The Department also included in its proposal for reauthorizing
the Elementary and Secondary Education Act a section under Title XI
that addresses state requirements for monitoring LEA compliance with
the Act. In addition, our office is participating with the Department
in a pilot program with four SEAs that will address the better use of
LEA single audits for targeting monitoring and technical assistance
activities.
We are conducting additional reviews of compliance monitoring in
elementary and secondary programs. We are completing an audit to
determine whether the Higher Education Act Title III program is being
monitored in an efficient and effective manner and whether adequate
enforcement action is being taken by the program office. Another audit
will evaluate the Department's monitoring of elementary and secondary
formula grant programs.
We also will continue our work with the Department on the K-12
Auditing, Monitoring and Technical Assistance Support Project to
develop an internal data exchange system to improve the Department's
program monitoring process.
At this time, I would be pleased to answer any questions you may
have.
Chairman Kasich. Ms. Gaffney.
STATEMENT OF SUSAN GAFFNEY
Ms. Gaffney. Mr. Chairman, Mr. Spratt, members.
When you are at HUD trying to minimize fraud, waste and
abuse, you are highly motivated to do so for a couple of
reasons:
One, HUD is serving only about one out of five of the
households in this country who are eligible for HUD assistance.
So every dollar we are losing to waste, fraud and abuse is a
dollar some needy household is not getting.
The other thing that gets to you about HUD is that fraud,
waste and abuse in HUD tends to be manifested in really abysmal
living conditions. We pay an enormous amount of money because
of fraud, waste and abuse to house needy people in terrible
conditions, and no one wants that. It gets you motivated.
Mr. Chairman, and particularly, Mr. Spratt, this has been a
very thoughtful discussion today. The point of my written
testimony and perhaps it wasn't clear, was to say there hasn't
been much thoughtful discussion about waste, fraud and abuse in
this Government. What I see having happened over the last years
has been very superficial. There has been some kind of an
assumption that if you downsize the Federal bureaucracy, that
is wonderful. You have won the war against waste, fraud and
abuse. If you contract out, that is good, that is wonderful in
and of itself. If you get an unqualified audit opinion, people
seem to think that means you have solved all of your financial
problems.
None of these things should be taken, in and of themselves,
or even collectively, as giving you an adequate basis for
assessing fraud, waste and abuse. I don't think GPRA is going
to do that either. I don't think there are any silver bullets
in this area. I think what it takes is oversight, oversight,
oversight, and I should tell you, from my experience, oversight
is not there on either the congressional side or the Executive
Branch side. Fighting fraud, waste, and abuse also requires
legislative reform. The Comptroller General was incorrect about
HUD when he said that there had been legislation to
consolidate/streamline HUD programs. There has not been. The
number of programs has continued to grow. There is no attempt
to match the programs with the capacity of the staff to manage
them. And if it is not clear, I am blaming the Congress here.
Maybe the Administration has some part in it, but this is what
the Congress is supposed to be doing.
Now, I would like to make a couple of remarks about HUD
2020. First, HUD is inherently vulnerable, is inherently high
risk, and that is because we have half a trillion dollars of
mortgage insurance in place, we have 3,400 housing authorities,
we have 4.4 million households who are receiving assistance.
The second thing nobody talks about, but I would like to
talk about, is another reason why HUD is vulnerable. Every one
of these well-meaning programs seems to generate an industry
that grows up around it, and that industry ends up knowing the
programs and the loopholes in those programs better than the
HUD people know them.
The third thing about management reform at HUD is that the
management reform agenda changes with each Secretary. The
entire bureaucracy in HUD engages in each of these changed
agenda. It is not as though there is a civil service standing
to the side, tending to the institutional needs of HUD, no.
Every 4 years, every 2 years, every 18 months, whatever it is,
there is a new reform agenda. So my plea to you is: HUD has
downsized so severely, we are embarked now on this HUD 2020
Management Reform, and I don't think there is any way to go
back; we must go forward. I plead with you to take a role in
making sure that it actually works, that it continues; that,
for instance, the whole thing doesn't fall apart when Secretary
Cuomo leaves office because it is associated as his management
reform plan.
That concludes my testimony.
[The prepared statement of Susan Gaffney follows:]
Prepared Statement of Hon. Susan Gaffney, Inspector General, U.S.
Department of Housing and Urban Development
Chairman Kasich, Ranking Member Spratt, and members of the Budget
Committee, I appreciate the opportunity to appear before you today to
give you my perspectives on waste, fraud, and abuse in the Federal
Government.
My perspectives are based on the 6\1/2\ years I have spent as
Inspector General (IG) at the Department of Housing and Urban
Development (HUD). IGs, as you well know, are required by statute to
focus on promoting economy and efficiency, and preventing and detecting
waste, fraud, and abuse. I think it's fair to say that, as a result of
their very focused mission, the IGs have developed considerable
expertise in these areas. That, of course, does not mean that the IG
view is the only view to consider in evaluating Federal programs.
It's also important to keep in mind that I am the IG at HUD. I work
at HUD, and so do the other people in the HUD OIG, because we believe
in HUD's core mission. We are committed to fighting waste, fraud, and
abuse in HUD programs and operations because every dollar lost to such
activities is a dollar that people who need HUD's assistance aren't
getting. Despite a robust economy, HUD serves only about one fifth of
those households that could qualify for housing assistance. It's also
easy to get motivated to fight waste, fraud, and abuse when the results
of such activities are graphically manifested in the form of deplorable
living conditions.
I do not see waste, fraud, and abuse as a political issue, but I
think that others might. There is, for instance, concern that
acknowledging waste, fraud, and abuse will lead to the demise of needed
programs. Accordingly, there is a tendency to declare that the battle
against waste, fraud, and abuse has been won. There is also the fact
that fixing the problems that lead to waste, fraud, and abuse tends to
require either sustained concentration on boring, bureaucratic
processes, and/or changes in programs that have established
constituencies. As a result of these factors, it seems to me that the
discussion about, understanding of, and perhaps concern about waste,
fraud, and abuse in the Federal Government are quite shallow.
Take the case of HUD. When Secretary Cuomo took office in January
1997, he said that HUD had become the poster child for mismanagement,
and he vowed to turn the Department around. And indeed, over the past
couple of years, Secretary Cuomo has reported a reinvigorated, more
efficient, and more effective HUD. These reports have largely been
based on HUD's getting a ``clean'' audit opinion on its financial
statements; the Secretary's downsizing of the HUD bureaucracy; the
proclaimed success of Secretary Cuomo's HUD 2020 Management Reform;
Secretary Cuomo's launching of new programs; positive assessments by
consultants paid by HUD; and increased appropriations for HUD. Permit
me to look at each of these measures of success from an IG's
perspective.
is hud's ``clean'' audit opinion a success story?
In March 1999, the OIG issued its audit of HUD's 1998 financial
statements. For the first time ever, HUD received an unqualified
opinion, meaning that HUD had produced complete and reliable financial
statements. The unqualified opinion got good press, and Secretary Cuomo
threw a celebration party for HUD employees. The Deputy Director of OMB
and ``Mr. Clean'' attended.
There are two big problems with this apparent success story.
First, HUD paid a contractor more than $2 million to get its 1998
financial statements in the shape required for an unqualified opinion.
This is problematic for a variety of reasons. Obviously, it's a lot of
money to spend to get an unqualified opinion for a governmental entity;
that amount of money could have provided housing assistance to about
350 needy households. Further, it shouldn't have been necessary--HUD's
financial management systems should be able to produce the financial
statements without further, extensive work. But, if the financial
management systems aren't up to the task, and they aren't, then we
cannot assume that HUD will continue to get unqualified opinions--
unless they pay for the additional contractor work each year. This
year, a similar contract is in place to put the financial records in
order.
Second, the clean or unqualified opinion was equivalent to the
OIG's saying that HUD had a balanced checkbook. The more important
question is whether the money was spent for the right purposes. This
question was addressed in the Report on Internal Controls, which
accompanied the audit opinion and listed eight material weaknesses. The
material weaknesses may sound like ``green eye shades'' types of
concerns, but they actually constitute serious deficiencies in HUD's
ability to ensure that funds are spent for proper purposes. The eight
material weaknesses are:
HUD needs to do more to ensure that subsidies are based on
correct tenant income.
Improvements are needed in multifamily project monitoring.
HUD needs to complete improvements to its financial
management systems.
HUD must improve the management of its resources.
Monitoring of insured mortgages needs to place more
emphasis on early warning and loss prevention.
The Federal Housing Administration (FHA) needs to improve
its accounting and financial management systems.
HUD must address problems that cause resource shortages
affecting FHA programs.
FHA must improve Federal basis and budgetary accounting.
Consider the import of the first material weakness, which is gently
labeled ``HUD needs to do more to ensure that subsidies are based on
correct tenant income.'' This material weakness has its foundation in
an estimate that in 1998, under its public housing and Section 8
programs, HUD made housing subsidy overpayments totaling $857 million
(as compared to total spending under these programs of $15.5 billion).
HUD made the overpayments because some recipients underreported or
didn't report their true incomes; and neither HUD nor the administering
housing authorities had control systems adequate to identify the
underreporting or failure to report. This matters a lot, because,
again, every dollar of overpayment is a dollar that is not being made
available for truly needy families who are on long waiting lists for
HUD assistance.
HUD acknowledges this weakness and intends to correct it through a
process that starts with matching reported tenant incomes with IRS and
Social Security income data. HUD's first match of data (for calendar
year 1998) identified 280,000 instances of income underreporting that
exceeded established thresholds ($4,000 for project-based Section 8;
$8,000 for public housing and tenant-based Section 8). This week, HUD
started mailing letters to tenants asking them to explain the
discrepancies to the PHAs or owners. HUD will also be notifying the
PHAs or owners that discrepancies exist and providing them with
instructions to remedy the discrepancies and report back to HUD. Since
this methodology has not yet been tested, and there is question about
the accuracy of the tenant income data in HUD systems, we are concerned
that a large number of tenants may receive erroneous income discrepancy
letters (for calendar year 1998 income), which will have negative long-
term implications for the computer matching program.
Or consider the second material weakness, ``Improvements are needed
in multifamily project monitoring.'' This material weakness concerns
HUD's oversight of about 30,000 privately and non-profit owned
multifamily projects. The Report on Internal Controls says that:
``Overall, we found that monitoring of troubled and potentially
troubled assisted projects was inadequate. We noted audited financial
statements that were not submitted and reviewed, and physical
inspections and management or occupancy reviews that were not performed
by the field offices. In addition, field offices were not adequately
following up to resolve identified deficiencies.''
This material weakness was first reported in the financial audit
for Fiscal Year 1991. HUD's compliance and monitoring approaches for
dealing with problem multifamily projects are still evolving.
You might be asking, ``So what?'' Results from the OIG's Operation
Safe Home multifamily equity skimming initiative are instructive.
Equity skimming is the misuse, by an owner or managing agent, of any
part of the rents, assets, proceeds, income or other funds derived from
an FHA insured multifamily project, in violation of the Regulatory
Agreement between the owner and HUD. Mortgage defaults and deteriorated
living conditions tend to go hand in hand with equity skimming. So, in
1994, the OIG made it a priority to identify equity skimming and get
diverted funds repaid or the projects repaired. Between 1994 and
September 30, 1999, we examined 147 multifamily projects and then, in
conjunction with HUD and the Department of Justice, successfully
pursued repayments of more than $90 million.
The OIG is maintaining its focus on equity skimming:
Last month, for example, based on a lengthy investigation
by the OIG and the FBI, the U.S. Attorney for the Middle District of
Florida announced guilty pleas by 10 individuals and one business. They
had conspired in an equity skimming scheme which allowed the owners of
13 HUD-insured multifamily developments to illegally divert more than
$987,000 between 1991 and April 1995.
Last week, based on another lengthy investigation by the
OIG and the FBI, the U.S. Attorney for the Northern District of
California announced the indictment of a prominent figure in the
multifamily industry on 19 charges of stealing over $1.8 million from
multifamily projects, defrauding the United States and HUD, and paying
illegal kickbacks. The grand jury, which expressed outrage that HUD
hadn't detected and stopped these practices, gave a standing ovation to
the auditors and agents who had conducted the investigation.
HUD officials have acknowledged that corrective action is needed in
these eight areas of material weakness. The unqualified opinion does
not justify overlooking the fact that these long-standing, serious
problems continue to exist.
should the downsizing of hud be considered a success story?
Efforts to reduce the Federal bureaucracy seem to be universally
applauded, and Secretary Cuomo has in fact claimed HUD's downsizing as
a major accomplishment.
I am somewhat perplexed by this tendency to see downsizing, in and
of itself, as a good thing, without regard to the bigger picture of
overall expenditures and impact on program delivery. At HUD, there is
evidence that the downsizing that started in 1995 has increased costs
as well as program abuse.
In June 1995, as part of his ``Response to GOP Proposal to
Dismantle HUD,'' Secretary Cisneros issued a Reinvention Blueprint that
called for a radical restructuring of HUD programs and the
``transformation of HUD from a lumbering bureaucracy to a streamlined
partner with State and local governments. Significant downsizing is
anticipated, reducing HUD's current workforce of 12,000 today to fewer
than 7,500 employees.'' There was no analytic basis for the 7,500
target. Further, the radical restructuring of HUD programs was
subsequently shelved, but HUD's commitment to downsizing continued
through rounds of untargeted buyouts.
By the time Secretary Cuomo took office in January 1997, HUD's
staffing had been reduced to about 10,500. Secretary Cuomo announced
his commitment to achieving the target staffing level of 7,500; and, a
little more than a year later, HUD staffing was at 9,100, the reduction
once again having been accomplished through use of untargeted buyouts.
After massive staff reshuffling among programs and locations, however,
it was the Single Family Mortgage Insurance Program that took the brunt
of the staffing reductions; its staff was cut in half.
The Secretary's HUD 2020 Reform Plan envisioned contracting out as
a principal means of compensating for the Single Family staff
reductions. Notably, HUD's Real Estate Owned (REO) single family
properties (acquired as a result of HUD's paying insurance claims)
would be managed, marketed, and sold by a few full-service contractors,
as opposed to those functions being handled by a combination of HUD
staff and about 350 real estate asset management contractors. The new
management and marketing contractors were to be in operation by October
1998.
HUD never analyzed the costs and benefits of this approach. When
OIG auditors questioned why program officials hadn't prepared the cost
comparison required by OMB Circular A-76, program officials answered
that they weren't required to, because the new contracting wouldn't
affect the jobs of more than 10 employees. That's because the
aforementioned staffing reductions had already taken place.
So what? Well, the major staffing reductions took place in the fall
of 1997. Because large scale procurement isn't one of HUD's strongest
suits, the new management and marketing contractors didn't start
operation until April 1999 (rather than October 1998, as planned). In
the intervening 15 months, OIG auditors found that ``inventory
increased, sales to homeowners declined, age and condition of FHA
properties deteriorated, revenue was lost, and holding costs increased.
* * * FHA management issued emergency contracts, and placed temporary,
inexperienced, and/or untrained HUD staff in property disposition jobs.
The effort did not overcome the problems.''
HUD awarded 16 management and marketing contracts having an
estimated 5-year cost of $927 million. Seven of these contracts (with
an estimated 5-year cost of $367 million) were awarded to a single
contractor, Intown Management Group. OIG auditors looked for but
couldn't find any evidence that HUD officials had assessed Intown
Management Group's financial capability to handle this huge workload
(estimated to be 40 percent of HUD's total REO inventory). Forty-five
days into the contract period, Intown voluntarily withdrew from one of
its seven contracts. Six months into the contract period, HUD
terminated Intown's six other contracts for non-performance. At that
time, Intown had sold only about 2.8 percent of its assigned inventory.
By the end of January 2000, HUD's REO inventory totaled 47,711
properties, 42 percent of which had been in the inventory 6 months or
more, and 17 percent of which had been in the inventory 12 months or
more. Ten months earlier, when the management and marketing contractors
started work, the inventory had totaled 43,560 properties, 30 percent
of which had been in the inventory 6 months or more, and 10 percent of
which had been in the inventory 12 months or more. These statistics
demonstrate the difficulty of disposing of properties that have been in
the inventory for long periods and the tendency of contractors to focus
their efforts on disposing of recently acquired properties.
This matters a lot. Vacant, boarded up HUD-owned homes have a
negative effect on neighborhoods, and the negative effect magnifies the
longer the properties remain in HUD's inventory. The good news part of
this sad saga: the neighbors throughout the country have made their
anger about the HUD REO situation known to the media and the Congress.
The downsizing of the Single Family staff has also afforded
increased opportunities for fraud. For example:
OIG and FBI investigation established that Allstate
Mortgage Insurance, a HUD-approved lender in the Direct Endorsement
Program, originated more than $97 million in 427 fraudulent loans
during the period June 1996 through July 1997. OIG auditors followed up
to find out why Single Family staff had not detected a fraud of this
scale. The auditors concluded that staffing reductions had eroded the
Single Family staff's ability to adequately oversee mortgagees' loan
origination practices, a situation that was exacerbated by confusion
about a new HUD 2020 policy designed to compensate for the staff
reductions.
In January 2000, as a result of another OIG and FBI
investigation, a HUD Housing Specialist in the Los Angeles Office pled
guilty to receiving $80,000 in kickbacks in exchange for selling about
$2.1 million in HUD REO properties to a real estate company owner for
only about $700,000. OIG auditors again followed up to find out why HUD
staff had not detected this fraud, which continued over a 7-month
period. They found that the Housing Specialist's work had been subject
to no supervisory review. The responsible supervisor said the office's
REO workload was too large, and the pressures to dispose of it too
great, to allow for any supervisory review.
I trust that this recounting explains why I do not believe that
downsizing, in and of itself, should be counted as success.
is secretary cuomo's 2020 management reform a success story?
When Secretary Cuomo announced his HUD 2020 Management Reform Plan
in June 1997, he said: ``For HUD to fulfill its mission, it must have
credibility--with Congress, with local government[, with the] customer.
They must all believe that HUD has the competence and capacity to
perform its functions. It's time HUD put its own house in order.'' HUD
2020 was Secretary Cuomo's plan to put HUD's house in order.
Since the fall of 1998, Secretary Cuomo has cited increased HUD
budgets and positive statements by consultants paid by HUD as evidence
that HUD's credibility has been restored. Secretary Cuomo in turn
presents this as evidence that the HUD 2020 Management Reform has
worked.
Again, the OIG's approach is different. We have tracked the
progress of HUD 2020 in as objective a manner as possible, against the
goals and time frames Secretary Cuomo established for it. And from this
perspective, at this writing, HUD 2020 cannot be called a success. More
than 2\1/2\ years after its announcement, HUD 2020 is still very much a
work in progress.
HUD 2020 was supposed to be fully operational by October 1998. By
that time, staffing reductions and organizational changes had been
made, but the business process improvements called for by HUD 2020 had
not taken place. At this writing, 16 months after the October 1998
deadline, we are still waiting to see the business process
improvements. For example:
Single Family Property Disposition
Earlier in this statement, I talked about the management and
marketing contracts, the HUD 2020 device intended to increase the
efficiency of HUD's Single Family property disposition function and
compensate for severe reductions in Single Family staff. Again, between
April 1999, when the management and marketing contractors started work,
and January 31, 2000, HUD's REO inventory has increased from 43,560 to
47,711 properties; the percentage of properties in the inventory 6
months or more has increased from 30 to 41; and the percentage of
properties in the inventory more than 12 months has increased from 10
to 17.
While there is evidence of a decline in HUD's inventory from a high
of 51,537 properties at September 30, 1999, the size of the older
inventory has grown from month to month.
Scoring the Financial and Physical Health of HUD's Public and
Multifamily Portfolios
Another key initiative under HUD 2020 is the centralized REAC,
whose primary purpose is to score the physical and financial health of
HUD's public housing and multifamily portfolios, thus enabling other
HUD entities to better target their monitoring and enforcement efforts.
The Department budgeted about $63 million in Fiscal Years 1998 and 1999
and another $100 million over Fiscal Years 2000 and 2001 to develop all
assessment, including the physical and financial assessment systems.
While we consider this comprehensive approach to assessing the HUD
portfolio a positive step, we have yet to see evidence that results are
being or will be widely used:
During Fiscal Year 1999, the REAC reported that 28,835
physical inspections of multifamily and public housing properties had
been conducted. The Office of Housing has established a procedure to
address physical inspection results. However, the procedure relies on
owners' certifications to assure that repairs are complete, even in the
case of health and safety violations. In contrast, the Office of Public
and Indian Housing has generally been reluctant to use the inspection
results in their monitoring of the Public Housing Authorities because
the scores were only advisory in Fiscal Year 1999. While it is true
that the scores to date have been advisory, the physical deficiencies
are real conditions--including health and safety violations--that need
to be corrected.
HUD has announced that it will start official physical inspections
in June 2000. There is, however, significant question about how this
intention complies with the following instruction in the Conference
Report on HUD's Fiscal Year 2000 appropriations:
``The conferees direct HUD to delay implementing the Public Housing
Assessment System (PHAS) until, in consultation with public housing
authorities (PHAs) and their designated representatives, the Secretary:
(a) conducts a through analysis of all advisory PHAS assessments; (b)
reviews the GAO's study of the PHAS when it is complete; and (c) based
on that analysis and review, publishes in the Federal Register a new
consensus-based PHAS final rule that incorporates any recommended
changes resulting from the process referenced above.''
To the OIG's knowledge, the GAO study of the PHAS will not be
complete by June 2000. At least one major housing interest group is, in
addition, claiming that HUD did not comply with the other provisions of
the Conference Report language before issuing the final PHAS rule.
During Fiscal Year 1999, the REAC (REAC) assessed the
financial reports for approximately 2,800 Public Housing Authorities
and received financial statements for approximately 7,800 insured
multifamily projects. The assessment of Public Housing Authorities
financial reports is on schedule; however, the assessment was only
advisory for Fiscal Year 1999. Consequently, the results of the
assessments were not generally utilized by Field Offices.
In contrast, delays were encountered in obtaining electronic
submission of insured multifamily projects financial information. The
REAC therefore extended the financial statement filing deadline to
August 1999 from March 1999, and the Office of Housing delayed
releasing the data to the Field Offices until staff could be trained on
the use of the data. Distribution of financial results began on
September 30, 1999. REAC has advised that all financial information and
analyses are now available to the Office of Housing for project
monitoring. The OIG has yet to determine how or whether the results are
being used.
Taking Action to Improve Troubled Public Housing
Another key initiative under HUD 2020 are two Troubled Agency
Recovery Centers, whose mission is to work with public housing
authorities designated as troubled by the REAC, in order to assist the
housing authorities in bringing their performance to an acceptable
level. HUD declared the Troubled Agency Recovery Centers fully
operational on October 1, 1998.
In September 1999, about a year later, the OIG looked at the two
Troubled Agency Recovery Centers and found they were working at 10
percent of their planned capacity. The reason is simple: HUD had
expected that the REAC's scoring systems would identify 575 troubled
public housing authorities that would constitute the Troubled Agency
Recovery Centers' workload by October 1998. However, at this writing,
almost 16 months later, the REAC still isn't issuing official scores,
so the Troubled Agency Recovery Center workload is still defined by the
former and very deficient self-assessment system known as the Public
Housing Management Assessment Program (PHMAP). Under PHMAP, there are
only 52 troubled public housing authorities.
Consider what this means. On the one hand, if HUD was correct that
its Troubled Agency Recovery Center staff could handle 575 troubled
authorities, but their actual workload is only 52, then 90 percent of
that staff has been underutilized or not utilized for a long time.
More importantly, HUD doesn't need elaborate Real Estate Assessment
scoring systems to know that there are some very troubled public
housing authorities that aren't identified as such by PHMAP. Consider
the case of the Puerto Rico Housing Administration (PHA).
In December 1996, HUD took the PHA off its PHMAP-based
list of overall troubled public housing authorities. The PHA has never
gone back on that list.
In June 1998, the OIG issued an audit report on the PHA,
alerting HUD to a series of potentially serious problems.
In September 1998, OIG officials told Public and Indian
Housing (PIH) officials that there were virtually no controls over the
PHA's procurement system, resulting in high potential for fraudulent
activity. We urged PIH to intervene immediately to correct PHA business
practices. To date, there has been no HUD intervention at the PHA, and
the PHA continues doing business as usual.
On October 29, 1998, based on an investigation by the FBI,
OIG, and the Office of the Comptroller of Puerto Rico, three
individuals were indicted on charges of conspiracy to defraud HUD and
embezzlement of over $1 million from the PHA. The three individuals
have since pled guilty.
On March 25, 1999, based on an FBI and OIG investigation,
six individuals were indicted on charges of bribery, conspiracy, money
laundering, and theft of over $1.4 million in PHA funds. Two of the six
individuals have since pled guilty.
Currently, the FBI and the OIG are investigating five
other major cases of potential procurement fraud at the PHA.
Taking Enforcement Action against Bad Landlords
Another key initiative under HUD 2020 is the centralized
Enforcement Center. At the heart of Secretary Cuomo's ``Get Tough''
policy, the mission of the Center was to pursue civil and regulatory
actions against (i) public housing authorities and private, multifamily
owners whose properties receive failing scores from the REAC; and (ii)
Community Planning and Development and Fair Housing and Equal
Opportunity grantees who do not pass audit scrutiny or who engage in
waste, fraud, or abuse.
I expect that the delay in the REAC's issuing official scores for
public housing and multifamily properties has negatively affected the
Enforcement Center's operations. I am unable to provide you with a
definitive assessment, however, because the OIG is just now completing
its audit of the Enforcement Center.
I can provide you with two anecdotes that indicate there may be
cause for concern.
In January 2000, as a result of OIG, FBI, and IRS
investigative work under the OIG's Housing Fraud Initiative, the U.S.
Attorney for the Central District of California announced 41
indictments and guilty pleas for Single Family Mortgage Insurance
fraud. Secretary Cuomo promptly issued a press release claiming that
the indictments and guilty pleas resulted from his ``Get Tough'' policy
and his establishment of the Enforcement Center. Neither had any
relevance whatever to the investigations or the results of the
investigations.
In the spring of 1998, Enforcement Center personnel
invited the OIG to assist them in pursuing a $15 million civil fraud
case against Associated Estates Realty Corporation, in Cleveland, Ohio.
The case related to Associated Estates' ownership of three HUD-insured,
Section 8 subsidized multifamily properties that were notorious, two of
the properties having been cited by the City of Cleveland for more than
8,600 health and safety violations.
The OIG agreed with the Enforcement Center's assessment, and an OIG
agent accompanied the Enforcement Center personnel to a meeting with
the U.S. Attorney's Office. The U.S. Attorney's Office tentatively
agreed with the Enforcement Center's assessment, and requested
additional information.
The next time the U.S. Attorney's Office or the OIG heard about
Associated Estates was from a March 1999 article in the Cleveland Plain
Dealer. The article said that HUD program officials (who had taken
jurisdiction of the case away from the Enforcement Center) had settled
with Associated Estates, agreeing to pay Associated Estates $1.78
million for the retroactive rent increase on the condition that
Associated Estates found new owners for two properties. The Plain
Dealer quoted Secretary Cuomo as saying: ``This settlement agreement
sends a strong message to owners and managers of housing subsidized by
HUD. If you don't provide safe and decent housing to families in need,
your days of getting money from this department are over.''
In December 1999, the Plain Dealer reported that HUD had paid the
$1.78 million to Associated Estates, even though Associated Estates
hadn't found new owners for the two properties. Howard Glaser,
Counselor to the Secretary, was quoted as saying, ``Everybody agreed.
Let's stop this now, take the properties, even if we have to hold [our]
nose and make the payment. The guy who signed it [Gary Eisenman, HUD's
General Deputy Assistant Secretary for Housing], would be the first to
tell you he held his nose.''
What the Plain Dealer did not report is that, in addition to
providing for the $1.78 million payment for a retroactive rent increase
for one property, the settlement agreement also released Associated
Estates from any civil or administrative claims relating to their
ownership and operation of four HUD-insured and subsidized properties.
Three of the four properties were the same properties that were
involved in the $15 million civil fraud case that the Enforcement
Center had wanted to pursue.
Improving HUD's Financial Information System
Another key initiative under HUD 2020 is the Financial Systems
Integration Plan. The Plan was designed to correct Department-wide
financial management deficiencies while simultaneously providing the
information necessary to carry out the financial and programmatic
missions of the Department.
In late 1997, the Department decided to use an off-the-shelf
software in the development of its financial management system known as
HUDCAPS. In a January 1998 memorandum to the Secretary, we pointed out
several risks inherent in that decision. We noted the decision to use
the standard software was made without a thorough analysis of other
alternatives. Also, the selected software was not user friendly and was
not the ``state of the art technology'' for the time. This year our
concerns became reality. After much effort, schedule delays, frequent
scope changes, and cost increases, HUDCAPs was prepared to operate as
Department-wide ledger beginning with fiscal year 1999. However, as
implemented, the HUDCAPs core financial system still does not fully
comply with Federal financial system requirements and still does not
correct long standing financial system weaknesses in its feeder systems
such as the FHA general ledger.
The following financial management systems deficiencies, which were
reported in prior years, were present during fiscal year 1999.
Insufficient information about individual multifamily
loans. The financial system cannot identify high risk and troubled
loans for monitoring and oversight.
Lack of integration between program and accounting
systems. For example, monthly cash reconciliations are not being done
and FHA summary transaction data are not entered into the department-
wide system on a timely basis.
Inability to support adequate funds control for FHA,
which, among other things, resulted in an Anti-Deficiency Act violation
in fiscal year 1999.
Inability to fully support budgeting for Section 8
project-based programs. HUD was to do an initial recapture of unneeded
excess funds remaining on expired contracts in August, 1999 but was not
able to complete that recapture until December due to the systems
problems. Moreover, that recapture excluded 391 expired contracts with
$408 million in reserve budget authority because of insufficient data
to perform the analysis.
should the announcement of new programs be considered a success story?
The OIG has long held that there is a mismatch between the number
and complexity of HUD's programs and the capability of HUD staff to
administer those programs. In 1994, at the request of Secretary
Cisneros, we prepared a major report on ``Opportunities for
Terminating, Consolidating, and Restructuring HUD Programs.'' The
report was a principal basis for Secretary Cisneros' Reinvention
Blueprint, which called for a radical restructuring of HUD programs.
You may remember that prospects for enactment of the Reinvention
Blueprint ended when the cries for abolishment of HUD began.
When we did our 1994 report, we counted 240 separable HUD program
activities. Our last count, in 1997, was 328 separable HUD program
activities. We believe the count has continued to increase while HUD
staff has continued to decrease.
Against this background, you can understand why the OIG does not
consider it good news when Secretary Cuomo announces the ``teacher next
door'' initiative, the ``officer next door'' initiative, the gun
buyback initiative, the Pine Ridge initiative, the HUD storefront
initiative, the gun safety initiative, the ``healthy homes''
initiative, or the initiative to organize public housing authorities to
file suit against gun manufacturers. On its own, each of these
initiatives may have some appeal, but their effect is to divert scarce
HUD resources away from HUD's core programs.
The diversion of HUD resources away from HUD's core programs has
been particularly apparent in the case of the Community Builder
Program, a key initiative under HUD 2020. Our September 30, 1999 audit
of the Community Builder Program evaluated Community Builder hiring
practices, reviewed their assigned duties and responsibilities, and
examined their impact on other HUD organizational elements. Our audit
found serious problems with Community Builder hiring practices, the
Community Builder concept, and the Community Builder's impact on HUD
operations:
There was little evidence to support HUD's decision that
it needed about 800 Community Builders. This issue is of importance
because the Community Builder positions were established within the
framework of HUD's downsizing staff. That is, HUD neither sought nor
obtained increased funding for the Community Builders.
HUD violated Office of Personnel Management rules in
hiring ``external'' Community Builders ( who were not HUD staff at the
time) as term appointments.
While the Community Builder concept was part of an attempt
to distinguish HUD outreach and monitoring functions, it proved to be
an expensive and controversial solution. A common problem identified in
many of our recent audits of HUD programs is the lack of staff
resources to effectively manage and monitor. The nearly 800 Community
Builder staff committed to outreach functions, are a major drain on
potential monitoring resources.
In reviewing the impact of Community Builder work, we
found few measurable results. In our interviews with 59 Community
Builder staff, 39 said they spent more than half their time on public
relations activities.
Our audit recommended the Community Builder program be terminated.
should positive assessments by consultants paid by hud be considered
authoritative?
Because HUD 2020 has had a staggering impact on the Department, the
OIG has been monitoring its progress on a realtime basis. While OIG
work must by law be conducted in accordance with professional standards
that ensure its independence and objectivity, the consultants paid by
HUD are not governed by such strictures. Once commencement of OIG HUD
2020 work is announced, it has become almost standard operating
procedure for the Department to hire a consultant to provide a
contemporaneous assessment. Here are a few examples:
Our assessment of the HUD 2020 Management Reform Plan, as described
in Chapter One of our September 1997 and March 1998 Semiannual Reports
to Congress, was contrasted with a $412,000 assessment by Booz-Allen &
Hamilton and their sub-contractors to include David Osborne and James
Champey. Our analysis was an effort to review the progress of
organizational changes against HUD 2020 plans and we were critical of
major delays in reform implementation. On the other hand, the
contractor's assessments were conceptual, focusing on the soundness of
the reform concepts. Since Booz-Allen & Hamilton's report was issued in
March 1998, it has been used on numerous occasions by HUD management to
acclaim the success of HUD 2020 Reforms.
In Chapter One of the OIG's September 30, 1998 Report to the
Congress (which was sent to the Congress on December 11, 1998), we
tracked the progress of HUD 2020 against milestones that HUD had
announced at the outset of HUD 2020. We reported that most of the
reform initiatives were well behind schedule. For example, the HUD 2020
Plan had called for the Troubled Agency Recovery Centers to be fully
operational by October 1, 1998; but OIG auditors found that the
Troubled Agency Recovery Centers were operating at only 10 percent of
capacity. On October 30, 1998, the Department contracted with Price
Waterhouse Coopers for a $126,000 evaluation of HUD's progress in
meeting seven HUD 2020 milestones. However, in the process, HUD refined
the milestones substantially, enabling a positive assessment of
progress by Price Waterhouse Coopers on December 1, 1998. In the case
of the Troubled Agency Recovery Centers, for instance, the refined
milestone was that two Troubled Agency Recovery Offices would be opened
by October 1, 1998. In the OIG's view, there is a vast difference
between opening offices and ensuring that those offices are fully
operational.
Our recent comprehensive review of the Community Builder Program
was contrasted with a simultaneous $146,000 Analysis of Community
Builder Effectiveness by Ernst & Young. Under their engagement
parameters with HUD, Ernst & Young was provided a list of Community
Builder case studies to sample and a list of interview sources. The
scope of their engagement did not provide for interviews of HUD
employees regarding the Community Builder Program. Our review included
interviews with 231 parties involved in the program to include
Community Builders, other HUD staff and outside customers. The findings
in both reports were strikingly different.
are increased appropriations for hud a success story?
Since being confirmed as Secretary of HUD, Andrew Cuomo has said
that HUD must get its own house in order before it could expect to be
entrusted with new programs and/or increased budgets. As I said at the
start of this testimony, Secretary Cuomo along with other Principal
Staff, notably Deputy Secretary Ramirez, have declared much of the 2020
Management Reforms a success. They have taken advantage of
opportunities the Congress has provided them to testify as well as
announcing the results of studies they have contracted for as vehicles
to communicate this.
Just 10 days ago the HUD Public Affairs Office issued a press
release announcing the President's 2001 Budget. The press release
contained the following statements by Secretary Cuomo:
``This budget shows that HUD is back in business, and has achieved
a new level of public trust and confidence by proving it can create and
run quality programs;''
``The budget will build on HUD's success and help unlock the door
to prosperity for people and places left behind in these good economic
times;''
``Just a few years ago, our critics were calling for the
elimination of HUD;'' and,
``Today, HUD is held up as a model of successful government
reinvention.''
The Secretary should be congratulated for both his acumen and
persistence in conveying the budgetary needs of HUD's constituents and
his success in attaining increased appropriations. For Fiscal Years
1999 and 2000 the Department's efforts were recognized with increased
appropriations: the best HUD budgets in 10 years was the Secretary's
message. The President's 2001 Budget continues this trend with a
proposed increase of $6 billion. As I said earlier, we in the OIG
believe in HUD's mission. HUD is the hope of last resort for many folks
living in this Country, and few people convey that message as
convincingly as Secretary Cuomo.
Conversely, staff in the OIG routinely see first hand the waste and
abuse of scarce HUD funds. HUD could do a much better job with the
resources it has if it dealt more with the substance, that is the
infrastructure, rather than the ministerial aspects of reform. In other
words, HUD needs to deal with the material weaknesses and not just the
checkbook balance if it is to assure that increased funding truly
assists the rightful beneficiaries.
yet again, so what?
I support many of the goals that Secretary Cuomo has for HUD. I
trust it is clear to you, however, that Secretary Cuomo and I have very
different views about the current state of affairs at HUD. To some
extent, that is not surprising: Secretary Cuomo, understandably, wants
to tell a success story; but my job is to report the facts, including
problems, and encourage problem-solving when appropriate. As I said at
the outset of this testimony, an IG's view is a particular view, but I
believe it is critically important that HUD identify and solve its
problems in order to better serve the people who need HUD's help.
The media have tended to label Secretary Cuomo's and my differing
views as a personal feud. That perception is highly unfortunate, but I
think it arises because Secretary Cuomo and I seem to be the only
people, other than GAO, engaging in any dialogue about waste, fraud,
and abuse at HUD. And that doesn't make any sense to me.
First, I think it goes without saying that no cabinet department
should be an island unto itself. Yet ongoing Congressional and
Executive Branch oversight of management issues at HUD is minimal, at
best. Your hearing today is, to me, a relatively exceptional expression
of interest by the Congress. For its part, the Office of Management and
Budget (OMB) tends to track a small number of narrow issues. OMB, for
instance, exerts considerable pressure on agencies to obtain
unqualified opinions on audits of financial statements, but I am aware
of no equivalent OMB interest in the accompanying Report on Internal
Controls. Yet we know that Congressional and Executive Branch oversight
can be very effective: witness the Y2K success story.
Second, I don't think HUD can solve its problems all by itself. I
am not opposed to downsizing the Federal bureaucracy, but we should be
determined that the downsized bureaucracy has the capacity to
administer its programs. And that, to me, means that we should be
looking for every opportunity to consolidate, terminate, and streamline
programs. We should be considering increased use of formula and block
grants. We should be talking again about devolution of responsibilities
to States and localities, a concept that hasn't made much progress at
HUD. We should be looking for ways to build incentives into programs
that work to prevent fraud, waste, and abuse, thus requiring less
onerous and unappreciated monitoring by the Federal Government. We
should be thinking about whether Government Corporations such as Ginnie
Mae and FHA should be allowed to truly operate as government
corporations and, in the process, solve their own management problems.
Obviously, such actions would require intensive, ongoing efforts on
the part of the Congress and the Executive Branch. But, in my view, the
benefits would far outweigh the costs.
Mr. Chairman, that concludes my testimony. I appreciate the
opportunity you have afforded me to appear here today.
Addendum Submitted by Susan Gaffney, Inspector General, U.S. Department
of Housing and Urban Development
Office of Inspector General,
U.S. Department of Housing and Urban Development,
Washington, DC, February 23, 2000.
Hon. John Kasich,
Chairman, House Budget Committee, House of Representatives, Washington,
DC.
Dear Chairman Kasich: Thank you for the opportunity to present my
views on governmental fraud and waste to the Committee and for the
courtesy extended to me and my Inspector General colleagues by the
Chairman.
In part, my testimony was based upon ongoing audits and
investigations. Because of this, I am revising my written testimony
concerning an FHA violation of the Anti-Deficiency Act (see Page No. 10
of the Statement). As I was testifying, the OIG's contract independent
auditors were discussing the violation with Office of Management and
Budget (OMB) officials. Based upon those discussions and a unique
automatic apportionment provision for the payment of credit financing
interest to the U.S. Treasury in OMB Circular No. A-34, the independent
auditors have concluded that the provisions of 31 U.S.C. 1517 do not
apply to the type of payment that FHA made. We agree with this
conclusion.
The part of the same statement pertaining to FHA's inadequate funds
control is still accurate. The independent auditors still consider this
a material weakness. The same transaction was improperly recorded and
reported by HUD necessitating a change to their September 30, 1999
financial statements. Moreover, at the direction of OMB, both the HUD
Deputy Chief Financial Officer (CFO) and FHA's Comptroller are
devising, with the help of consultants, a plan to establish funds
control at FHA. According to the Deputy CFO, two new FY 2000
appropriations have been placed under an improved funds control system
and agreement has been reached with the FHA Comptroller on the handling
of FHA field budget accounts that is to be implemented this fiscal
year.
Should you or your staff have any questions or concerns over this
matter, please feel free to contact me.
Sincerely,
Susan Gaffney,
Inspector General.
Chairman Kasich. Thank you very much.
STATEMENT OF DONALD MANCUSO
Mr. Mancuso. Mr. Chairman, I guess after the previous two
speakers, I will do my remarks in a much briefer form as well.
I think much of what I was going to say was actually discussed
earlier----
Chairman Kasich. Let me just tell you, sir, at home now I
barely get to speak. [Laughter.]
So go ahead.
Mr. Mancuso. Well, again, this committee is well aware of
the size of the Department of Defense and the many problems
that are faced there. In that light, by the way, I would also
like to take a minute just to thank the committee for the
Wastebusters website. We have received about three dozen tips
so far, and, based on some of them, we recently initiated what
will be a major review involving the Standard Procurement
System, which is a new system that is intended really to bring
our ability to track procurements into this century.
Chairman Kasich. Have these, if I could interrupt you,
proved to be useful to you?
Mr. Mancuso. Most certainly.
Chairman Kasich. They are.
Mr. Mancuso. Most certainly, Mr. Chairman. And I know we
will be responding, as the other IGs will, as well. Some
matters, I suspect, will warrant full-scale reviews, while
others clearly may not. But certainly the added information is
useful to us.
In your request involving this hearing, you asked that we
also comment on management's response to IG findings. Before I
speak to the larger issues facing the Department, I just wanted
to put into some perspective how the Department is responding
overall to reviews and audits of the Department, and more
particularly to the DOD IG audits and evaluations.
The news is generally good. Management has been very
responsive. When it comes to the DOD audit recommendations, and
we have had about 1,000 of them emanating from about 250
reports a year, or about 2,000 recommendations in the last 2
years. About 97 percent have been favorably received and
accepted by management. Now, does that mean that management
quickly implements those recommendations that they have agreed
to? No, I am sorry to say the answer to that is not always.
They usually do. There are some significant exceptions where
they have not, but we have a follow-up procedure where we work
with management to address those things and, in fact, the
letters from Congress each year on this topic are welcome to
us. We can actually go back and report where management has not
yet complied with some of the recommendations. However, I would
like to state that my main concern is not with management
inaction on audit advice, but rather the inadequate audit and
investigative coverage of many high-risk areas due to our
resource constraints.
I would like to start with some of the ten items that we
identified in responding to your committee's request that we
comment on major problems facing the Department. One of the
topics, and again it was discussed earlier today, is
information technology. Information technology in the
Department of Defense is big business. We are talking about $16
billion a year in acquisition, maintenance and the running of
these systems.
Less than ten of the Department's major IT acquisition
programs have been audited in each of the past couple years.
That is unbelievable when you consider the hundreds of
different programs that are out there. Additionally, the
Department has been a bit slow in complying with the Clinger-
Cohen Act. It is good news that there has been some recent
progress in that direction, but we still see major
vulnerabilities in the Department because of its past lack of
attention in coordinating and pushing forward in the concept of
Clinger-Cohen.
We have also found in the area of information technology
that, as large as we are with as many systems as we have in the
Department, we are clearly vulnerable to attack by hostile
regimes and others. The Defense Information Security Agency
reported that there were about 18,000 cyber attacks on DOD
computers last year. DOD is the leader in cryptology in the
world. So the classified systems are well protected, but there
is a significant problem with security of unclassified systems.
We are working that area. We have our own team of computer
intrusion people, and we work with other agencies as well in
that regard.
One of the most significant areas facing the Department,
though, is financial statement review. It has been pointed out
that the Department of Defense has been extraordinarily behind
the curve in being able to achieve unqualified audit opinions
on financial statements. As Mr. Walker pointed out, the
Department is really not prepared to achieve an unqualified
opinion on its overall statement until at least 2003. We only
have one of the 10 major statements currently receiving
unqualified audit opinions, and that is the Military Retirement
Trust Fund.
What is behind this, however, is a lack of adequate
accounting systems; and modernizing them, and getting them to
talk to each other so that we can have clean opinions. There
were $1.7 trillion in unsupported adjustments last year
involving Department of Defense financial statements.
Chairman Kasich. Could I just interrupt to ask you a
question? Why is this the case? Is there some explanation for
this?
Mr. Mancuso. The explanation is that, for an extended
number of years, finance and accounting procedures were
extraordinarily decentralized. Hundreds of systems have
operated independently. Over the last decade, there has been
massive consolidation related to the formation, for instance,
of the Defense Finance and Accounting Service, and a great
reduction in numbers of systems has taken place. Unfortunately,
much more needs to be done.
The size of the systems and the amount of dollars involved
is causing it to take a number of years to develop, test and
field the systems that are going to be necessary for the
Department to have data that can be relied upon. One of the
outgrowths of this is this huge amount of unsupported
adjustments. That would be wholly unacceptable in a business.
If you were running a business, your accounting firm would
be aghast to find even more than just a few adjustments, much
less unsupported adjustments. But in the case of DOD, as
someone stated earlier, there is a plugging in of the figures.
We found that last year there were actually about $7 trillion
of adjustments. Of the ones we audited, which were about half,
we found that about $1.7 trillion were unsupported; in other
words, there was not enough basis in the accounting records to
support those adjustments.
Chairman Kasich. One more follow-up. What does that mean?
What does that mean to the practical side of what we are doing
on a day-to-day basis?
Mr. Mancuso. If you are a war fighter, if you are a person
who is performing the DOD mission, it probably doesn't mean
very much because things are still going on, missions are being
accomplished, and DOD operational managers have little need to
refer back to the financial statements.
In truth, however, the same information that is lacking to
produce a good financial statement is the information that
managers generally need to efficiently and effectively run
programs. So there is, of course, a real and serious impact
overall on DOD management and the efficiency of it.
We have been pointing out for several years now that the
Department, although it is moving forward, needs a more
consolidated and consistent approach. We have worked on a
regular basis with the Department on this challenge. For
example, there was a meeting earlier this week with GAO, OMB,
our office and the comptroller's office, again, trying to keep
these processes online. But we see little hope for clean
opinions for the statements in some of these major accounts
until 2003.
There have been some comments today on the military health
care system. In DOD, that is a $16-billion-a-year business,
serving about 8 million beneficiaries. They have made great
progress in the area of managed care. They have worked closely
with us in building in internal controls; nonetheless, there is
a huge amount of fraud. We work very closely with HHS and the
Bureau on those things. But, yes, the amount of fraud in that
area is still rather significant.
Logistics is another area of concern. There are about 300
ongoing initiatives to make it more efficient. Still, much more
needs to be done. You can look at it as a success story or a
failure, but in the last 10 years, the wholesale stock supply
has been reduced by about half, to $55 billion. Nonetheless, of
that $55 billion, there is much that isn't needed or is
antiquated or otherwise being held in an inefficient way. There
are also initiatives that will bring us forward in
transportation and other logistics areas.
I could speak at great length about readiness concerns, but
I think they are topics you are all familiar with. The main
thing I would point to in the area of readiness, and I don't
believe Mr. Walker pointed to it, is really the operational
tempo.
The operational tempo has made it extraordinarily difficult
for the people in logistics to gauge what parts, supplies, and
equipment we need. You have the Air Force, for instance,
putting 2 years' worth of flight time on aircraft during a 6-
month deployment to Southwest Asia. That presents problems that
are not easily forecast. You have training problems and
readiness shortfalls in other areas as well. Again, those items
are detailed in my statement, Mr. Chairman.
I think I will just end right there, please.
[The prepared statement of Donald Mancuso follows:]
Prepared Statement of Hon. Donald Mancuso, Deputy Inspector General,
U.S. Department of Defense
Mr. Chairman and members of the committee, I appreciate the
opportunity to be here today to discuss the management challenges faced
by the Department of Defense (DOD) and the responsiveness of its
managers and commanders to findings and advice provided by the Office
of the Inspector General, DOD.
The Committee needs no reminder that the DOD is one of the largest
and most complex organizations in the world. The Department is
responsible for roughly $1.3 trillion in assets; operates 638 major
installations and thousands of small sites around the world; and
currently has about 700,000 civilian employees and 2.4 military
personnel in the active forces or the Ready and Standby Reserves.
Thousands of programs and projects are needed for the Department to
successfully execute operations across the spectrum from warfighting to
peacekeeping as well as humanitarian and emergency relief operations.
Critical functions include: research and development; procurement;
logistics; intelligence; and a wide variety of other activities to
train, equip and sustain the Armed Forces.
There has been widespread concern about waste and inefficiency in
military programs throughout this nation's history. Although it is
doubtful that efforts to equip and support the Armed Forces are
inherently more susceptible to fraud or mismanagement than other
government activities, the size and complexity of the Department of
Defense pose formidable management challenges and risks. The
Department's own assessments of the need for reforms, oversight by the
Congress, General Accounting Office reports, and the work of the DOD
audit and investigative communities show that a wide range of problems
currently merit attention and action. We welcome additional measures,
such as the Committee's Wastebusters website, to help identify problems
and risks. Tips that you refer to us from the Wastebusters website will
supplement those received on our own DOD Hotline, which averages 14,000
calls annually.
A few weeks ago, you referred about three dozen e-mail tips
received at the Wastebusters website to my office for review. We
appreciate every new source of leads for possible audits and
investigations. I assure you that we are taking the Wastebusters tips
seriously and will keep the Committee fully informed on the disposition
of each one. For example, because three Wastebusters tips concerned the
new DOD Standard Procurement System (SPS), we have initiated an audit
of SPS implementation at Air Force sites.
Another welcome recent congressional initiative was the joint
letter in September 1999 from the House Majority Leader, the Chairmen
of the House Government Reform Committee, Senate Budget Committee and
Senate Governmental Affairs Committee, and you, Mr. Chairman, on DOD
management challenges. Specifically, you requested we update our
previous assessments of the most serious management problems facing the
DOD; identify related reports; summarize significant audit
recommendations that address major problem areas; comment on progress
made in implementing audit recommendations and correcting management
problems; and identify programs that have had questionable success in
achieving results. Although we have worked to include much information
of that kind in our semiannual reports, we appreciated the additional
opportunity to discuss the results of our oversight efforts.
Our December 15, 1999 reply to the joint inquiry discussed groups
of often interrelated problems which we sorted into ten principal
management challenges, as follows:
1. Information Technology Management
2. Information Technology Security
3. Other Security Concerns
4. Financial Management
5. Acquisition
6. Health Care
7. Supply Inventory Management
8. Other Infrastructure Issues
9. Readiness
10. Turbulence from Change
dod management responsiveness
Before discussing each area, I would like to address the overall
question of DOD responsiveness to the need for reform and the specific
issue of how well managers respond to Inspector General, DOD, advice.
Starting in the late 1980's and continuing through the 1990's into
the present day, the DOD has been attempting to restructure virtually
all of its internal processes. The Congress has been closely involved
in dozens of specific initiatives, particularly in the area of
acquisition reform. Our overall assessment is that the DOD has seldom,
if ever, been so committed to across the board management improvement.
However, even after several years of concerted effort, progress has
been mixed and much more needs to be done to cut costs and improve
effectiveness.
To identify specific problems and monitor improvement efforts, the
Department performs a huge number of self-assessments, including
thousands of internal audits and inspections annually. Those
assessments include about 250 audit and evaluation reports with about
1,000 recommendations each year from the Office of the Inspector
General, DOD.
To respond to the problems identified by audits, management reform
studies and other reviews, the DOD is carrying out many hundred major
management improvement initiatives simultaneously. Cumulatively, and
with continuous management emphasis, those initiatives should
dramatically improve the efficiency of DOD support operations over the
next several years. We also believe that, on an overall basis, the
Department is being very responsive to audit advice as it develops and
carries out these management improvements. For example, managers agreed
to take responsive action on 97 percent of the 2,040 audit
recommendations made by this office during fiscal years 1998 and 1999.
We do not have comparable information from earlier periods, but senior
auditors in my office believe that this compliance rate is far higher
than was the case during the earlier years of the OIG, DOD. We do not
expect to win every battle and it would be unreasonable to expect
agreement with every audit recommendation, nor is it realistic to
expect timely implementation of every agreed-upon recommendation. The
majority of agreed-upon actions are carried out within reasonable
timeframes, but significant exceptions do occur. Nevertheless, we
believe that the very high level of acceptance of our recommendations
and reasonably good follow-up record speak well for both the auditors'
performance and the receptiveness of managers to the audit advice they
receive.
The main concern with the effectiveness of auditing in DOD relates
not to management inaction on audit advice, but to the inadequate audit
coverage of many high risk areas because of resource constraints and
conflicting priorities. I will elaborate on that concern later when I
discuss the top management challenges.
information technology management
Information technology is transforming both military science and
business practices. The DOD operates about 10,000 mission critical or
essential networks and is rapidly expanding its use of web-based
technology for electronic commerce and other ``paperless'' functions.
The annual budget for information system development, procurement,
operation and maintenance is about $16 billion, but even that large
figure does not fully portray the paramount importance of information
systems to virtually every facet of managing the Armed Forces and their
support establishment.
The DOD badly needs to complete its implementation of the Clinger/
Cohen Act. Appropriately, there has been increased congressional
interest recently in turning around the long-standing problem of
inadequate management control over information technology investments,
standards and practices. The Defense Appropriations Act for Fiscal Year
2000 levied stringent new requirements on the Department to ensure a
complete break with overly decentralized and often inefficient
practices for reviewing, approving, monitoring and funding automated
system acquisition projects. Better management is needed to avoid
costly acquisition failures of the 1990's like the Army Ground Based
Common Sensor System and Defense Commissary Information System.
Currently, less than 10 of the Department's hundreds of ``IT''
acquisition projects are being audited annually. Now that the massive
Y2K audit effort is behind us, it is vitally important to provide more
oversight in this area.
We are currently working with senior DOD managers to develop a more
active audit effort, resources permitting, to support and fine tune the
Department's management control processes for IT system acquisition.
Successful implementation of effective management oversight processes
will help avoid recurrence of most information system problems
currently evident in the DOD. Those problems include: too many systems;
block obsolescence; insufficient interoperability; security
vulnerabilities; inconsistent budgeting and reporting; noncompliance
with policies on data standardization, documentation and configuration
management; user dissatisfaction; frequent system acquisition schedule
slippage and cost overruns; and disconnects between evolving business
practices and their supporting system projects.
In addition to improving management of system acquisition, the
Department needs to modernize and cut support costs for communications
and other information technology infrastructure. The Y2K conversion has
forced the acceleration of efforts to replace and modernize various
equipment, including DOD telecommunications switches throughout the
world, and the increased awareness of the Department's dependence on
information technology should focus more attention on related
infrastructure issues.
Overcrowding of the radio frequency spectrum throughout the world
presents a particularly difficult challenge to military planners and
users of weapon and communication systems. We reported in October 1998
that at least 89 weapons and telecommunications systems had been
deployed overseas without the proper frequency certification and host
nation approval. In addition, the Military Exchange stores were selling
products not covered by, or compliant with, host nation frequency
agreements. As a result, communications equipment deployed without host
nation approval and frequency assignments cannot be used to its full
capability for training, exercises or operations or without risking
damage to host nation relations. Potential frequency spectrum conflicts
should be considered during system design, when host nation agreements
are negotiated and before systems are deployed. The DOD also needs a
more systematic process to update telecommunications agreements with
other countries, clarification of accountability for managing those
agreements and more emphasis on compliance with them. The most recent
register of telecommunications agreements was over 4 years old, at the
time of the audit.
information technology security
The heavy dependence of the public and private sectors on computer
technology for processing sensitive information, controlling
infrastructure ranging from air traffic control systems to power grids,
and supporting modern communications makes information warfare an
attractive strategy for hostile regimes and groups. Hackers view
accessing or vandalizing Government information systems virtually as a
sport, and there is a significant threat that criminals will exploit
information system security weaknesses to steal data or funds. The
Defense Information Systems Agency states that over 18,000 cyber
attacks against DOD were detected in FY 1999, a three fold increase
over the previous year. While this increase is partially attributable
to more effective detection, there is probably more activity in this
arena.
The DOD internal audit community, GAO and other reviewers have
outlined DOD information assurance challenges in numerous reports. To
meet those challenges, the Department needs to adapt lessons learned
from the Year 2000 conversion effort; consolidate and update policy
guidance; establish better management control over the many separate
efforts now under way or planned; develop reasonable program
performance measures; ensure full attention to information assurance
concerns in new system development and electronic commerce initiatives;
intensify on-site information security inspection and audit efforts;
and improve training across the board for technical personnel, security
officers and system users. The DOD is turning increased attention to
these matters, but a sustained effort will be needed on a continuous
basis for the foreseeable future. The DOD audit and investigative
communities are working cooperatively with DOD management to provide
support in this vital area. These include the establishment of the
Defense Information Infrastructure Intrusions Investigative Team (DI4T)
by the Defense Criminal Investigative Service to provide immediate
criminal investigative response to suspected computer intrusions
against the DOD Information Infrastructure (DII). The DI4T is an
integral part of the law enforcement-counterintelligence cell of the
DOD Joint Task Force-Computer Network Defense (JTF-CND) that provides
for the coordination and overall situational awareness of all law
enforcement and counterintelligence activities within the DOD conducted
in support of the computer network defense and the DII. The DCIS and
DOD are also represented and maintain an active role in the operation
of the National Infrastructure Protection Center (NIPC) at the Federal
Bureau of Investigation.
other security concerns
In addition to the challenge of protecting access to information
systems, the DOD received new indications that its procedures for
minimizing security risks from within its own workforce and contractor
personnel also needed improvement. In October 1999, the GAO reported
severe problems at the Defense Security Service (DSS), which handles
DOD personnel security investigations. The GAO faulted the timeliness
and quality of DSS investigations and highlighted a backlog of several
hundred thousand cases. The DOD agreed with all GAO recommendations and
had already replaced the Director, DSS. We are following up on the
agreed-upon recommendations and attending periodic DSS management
reviews to monitor the status of corrective actions. We also are
participating in a DOD study of alternatives for reducing the backlog
of clearance investigations and we are completing audit work on several
related issues. We plan a series of four reports over the next several
weeks.
The United States Government controls the export of certain goods
and technologies by requiring export licenses for specific dual-use
commodities or munitions. In the wake of the Cox Commission Report and
other disclosures, congressional and media attention has focused on the
dangers to national security posed by an export licensing process that
is often alleged to favor commerce over national security. Meanwhile,
Defense industry and friendly countries are critical of the current
slow and unpredictable license review procedures.
The Government needs an export licensing and technology transfer
program that protects critical military capabilities through timely and
reasonable reviews but also supports Defense cooperation with allies
and friends. In an effort to strengthen security and export controls
and to accelerate the review process, the Deputy Secretary of Defense
approved an Arms Transfer/Technology Transfer White Paper on September
30, 1999, which kicked off an effort to reengineer the DOD process for
reviewing license applications. However, the DOD cannot unilaterally
revamp the multiagency license review process and attaining interagency
consensus in this area is very difficult.
Additional challenges facing DOD in this arena include determining
personnel requirements and addressing the marginal adequacy of the
Foreign Disclosure and Technical Information System (FORDTIS), the
principal automated tool for DOD export control analysts. The DOD also
has no overall capability for analyzing the cumulative effect of
exports and other technology acquisitions upon other countries'
military capabilities, even though this information is critical to
evaluating risks inherent in proposed exports. Commenting on an IG,
DOD, draft report, the Department generally agreed with our
recommendations for process improvements; however, the new DOD review
of the entire process may result in some of our recommendations being
overtaken by events. Currently, we are concentrating on meeting the
multi-agency audit requirements mandated by the Congress in the
National Defense Authorization Act for Fiscal Year 2000. This year, our
review is focused on controls in DOD laboratories and other facilities
over information released to foreign visitors. We will submit our
report in March.
financial management
The DOD continues to be unable to prepare financial statements that
can withstand the rigors of audit for most individual major funds and
the overall Department. For FY 1998, as in previous years, only the
Military Retirement Trust Fund received a favorable audit opinion. It
is unlikely that the audit results on the financial statements for FY
1999 will be significantly different when we issue our reports in late
February. The DOD financial statements for FY 1998 were less timely
than ever and a record $1.7 trillion of unsupported adjustments were
identified by auditors. This startling figure reflects the continued
lack of integrated, double-entry, transaction-driven, general ledger
accounting systems. The laborious workaround procedures still needed to
compile the financial statements are simply inadequate.
The inadequacy of current systems continues to be the major
impediment to achieving favorable audit opinions and producing reliable
financial reporting. Major changes are necessary to ensure that over
200 complex accounting and feeder systems can produce auditable data.
For this reason, DOD does not expect a significant improvement in the
overall results of financial statement audits for several more years,
although individual segments of the Department are beginning to show
progress.
The DOD made a credible attempt to meet several congressional
reporting requirements with the first Biennial Financial Management
Improvement Plan, September 1998. In April 1999, we reported our
assessment of the Plan. Its primary weakness was a lack of information
on the status of efforts to achieve compliant systems. This lack of
specific data indicates insufficient overall DOD management control
over the financial systems remediation process. The Department agreed
with our recommendation to adopt lessons learned from the Year 2000
conversion regarding a central management plan, standardized reporting
for every system and periodic senior management review. However,
implementation of that concept has been disappointingly slow. Nor does
the Department appear to be making a concerted effort to comply with
the congressional requirement for a wall-to-wall property inventory
this year, which is needed to enable accurate financial reporting
regarding DOD property.
Audits also continue to indicate problems related to cash
management and rate setting in the DOD working capital funds,
inaccurate or untimely recording of obligations and disbursements in
accounting records, and inability to eliminate unmatched disbursements.
In addition, internal controls in disbursing offices need improvement
to reduce vulnerability to fraud. As of September 30, 1999, the Defense
Criminal Investigative Service had 85 open financial fraud cases. We
have worked closely with the Defense Finance and Accounting Service to
improve their fraud control program, but contractor payment processes
remain vulnerable to fraud and error. Last year, contractors
voluntarily refunded $97 million of over payments. No one can tell how
many inaccurate or fraudulent payments were made, but not detected.
acquisition
In fiscal year 1999, the DOD purchased about $135 billion in goods
and services, using more than 250,000 contracts, grants, cooperative
agreements and other transactions. Because of its huge scale and impact
on US military capability, the DOD acquisition program has always been
controversial. There have been nearly continuous reform efforts over
the past 20 years to reduce costs and acquisition lead time or to
address the myriad of other issues present in this area.
Resource constraints, numerous mandates and requests for internal
audits in other management areas, and the long-standing comparative
reluctance of DOD acquisition officials to request audits have severely
curtailed internal audit coverage over the last few years. This is
particularly true for the several hundred ongoing weapon system
acquisition programs. Although the largest of those programs are
frequently audited by the General Accounting Office, very few of the
small and medium size programs are receiving audit coverage. Available
resources are insufficient to support a systematic program of
comprehensive internal auditing based on risk analysis. Similarly, the
39 percent reduction of the Defense Contract Audit Agency between 1990
and 1999 has limited contract audit coverage.
Although recent audit coverage on many acquisition programs, issues
and initiatives has been limited, we have been actively involved in
numerous DOD acquisition reform process action teams and task forces.
We have commented extensively on proposed acquisition legislation and
regulatory changes. We have also performed indepth audits of some
acquisition issues of particular interest to the Department and
Congress. Those issues include spare parts pricing, defense industry
consolidation, and the use of multiple award task order contracts.
The IG, DOD, supported the acquisition reform laws passed during
the 1990's. Further refinements to those laws and others governing DOD
acquisition practices should be welcomed and fully considered. However,
we urge that the primary focus for the near term be on fully
implementing and assessing the impact of the recently enacted changes,
as opposed to proposing more changes just to maintain a sense of
momentum.
Determining the impact of the enacted legislative and regulatory
changes and of numerous ongoing acquisition initiatives is often
hampered by slow implementation actions, insufficient experience to
date using the new practices, uncertainty on whether implementation was
complete or properly done, a lack of specified performance metrics and
the absence of independent validation of reported results.
Audits continue to indicate problems in the Department's attempts
to comply with reform legislation, specifically in the area of adopting
commercial buying practices and establishing equitable business
relationships with contractors for spare parts. When genuine
competition exists, market forces drive prices down. However, when
competition is limited or non-existent, there are no equivalent market
forces and in sole-source purchasing the Department frequently pays
exorbitant prices.
Our audit coverage over the past 2 years has been concentrated in
the historically high risk area of aviation spares, but the same
problems likely pervade other commodity areas. The DOD has been slow in
providing adequate guidance and training to contracting officers. There
continues to be too much emphasis on weakening the Truth in
Negotiations Act, the primary safeguard of the Government's interest
when competition is lacking. On the other hand, the Department is
attempting to establish more reasonable, long term arrangements with
several key suppliers and useful models may result from those efforts.
We will issue additional reports on this matter over the next few
months.
Throughout the 1990's, most acquisition reform emphasis was on
systems and hardware procurement. The DOD has realized that purchasing
services, such as management consulting, information system
maintenance, testing support and environmental cleanup, deserves equal
emphasis. We believe that, in many ways, contracting for services is
intrinsically harder than for systems or equipment, yet training for
contracting personnel in this area is deficient. The DOD spent over $50
billion for services in 1999, so it is important that controls be
adequate and decision making be sound.
We are gratified by the quick response of the Congress, Office of
Federal Procurement Policy and DOD to our report that multiple award
task order contracts were being misused to avoid competition. We will
issue a comprehensive report on services contracts in a few weeks.
Likewise, we are assessing the impact of downsizing on the DOD
acquisition work force and will issue a report in the near future.
health care
The Military Health System (MHS) costs nearly $16 billion annually
and serves approximately 8.2 million eligible beneficiaries through its
health care delivery program, TRICARE. TRICARE provides health care
through a combination of direct care at Military Department hospitals
and clinics and purchased care through managed care support contracts.
The MHS has dual missions to support wartime deployments (readiness)
and provide health care during peacetime.
The MHS faces three major challenges: cost containment,
transitioning to managed care, and data integrity. These challenges are
complicated by the inadequate information systems available to support
the MHS.
Cost containment within the MHS is challenged by the continued lack
of good cost information combined with significant levels of health
care fraud. Lack of comprehensive patient-level cost data has
complicated decisions regarding whether to purchase health care or to
provide the care at the military treatment facility.
To combat health care fraud, the Defense Criminal Investigative
Service has developed an active partnership with the TRICARE Management
Activity to give high priority to health care fraud cases, which
comprise a growing portion of the overall investigative workload. As of
September 30, 1999, we had 531 open criminal cases in this area. The
following examples of recently closed cases show the kinds of improper
activity being encountered.
Genentech, Incorporated, of San Francisco, California, was
sentenced to pay the Government a total of $50 million to resolve
issues related to the introduction of misbranded drugs in interstate
commerce. Genentech admitted that, between 1985 and 1994, it
aggressively marketed the synthetic hormone Protropin, one of its most
lucrative prescription drugs, for various medical conditions for which
the drug had not received Food and Drug Administration (FDA) approval.
During this time period, the FDA had approved the drug only for use
against a rare growth disorder found in a small percentage of children.
As a result of an investigation in connection with a Qui
Tam suit, a $7,742,564 settlement was reached between the Government
and the Chapter 11 trustee for the National Recovery Institute Group
(NRIG). The suit alleged that NRIG, a drug and alcohol abuse clinic,
billed TRICARE, Medicare and Medicaid for services not rendered in
accordance with program requirements and for services that were not
medically necessary.
Investigation of a Qui Tam complaint resulted in a $51
million civil settlement by Kimberly Home Healthcare, Incorporated, of
Miami, Florida (Kimberly), a subsidy of Olsten Health management
Corporation. Kimberly pled guilty in U.S. District Courts in Atlanta,
Miami and Tampa to assisting the Columbia Healthcare Corporation in the
preparation and filing of false cost reports with the Government for
home health care. In addition to the civil settlement mentioned above,
the corporation was sentenced to pay fines totaling $10,080,000.
A $4,149,555 settlement agreement was reached between the
Government and Nova Southeastern University, Incorporated (Nova), Fort
Lauderdale, Florida. The settlement was a result of an investigation
into allegations that Nova billed TRICARE, Medicare and Medicaid for
psychological services purportedly provided by licensed therapists or
physicians when, in fact, the services at issue were provided by
unlicensed student interns.
These are but a few examples of problems that pervade the health
care industry and represent a growing challenge for the DOD.
Data integrity in management information systems has been a
persistent problem affecting health care program effectiveness and
efficiency. Incomplete and inaccurate data has made the DOD unable to
clearly identify health care costs, identify unit and individual
readiness for deployment, or coordinate direct health care with
purchased health care. DOD management is now putting considerable
emphasis on better data quality and significant progress is being made.
Transitioning to managed care is a critical element of peacetime
health care delivery. The issue is complicated by a lack of
understanding about TRICARE, multiple TRICARE programs offering similar
but not identical benefits, and increased focus on providing peacetime
health care to the growing retiree population. An audit of the TRICARE
marketing program showed that while beneficiary understanding of
TRICARE is improving, DOD has provided Service members with incomplete,
incorrect, and inconsistent information. In addition, the combination
of base and hospital closures and military downsizing, with a growing
and aging population of retired beneficiaries (those eligible for
Medicare but not DOD-purchased health care), more eligible veterans and
their families are finding themselves without access to direct care
resources. Attempts to address that problem have led to a proliferation
of health care demonstration programs that have further confused the
eligible population.
supply inventory management
Although DOD has substantially downsized its force structure, it
has not reduced operations and support costs commensurately. However,
the Department is pursuing over 300 logistics reform initiatives, many
of which involve supply inventory management. The DOD intends to
consolidate management of inventory functions and reduce warehousing
requirements; reengineer DOD product support activities; adopt best
business practices that include world-class standards of logistics
performance; implement electronic commerce; and improve response times
for delivering goods and services to customers by expanding the use of
prime vendors, virtual prime vendors, and direct vendor delivery.
Determining appropriate requirements for materiel to be managed and
stocked, identifying and canceling purchases of excess materiel,
eliminating unnecessary items from inventory and distributing items
more efficiently are areas that need improvement. In addition, spare
parts shortages impacting readiness are being reported by operational
units and repair depots, total asset visibility initiatives remain
insufficient and inappropriate disposal practices continue to be a
problem for the Department. Accordingly, supply inventory management
remains a high risk area.
The Department has reduced wholesale supply stocks by almost one
half over the last 10 years, from about $107 billion in 1989 to a
current estimate of $55 billion. Nevertheless, an FY 1999 GAO report
states that about 60 percent of the total on-hand secondary inventory
in FY 1997 exceeded DOD requirements. The DOD disagrees with the GAO
figure, but it is clear that further improvement is needed in inventory
management. The gradual transition from just-in-case to just-in-time
supply support practices is reducing logistics costs, but operating
units and repair depots are raising concerns about spare parts
shortages. All of the Services are reporting shortages, but the problem
is most acute for Air Force aircraft, as reflected in mission capable
rates that have declined to 73 percent. The DOD needs to do a better
job of forecasting requirements, making smart procurement decisions to
achieve economical order quantities, executing spare part budgets,
reducing repair cycle times and implementing information systems that
are crucial to effective and efficient inventory management.
The Department has vulnerabilities in preventing public access to
live ammunition, explosives, and other dangerous residue cleared from
military ranges. An IG, DOD, evaluation of the munitions disposal
process led to multiple recommendations to the Department in September
1997 to tighten controls and improve procedures for clearing ranges and
disposing of munitions. Although conditions at the ranges and in the
disposal process warranted immediate attention, and the Secretary of
Defense designated the handling of unexploded ordnance a material
management control weakness in January 1999, the cognizant DOD level
offices were still determining responsibility for issuing guidance in
September 1999. Fortunately, ongoing follow-up indicates that many
installations and commands are taking corrective action despite the
continued lack of DOD guidance.
Although the wave of property disposal caused by force structure
and inventory reductions in the early to mid-1990's has abated,
somewhat, the DOD still has a high volume of widely dispersed disposal
operations which continue to pose significant challenges. The
Department's ongoing efforts to improve asset visibility and
requirements determination should help minimize the instances of needed
items being sent to disposal, but more effective demilitarization
practices are needed. The Department has implemented some audit
recommendations in this area, but is lagging behind on others. For
example, in April 1997 we reported that no effective process existed
for determining which of the hundreds of thousands of Government-owned
property items and other materiel in contractor plants were munitions
list items requiring demilitarization screening and special disposal
instructions. Regulatory changes to address that problem are still
incomplete.
This area also remains vulnerable to criminal schemes, as indicated
by the 57 open Defense Criminal Investigative Service cases involving
disposal activities as of September 30, 1999.
other infrastructure issues
In addition to adopting more modern and efficient supply processes,
the DOD needs to improve a wide variety of other support activities to
cut costs. These include maintenance, transportation and facilities
functions. For purposes of this discussion, the facilities area
includes base structure, military construction, real property
operations and maintenance, and environmental cleanup. The common
challenge in these areas is how to cut costs to reduce the current
imbalance between DOD administrative and other support costs on the one
hand, and modernization and operations requirements on the other.
Disagreements between the DOD and Congress about depot maintenance
outsourcing remain a problem, but the Department has moved forward on
numerous public/private partnering arrangements that are promising. The
Services are also attempting to streamline maintenance operations at
other levels and the weapon system acquisition process is now geared
toward expanded contractor life cycle support, which should be more
economical. The Department has additional opportunities for management
improvement and efficiencies by consolidating requirements for
maintenance and repair contracts, implementing better performance
measures, restructuring and modernizing management information systems,
better accounting for depot maintenance workloads, and collecting more
reliable cost information.
Although worldwide transportation costs have dropped during the
1990's, DOD costs have not shown proportionate decreases. Numerous
initiatives are under way to address that problem. These include
implementing a commercial, off the shelf, on-line, freight management
and payment system (Powertrack) to replace the enormously inefficient,
paper intensive, transportation vendor pay practices that currently
create serious vulnerability to fraud. The DOD pays $650 million a year
to freight forwarders and shippers. In the controversial area of
household goods shipments, which cost an additional $1.2 billion
annually, three pilot reform programs are ongoing. We are auditing the
Powertrack system effort and some aspects of the household goods pilot
programs, at the request of DOD managers.
The DOD is still burdened with the cost of operating more bases
than are needed to support the force structure; however, the Congress
did not grant the DOD requests in the last two budgets for additional
base realignment and closure authority. It is still likely that an
agreement will be reached on more closures at some future date. In
addition to eliminating underutilized installations, the DOD needs to
keep working to avoid unnecessary facilities investments and stretch
available construction dollars as far as possible. The DOD is also
faced with heavy costs resulting from hazardous waste products from the
maintenance, repair and disposal of many current weapon systems, as
well as ground and water cleanup at active, closing and closed bases.
The Department is putting considerable emphasis on cost containment in
this area, but more needs to be done. As in other areas, the
environmental management effort is also challenged by fraud.
readiness
The difficulty of maintaining sufficient military readiness at
constrained budget levels has been the subject of congressional
hearings and public dialogue for the past several years. In addition to
financial problems, the readiness posture is affected by the changing
threat environment, which now includes bona fide information warfare
threats and concerns about weapons of mass destruction in the hands of
terrorists. However, increased operating tempo (OPTEMPO) has probably
had the most significant impact on readiness, affecting mission-capable
rates, personnel retention, spare parts availability, unit training,
and operations and maintenance costs.
Since the end of the Cold War, the frequency of U.S. military
involvement in operations other than war has increased, while force
structure and military end-strength have been reduced. This OPTEMPO has
adversely affected the combat capability of deployed units in Bosnia
and Southwest Asia as well as some units that remain at home station,
as they have to pick up the work of the deployed units while
simultaneously supporting them with personnel, equipment and spare
parts. Aircraft participating in deployments are being flown more hours
than is the case during regular training missions. It is estimated that
some wings are putting about 2 years worth of flying hours on aircraft
in about 6 months during their Southwest Asia deployments. This
accumulation of flying hours, combined with the age of some aircraft,
has revealed atypical and unbudgeted wear and maintenance problems
particularly on the F-15C and the A-10 aircraft. The pace of these
deployments is also, at least in part, causing aircraft mission-capable
rates to decline and the increased consumption of parts has exacerbated
existing parts shortages, causing cannibalization rates to increase.
The logistics problems affecting many units, especially in the Air
Force, were discussed previously under Supply Inventory Management.
Training is a key factor in readiness. The Air Force in particular
indicates that aircrew combat proficiency may be declining partly due
to frequent and recurring deployments. F-15 and F-16 fighter squadron
personnel, particularly those participating in Operation Southern Watch
in Southwest Asia, frequently described their mostly routine missions
as having little combat training value. For the Army, especially at
battalion, brigade, and division levels, current peacekeeping
operations detract from the Army's established training cycle to
sustain highly trained and combat-ready teams. While in Bosnia, armored
and mechanized infantry units generally do not conduct any armored
maneuver operations and are relieved from tank and Bradley gunnery
requirements. The inability to conduct needed training threatens skills
which are extremely perishable. Returning units to their wartime
mission capability levels during peacetime is also a problem, taking
from several weeks for some support units to more than a year for some
combat units. In addition, entire units are not always deployed. As a
result of deploying partial units, the nondeployed portions lack the
officers and senior noncommissioned officers needed to train more
junior soldiers, cannot conduct training above the small unit and
individual soldier level, and have to do not only their work but that
of the deployed portion of the unit.
Accurate reporting of unit level readiness also remains a concern.
The Global Status of Resources and Training System (GSORTS) indicates
that the readiness of units engaged in these deployments in all of the
Services has been adversely affected. These effects are particularly
evident in the Army with lower unit level readiness ratings, although
division level ratings have recently received much publicity. However,
important information about a unit's condition is not always readily
apparent in GSORTS and sometimes not reported at all. Actual unit
conditions are masked by factors such as the counting of temporarily
assigned personnel against wartime manning requirements, optimistically
estimating training status, and inconsistent reporting.
Other readiness indicators, such as reported backlogs of equipment
and real property for maintenance and repair, are notoriously
unreliable. There is extensive activity under way to address those
problems; however, audit and inspection coverage of these and other
readiness issues has been very limited over the past couple years,
partially due to the need to monitor Y2K conversion status.
turbulence from change
There are high stakes involved in the DOD efforts to implement
fundamental reform throughout the Department and, in all cases there is
a need to push ahead vigorously and expeditiously. In fact, in most
areas even more should be done. Nevertheless, it must be recognized
that the nature, scope, and duration of the DOD reform effort create a
number of significant management challenges in their own right. Those
``change management challenges'' include:
maintaining high workforce morale and productivity;
continuously retraining the workforce to ensure they have
adequate command of constantly changing rules and processes;
harmonizing the thousands of changes and initiatives so
that they do not conflict with each other;
measuring the results of each initiative and getting
objective feedback to validate reported performance; and
maintaining appropriate emphasis on internal controls and
accountability.
These issues are particularly hard to deal with because they tend
to cut across organizational and functional lines. We believe that much
more needs to be done to focus on workforce hiring, training and
retention, because even the best new procedure or process will fail
without a well motivated, properly trained and adequately supported
workforce. Our pending report on the DOD acquisition corps reductions
will highlight the problems that result from cutting the workforce in
half while workload remains relatively constant. We will also discuss
the ``greying'' of the acquisition workforce and the very high
attrition rates projected over the next few years. High turnover
compounds the training problem. These kinds of issues undoubtedly apply
to other sectors of the DOD workforce as well.
The problem of conflicting goals and inconsistent emphasis may be
inevitable when so many initiatives are ongoing simultaneously. The DOD
has realized that virtually all aspects of its operations involve
multiple organizations and disciplines, so that unilateral attempts by
individual managers to redesign processes are doomed to failure. The
growth in the 1990's of problem solving initiatives with a more
integrated, cross-cutting approach is one of the most positive trends
that we have seen in the Department. However, more needs to be done.
For example, the finance and acquisition communities appear to be
moving in opposite directions on contractor pay. The finance community
is attempting to improve controls over payments by taking measures like
rejecting vouchers with remittance addresses that are not in the
Central Contractor Registry and may be suspect. Some payments could be
delayed, but vulnerability to fraud and error would be reduced.
However, some DOD acquisition officials believe that payments to
contractors are not being made promptly enough, and they advocate
making payment without any attempt to match invoices to receiving
documents. The Department generally resolves inconsistent guidance, but
in the meantime the workforce cannot help but be somewhat unclear about
DOD priorities.
Finally, we believe strongly that proper oversight is particularly
useful and necessary during times of major changes. Identifying
impediments to implementing new laws and policies, suggesting ways to
fine tune initiatives to make them more effective, and providing
objective feedback on whether intended results are being achieved are
the kinds of valuable support that auditors can furnish. Perhaps the
best recent example of such support was our massive audit effort to
help the DOD implement its Y2K conversion plan. The Department has been
very generous in its positive comments on the important contribution
that we were able to make to the DOD success in overcoming the
difficult Y2K challenge.
Unfortunately, the resources allocated to the OIG, DOD, are not
sufficient to enable comprehensive oversight in many areas. Between
1995 and 1999, funded IG, DOD, work-years were reduced by 26 percent,
while mandated and requested workload simultaneously increased. The
Department scaled back further major cuts that had been planned for FY
2000 through 2004, but it was very disappointing when the Congress cut
our FY 2000 appropriation request. The combination of that reduction
and the continuing need for full scale audit support of Y2K conversion
has hampered our efforts to increase oversight coverage of the high
risk areas that I have discussed in this statement. Most of the
individual DOD process changes and new systems have not been audited
and the results are either unknown or unverified.
summary
In summary, the DOD faces a wide array of formidable problems, many
of which will require years of sustained effort to solve. We believe
that the DOD audit and investigative communities play a vital role in
identifying those problems, helping to fix them and verifying results.
On the whole, DOD managers recognize and appreciate that role and we
consider our working relationships with all major DOD components to be
good.
This concludes my statement.
STATEMENT OF JUNE GIBBS BROWN
Ms. Brown. Thank you, Mr. Chairman and committee members.
Everybody is concerned about fraud, waste and abuse in
Medicare and Medicaid. And as they are all very aware, these
are complex problems. There are no quick fixes. However, I
think we are making excellent progress in these problem areas
that undermine taxpayers' confidence in the system and, of
course, take a great deal of money.
But it is no time for complacency. In just the last month,
for instance, we have had two settlements; one was for $486
million with Fresenius, which is a dialysis products and
service company. They are repaying that $486 million to the
Government, and they have also agreed to withdraw a net of $137
million more in denied claims that they had. In addition to
that, we settled with Beverly Enterprises, the Nation's largest
operator of nursing homes, for $170 million. So we are bringing
back huge amounts of money to the Government, and most of that
goes back into the trust fund.
Much attention has been focused on the Medicare payment
error rate, which we have now reported in each of the last of 3
years. It was, the first year, $23.2 billion, which was
mentioned by Mr. Walker, and then it dropped to $10.6 billion
less over the following 2 years. So we now have the 1998 amount
as $12.6 billion. That is in the area of fee-for-service
payments in the Medicare system.
I would like to stress that while the error rate estimate
may include some instances of fraud, it is primarily not a
measurement of fraud. There are many things that could be fraud
that would escape that particular analysis. The reasons for the
errors in this audit are insufficient documentation, medically
unnecessary services, incorrectly coded services, or things
that were noncovered. We do catch some instances of fraud, but
basically things like falsification of documents or illegal
kickbacks would not be caught in this annual audit.
I want to commend you, Mr. Kasich, on the Balanced Budget
Act, which I know you were so instrumental in implementing.
That is saving the Government $70 billion over 5 years in new
procedures and conditions that the Department is implementing
under that act. These reforms have been deterring high levels
of abuse, and we think Medicare still pays so much in some
other areas, such as mental health service, rehabilitation
services, medical equipment and supplies, home health, nursing
facilities, prescription drugs, Medicare contractors, managed
care and Medicaid. We are doing other work in those areas, and
much of it is outlined in my written statement.
For example, one statistic you would be interested in is
that in a five-State study of partial hospitalization, those
are services for people with serious mental health problems, we
found over 90 percent of the Medicare payments were for
unallowable or highly questionable costs.
We recently replicated a review of Medicare home health
payments in four of our most populated States, and we found
that 19 percent of those payments were highly questionable or
improper. That was an improvement because the previous study
showed that 40 percent of those payments were improper. So we
still have a lot of work to do in that area, but it is going in
the right direction.
We still encounter problems with the financial management
accounting procedures of Medicare contractors. These are
contractors of HHS who pay the bills. We have had 13 of them
with major settlements, one for $140 million, that they had to
repay the Government. So even in this area, there are problems.
HCFA is limited and must use a very specific group of
contractors, so they have very little flexibility on selecting
new people for these arrangements.
Now, we have a lot of cooperation going on in the health
care area, and I think it has really paid off and has allowed
for these huge settlements and big reductions in the increase
in the costs over government of Medicare. In 1998, for
instance, we had only a 2.5-percent increase, and in 1999, we
have actually had a 1-percent decrease in the cost of Medicare.
This is unprecedented. Most analysts have said that the
Department's attack on fraud, waste and abuse is partly
responsible for this change.
We work a lot in prevention, as well, because we feel that
just catching people and getting money back isn't going to
solve the problems. So we have initiated a new approach to work
closely with the health care industry. We are producing
compliance guidance, special fraud alerts and advisory
bulletins to help them know what we expect of them and how to
comply with our programs.
We have had a hotline since 1997. It has received 900,000
calls. We are now receiving about 11,000 a week. That is
allowing beneficiaries and people who are working in the
industry to report to us things they consider questionable, and
we are having great success with that.
In 1999, this multidimensional approach, working with
others such as the Department of Defense, who also has health
care concerns, we have had 303 health care convictions, 534
civil actions, almost 3,000 exclusions from Medicare and other
health care programs, $251.5 million in disallowances, over
$400 million of investigative receivables, and $11.9 billion in
savings. These savings were achieved through legislative and
regulatory changes recommended by our office. Then with our
partners, including the Congress, they have been implemented.
$369 million was actually returned to the trust fund in 1999.
$4.7 million was recovered for the Federal share of Medicaid,
and the rest went to the States.
So, in conclusion, I think that the new authorities we have
and the new resources have paid off, but I am very concerned
about deliberate fraud, which continues. Also, we have a
criminal element that has entered into this system, and are
doing a lot to counteract that, but it is still a great
problem. We cannot put down our guard.
Thank you. I welcome your questions.
[The prepared statement of June Gibbs Brown follows:]
Prepared Statement of Hon. June Gibbs Brown, Inspector General, U.S.
Department of Health and Human Services
Good Morning, Mr. Chairman. I am June Gibbs Brown, Inspector
General of the Department of Health and Human Services. I am here today
to discuss some of the most significant issues that confront our
Department, focusing my attention on the Medicare and Medicaid
programs. These are complex problems relating to fraud, waste, and
abuse that defy quick fixes and simplistic solutions. But failing to
address them undermines the effectiveness of our programs, costs
taxpayers billions in lost and wasted dollars, and deprives vulnerable
beneficiaries of the care and support they need. I really want to
stress to you today that we need to remain vigilant, on guard, and
steadfast in our efforts to address these problems. While we have made
excellent progress in recent years, this is no time for complacency,
declaring victory, or relaxing our guard.
We need no further proof of this than the announcement last month
of the largest health care settlement in the history of the country.
Fresenius Medical Care, the world's largest provider of dialysis
products and services, agreed to pay criminal and civil penalties of
$486 million to settle allegations of improper payments for nutritional
therapy and laboratory tests for patients suffering from renal disease.
The company has also agreed not to pursue approximately $196 million in
denied claims in return for a payment of $59.1 million.
The progress we have made in the area of fraud, waste, and abuse is
in large part because of the efforts of a wide variety of individuals
and entities including the Department, the Congress, the Department of
Justice, other law enforcement agencies, provider groups, and
beneficiaries. These efforts have resulted in structural and payment
reforms, heightened awareness, and prosecutions of wrongdoers. Much
public attention has been focused on our Medicare error rate (which we
have now reported in each of the last 3 years) and the fact that the
projection dropped in half in FY 1998. While this has been extremely
encouraging, the error rate is still too high, there are still
particular areas of Medicare that are highly susceptible to fraud and
abuse, and there are still daunting issues that confront us that are
not reflected in the published Medicare error rate.
With respect to the last point, I would like to stress that while
the error rate estimate may include some instances of fraud, it is a
payment error estimate and not a fraud estimate. That is, since our
review consisted primarily of a review of medical documentation, it is
unlikely to detect all instances of fraud. The review would catch some
instances of fraud such as where providers did not exist. However, it
is less likely to detect more sophisticated fraud, such as
falsification of documents and illegal kickbacks. Therefore, the true
prevalence of fraud remains unknown, but based on other work we have
done we believe that it remains substantial. We believe that we can
make the most progress in combating fraud by continuing to focus our
resources on specific areas of vulnerability rather than attempting a
broad overall measurement of the prevalence of fraud.
With this in mind, I would like to spend my time with you today
discussing the vulnerabilities that confront us, and some of our recent
and ongoing initiatives.
background
The Office of Inspector General (OIG) was created in 1976 and is
statutorily charged with protecting the integrity of our Department's
programs, as well as promoting their economy, efficiency and
effectiveness. The OIG meets this statutory mandate through a
comprehensive program of audits, program evaluations, and
investigations designed to improve the management of the Department and
to protect its programs and beneficiaries from fraud, waste and abuse.
Our role is to detect and prevent fraud and abuse, and to ensure that
beneficiaries receive high quality, necessary services, at appropriate
payment levels.
The Health Care Financing Administration (HCFA) is the largest
single purchaser of health care in the world. With expenditures of
approximately $310 billion, assets of $181 billion, and liabilities of
$40 billion, HCFA is also the largest component of the Department.
Medicare and Medicaid outlays represent 34.2 cents of every dollar of
health care spent in the United States in 1998. The Medicare program is
inherently at high risk for payment errors due to its size as well as
its complex reimbursement rules, and decentralized operations (39
million beneficiaries and 860 million claims processed annually).
overall medicare payment error rate
As part of our first comprehensive audit of HCFA's financial
statements for FY 1996, we began reviewing claim expenditures and
supporting medical records. Our primary objective was to determine
whether services were (1) furnished by certified Medicare providers to
eligible beneficiaries; (2) reimbursed by Medicare contractors in
accordance with Medicare laws and regulations; and (3) medically
necessary, accurately coded, and sufficiently documented in the
beneficiaries' medical records.
For FY 1998, we projected that net improper payments totaled about
$12.6 billion nationwide, or about 7.1 percent of total Medicare fee-
for-service benefit payments. The FY 1998 estimate is $7.7 billion less
than the FY 1997 estimate of $20.3 billion, and $10.6 billion less than
the FY 1996 estimate of $23.2 billion--a 45 percent drop.
As in past years, the improper payments include anything from
inadvertent mistakes to outright fraud. We cannot quantify what portion
of the error rate is attributable to fraud. We have, however,
quantified the estimated provider billings for services that were
insufficiently documented, medically unnecessary, incorrectly coded, or
non-covered. These were the major error categories noted over the last
3 years. Some examples:
Medicare paid a physician $871 for 40 hospital visits. The
medical records, however, supported only 18 visits. Therefore, payment
of $479 for the 22 visits without supporting documentation was denied.
A community mental health center was paid $21,421 for a
beneficiary who received services under the ``partial hospitalization''
program. This program is limited to providing services to beneficiaries
with very serious mental conditions that would otherwise require
inpatient hospital stays. The medical reviewers determined that the
beneficiary had already achieved sufficient stabilization and did not
meet the definition of one who would otherwise require in-patient
services.
specific vulnerabilities confronting the department
While it is encouraging that the Medicare error rate overall has
declined, the challenges and issues confronting the Department are
still daunting. There are specific areas or pockets of the program that
are particularly vulnerable to fraud and abuse or quality control
problems. This may be due in part to inadequate enrollment procedures
for providers, deficient internal controls, excessive payment rates, or
especially vulnerable beneficiaries.
Mental Health Services
We continue to be concerned about inappropriate Medicare payments
involving mental health services in a variety of settings.
Community Mental Health Centers. In 1998, the OIG
completed its five-State study of partial hospitalization services
provided in community mental health centers and found that over 90
percent of the Medicare payments ($229 million of $252 million) were
for unallowable or highly questionable services.
Hospital Outpatient Departments. We are currently
completing in-depth reviews of outpatient psychiatric services provided
by 10 acute care hospitals. Also, a similar 10-State review and
individual hospital audits of outpatient psychiatric services is being
performed at psychiatric hospitals.
Mental Health Services in Nursing Homes and Ambulatory
Care Settings. In 1996, we examined the provision of mental health
services to nursing facility residents. We found that for 32 percent of
the records reviewed, Medicare paid for medically unnecessary mental
health services in nursing homes. We are currently conducting a follow-
up study. We are also conducting a similar study of mental health
services in ambulatory care settings.
Rehabilitation Services
The Medicare program provides coverage and payment for physical,
occupational, and speech therapy services that are reasonable and
necessary to treat an individual's illness or injury. These services
are provided in a variety of settings, including nursing homes, various
rehabilitation facilities, and outpatient departments of hospitals.
Nursing Homes. We found that 13 percent of physical and
occupational therapy given to Medicare patients in nursing homes in
1998 was not medically necessary or was provided by individuals who did
not have the proper qualifications to do so. The cost of these improper
payments was $1 billion.
Outpatient Rehabilitation Facilities. The OIG has an
ongoing six-State review of outpatient rehabilitation facilities in
Florida, Louisiana, Michigan, New Jersey, Pennsylvania, and Texas,
which accounted for about 50 percent of the total outpatient
rehabilitation facility payments nationwide during CY 1997. Our results
to date indicate that Medicare fiscal intermediaries may have made
substantial payments for unallowable or highly questionable services.
We are continuing our studies of therapy services provided in
nursing homes to ensure that waste and abuse are prevented while
necessary services are rendered. Additionally, the OIG is currently
planning a review of therapy services provided in outpatient
departments of acute care hospitals. We will select a statistically
valid sample of claims and request medical record reviews to determine
whether the therapy services provided were reasonable and necessary for
the patient's illness or injury.
medical equipment and supplies
While Medicare payments for medical equipment and supplies
represent a small proportion of the program (about $6 billion), over
the years we have devoted significant resources to this area due to the
significant problems associated with the provision of this benefit. We
have consistently reported on excessive Medicare reimbursement rates,
unnecessary services, services not rendered, and sham business billing
Medicare. For example:
We found that Medicare paid an estimated $20.6 million in
1997 for services that started after a beneficiary's date of death.
Almost half of this was for durable medical equipment claims.
We recently reported that 42 percent of claims for
orthotic body jackets were for more expensive items than the one
actually provided. In a separate report, we found that Medicare pays
substantially more for these items than Medicaid programs and other
Federal payers that we reviewed.
We reported that nearly 25 percent of certificates of
medical necessity for home oxygen were inaccurate or incomplete. In
addition, 13 percent of beneficiaries reported never using their
portable oxygen systems.
We found that 57 percent of documentation for therapeutic
shoe claims were missing or inaccurate. Many recent reforms have been
made in this area. For example, the Balanced Budget Act of 1997
requires providers to pay a modest surety bond. However, this provision
has not yet been implemented. Furthermore, we believe that additional
action should be taken to reduce payments for selected items, such as
hospital beds, and that providers should be required to pay an
application fee to cover the cost of processing their applications to
participate in the program. Our work in this area continues with
studies related to blood glucose test strips, ventilators, orthotics,
and the National Supplier Clearinghouse.
Home Health
The 1990's saw dramatic increases in Medicare payments for home
health services, growing from $3 billion to almost $18 billion during
this period. Some of this growth was due to the legitimate need for and
the value of these benefits for homebound Medicare beneficiaries. But,
we also saw signs that fraud, waste, and abuse were significant
contributors.
Based on our work, we found the home health benefit to be a program
that grew too quickly with inadequate controls. The inability of
Medicare to effectively identify improper claims before payment
combined with the ease of entry of home health agencies into the
program makes the Medicare trust fund especially vulnerable to losses
from the home health program. For example, a 1997 audit disclosed that
40 percent of the claims sampled in four of the most populated States
should not have been reimbursed.
Fortunately, most of the vulnerabilities have been addressed by the
Balanced Budget Act of 1997 and in subsequent Department regulatory and
administrative initiatives. These solutions are now being implemented
through the development of a prospective payment system, increases in
the number of audits, more thorough enrollment and re-enrollment
procedures, and various new penalties for abusive actions.
Additionally, as the home health agencies themselves are best
positioned to guarantee the integrity of their product, we recently
issued ``Compliance Program Guidance for Home Health Agencies'' to
assist them in developing specific measures to combat fraud, waste and
abuse, as well as in establishing a culture of ethics that promotes
prevention, detection, and resolution of instances of misconduct.
To determine whether these program changes were having a positive
impact on Medicare reimbursement, we recently replicated our 4-State
review. Our report revealed that the error rate had, in fact, been
significantly reduced, down from 40 to 19 percent. Although this
reduction indicates notable progress, a 19 percent error rate is still
too high and we are still far from finished with the task of reforming
the home health program. Until all the recent reforms are fully
implemented, the Medicare home health program will remain a serious
risk.
Nursing Facilities
We are continuing our longstanding monitoring of Medicare payments
made on behalf of nursing home patients.
Infusion Therapy. We recently reviewed infusion therapy
services (such as use of an electronic pump to administer drugs)
provided by some suppliers to skilled nursing facilities. Our audit
found that suppliers charged excessive prices for infusion therapy,
provided unnecessary services to patients, and improperly billed for
services that the nursing facilities, in turn, misclassified on the
Medicare cost reports. We are concerned not only about the financial
effects of the overpayments we identified but also about
overutilization and underutilization of therapy services.
Access. We also studied the impact of the new nursing home
prospective payment system on access to care. We found that Medicare
patients are able to access care in skilled nursing facilities,
particularly therapy patients. In fact, we found that it is easier to
place Medicare therapy patients in nursing homes after the new payment
system went into effect than before. On the other hand, patients
requiring extensive services are more difficult to place under the new
payment system.
Prescription Drugs
While Medicare does not pay for over-the-counter or many self-
administered drugs, it does pay for certain categories of prescription
drugs used by Medicare beneficiaries. Since 1992, Medicare outlays for
prescription drugs have grown dramatically, increasing from $663
million to $2.3 billion in 1996. Prior to January 1, 1998, Medicare
payments were based on ``average wholesale prices (AWP)'' which are
mainly provided by manufacturers but bear little relationship to actual
wholesale prices. Based on our work, we believe that Medicare continues
to substantially overpay for these drugs. Legislative options include
basing allowances on acquisition costs, mandating rebates, and
permitting/requiring competitive bidding. We believe that such actions
could save Medicare almost $800 million annually, depending upon the
option adopted.
Medicare Contractors
The Medicare program is administered by the Health Care Financing
Administration (HCFA) with the help of 64 contractors that handle
claims processing and administration. The contractors are responsible
for paying health care providers for the services provided under
Medicare fee-for-service, providing a full accounting of funds, and
conducting activities designed to safeguard the program and its funds.
There are two types of contractors--fiscal intermediaries and carriers.
Intermediaries process claims filed under Part A of the Medicare
program from institutions, such as hospitals and skilled nursing
facilities; carriers process claims under Part B of the program from
other health care providers such as physicians and medical equipment
suppliers. We have encountered problems associated with:
Financial management and accounting procedures and
longstanding weaknesses in internal controls, including deficiencies
related to the receivable amounts reported in HCFA's financial
statements and electronic data processing.
The effectiveness of the Fraud Units which are designed to
detect and deal with problems of fraud and abuse within the provider
community.
In addition, there had been numerous allegations that contractors
have falsified statements that specific work was performed, and
altered, removed, concealed, and destroyed documents to improve their
ratings on Medicare performance evaluations. Wrongdoing has been
identified and we have entered into civil settlements with 13 Medicare
contractors since 1993, with total settlements exceeding $350 million.
Managed Care
Managed care plans, such as managed care organizations (MCOs),
provide comprehensive health services on a prepayment basis to enrolled
individuals. Medicare beneficiaries have the option to enroll in these
plans, which contract with HCFA to furnish all medically necessary
services covered under the Medicare program. Medicare enrollment in
managed care plans has been steadily increasing. In January 1993, 177
plans with Medicare contracts serviced 2.5 million beneficiaries. In
October 1999, 409 plans had approximately 7 million Medicare enrollees.
Medicare payments to managed care plans have also grown significantly--
from $8.6 billion in Fiscal Year (FY) 1993 to $37.2 billion in FY 1999.
Some of our most recent work includes the following:
Enhanced Payments to Managed Care Organizations. Our past
audits demonstrated that HCFA did not have effective controls over the
higher capitation payments to MCOs for beneficiaries with either end
stage renal disease (ESRD) or dually eligible (Medicare and Medicaid)
status. These audits identified over $122 million in improper payments.
We have also been reviewing the extra payments made for beneficiaries
with institutional status. Our audits indicate that there is
potentially $22 million in overpayments to MCOs for beneficiaries
classified as institutional status. We are continuing our audits to
identify overpayments based on institutional status at specific MCOs
and also determining whether past problems with properly identifying
ESRD and dually eligible beneficiaries have been corrected.
Fee-for-Service Payments to Disenrolled Beneficiaries. The
HCFA analysis of how well a MCO performs does not include reviewing
fee-for-service (FFS) payments made for beneficiaries after they have
disenrolled from the managed care organization. We identified $224
million in Part A FFS medical services received within 3 months of the
disenrollment date by these individuals. We are continuing our review
to determine if the managed care organizations may have encouraged the
disenrollment and/or provided poor care.
Administrative Costs. Risk-based MCOs receive what appears
to be a large amount of funds for administrative costs to operate their
Medicare managed care programs. The HCFA has very little information
available on how the MCOs used these funds, which are provided as part
of the Medicare capitation amount. Based on our analysis of 9 MCOs, we
found that the MCOs overestimated by 100 percent the funds they needed
to cover administrative costs. We also found that the 9 MCOs had $66
million in administrative costs that would have been disallowed had the
MCOs been required to follow Medicare's general principle of paying
only reasonable costs. We are also analyzing the variances in
administrative funds (as a percentage of total funds received from
Medicare) among MCOs.
Dissatisfaction of Vulnerable Beneficiaries. Although
beneficiaries, in responding to OIG surveys, reported generally
positive experiences with HMOs, some indicated that they disenrolled
because they received a lower standard of health care or because they
felt their health had declined while in the HMO. This was particularly
true of disabled beneficiaries and those with functional impairments
and serious illnesses, who reported much less positively about their
experiences.
Medicaid
Medicaid is a means-tested health care entitlement program financed
by States and the Federal Government--43 percent from the States and 57
percent from the Federal Government in FY 1998. To date, all 50 States,
the District of Columbia, and the five territories have elected to
establish Medicaid programs. The responsibility for detecting,
investigating and prosecuting fraud and abuse in the Medicaid program
is shared between the Federal and State Governments. Each State is
required to have a program integrity unit dedicated to detecting and
investigating suspected cases of Medicaid fraud. Most States fulfill
this requirement by establishing a Medicaid Fraud Control Unit (MFCU).
Although originally managed within HCFA, the oversight responsibilities
for the fraud control units were transferred to our office in 1979
since the Units' activities were determined to be more closely related
to the OIG investigative function. Federal funds for the Medicaid fraud
control program are included in the Health Care Financing
Administration appropriation. The program currently reimburses the
States for the cost of operating a unit at a rate of 75 percent.
The types of fraudulent schemes we see in the Medicaid program in
many ways mirror those in Medicare:
Billing for Services Not Provided. This is one of the most
common types of fraud. Examples include a provider who bills Medicaid
for a treatment or procedure that was not actually performed, such as
blood tests when no samples were drawn or x-rays that were not taken.
False Cost Reports. A nursing home owner or hospital
administrator may intentionally include inappropriate expenses not
related to patient care on costs reports submitted to Medicaid.
Illegal Remunerations. A provider (i.e., nursing home
operator) may conspire with another health care provider (i.e.,
physician, ambulance company) to share a certain portion of the
monetary reimbursement the health care provider receives (kickbacks)
for services rendered to patients. Kickbacks include not only cash, but
vacation trips, automobiles or other items. The practice results in
unnecessary tests and services being performed for the purpose of
generating additional income to both the referring source and the
provider of the service.
In 1998, the MFCU reported 937 convictions and recoveries totaling
more than $83 million (Federal and State). It should be noted that
there are areas of MFCU activity, such as patient abuse cases, that do
not generate a monetary return, but are part of the overall effort to
provide quality care and to hold the health care community accountable
for the Federal and State dollars spent. In FY 1998, patient abuse
cases accounted for over 30 percent of the 6,839 cases investigated by
the 47 units.
Precisely because Medicaid is really a compilation of 56 separate
programs, fraud and abuse coordination is extemely important.
Therefore, the OIG, MFCUs, and other law enforcement agencies work
together to coordinate anti-fraud efforts. For example:
The OIG and MFCUs have joined with other State and Federal
law enforcement agencies to organize health care fraud task forces
throughout the country.
The OIG has established with the Department of Justice and
other enforcement agencies an Executive Level Working Group to focus on
health care fraud.
Ten years ago, the OIG helped establish the National
Health Care Anti-Fraud Association, representing both governmental and
private third party payers and law enforcement agencies, to coordinate
governmental and private health care fraud enforcement activities.
Other cooperative efforts include State Medicaid Audit
Partnerships. Five years ago, we began an initiative to work more
closely with State auditors in reviewing the Medicaid program. The
Partnership Plan was created as an effort to provide broader coverage
of the Medicaid program by partnering with State auditors, 11 State
Medicaid agencies and two State internal audit groups. Reports issued
have resulted in identifying $173.7 million in Federal and State
savings. Since its inception in 1994, active partnerships have been
developed in 23 States on such diverse issues as:
Program issues related to Medicaid outpatient prescription
drugs.
Unbundling of clinical laboratory services.
Outpatient non-physician services already included as an
inpatient charge.
Excessive costs related to hospital transfers.
Excessive payments for durable medical equipment.
Acquisition costs for Medicaid drugs.
Program issues related to managed care.
Joint projects have also identified areas where improvements in
program operations could be achieved, unallowable program expenditures
could be recovered and future cost savings could be recognized.
ways to address these problems
As noted earlier and as evidenced by the examples discussed above,
the problems that I have discussed with you today are extremely
complex. Clearly, the Department cannot eliminate the errors, waste,
and fraud without relentless oversight through audits, investigations,
and evaluations and through effective agency oversight. In the past, a
stable source of funding was not always available. However, since the
passage of the Health Insurance Portability and Accountability Act of
1996 our effectiveness has been strengthened through an increased and
predictable funding base for us and the Health Care Financing
Administration for fraud and abuse control efforts.
It became increasingly obvious that our traditional approaches
alone would not be sufficient to win this battle. We needed structural
reforms, new partnerships, and new ways of thinking. Only through a
multifaceted, coordinated effort could we eliminate or mitigate the
risks and avoid the consequences I have discussed here. Again, the
Health Insurance Portability and Accountability Act of 1996 gave us the
foundation for doing this. It authorized the Health Care Fraud and
Abuse Control Program, a partnership between the Office of Inspector
General and the Department of Justice to coordinate Federal, State, and
local law enforcement activities with respect to health care fraud and
abuse. We are very thankful that the Congress and the Administration
have provided us with additional resources and authorities in recent
years to assist us in addressing the challenges we face. I would like
to take a moment to describe some of the broad initiatives that we have
taken as a result.
General Upgrading of Capacity
Our first step was to upgrade our facilities, methods,
technologies, skills, and organizations. We are expanding our
investigative efforts to new geographic areas, particularly in areas
with higher than usual suspicious activity, and more generally in an
all out effort to provide full security coverage for our programs. We
have developed new analytic techniques and computing capacity to
uncover and analyze suspicious payment and utilization trends which can
then be investigated or audited as appropriate. We are combining our
audit, investigative, evaluation, and legal functions to more
effectively prevent, uncover, and respond to fraud and waste. And we
have strengthened our procedures for coordinating our efforts with
those of the Department of Justice.
In FY 1999 there were 401 convictions (303 were health care
related), 541 civil actions (534 were health care related), 2,976
exclusions from the Medicare or other Federal health care programs,
$251.5 million in disallowances from questioned costs, and $407.7
million in investigative receivables. The Office of Inspector General
also conducted studies and made recommendations which contributed to
the achievement of $11.9 billion in savings related to program reforms
and other actions to put funds to better use. Furthermore, $369 million
was returned to the Medicare trust funds in 1999, and an additional
$4.7 million was recovered as the Federal share of Medicaid
restitution.
Program Structural Reform
It was clear that some of the more serious problems the Department
was facing stemmed from the very structure of its programs. This was
particularly true of those where payments to providers were based on
their costs or charges. This approach contains inherent incentives to
exaggerate prices and over-utilize services. Some programs also had
very weak screening criteria and enrollment processes, enabling easy
entry by unscrupulous individuals and business entities. Others used
payment methods that made it too easy for Medicare to pay incorrectly
in the first place and difficult to recover funds when improper
payments were discovered. In many cases the sheer volume of payments
made reasonable scrutiny practically impossible.
Examples of exactly these kinds of situations are those which I
have described earlier in my testimony--including home health, nursing
home, and mental health services, and medical equipment and supplies.
No amount of auditing and investigating can adequately deter, detect,
and respond to the errors, waste, and outright fraud that could occur
in these areas. What is needed are fundamental reforms in the program
structures themselves, and stronger safeguards in the form of
certification standards and enrollment procedures.
We are particularly proud of the studies which my office
contributed to promoting a greater understanding of the vulnerabilities
that were addressed in the Balanced Budget Act of 1997. The
Congressional Budget Office has estimated that the savings from the
reforms to which we made contributions will total almost $70 billion
over 5 years.
Financial Statement Audit
As required by the Government Management Reform Act of 1994, we
issued our third comprehensive financial statement audit of HCFA. The
purpose of financial statements is to provide a complete picture of
agencies' financial operations, including what they own (assets), what
they owe (liabilities), and how they spend taxpayer dollars. The
purpose of our audit was to independently evaluate the statements and
determine whether they were fairly presented.
We are pleased to report that HCFA has continued to successfully
resolve many previously identified financial accounting problems. For
example, substantial progress was made in improving Medicare and
Medicaid accounts payable estimates, as well as estimates of potential
improper payments included in cost reports of institutional providers.
However, our opinion on the FY 1998 financial statements remains
qualified. In accounting terms, a qualification indicates that we still
found insufficient documentation to conclude on the fair presentation
of all amounts reported.
Most significantly, Medicare accounts receivable (i.e., what
providers owe to HCFA) were not adequately supported. We found
deficiencies in nearly all facets of Medicare accounts receivable
activity at the 12 contractors in our sample. Some contractors were
unable to support the beginning balances, others reported incorrect
activity, including collections, and finally others were unable to
reconcile their reported ending balances to subsidiary records. We also
found that substantial amounts of receivables had been settled with
insurance companies but were still presented as outstanding accounts
receivable. As a result of these problems, we could not determine
whether the Medicare contractors' accounts receivable balances and
activities were fairly presented.
Material weaknesses are serious deficiencies in internal controls
that could lead to material misstatements of amounts reported in the
financial statements in subsequent years unless corrective actions are
taken. The FY 1998 report on internal controls notes two material
weaknesses besides accounts receivable:
Financial reporting remained a material weakness because,
among other things, HCFA does not have an integrated accounting system
to capture expenditures at the Medicare contractor level. Instead, HCFA
relies on a complex system of reporting that includes use of ad hoc
reports to accumulate data for financial reporting.
The HCFA central office and Medicare contractors continued
to have material weaknesses in electronic data processing controls
relating to security access, application development and change
controls.
To ensure progress in reducing past problems while keeping abreast
of continuing changes in the health care area and adequately
safeguarding the Medicare Trust Fund, we recommended, among other
things, that HCFA:
Enhance prepayment and post payment controls by updating
computer systems and related software technology to better avoid and
detect improper Medicare payments and
Continue to direct that the Medicare contractors and peer
review organizations (PROs) expand provider training to (1) further
emphasize the need to maintain medical records containing sufficient
documentation, as well as to use proper procedure codes when billing
Medicare, and (2) identify high-risk areas and reinstate selected
surveillance initiatives, such as hospital readmission reviews and DRG
coding reviews.
We believe these types of reviews are critical to reducing improper
Medicare payments and ensuring continued provider integrity.
Industry Outreach and Education
We have engaged in numerous proactive outreach efforts designed to
help the medical care industry avoid fraud and waste, increase their
compliance with Medicare rules, and generally understand more about the
nature of waste, fraud, and abuse. Information about these outreach
efforts and results of our audits, investigations, and evaluations are
routinely made available through the Internet on our website at
www.hhs.gov/progorg/oig. We have issued an open letter inviting health
care providers to join us in a National campaign to eliminate fraud and
abuse. Following is a brief description of these initiatives.
Compliance Guidance. A cornerstone of our prevention
efforts has been the development of compliance program guidance to
encourage and assist the private health care industry to fight fraud
and abuse. The guidance, developed in conjunction with the provider
community, identifies steps that health care providers may voluntarily
take to improve adherence to Medicare and Medicaid rules. Each guidance
sets forth seven elements that we consider necessary for a
comprehensive compliance program and identifies risk areas for the
specific industry sector. So far we have issued compliance program
guidance for use by clinical laboratories, hospitals, home health
agencies and third party billers, hospices, durable medical equipment
suppliers, and Medicare+Choice organizations. We also solicited input
from the nursing home and physician communities on issues that should
be addressed in upcoming guidance for those health care sectors.
Corporate Integrity Agreements. Virtually all health care
providers that enter into agreements with the government in settlement
of potential liability for violations of the False Claims Act must also
agree to adhere to a separate ``corporate integrity agreement.'' Under
such an agreement, the provider commits to establishing a compliance
program or undertaking other specified steps to ensure their future
compliance with Medicare and Medicaid rules. The duration of most
corporate integrity agreements is 3 to 5 years, during which time the
provider must submit an annual report to the OIG on its compliance
activities. At the close of 1998, our office was monitoring 428
agreements; a total of 138 corporate integrity agreements were entered
in 1999.
Special Fraud Alerts and Advisory Bulletins. We issue
special fraud alerts and advisory bulletins on topics that warrant
attention by medical care providers. Through these publications we can
spell out kinds of situations that could get providers into trouble.
Recent topics include hospital payments to physicians to reduce or
limit services to beneficiaries (commonly known as ``gainsharing''
arrangements); the effect of exclusion from Federal health care
programs on excluded providers and those who employ or contract with
them; and physician liability for certifications of medical necessity
in the provision of medical equipment and home health services.
Advisory Opinions. During this past year, in consultation
with the Department of Justice, we finalized our process for providing
written advisory opinions in response to requests for clarification
from businesses regarding the sanction authorities enforced by the
Office of Inspector General, including the anti-kickback statute and
the Civil Monetary Penalties Law. From the inception of the advisory
opinion program in February 1997 to the close of FY 1999, the OIG
issued 32 advisory opinions. In addition, we frequently speak to
industry groups on areas of suspected fraud and abuse and measures they
can take to avoid trouble.
Self Disclosure Protocol. Introduced as the Voluntary
Disclosure Program as part of Operation Restore Trust, the self
disclosure protocol allows health care providers to report questionable
practices they discovered as part of a comprehensive compliance plan to
the Government for resolution. The practices are more than simple
errors that amount in direct overpayment to the contractors, but rather
those issues that may be viewed as potential fraud and abuse. It allows
the provider community to work with the Government in fighting fraud
and abuse as partners instead of adversaries. The cooperative effort
has created a better working relationship between the Government and
the provider community regarding current health care fraud issues. We
have had 70 self disclosures, 59 since our new protocol was published
in the Federal Register in October 1998. To date, we have had 7
settlements amounting to $4.3 million.
Beneficiary Outreach and Education
Enlisting beneficiaries as partners in fighting fraud and waste
assists in identifying abuses at an early stage, and preventing ongoing
or widespread abuse. Our studies indicate that Medicare beneficiaries
are well-positioned to identify possible fraud, with three out of four
stating that they always read their Explanation of Medicare Benefits
statements. We have been working with the Administration on Aging,
HCFA, and AARP to carry out an outreach campaign to educate
beneficiaries and those who work with the elderly to recognize
potential fraud and abuse and to report it appropriately. State and
local area offices on aging supported by the Administration on Aging
have contributed to this effort. They are already teaching Medicare
beneficiaries how to protect their Medicare cards and numbers, avoid
situations which can lead to fraud, how to interpret their Medicare
bills and explanations of benefits, and how to report questionable
billings to Medicare or to the Inspector General's Hotline.
Congress has also been of assistance in our fight against waste,
fraud and abuse by enacting the Beneficiary Incentive Program in which
individuals can receive cash awards in exchange for leads resulting in
action against fraudulent or abusive providers.
Fraud Hotline
In conjunction with both the industry and beneficiary outreach
efforts, we have also been improving the toll-free hotline for
beneficiaries and providers to report suspected fraud. Now millions of
beneficiaries see the number 1-800-HHS-TIPS printed on the forms they
receive that explain the Medicare benefits paid for them. Since 1997,
the Hotline has received 900,000 calls which contributed to identifying
$30 million in improper Medicare payments, of which approximately $6
million has already been recovered.
conclusion
As I stated at the beginning of my testimony, I believe a
concentrated effort by a large number of people has resulted in
tangible progress in combating fraud, waste, and abuse in recent years.
But as I have discussed with you today, the problems that remain are
serious, complicated, and have profound consequences. I am particularly
concerned about the deliberate fraud which we cannot always measure but
that we know continues. We must never let down our guard, and we must
continue to dedicate the resources and make the concerted effort to
reduce these problems.
I really appreciate the opportunity you have given me today to
focus attention on the continuing problems and vulnerabilities that
confront us and to share with you some of our efforts and recent
initiatives. I would be happy to answer any questions.
Chairman Kasich. Ms. Brown, let me just compliment you for
your efforts to try to determine the number of the problems,
try to measure the problems. I think you were the first one
that actually pushed to have that done. I do want to tell you
that I am glad those numbers have dropped. But I think those
numbers dropping have been a matter of documentation, more than
they have been systemic solutions, correct?
Ms. Brown. Well, I would like to clarify that a little.
When we have gone out for documentation of services, we would
go out at least three times or four times to people, and they
knew that they had to pay back if they didn't provide the
documentation. It still didn't come in. I don't think it was a
lack of good documentation. I think it was a lack of having
provided the service, or knowing it was not a covered service,
or something like that. Now we are getting the documentation
in, and the errors also fall into other categories.
Chairman Kasich. But right now we are really virtually
unable to--and I don't want to take away from the good work
that has been done--it is kind of like, the reason I guess I am
a little hesitant to talk to investigators and chide them at
all, it is kind of like, well, we say we balanced the budget,
and then they say, well, you idiots, you didn't pay down the
debt. You know what I mean? So it is like it never ends.
[Laughter.]
But I think we have to recognize up front that you have
done good. And this is not designed to frustrate you or our
friends that are here from the GAO, as long as a good effort is
being made.
We really are virtually unable to do anything in Medicaid
right now; is that correct? We haven't figured out how to do
it.
Ms. Brown. Well, we are doing some work in Medicaid. Three
States are working with us to develop an error rate, but there
are 56 different programs for Medicaid, and each one is
individual. So they have to be done on a per-State basis. So
North Carolina, Alabama, and Louisiana have been trying to
develop that error rate, but they aren't there yet.
Chairman Kasich. So we really have 50 States that don't
have an investigated system to check Medicaid.
Ms. Brown. Well, not to check the error rate. But we work a
lot in Medicaid. We have 23 different States that we are
working jointly with to audit their systems and bring back
money for both the State and the Federal Government. We provide
the grants and oversee the Medicaid Fraud Control Units in each
State. So those units also have significant work that they are
doing strictly in the Medicaid area.
Chairman Kasich. Maybe we ought to ask them to give us a
little bit more comprehensive work in Medicaid, Jim, so we can
be more up-to-speed with what they are doing. In managed care,
right now, we still don't have a very good measure for that, do
we?
Ms. Brown. No, we don't. We realize the vulnerabilities are
almost the opposite type than we have in fee-for-service area,
and we are doing some work in that area, but we haven't got the
statistics on it.
Chairman Kasich. And in the fee-for-service area, there are
a number of areas that you are unable to measure now; for
example, the creation of dummy practices and virtual patients;
is that correct?
Ms. Brown. Sometimes we catch it if the provider isn't
legitimate. But we are doing more of that work through some of
our other means. We have actually had, for instance, in
Florida, a huge home health organization, and they have a room
this size now that has documentation of patient records. Not
one page of that is legitimate. They paid people to create
those records, and they were getting millions of dollars from
the Government for services that were never performed.
Chairman Kasich. It seems we have a system where we hand
the checkbook to somebody to pay the bills, which is
essentially what we have; is that correct?
Ms. Brown. Yes.
Chairman Kasich. The pressure on them is to pay the bills
so that they can get another contract to pay the bills. So it
becomes very difficult. I have become pretty well convinced
that in the area, particularly of Medicare, and there are a lot
of problems, in terms of how you would make the transition, but
until the buyer and the seller are together in this process, I
am not convinced that we will ever fix this. And we really do
not know the extent to which people waste money, take advantage
of people, just simply in the area of coding.
Ms. Brown. Yes.
Chairman Kasich. Or in the area of unnecessary services.
But I think the good news is I think that the vast majority of
physicians--I have never really met anybody in medicine that I
consider to be dishonest, I really haven't. So I have got to
think the numbers are small. But what you are talking about
with that situation in Florida, you could get a whole con game
going here in a lot of different ways, and it is hard to check
because there is no ``rubber meeting the road'' in this.
Ms. Brown. That is right. We have indicted 26 individuals
there so far. Very, very few of the people are actually
physicians or other health care professionals. We have another
element that has moved in. As was brought out earlier, this is
where the money is, so there are a lot of people who have no
medical background that are arranging these very progressive
schemes to bilk the systems.
Chairman Kasich. Mr. Mancuso, isn't the problem with not
being able to do audits, that you have 2,000 years of supply of
``X'' in a warehouse somewhere, and it keeps getting ordered,
and then you have real needs that are ``Y,'' but we haven't
ordered the parts because we ordered all of this ``X,'' and we
are not able to move the inventories properly and match the
inventories with the legitimate needs? Is that not a pretty
good analysis of what happens when you can't add up your books
or keep track of your inventories?
Mr. Mancuso. That is certainly a summary of an overall
logistics problem, and it speaks to the Department's gradual
move from ``just in case'' to ``just in time''; meaning, moving
from buying a lot of parts that you might need, to buying parts
when you need them and having systems that can properly track
them.
One of the things that we are watching in the Department
and concerned about is last year, in the authorization act, the
Congress required that the Department begin a very careful
analysis of inventory, a wall-to-wall inventory, and report
back to the Congress later this year. We have seen virtually no
movement toward complying with that.
On the other hand, there are some very positive things
going on in the logistics area, as I had stated, about 300
different reform efforts that are ongoing. So there is
certainly some progress, but much more needs to be done, and a
lot of it is even tied in with the disposal problems that we
have in actually disposing of some of the items in inventory.
Chairman Kasich. How long have you been over there?
Mr. Mancuso. Since 1982.
Chairman Kasich. I came in, in 1983. Is there any way to
fix this stuff?
Mr. Mancuso. I would have to say that, from where we sit in
the IG's office, there is progress, but it is never as fast as
we want to see it happen. And there are a lot of competing
interests within the Department; from warfighters who feel they
have to have absolutely everything that they could possibly
ever need on hand at any time, to people who are being more
pragmatic and believing that they can develop a system that
will be so precise that only exactly what you need would be
available, and it would be available in a time frame that would
work. The truth and the reality has to be somewhere in between.
And what we have seen, again, is some significant progress, but
it is a slow process. And it is better than it was in 1982,
that is most certainly true.
Chairman Kasich. Is it an individual that can make a
difference over there? You have to take a break from trying to
deal with that building. Bill Owens left as the vice chairman
of the Joint Chiefs because he was bashing his head up against
the wall. It was hard for him to get the systemic changes he
wanted. It takes so much effort to change. I know you need the
systems, but even if you have somebody who is the head over
there, it doesn't necessarily mean that the limbs are actually
going to work because the head is making a command.
Mr. Mancuso. That is correct.
Chairman Kasich. Do you just have to have a whole team of
people that go in there? How, precisely, do you do it?
Mr. Mancuso. I don't want to oversimplify, but there are
several areas, where we feel a cross-cutting approach that had
top-level management support would work. For instance, I think
it was mentioned earlier, the Y2K conversion effort was
something that the Department had not experienced before, where
a single effort with a beginning and absolute ending date was
designed. From the top levels of the Department, every manager
was made to understand that they would, in fact, support this
effort and be held accountable. In some cases, the Department
spoke about withholding funds from managers who were not moving
that process along.
We have recommended, and the Department has agreed, to
apply the methodology that we devised during the Y2K
conversion, toward tackling some of the larger problems in the
Department. Although that idea has been accepted, we feel it is
not moving along as rapidly as we would like to see it. We are
concerned because the experience that people had in that effort
is perishable. People come and people go. Right now there are a
good number of people who have seen how a cross-cutting,
nonparochial effort can, in fact, work. We are hopeful that we
will be able to apply this approach to a number of processes.
Chairman Kasich. I am going to get to Mr. Sununu who is
going to talk about HUD, and Mr. Hoekstra about education, and
I know that my colleagues on the other side will have a couple
of questions.
One final question: Remember I mentioned about the bounty
hunter? If you actually put a system into place that said that
you save ``X'' dollars, you get a piece of it, what do you
think would happen?
Mr. Mancuso. There actually are a few systems in place that
have been used, but not in a widespread way.
Chairman Kasich. I know that there are a few examples,
because I have checked it----
Mr. Mancuso. Well, for instance, the IGs--and many people
are not aware of this--are actually able to award money to
people within the Department who have managed to save money or
to assist in matters that go beyond their normal call to duty.
I have seen where that has happened. I have seen people in that
area who worked with that person or people who now become more
energized and a little more vigilant, and certainly it is a
useful process. But, again, that is on a very small scale.
What you are suggesting is certainly something that is
worth considering. The management of it, again, in a large
department might be a bit difficult.
Chairman Kasich. You were shaking your head no, Ms.
Gaffney. Is that a bad idea?
Ms. Gaffney. Yes, I think it is a bad idea.
Chairman Kasich. Why?
Ms. Gaffney. Oh, I think, you know what I was trying to say
to you before about setting out certain performance indicators,
standards: you start warping people's behavior. So, if you say
you think I will respond to money, then pretty soon I am going
to be getting that money however I can, even if it isn't the
appropriate way. You have to be very careful about setting out
those kind of standards.
But I would tell you, Mr. Kasich, our people, if you are
talking about our agents and auditors, they are highly
motivated and highly dedicated. They don't need more.
Mr. Mancuso. I did not understand you to mean you were
talking about the oversight people in the Department.
Chairman Kasich. I hope you are not broken down on the side
of the road tonight and any of those people pass by, but
nevertheless----
[Laughter.]
Chairman Kasich. Give me a call. I will come get you.
What did you say?
Mr. Mancuso. I did not understand you to mean that you were
talking about our auditors and investigators, but rather
someone who may be buried in the logistics area, for instance,
who might come up with a good idea.
Chairman Kasich. That is what I am saying. Look, I had a
guy who worked in a--I don't need to tell you. We all have our
stories. I don't need to tell you a story.
Yes, Ms. Brown.
Ms. Brown. I was going to say there is the Qui Tam
provision, which means essentially a whistle-blower can turn in
information, ask the Government to join in. Essentially, they
can sue.
In this case I mentioned, the whistle-blowers got over $30
million.
Chairman Kasich. I saw that television show. And there was
a big court case about who got what, wasn't there?
Ms. Brown. Well, they always have--it is decided by the
judge, and the amounts are usually 10 to 15 percent. Well, when
we have these multimillion dollar settlements, those are very
large payoffs. There is a whole Qui Tam bar that is set up and
very active in the country because of the large amounts that
people are paid.
Chairman Kasich. Mr. Moran, you are recognized.
Mr. Moran. Thank you, Mr. Chairman.
Mr. Chairman, the reason that I made the point about the
Education Department, I wanted to get some things on the record
because I do think that there is another side or that the full
story is not as negative as some of our friends and colleagues
would suggest.
For example, in 1993, early 1993, there was a management
reform study that detailed a real mess that the Clinton
Administration, Secretary Riley, inherited. And since then, the
default rate has dropped to less than half of what it was when
they came into office. Did you know that, Mr. Chairman? It is
down to the lowest default rate ever, 8.8 percent. It has never
been that low. They doubled their collections on defaulted
loans. They went from a billion to $2.2 billion. They put
together a performance-based organization, and it seems to be
getting a better hold on their financial assistance programs.
They go through the annual financial audit.
But what I think you would be most impressed at, and I know
you are probably aware of this, but perhaps----
Chairman Kasich. I am easily impressed too.
[Laughter.]
Mr. Moran. Well, good. Then you ought to be very impressed
by the fact that they have one-third fewer employees than they
did in 1980, despite the fact that there has been a doubling of
the Education budget. And nearly a quarter of all of the
Education Department employees are involved in investigating
fraud and abuse.
Chairman Kasich. I just wanted to tell you, you know, I
tried to run against----
Mr. Moran. Are you impressed?
Chairman Kasich. Well, I wanted you to know I tried to run
against Lamar, so----
Mr. Moran. Yes. Oh, OK.
Chairman Kasich. But here is the only thing I wanted to ask
and that is I think probably the single biggest reason why we
have a lower default rate, and I don't know this, is that we
finally began to handle the proprietary schools, which had an
enormous default rate, I would think that is No. 1.
No. 2, is the direct loan program, which has been argued a
winner. We don't know if it is a winner because that is a place
where the Federal Government is making a loan, and we don't
know what all of the costs are up front and, we don't know what
the default rate is going to be in the back. So the direct loan
program is something that can't be measured yet. But, hey, I
want to tell you, if there is progress made here, I am glad..
Mr. Moran. Yes.
Chairman Kasich. I mean, cutting the total number of
employees there, I am thrilled.
Mr. Moran. Yes. And they have eliminated----
Chairman Kasich. But I think they ought to be able to add
their books up, don't you think?
Mr. Moran. I think that would be laudable. [Laughter.]
But they have also eliminated a third of all of their
regulations. You knew that, too, I know. So I am glad you gave
me an opportunity to put that on the record.
Chairman Kasich. Jim, could I tell you honest to goodness--
--
Mr. Moran. Yes.
Chairman Kasich. I am not doing this because I want to make
Secretary Riley look bad.
Mr. Moran. Yes.
Chairman Kasich. That is not my interest here. I don't care
about that. I am leaving here, man. I don't want to make people
look bad. And if they are doing good, we have got to tell them.
Like the Customs, apparently, he is doing a good--a great job,
fantastic, praise him.
But you want to talk about what is going on, how many
billions of dollars did we spend on SDI, and what do we
actually have to show for it? That was under, what, 12 years of
Republicans. It doesn't matter to me who is there. Let us just
make it work.
Mr. Moran. I agree. With regard to the student aid, one
thing that would be very helpful is coordination with the IRS.
It seems to me that is essential. And here, it is not the
Education Department. I understand it is the IRS. They want a
change of the tax code before they move forward.
But anyway, let me get to some of the things on HUD. The
HUD report is perhaps the most critical. I know that Secretary
Cuomo is not 100-percent excited about all of your findings or
perspective on this, Ms. Gaffney, but I do think there are a
number of areas in HUD, where you are right on.
And I know, in terms of Section 8 subsidies, for example,
we do have a long ways to go to fix some of the integral
problems there. When you leave it up to the tenant to report
their income, it is contrary to human nature not to give a
figure that is going to ensure that they can keep an affordable
house for their family. And I don't know a whole lot of
families who are so conscientious that they don't underreport
that income. I can understand why it happens, but I think we
need stronger systems. And I am glad that you are suggesting
that because it does deprive money from people who legitimately
need it.
And I have to say, and I have worked with Mr. Lazio on
this, 80 percent of the people who are eligible and who are not
getting housing, generally speaking, there are far more
compelling needs within that four-fifths of the eligible
population than there is within the people who are actually
getting it. And I think we need to be tougher in terms of
eligibility. And I suspect even the $80 million is understated.
You can respond, and particularly if you disagree with
anything I say, but I want to cover a few things. In terms of
the Defense Department, we just came out of a hearing, military
health care, lots of money. It is estimated that there may be a
shortfall of over $5 billion over the next 4 years in terms of
the actual health care, military health care needs, even though
there is a big increase in the budget. The DMARC came up with
that estimate, apparently.
But there are a lot of areas where management reform would
probably save tremendous sums of money. For example, have we
ever done a survey, Mr. Mancuso, to give us a sense of how many
people who have health insurance coverage go to military
treatment facilities, get it for basically free, and don't use
their other health insurance? For example, you have got an
enormous population of people who retire after 20 years in the
Service, but they are in their early 40s. Most of them move on
to the private sector. They then vest, and they also become
eligible, oftentimes, for a pretty decent health care plan.
If the military health plan is more generous and
accessible, then they don't use that plan. And in some cases, I
know a lot of consultants, they don't offer a health care plan
to military retirees because the military retiree doesn't need
it. So we are subsidizing their employer.
Has there ever been a study of that, the extent of
duplication of coverage?
Mr. Mancuso. No, not to my knowledge, Congressman. I do
know that the people in Health Affairs who run the military
program have looked at a number of different ways that they can
find savings. One of the ways recently was to begin to
coordinate with the Medicare program and have people, as they
move into Medicare, fall into that system. I am not sure if you
are aware, but there has been considerable outrage and much to
be said about that effort. People feel, and it is just a
commonly held belief, that if you enlist in the military, if
you serve your 20 years, you should be entitled to that
service, to military health care service, from cradle to grave,
regardless of what other health insurance you might have or
what other Government benefits might, in some way, substitute.
And, again, I don't feel I can speak more competently than
that on this issue. It is not an area we have looked at,
although I know it is an area that the people in Health Affairs
have attempted to consider in their efforts to control costs.
Mr. Moran. We have a lot of bills pending now that would
provide universal full coverage to all military retirees. I
think some form of audit to determine the amount of what really
is, what is the term when you pay for something that is already
paid for? You charge it to another firm, the States, we do that
with new programs. It begins with an ``S.''
Mr. Mancuso. Subrogation.
Mr. Moran. I guess it is subroga--well, I am not sure, no.
Mr. Mancuso. Insurance companies do it.
Mr. Moran. But anyways, you know what I am talking about.
And I think we are saving a lot of insurance firms that have
been paid for that coverage lots of money by offering this, and
we ought to look into that before we take on an immense new
entitlement, as compelling as the needs may be in many cases.
I wanted to also, though, ask before my time is up, the
base closings, can you give us a figure for how much potential
savings has been lost because we have delayed the next round of
BRAC?
Mr. Mancuso. I can only repeat the Department's position. I
believe the Secretary uses a figure of about $3 billion a year
that he would foresee in annual saving. Now, of course, during
the course of our work we can see some of these areas where
efficiencies could be had. So we have long supported the idea
of continued base closings or a new base closure effort.
Mr. Moran. Yes. I think more strongly than some of us in
the Congress have, for obvious reasons, but it is a substantial
amount of potential savings.
The last thing I want to say, it is not a question, Mr.
Chairman, but you made the point that you don't know any
dishonest doctors, and I may know a few, but not very many.
[Laughter.]
But you have to ask yourself is it dishonest or simply good
business practice when you provide a service that is marginally
compensated, but that could be described as a service that is
compensated at a much higher rate? And I don't know many
doctors that don't pick the description of a medical service
that has the highest compensation rate and charge Medicare
that, rather than the lower. They do it to Medicare. They don't
do it to HMOs because HMOs don't allow it. But many times if
you take the actual described service, you will find that what
was provided could have been charged, it could have been
described as something else and charged at a much lower figure.
And I think that is one of the things that is endemic within
Medicare reimbursement, and I don't know how you get a handle
on it. But I think it is substantial and serious.
Chairman Kasich. I think you have a situation today, where,
Jim, I think that there is a doctor on this committee who said
we always charged the lower rate because we didn't want to get
caught charging the higher.
But I have a friend at home who now has a practice with a
number of doctors in it, and they have a building, and he is a
great friend of mine. And he said, you know, John, I just
struggle to make sure that we don't fall to the temptation of
coding at a higher level.
How do you ever get it done? That is our problem today,
isn't it, trying to legislate ethics sometimes. So I think we
can have some systems in place, but frankly, that is going to
be their greatest challenge in the future; how do we get people
to be just decent to one another.
Mr. Moran. That is one of the more compelling reasons for
managed care. Because when you do that, when you privatize it,
there is an incentive to hold overall prices down, and
particularly on a per-capita basis.
But thanks for the hearing, Mr. Chairman, and giving us the
time.
Chairman Kasich. Mr. Hoekstra.
Mr. Hoekstra. I thank the Chairman.
Ms. Gaffney, thank you for, I read parts of your testimony,
and thanks for putting it in perspective, saying you are
dedicated and committed to the mission at HUD, and every time
you find a dollar that could have been wasted or lost in fraud
somewhere, you take that dollar and apply it to the other 20 or
30 percent of the people that can't access the services. I
think we face much the same issue in any of the departments we
deal with because the mission is very important.
I have got a couple of students here from my district, and
when we lose a dollar or whatever in Education, it is Megan and
Michael in the back or, in the future, to get the Chairman's
attention, it is Reese or Emma that are going to lose the
benefit of those dollars.
Just a couple of things, and before Jim leaves, in the
supplemental that is going to come out in a couple of weeks, we
are going to ask for some extra money to really go in and take
a look at the financial systems and the expenditures within the
Department of Education. I believe now we are out of four out
of the five or we are approaching four out of five or five out
of the last 6 years where the audits have been, from my
perspective, less than acceptable. We are only one year where
we have a clean audit.
The other thing, and I am sure Mr. Moran will agree with me
on this, Jim, I am hoping that when we get back, I will have
some legislation in place that will allow us to do the matching
with the IRS and the student loans. And hopefully we can
develop something that maybe we can do in a bipartisan way and
get to the floor of the House and actually make it happen
because I think we are all agreed on that.
Mr. Moran. I would love to cosponsor like that.
Mr. Hoekstra. Right. Thank you.
Chairman Kasich. That would be a great thing; if as a
result of Pete's work on his subcommittee and the work of this
committee, that we could actually get that legislation done,
get it written and get it to the floor like right away.
Mr. Hoekstra. Right.
Chairman Kasich. And I think we could do that. I think we
could get it scheduled, but we need to know precisely what we
need to write. But let's write it and do it, and let's try to
get it done before we get to May.
Mr. Hoekstra. We will be working on that during the recess
and, hopefully, get something--I think we all know what we want
to get done. We have just got to get it written and make sure
we write it technically in a correct way.
Ms. Lewis, you are going to come back, I think, to our
committee on March 1. We are looking forward to getting the
report from you. Number one, thank you for getting it done on
time this year. Last year, having to wait 6\1/2\ or 8\1/2\
months past the due date just wasn't acceptable, and I am glad
that you are going to meet your commitment that the report will
be done.
I also appreciate you making available the auditors to meet
with us this week to give us a preliminary indication as to
what will be in that report. As I said a few minutes ago, I am
disappointed with where we are, where the Department is, on
being able to present a clean audit. Obviously, they have made
some progress. But the bottom line is that we are not getting a
clean audit, and we are not getting a clean audit for an agency
that has access or utilizes a lot of our dollars, a lot of the
taxpayer dollars.
I want to ask some questions about information technology.
I think in one of the documents that you sent to Mr. Armey, and
maybe even to Mr. Kasich back in December, you had indicated
that from 1995 through 1998 there had been like 115
recommendations, 88 of which remained open. And I think in
testimony in front of our subcommittee back in December, you
indicated that some of those were multiple or were----
Ms. Lewis. Repeat.
Mr. Hoekstra. Were items that had been repeated.
Ms. Lewis. Repeated, yes. I believe, Congressman, that was
from the financial statement audits.
Mr. Hoekstra. Yes, I think that could be right.
In that process and in that tracking, was there a
recommendation to begin a more accurate tracking of inventory
of computer and electronic equipment, do you know?
Ms. Lewis. I don't know, specifically. I can get back to
you on that. I know, I recollect that there will be--I believe
the matter has been addressed previously, either in the
internal control report or the management letter. I believe it
will be more specifically addressed in the fiscal year 1999
audit internal control reports due on March 1st.
In addition, this problem of a lack of good control over
inventory has been self-reported by the Department in the
annual FMFIA reports. What we have looked to do is bring some
additional attention to this at the deputy secretary level to
ensure that commitments made on paper to address these problems
actually get followed through, and we are currently seeing some
action.
Response to Question by Congressman Hoekstra Concerning Inventory of
Computer Materials
Office of Inspector General,
U.S. Department of Education,
Washington, DC, March 6, 2000.
Hon. John Kasich,
Chairman, House Budget Committee, House of Representatives, Washington,
DC.
Dear Mr. Chairman: At the hearing on February 17, 2000, before your
committee, I was asked a question by Congressman Hoekstra on an
inventory of the computer materials in 1999. My response was ``no.'' I
would like to clarify my response for the hearing record. The
Department collected data on information technology assets in 1999,
including bar codes and physical descriptions of property on-hand.
However, the inventory data was not complete and not fully validated by
the Executive Officers of each of the principal office components of
the Department. The Department also failed to review purchase orders to
ensure that property that had been recently purchased was included in
the inventory.
I request that this letter be included in the official hearing
records of the Committee. If you have any questions, please feel free
to contact me.
Sincerely,
Lorraine Lewis,
Inspector General.
Mr. Hoekstra. Yes, I am interested in that. When you
communicate with the deputy secretary or the secretary, what
are the different levels of communications that you have? I
mean, sure there's the informal, but there are written
correspondence. What does it mean when you do a formal report?
Ms. Lewis. A formal audit?
Mr. Hoekstra. A formal report. Is that a term that you use,
that there may or may not be a formal report to the deputy
secretary?
Ms. Lewis. I can tell you that what I have seen since I
have been there in June, and going back to look at some of our
historical documents, is we have sent memoranda to the deputy
secretary and Secretary on occasion. We have provided them
copies of our audit report. Sometimes they are----
Mr. Hoekstra. So there is no such designation as a ``formal
report'' that you are aware of? No. OK. That is all right.
Ms. Lewis. I will have to go back and check and see if I
have missed something.
Mr. Hoekstra. Was there an inventory of the computer
materials and those types of things in 1999 that you are aware
of?
Ms. Lewis. No.
Mr. Hoekstra. There was not?
Ms. Lewis. I am not aware of that. I am aware of the issue
of the need for an inventory was reported on the 1999 FMFIA
report.
Mr. Hoekstra. Do you know whether they conduct or, on a
regular basis, conduct inventories of their computer and
electronic equipment or not?
Ms. Lewis. This is an area that we, in the OIG, are
currently looking at very closely. I have asked the deputy
inspector general to lead an effort to identify, from the past
work we have done, very specific action items that the
Department should be taking right now and forwarding those
pieces of information to the deputy secretary, in addition to
assisting the Department in whatever we can in terms of getting
a better handle on its inventory control.
Mr. Hoekstra. You are aware that there may be a problem and
there may be missing equipment?
Ms. Lewis. I believe there is a problem, and it requires
serious attention in the Department.
Mr. Hoekstra. Like I said, I think our focus is going to be
on either getting to you or getting to GAO the resources
necessary to get the financial controls in place at the
Education Department. I think, with what we heard in the
hearing in December, what we are going to hear over the next
couple of weeks about the financial controls and the financial
reporting, and with some of the other problems that are being
brought to our attention within the Department, I would almost
see it as a need for crisis management.
We are investing $35 billion discretionary, $50 to $60
billion through the loan program in perhaps some of the most
important spending that we have in Washington today, that is in
the educating of our kids. And we can't continue to have this
Department perform in the way that it is performing because
this is just telling us where the money is going. And we can't
even do that. And I think in some cases we are finding that it
is vanishing in some very interesting ways. So right now we
can't even say where the money is going.
And we really need to be focusing on the next issue, which
is, OK, we figured out where the money is going, now is it
actually making a difference? And when you don't know where the
money is going and where you can't track the money, you can't
tell whether it is making a difference. Is it four out of the
five or five out of the last 6 years that we haven't had a
clean audit?
Ms. Lewis. Four out of the last five have not been clean.
1997 was clean, and 1999 is expected to be four qualified
opinions, plus one disclaimer on one statement.
Mr. Hoekstra. As I said earlier, for the layperson who
hears qualified opinion, for the auditors, they said this is a
C minus to a D minus, and when you are making the adjustments,
compared to the $1.7 trillion in the Department of Defense,
that may be pretty good. But if you are comparing it to what is
going on in the private sector, a C minus to a D minus, the
auditors are telling you the trading of the stock would be
suspended, and there would be an investigation. That is not
good enough.
It maybe is not technically correct. I am not an auditor. I
call it another failed audit because the auditors are saying,
and the public in the private world, this stock in this company
would be in big trouble. And that is why I refer to this as it
is time to view this as a crisis because of the dollars that
are going into this area and because of the issue that we are
dealing with. Every dollar is important.
But when we are spending and committing it to our kids, and
the parties are tripping over each other to see who can pour
more money into that department and invest it on our kids and
say, ``Look, now, we are spending more than you are.'' ``No, we
have got more than you do,'' and all we are doing is we are
pouring it into a Department that can't tell us really how much
we are spending or where we are spending it is unacceptable. I
am hoping that by putting the extra money through GAO, by
recognizing that it is a situation for crisis management, maybe
we will get the attention of the Department that they will
actually focus on it and get it done because it has to happen,
and it has to happen sooner rather than later.
Thank you.
Chairman Kasich. Mr. Markey, do you want to go now or do
you want to--the gentleman is recognized.
Mr. Markey. Thank you, Mr. Chairman.
Ms. Gaffney, it is not your job to celebrate successes.
That is not what we are doing here today. But upon reading your
testimony, I am puzzled by your taking HUD to task for spending
$2 million on a contractor to get the books balanced, and you
lead off your testimony with that expenditure.
HUD has been properly criticized over the years for not
being able to balance its books. That has been a historical
problem. Secretary Cuomo appears to have decided, perhaps out
of frustration with the history of HUD, to stop trying to run a
large cabinet agency without knowing where the money went, get
a baseline. What is going on? Why have there been so many
problems in the past?
An IG should be praising, Ms. Gaffney, that kind of
intolerance of sloppy bookkeeping, not leading off your
testimony with slamming him for it.
Now, I am gravely puzzled by a very disturbing trend within
your own office with regard to making cash recoveries. In the
last 5 years, the total cost savings and cash recoveries
reported by the IG's office at HUD has fallen from $262 million
in 1994 to $78 million in 1999. There has been, in other words,
a 70 percent decline in this recovery activity in your office
during the time of your tenure. That activity seems to have
collapsed on your beat.
Now, often we can blame that kind of collapse on a small
office losing key staff, but in your case, the IG's budget at
HUD has risen dramatically over the same period from $46
million in 1994 to $81 million in 1999, which is a 76 percent
increase in your budget over the same time period that there
has been a 70 percent decline from a peak in 1994 down to 1999.
In fact, in 1999, those two lines cross for the first time
in history. That is, for the first time, the IG spent more
money than it recovered at HUD, the law of diminishing returns
having set in.
Put another way, while previous IGs recovered $5 to $6 for
every dollar spent, your semiannual report to Congress shows
that this ratio has fallen from 5-to-1 in 1994 to 3-to-1 in
1995 to 2-to-1 in 1997 to 1.5-to-1 in 1998 to less than 1-to-1
in 1999.
Now, I want to place this chart in the record, if I may,
Mr. Chairman.
Chairman Kasich. I am impressed with all your investigative
research here on the IG.
[The information of Congressman Edward Markey follows:]
HUD INSPECTOR GENERAL
[Dollars in thousands]
--------------------------------------------------------------------------------------------------------------------------------------------------------
Inspector General's budget, Inspector General's reported total cost savings and cash
Fiscal year appropriated level recovery \1\
--------------------------------------------------------------------------------------------------------------------------------------------------------
1989................................................. $26,011 \2\ $177,355
1990................................................. 30,028 192,890
1991................................................. 38,804 262,964
1992................................................. 44,665 229,159
1993................................................. 46,160 250,846
1994................................................. 46,305 262,359
1995................................................. 47,356 121,462
1996................................................. 47,850 122,213
1997................................................. 52,850 82,832
1998................................................. 66,394 91,382
1999................................................. 81,910 77,897
--------------------------------------------------------------------------------------------------------------------------------------------------------
\1\ Derived from Profiles of Performance included in the Inspector General's Semi-Annual Reports to Congress. Figures include cash recoveries, savings,
cost efficiencies realized, commitments to recover funds, cost efficiencies sustained, and fines levied. Prior to 1994, figures may include amounts
due to HUD program participants.
\2\ Prior to 1989, the IG did not report cost efficiencies realized.
Mr. Markey. I think that you have conducted yourself, Mr.
Chairman, in a way that has inspired the rest of us.
[Laughter.]
Chairman Kasich. Thank you.
Mr. Markey. To the same kind of green eyeshades, bigger,
and looking at this hearing the way you would want us to.
Ms. Gaffney, a cynic might conclude that we can't afford to
keep you at work with that declining ratio. Now, if things
don't change fast, your own management of the IG's office will
become a major problem in and of itself. So how do you account
for your record of now spending more money but recovering less?
And what do you intend on doing on reversing that collapse?
Ms. Gaffney. Mr. Markey, before I answer that question,
could I go to your first point, please, about the $2 million?
Mr. Markey. Oh, please.
Ms. Gaffney. What we are all hoping for is that we will
have financial systems that will generate financial statements
that will be auditable. Yes, it is wonderful--and if I didn't
say it--that people now care about getting unqualified
opinions, about putting together financial statements. That is
wonderful. But if you have to do manual work and hire
contractors to put those statements together instead of getting
them from your financial systems, the problem with that is you
can't be sure that you are going to get an unqualified opinion
the next year.
So the focus long term needs to be getting your financial
systems in shape. Those financial systems are still not in
shape at HUD, and that is what my point is, that that is what
we need to work on. That needs----
Mr. Markey. Do you have a problem in getting a baseline
number and spending----
Ms. Gaffney. Yes.
Mr. Markey [continuing]. And spending a relatively small
percentage of the budget in order to start all over? You have a
problem----
Ms. Gaffney. Mr. Markey, let me explain to you the current
situation at HUD. This year HUD implemented a new core
accounting system. It has been unable to maintain connectivity
across the board with the feeder systems in HUD.
HUD didn't used to have one standard general ledger. This
was a wonderful chance, a wonderful effort to develop one
standard general ledger in HUD.
It has been difficult. The feeder systems aren't compatible
with the new standard general ledger. So what has happened now
is that they can't even post transaction changes in the
standard general ledger to get financial statements. They are
being posted in an entirely different system.
Am I making myself clear?
Mr. Markey. No, you are not. You are not. Not in terms of--
you know, let me tell you this, OK? One of the things that this
Budget Committee has on an ongoing basis is the difficulty of
getting honest numbers. This committee has the highest
percentage of--the highest prevarication coefficient in
testimony before this committee than any other committee in
terms of the numbers. So I personally believe that if a Cabinet
Secretary says let's go back and examine all these premises
from the past, let's get a zero-based budgeting here and start
all over again, yes, there is going to be some discombobulation
at the get-go. But in setting up that new system, setting up
that tougher accountability, obviously you are trying to jar
loose a lot of the bureaucratic inertia which has been in place
over the years.
You know, we can disagree on this, OK? But I just think
your focusing on a $2 million expenditure at the lead-off of
your testimony is--you know, there is a bit of--I don't know.
There is a bit of snideness in the testimony, but----
Ms. Gaffney. I didn't intend that.
Mr. Markey. I know that, but it comes through. And I just--
my time is going to run out.
Chairman Kasich. No, it isn't going to run out. Ed, would
you yield for a second? I think what the gentle lady is trying
to say is that--and she is talking in a language of an
accountant. What she is trying to say is she would like the
people at HUD to be able to add their own books and make the
numbers add up.
Ms. Gaffney. Right.
Chairman Kasich. That is what she is saying. She is saying
she doesn't understand why we have got to hire somebody out
here to decide what is going on in their own business. That is
what she was saying about the $2 million.
Mr. Markey. No, I appreciate that.
Chairman Kasich. And I would think you would want them to
be able to reconcile their numbers.
Mr. Markey. I would want them to. I guess my point is that
the agency was trying to accomplish a good purpose. The purpose
was----
Ms. Gaffney. I agree with----
Mr. Markey [continuing]. To make the agency more
accountable, to begin a process by which somebody is coming in
from the outside and bringing all these internal parties that
are inside the bureaucracy at HUD, bringing them together and
trying to make some rational sense out of after a generation of
bitter criticism of HUD being an inefficiently managed agency.
I am saying that in doing that, that is something to be
praised.
Ms. Gaffney. And there were days----
Chairman Kasich. She did say earlier----
Ms. Gaffney. There were years when Cabinet agencies didn't
care whether they were able to produce financial statements.
Chairman Kasich. It is just curious to me that we have only
picked on one IG since we have come in this room today.
Mr. Markey. How much time do I have? [Laughter.]
Chairman Kasich. But, wait, let me just tell you--but we
have only picked on one, Ed. It is curious to me. It is fair to
ask them the tough questions, also, but we have only picked on
one.
The other thing that I wanted to say to you is----
Mr. Markey. She may have an explanation. Why don't you give
her--she hasn't even had a chance yet, John, to give her
explanation.
Chairman Kasich. Ed, I am not trying----
Ms. Gaffney. I would like to do that.
Mr. Markey. She may have a legitimate explanation. You are
defending someone before she has explained----
Chairman Kasich. I am not defending her. I just don't want
you to badger the witness. That is all.
Mr. Markey. I appreciate that.
Chairman Kasich. The only thing I am saying about what she
said earlier--I wanted to explain to you--is she said with the
items that Secretary Cuomo has put in place, she would hate for
somebody to come in and dismantle them just because it happens
to be, you know, a Cabinet Secretary who happens to be a
Democrat. She was pleading for consistency in the next HUD
Secretary.
Look, I don't want to get in the middle. I just don't like
to see anybody get--I mean, you are doing fine. And Secretary
Cuomo has just called me, and we are working together on a
major item that I am very happy about. The gentleman has got
his time.
Mr. Markey. OK. Could you answer the second part of the
question?
Ms. Gaffney. Yes, Mr. Markey. I have our recovery numbers
going back to 1992 through 1999. They do not resemble yours, so
I don't know what your chart is, but let me read them across.
Mr. Markey. I am using the numbers that are derived from
the profiles of performance included in the inspector general's
semiannual reports----
Ms. Gaffney. So am I.
Mr. Markey [continuing]. To Congress from your office.
Ms. Gaffney. So am I.
Mr. Markey. OK.
Ms. Gaffney. In 1992, the total recoveries were $49
million. In 1999, they were $48 million. In the middle years,
they went as high as 73, 59.
Two things you need to know--three things. First of all, in
1992 and 1993, there were major----
Mr. Markey. Excuse me. I am sorry.
Ms. Gaffney. In 1992 and 1993, there were major reporting
errors. I wasn't in the HUD OIG at that point, but there was
$40 million that was included in the recovery numbers in 1992
that shouldn't have been, $14 million in 1993.
Nonetheless, your point is well made. Our budget has
increased over this period, and what I am saying to you is that
the recoveries have remained pretty static. And you are right
to ask for an explanation. There is one big explanation: that
is, when I went to the HUD OIG, I said I don't care about
numbers. What I care about is quality work and having a
positive impact on HUD.
The reason I said that, Mr. Markey, is all of the IGs
during the late 1980s and the early 1990s were engaged in what
I considered a pretty counterproductive effort. They had
accepted dollar recoveries as the one measure of performance
for IGs, and it is what I tried to say to you before. People
aren't dumb. If I say to you give me numbers, you will give me
numbers, OK, and you will fabricate--well, that is too strong a
word. However, I really think that our focus should not be on
generating that kind of numbers but on solid, substantive work.
Mr. Markey. Good. Thank you. And that is a fair answer.
That is a very fair answer. Thank you.
Ms. Gaffney. Thank you.
Mr. Markey. OK. Thank you, Mr. Chairman.
Chairman Kasich. Thank you, Mr. Markey.
The gentleman from New Hampshire.
Mr. Sununu. Thank you, Mr. Chairman.
As always, somehow fate conspires to place me after Mr.
Markey, and as always, I have drawn yet another kernel of
knowledge from his wisdom: prevarication coefficient. I will
remember that phrase, that fabulous metric by which we should
measure the performance of all of our committees. Thank you,
Mr. Markey, and thank you, Mr. Chairman----
Mr. Markey. Will you yield just briefly? Can I tell you
where we got it from? When I was running for State
representative the first time----
Mr. Sununu. I thought you just made it up on the spot.
Mr. Markey. No, no. When I was running for State
representative for the first time in 1972 and all I had were my
two brothers, so the three of us were ringing doorbells. And
after about a month, we decided that we had won because
everyone was telling us that they were with us at the doors
that we were ringing.
So then finally one night we decided to build in a
prevarication coefficient: How many people were actually
telling us the truth or just being nice to the young men
ringing the doorbells so that they wouldn't go away
disappointed? So we decided it was about a one-third
prevarication coefficient at the doors. So we had to actually
increase our work rather than reduce it.
Mr. Sununu. Well, maybe the 33 percent will be our
threshold for this committee from now on.
Let me offer a comment in response to the point that Mr.
Markey made, and I think that the inspector general's response
was certainly appropriate and giving credit for spending the $2
million to have good books. But my experience is that there is
a fundamental reason for being concerned about that, and that
is because if you don't have the financial systems in place
that give you that unqualified opinion, you may spend the $2
million to know where you are, but the financial systems will
have no ability to provide for improvement. So that you may
know where you are, but you don't have good enough financial
systems to bring down or to avoid the $1 billion in fraudulent
Section 8 payments that are described in the material that we
were provided with. You don't have financial systems in place
that are going to do anything about increases in FHA default
rates or in poor performance in collecting bad debt.
If you want to improve in those areas, you are going to
need the kind of financial systems in place that can give you
the unqualified audit without spending the $2 million.
So while I would agree with the point the gentleman made
that it is certainly an achievement to have the audit in place,
unless the systems are better we are not going to be able to
make any material improvement.
I would like to ask Inspector General Gaffney to comment on
a few other points that I had a chance to raise with the
Comptroller General.
First, you said in a report you did in March of 1999, or I
guess it was testimony before the Banking Committee, that you
weren't able to reach any conclusions about the 2020 reforms.
My question is: Since then, over the last year, have you been
able to gather evidence or seen anything that would allow you
to make a more specific qualification of what has or hasn't
been successful in those reforms?
Ms. Gaffney. First of all, the position that HUD is in, you
know, is that it downsized very severely, and then it scrambled
to come up with ways to compensate for the downsizing. At this
point, I think you could say that the single-family property
disposition situation is certainly not in good shape. The 2020
response to downsizing the single-family staff was management
and marketing contractors. Then we had the InTown debacle.
Right now the inventory is higher than it was when we
started those contracts. More importantly, it is aging
significantly, and you know the impact that that has on
neighborhoods.
I believe HUD has a problem with contract administration.
Eventually, I sincerely hope it will get its act together and
this will work.
Mr. Sununu. Is poor contract administration the single
biggest reason for the deterioration in the FHA portfolio, the
HUD-owned properties?
Ms. Gaffney. At this point, I don't have enough information
about all the management and marketing contracts, but InTown
was the major influence in that buildup of the inventory.
Now, HUD terminated that contract in September, but by that
time InTown had disposed of almost no property at all.
Mr. Sununu. Has anything----
Ms. Gaffney. And that wasn't a contract administration
problem. They knew, HUD knew what was going on. But the award
of that contract was problematic.
That contract covered 40 percent of our REO properties, and
OIG auditors could find no evidence that HUD looked at InTown's
financial capability.
Mr. Sununu. It seems to me to be quite counterintuitive
that this portfolio would deteriorate--would expand and grow at
a time when economic prosperity around the country would seem
to create the most favorable possible climate for disposition.
Ms. Gaffney. Right.
Mr. Sununu. What other causes could there be for such
deterioration?
Ms. Gaffney. The major cause, in the last 10 months, the
last year, has been InTown Management, which simply did not
perform at all. Prior to that, the inventory had been
increasing, and our auditors attributed it to the severe cuts
in single-family staffing. And their finding was, when----
Mr. Sununu. What was the reduction in staffing?
Ms. Gaffney. It was cut in half, from about 2,000 to 1,000.
And what the auditors further found was that in HUD, if it is a
choice between doing something that generates more business or
taking care of business on hand, it is the new business that
takes priority.
So, for instance, if you have a choice between using scarce
staff to do more insurance or to take care of this inventory of
REO, you choose to generate more insurance.
Mr. Sununu. What are they doing now? InTown went bankrupt
in September, correct?
Ms. Gaffney. They redistributed the InTown----
Mr. Sununu. Has any progress been made in the last 6
months?
Ms. Gaffney. I think in the last 2 or 3 months or perhaps 4
or 5, the inventory hit a high of about 52,000. It is down to
47,000. So that is good news. The bad news is that every single
month over the last year the percentage of properties over 6
months old and over 12 months old has increased, and that is
through January 30.
Mr. Sununu. Well, it would seem to me that has little or
nothing to do with InTown, then, or with the bankruptcy, that
there is obviously far more fundamental problems than just the
contract management.
Ms. Gaffney. Well, it would seem to me that the contractors
are finding it in their interest to under the cream of the
crop, that is, houses newly coming into the inventory, rather
than deal with the old stuff that has been sitting around for a
long time.
Mr. Sununu. What other reforms have been suggested or
initiated in the past 3 or 4 months?
Ms. Gaffney. In the past 3 or 4 months, HUD has done an
income match. That is the income verification issue.
Mr. Sununu. What does ``just currently'' mean?
Ms. Gaffney. In September, I think they did the first ever
broad income match. And just yesterday they started sending out
280,000 letters to residents notifying them that it appears
that you have underreported your income by significant amounts.
Mr. Sununu. Notwithstanding the timeliness of that
initiative, has anything been undertaken before to try to deal
with the problem of underreporting income?
Ms. Gaffney. Over the years, they have done a variety of
pilots. Every year we do a sample for the purpose of the
financial statements.
Mr. Sununu. Is there a systemwide methodology used for
income verification?
Ms. Gaffney. They are proposing a systemwide methodology
for----
Mr. Sununu. But there is not one now----
Ms. Gaffney [continuing]. The first time. Well, we are
starting down that road for the first time.
Mr. Sununu. How is income verification done currently,
then? Is it just inquiry, through the application process? They
ask ``what is your income,'' and you write it down on the form.
Ms. Gaffney. Right, and--yes.
Mr. Sununu. But there is no----
Ms. Gaffney. Systematic way----
Mr. Sununu [continuing]. Formal system or----
Ms. Gaffney. Right.
Mr. Sununu [continuing]. Where there is a verification
process through an employer?
Ms. Gaffney. There has not been, no.
Mr. Sununu. At the local level, is there ever an effort to
verify income through an employer?
Ms. Gaffney. They are supposed to be doing that at the
initial screening.
Mr. Sununu. But there is no process, no HUD-driven process,
to verify income?
Ms. Gaffney. No, has not been. There is now.
Mr. Sununu. Until yesterday.
Ms. Gaffney. Right. Well, very recently.
Mr. Sununu. Or was the initiative that began just
yesterday, was that directed toward customers or was that
directed through the bureaucracy? In other words, is that an
attempt to set in place a verification system or simply to
double-check with customers?
Ms. Gaffney. No, it is intended to be a verification
system, and this is a system that--it matches----
Mr. Sununu. Who did the letters go to?
Ms. Gaffney. Residents in D.C.
Mr. Sununu. Right. So how is sending a resident a letter
saying tell us again what your income is any different than
just asking them verbally upon application and not actually
verifying?
Ms. Gaffney. What this letter does is it says we have
matched what you told your housing authority your income was
against IRS and Social Security data, and we find that, based
on that match, you underreported your income by $10,000. You
must now----
Mr. Sununu. OK. So this is a case where--I am sorry. So
they have actually done the verification through the IRS.
Ms. Gaffney. Right. Right. You must now march yourself to
the housing authority and give them this information.
Mr. Sununu. Is there any proposal to expand that beyond the
D.C. area?
Ms. Gaffney. Oh, yes. The mailing of the letters to the
residents was to have begun in March. All of a sudden it has
just been moved up.
Mr. Sununu. Moved up.
Ms. Gaffney. They have two hundred----
Mr. Sununu. Well, you know we are on an accelerated
appropriations cycle this year.
Ms. Gaffney. Yes. There are 280,000 letters that are going
out nationwide.
Mr. Sununu. Thank you very much. Thank you.
Chairman Kasich. Well, I want to thank all of you for being
here, and what we hope to do is, again, create these task
forces and have members chair them, and I think what you are
going to end up finding is that we are going to call each of
you back, along with the GAO, to focus on some of these things.
The first thing I am going to tell you is we have got to
find a way in which people can do their own books. I just think
that ought to be the one principle. We ought to know where the
money is. We ought to know where it goes. We ought to know what
it goes for. But we just have to break this down somehow, and I
think I have got to figure out a way to institutionalize this
in this committee now.
Our highest year was 1997 where we wrote the budget,
basically, big chunks of it, and now we are into surpluses, and
our role is different now, particularly with surpluses, nobody
is really too interested in saving money. But they are
interested in reform.
So we are going to figure out a way to do this, and I would
like to be able to accomplish some things this year. Hey, if we
just got it done, that we got the IRS and the Education
Department to work together on a match and actually
accomplished it, that would be significant.
Yes, ma'am?
Ms. Lewis. If I could just add one thing, I would like to
note that for the brand-new FAFSA, the Free Application for
Federal Student Aid, for the year 2000-01, the Department, with
OMB's approval, did change that form to note that the Secretary
of Education has the authority to verify income reported on
this application with the Internal Revenue Service. So the
actual law that was passed was incorporated into the form,
which is up on the Web, and obviously it is in hard copy. So it
does perhaps----
Chairman Kasich. Well, like Andy Griffith----
Ms. Lewis [continuing]. Act as a deterrent to someone who
may be thinking----
Chairman Kasich. Right.
Ms. Lewis. The only other thing, if I may add----
Chairman Kasich. Well, let me just--what you are saying is
like Andy Griffith told the guy, ``Put the signs up saying we
have radar.'' The guy says, ``We don't have any radar.'' He
says, ``Yeah, but if you put the sign up, they might think we
have the radar.''
I mean, I guess that is what that is. You know, like, well,
we could check. But you are not checking. Let's not talk--I
mean, we have got----
Ms. Lewis. It is not a verification. It is simply a
notice--or the persons who put the security sign in front of
their house and don't actually have the contract.
Chairman Kasich. Right.
Ms. Lewis. But it was intended to be put in there to bring
this to persons' attention. The only thing, if I may add,
perhaps out of scope here, is I am very privileged to testify
with my brand-new colleagues here in the IG community before
this committee. I have known Susan Gaffney as a professional, a
career civil servant back at OMB, as an inspector general. She
is a person of integrity, very committed to her job, and the
job she does at HUD. And I recognize Mr. Markey is not here. He
had to leave.
Ms. Gaffney. Please stop this.
Ms. Lewis. But it is very important for me to put that on
the record.
Chairman Kasich. I think she did all right there.
[Laughter.]
I will say to you, Ms. Lewis--it is clear why Ed left. No,
I am just kidding.
Listen, I would want to say to you that, my mother used to
teach me lessons about the people that would stick up for you.
And it's true in our society today there just aren't enough
people sticking up for enough people. And that is very nice of
you. I am just telling you as another person. For you to say
that about Ms. Gaffney is awfully nice, and that says a lot to
me about you.
So I think she is going to do just fine, and I think she
gives as good as she gets, from what I understand, of this
ongoing soap opera. [Laughter.]
But somehow we need to recognize the fact that the people
at HUD are making an effort. Some of these efforts, a lot, are
coming into play, just recently, but they are making an effort
there. And at the same time, we have a long way to go. These
systems are enormous. And we are just going to keep at it, and
we are not--nobody here is intending, to bang on anybody or
cast aspersions on anybody. Just so we are all plugging
together and working together, and I think that is what all of
you want. It is certainly what I want.
But I want people to know that this isn't the end of this.
I mean, I hope not. I don't want to be another politician to
say I shall not and then I do. But I would ideally like to keep
this going.
I have to tell you honestly that these efforts can only
happen if I can get my colleagues to be interested. And if we
had not been out of session, more members would have been here.
My personal view is that since everybody can get a piece of
this in this Budget Committee and carry and make something
theirs, that is what gives us the greatest opportunity to be
able to really carry this on and get some good things done. And
then wouldn't it be a wonderful thing if you could give us
things and we could actually do something. I mean, that would
make things really great. And that is where I hope we are going
to go with this. We just have to wait and see.
I have to tell you that we cannot do these things without
GAO and the IGs. I don't know how--I would like to have my own
staff to do investigations independent from all of you, but I
don't have that and I can't do it. So we need you, and we are
going to put our staff into this as well, and we want to be as
constructive as we can.
But I appreciate all of you being here. I appreciate all of
your hard work. I also want to tell you that I also appreciate
how it is sometimes when you are uncomfortable in the process
of doing your work. You have to go in those buildings, and when
you show up, it is kind of like somebody calling into the boss
and saying, ``Mike Wallace just showed up from `60 Minutes.'
Isn't this exciting?'' You know, and you have to keep going
back in there, and it is not an easy job. You have a tough job.
But you have to do it.
When you get to the point where you can't do it anymore,
then you have got to let somebody else do it.
But thank you all very much, and I look forward to further
contact.
Mr. Hoekstra. Mr. Chairman.
Chairman Kasich. The gentleman from Michigan.
Mr. Hoekstra. I ask unanimous consent that all written
statements and any written responses to questions may be
included in the record.
Chairman Kasich. Does anybody object to that? Ms. Gaffney,
do you want to object to that? [Laughter.]
OK.
[The prepared statement of Congressman Paul Ryan follows:]
Prepared Statement of Hon. Paul Ryan, a Representative in Congress From
the State of Wisconsin
Thank you, Mr. Chairman, and thank you for giving us the
opportunity to explore possible fraud, waste and abuse in the Federal
Government. I believe this issue, unfortunately, is in danger of being
completely overlooked and ignored in the current era of budget
surpluses.
I think that we would all agree here that if any government fraud,
waste or abuse exists, it should be addressed and eliminated regardless
of what the current budget circumstances are. There is a temptation, as
seen in the President's budget proposal, to spend the surplus and
automatically increase spending each year without giving any thought
for the need to aggressively examine whether the Federal Government
could be made into a more efficient machine. This is very troubling to
me.
The constituents in the District I serve provided me with troubling
examples of waste in the Federal Government. I turned to them for their
recommendations from their own personal experience and observations.
Gregory Campbell, the President of Carthage College, brought to my
attention a perfect example of waste in the Federal Government. The
Immigration and Naturalization Service (INS) requires colleges and
universities to collect a $95 fee from each foreign student and remit
it to the INS. To assist colleges in implementing this requirement, the
INS is developing an internet-based reporting system (The Coordinated
Interagency Partnership Regulating International Students or CIPRIS).
CIPRIS, however, is behind schedule. Nonetheless, the INS regulation
stipulates that fee collection is to be retroactive to August 1, 1999.
This means that institutions like Carthage College will be required to
submit college fees for several years before the system is operational.
Even worse, because the INS is behind schedule to meet their own
legislative requirement, this regulation poses an unfunded mandate on
these educational institutions.
Another recommendation came from Steven C. Molnar, Lieutenant of
Police in Franksville, Wisconsin. Lt. Molnar told me that Congress
should look more closely at the Community Oriented Policing (COPs)
Program to make sure that it is truly contributing to the reduction in
crime. And he's right. He is concerned that in the end, COPs may not
achieve the original goals and objectives it was set out to do.
Finally, the overwhelming response from my constituents is that
taxpayers are victimized by wasteful government regulations in two
ways: (1) they have to spend a great deal of time and money to comply
with wasteful, excessive regulations and (2) they have to fund these
regulations and implementations with their hard-earned tax dollars.
Gary Huss, President of Hudapack Metal Treating in Elkhorn, Wisconsin
put it best when he said, ``In many cases, a solution is proposed,
mandated, and backed punitively before the problem is defined.
Expensive solutions searching for a problem.''
Mr. Chairman, there is no excuse to put taxpayers in the position
of paying for and being victims of government fraud, waste and abuse.
Holding government agencies accountable in the era of budget surpluses
is just as important as when the government is operating under a budget
deficit. I appreciate the opportunity to work with you and my
colleagues on the committee to make this a priority and look forward to
implementing these priorities in the upcoming budget.
Thank you.
Chairman Kasich. We will stand adjourned.
[Whereupon, at 2:42 p.m., the committee was adjourned.]