[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.
---------------------------------------------------------------------------
    \5\ Medicare: Need to Overhaul Costly Payment System for Medical 
Equipment and Supplies (GAO/HEHS-98-102, May 12, 1998).
---------------------------------------------------------------------------
     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\
---------------------------------------------------------------------------
    \6\ Medicare: Better Information Can Help Insure that Refinements 
to BBA Reforms Lead to Appropriate Payments (GAO/T-HEHS-00-14, Oct. 1, 
1999).
---------------------------------------------------------------------------

                      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.
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \8\ Medicaid: Federal and State Leadership Needed to Control Fraud 
and Abuse (GAO/T-HEHS-00-30, Nov. 9, 1999).
---------------------------------------------------------------------------

               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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \31\ Intercity Passenger Rail: Amtrak Faces Challenges in Improving 
its Financial Condition (GAO/T-RCED-00-30, Oct. 28, 1999).
---------------------------------------------------------------------------
     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\
---------------------------------------------------------------------------
    \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).
---------------------------------------------------------------------------
     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.]

                                
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