[House Hearing, 107 Congress]
[From the U.S. Government Printing Office]



 
     ARE THE FINANCIAL RECORDS OF THE FEDERAL GOVERNMENT RELIABLE?

=======================================================================

                                HEARING

                               before the

                 SUBCOMMITTEE ON GOVERNMENT EFFICIENCY,
                        FINANCIAL MANAGEMENT AND
                      INTERGOVERNMENTAL RELATIONS

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             FIRST SESSION

                               __________

                             MARCH 30, 2001

                               __________

                           Serial No. 107-31

                               __________

       Printed for the use of the Committee on Government Reform







  Available via the World Wide Web: http://www.gpo.gov/congress/house
                      http://www.house.gov/reform


                        U.S. GOVERNMENT PRINTING OFFICE
76-938                          WASHINGTON : 2002
____________________________________________________________________________
For Sale by the Superintendent of Documents, U.S. Government Printing Office
Internet: bookstore.gpo.gov  Phone: toll free (866) 512-1800; (202) 512-1800  
Fax: (202) 512-2250 Mail: Stop SSOP, Washington, DC 20402-0001










                     COMMITTEE ON GOVERNMENT REFORM

                     DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York         HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland       TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut       MAJOR R. OWENS, New York
ILEANA ROS-LEHTINEN, Florida         EDOLPHUS TOWNS, New York
JOHN M. McHUGH, New York             PAUL E. KANJORSKI, Pennsylvania
STEPHEN HORN, California             PATSY T. MINK, Hawaii
JOHN L. MICA, Florida                CAROLYN B. MALONEY, New York
THOMAS M. DAVIS, Virginia            ELEANOR HOLMES NORTON, Washington, 
MARK E. SOUDER, Indiana                  DC
JOE SCARBOROUGH, Florida             ELIJAH E. CUMMINGS, Maryland
STEVEN C. LaTOURETTE, Ohio           DENNIS J. KUCINICH, Ohio
BOB BARR, Georgia                    ROD R. BLAGOJEVICH, Illinois
DAN MILLER, Florida                  DANNY K. DAVIS, Illinois
DOUG OSE, California                 JOHN F. TIERNEY, Massachusetts
RON LEWIS, Kentucky                  JIM TURNER, Texas
JO ANN DAVIS, Virginia               THOMAS H. ALLEN, Maine
TODD RUSSELL PLATTS, Pennsylvania    JANICE D. SCHAKOWSKY, Illinois
DAVE WELDON, Florida                 WM. LACY CLAY, Missouri
CHRIS CANNON, Utah                   ------ ------
ADAM H. PUTNAM, Florida              ------ ------
C.L. ``BUTCH'' OTTER, Idaho                      ------
EDWARD L. SCHROCK, Virginia          BERNARD SANDERS, Vermont 
------ ------                            (Independent)


                      Kevin Binger, Staff Director
                 Daniel R. Moll, Deputy Staff Director
                     James C. Wilson, Chief Counsel
                     Robert A. Briggs, Chief Clerk
                 Phil Schiliro, Minority Staff Director

    Subcommittee on Government Efficiency, Financial Management and 
                      Intergovernmental Relations

                   STEPHEN HORN, California, Chairman
RON LEWIS, Kentucky                  JANICE D. SCHAKOWSKY, Illinois
DAN MILLER, Florida                  MAJOR R. OWENS, New York
DOUG OSE, California                 PAUL E. KANJORSKI, Pennsylvania
ADAM H. PUTNAM, Florida              CAROLYN B. MALONEY, New York

                               Ex Officio

DAN BURTON, Indiana                  HENRY A. WAXMAN, California
          J. Russell George, Staff Director and Chief Counsel
                 Earl Pierce, Professional Staff Member
                        Grant Newman, Assistant
          Mark Stephenson, Minority Professional Staff Member









                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on March 30, 2001...................................     1
Statement of:
    Daniels, Mitch, Director, Office of Management and Budget....    60
    Walker, David M., Comptroller General of the United States, 
      General Accounting Office; and Donald V. Hammond, Acting 
      Undersecretary for Domestic Finance, Department of the 
      Treasury...................................................     3
Letters, statements, etc., submitted for the record by:
    Burton, Hon. Dan, a Representative in Congress from the State 
      of Indiana, prepared statement of..........................    75
    Daniels, Mitch, Director, Office of Management and Budget, 
      prepared statement of......................................    62
    Hammond, Donald V., Acting Undersecretary for Domestic 
      Finance, Department of the Treasury, prepared statement of.    42
    O'Neill, Paul, Secretary of the Treasury, prepared statement 
      of.........................................................    79
    Schakowsky, Hon. Janice D., a Representative in Congress from 
      the State of Illinois, prepared statement of...............    77
    Walker, David M., Comptroller General of the United States, 
      General Accounting Office, prepared statement of...........     8











     ARE THE FINANCIAL RECORDS OF THE FEDERAL GOVERNMENT RELIABLE?

                              ----------                              


                         FRIDAY, MARCH 30, 2001

                  House of Representatives,
  Subcommittee on Government Efficiency, Financial 
        Management and Intergovernmental Relations,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10 a.m., in 
room 2154, Rayburn House Office Building, Hon. Stephen Horn 
(chairman of the subcommittee) presiding.
    Present: Representatives Horn and Putnam.
    Staff present: J. Russell George, staff director and chief 
counsel; Dianne Guensberg, detailee; Bonnie Heald, director of 
communications; Earl Pierce, professional staff member; Matthew 
Ebert, policy advisor; Grant Newman, assistant to the 
committee; Brian Homm, intern; Mark Stephenson, minority 
professional staff member; and Jean Gosa, minority clerk.
    Mr. Horn. The first hearing of the Subcommittee on 
Government Efficiency, Financial Management and 
Intergovernmental Relations will come to order.
    We are here today to examine the executive branch of the 
Federal Government's progress in accounting for the billions of 
taxpayer dollars it spends each year. Those billions now add up 
to trillions of taxpayer dollars.
    For the record, it should be clear that the previous 
President and Cabinet are responsible for the balance sheets 
that are before us. The General Accounting Office and the 
subcommittee staff have reviewed all of the audits.
    Throughout the past decade, Congress has sought ways to 
make the executive branch of the Federal Government financially 
accountable to the Nation's taxpayers. In 1990, Congress 
approved, and the President signed into law the Chief Financial 
Officers Act. This law established the position of chief 
financial officer in each of the 24 major executive branch 
departments and agencies. Similar to chief financial officers 
in the private sector, the government's chief financial 
officers are responsible for the overall financial management 
of their respective agencies.
    In 1997, the Chief Financial Officers Act was amended to 
require the 24 major Federal agencies to prepare annual audited 
financial statements by March 1st following the end of the 
government's fiscal year on September 30th. In addition, the 
amended law requires the Department of the Treasury to prepare 
annual consolidated governmentwide financial statements.
    The General Accounting Office is headed by the very able 
Comptroller General of the United States, Mr. Walker. It audits 
and reports on these statements by March 31st.
    The General Accounting Office's most recent report for 
fiscal year 2000 is being released today. Based on the GAO 
report, the General Accounting Office and agency auditors' 
findings, the subcommittee is also releasing its report card 
today grading the 24 agencies on their progress in improving 
their financial management. The ultimate goal is to provide 
reliable information on program costs and benefits. This will 
allow decisionmakers to determine accurately the value of 
Federal programs and whether they are worth the cost to the 
taxpayers.
    The first step in the process, of course, is to know the 
cost. Although agencies have made progress since their first 
attempt to prepare financial statements in 1998, we are still a 
long way from achieving that basic goal. Each year an 
increasing number of agencies have been able to produce clean 
auditable financial statements. This progress was often 
achieved through very difficult efforts.
    This year, for the first time, all 24 agencies managed to 
file these statements by the March 1st deadline. Also, this 
year the number of agencies receiving clean audit opinions has 
risen. Nevertheless, the government earned a grade of C-minus 
for fiscal year 2000.
    Three agencies received A's, which is one more than last 
year. That is progress. Auditors report that the Department of 
Energy, the National Aeronautics and Space Administration and 
the Small Business Administration have effective financial 
management. This is a notable achievement for the Department of 
Energy and the Small Business Administration, both of which 
managed to overcome significant financial management problems 
reported in the previous years.
    In addition, the Office of Personnel Management admirably 
pulled its grade up from an F last year to a B-minus this year. 
Despite that progress, the failures of a few agencies continue 
to tarnish the overall record of the executive branch of the 
Federal Government. In fact, two agencies regressed. The 
National Science Foundation fell from an A to a B-plus, and the 
Department of Transportation fell from a D-plus to a D-minus.
    Most disheartening, however, is the abysmal lack of 
achievement by two significant government departments and one 
agency. For the 5th consecutive year, the Agency for 
International Development and two of the government's largest 
departments, the Department of Defense and the Department of 
Agriculture, still have major problems. They again received the 
unacceptable grade of F.
    Now we have a new administration, and hopefully it will 
focus close attention on these continuing failures. If we 
cannot accurately account for today's expenditures, how can we 
plan for future surpluses?
    We welcome our witnesses today who are most qualified to 
discuss this important matter: The Honorable David M. Walker, 
the Comptroller General of the United States; the Honorable 
Mitchell E. Daniels, Jr., the Bush administration Director of 
the Office of Management and Budget; and the Honorable Donald 
V. Hammond, Acting Undersecretary for Domestic Finance for the 
Department of Treasury.
    Gentleman, we look forward to your testimony, your insights 
and your recommendations, which will work to end this 
intolerable situation in the government's financial management.
    Again, we must say that this is largely due to the actions 
of the outgoing President and Cabinet. The new members have 
reviewed it, and as best they can, they have put various 
statements forward. Looking at your testimony I was very 
impressed by it, and yesterday I had an opportunity to mention 
this situation to the Secretary of the Treasury, and he assured 
me that next year every single agency will in a timely way get 
the financial data that are needed. I know he means business.
    So, we thank the gentleman from Florida, Mr. Putnam, who is 
here. Do you have any opening remarks, Mr. Putnam? You are free 
to voice them.
    Mr. Putnam. Thank you, Mr. Chairman.
    It is always a pleasure to have our Comptroller General 
here. I am, quite honestly, very amazed he finds time to do his 
job, as often as he is called up here to testify before 
committees. It is always a pleasure to have him. His comments 
are always very important and enlightening.
    This is a troubling issue. We have had extensive hearings 
in the Shays subcommittee on the defense side of the audit 
reports. Serving on the Agriculture Committee I am also very 
concerned about the improprieties at the USDA. In fact, just 
before I came to the committee I was handed a press release 
from the USDA informing me that they had just given $1 million 
to a Kentucky Fried Chicken franchise in my district to 
preserve two jobs, or some such thing as that. So, it clearly 
illustrates we have a long way to go.
    I look forward to the gentleman's testimony.
    Mr. Walker. That sounds like pretty good pay, Mr. Putnam.
    Mr. Putnam. It beats being in Congress.
    Mr. Horn. Let me swear in all the witnesses. As you know, 
this is an investigating committee, and we do swear in all the 
witnesses. Will the Director of the Budget, the Deputy 
Undersecretary of the Treasury and the Comptroller General 
please stand and raise your right hands, and those that back 
you up, I might add.
    [Witnesses sworn.]
    Mr. Horn. It is a pleasure to have you here, Comptroller 
General.

   STATEMENTS OF DAVID M. WALKER, COMPTROLLER GENERAL OF THE 
    UNITED STATES, GENERAL ACCOUNTING OFFICE; AND DONALD V. 
HAMMOND, ACTING UNDERSECRETARY FOR DOMESTIC FINANCE, DEPARTMENT 
                        OF THE TREASURY

    Mr. Walker. Thank you. Mr. Chairman, Mr. Putnam, it is a 
pleasure to be here to discuss our report on the U.S. 
Government's consolidated financial statements for the fiscal 
year ending September 30, 2000. The report has been provided to 
you and is being released to the public today.
    In summary, this is the fourth consecutive year in which we 
have been unable to express an opinion on the U.S. Government's 
consolidated financial statements. Certain material weaknesses, 
internal control, and accounting and reporting issues resulted 
in conditions that prevented us from being able to provide the 
Congress, and the American people, an opinion as to whether the 
government's consolidated financial statements are fairly 
stated in accordance with U.S. generally accepted accounting 
principles.
    While many of the pervasive and generally long-standing 
material weaknesses that we have reported in past years remain 
to be fully resolved, progress continues to be made in 
addressing the underlying causes of these problems at a number 
of agencies such as significant financial management system 
weaknesses, problems with fundamental recordkeeping and 
financial reporting, incomplete documentation and weak internal 
controls.
    Accelerating the pace of completing ongoing and planned 
efforts to implement financial management reform is essential, 
as reports of the various inspectors general and their contract 
auditors indicate that only 3 of 24 of the CFO Act agencies had 
neither a material control weakness nor an issue involving 
compliance with applicable laws and regulations.
    Agencies have made marked strides in obtaining unqualified 
audit opinions in their financial statements. The number of the 
24 CFO Act agencies that were able to attain an unqualified 
opinion on their financial statements from their auditors 
increased to 18 in fiscal 2000, up from just 6 only 4 years 
ago. Also, for the first time the Office of Management and 
Budget [OMB], reported that all 24 CFO Act agencies met their 
March 1 reporting deadline.
    But the timeliness of agencies having audited financial 
statements must be improved further. Issuing historical 
financial statements 5 to 6 months after year end is simply too 
late to be relevant in today's fast-paced, forward-looking and 
knowledge-based economy. These financial statements and our 
audit report should be issued much sooner. We should seek to be 
able to issue these consolidated financial statements and our 
report months earlier.
    For example, the auditors for the Social Security 
Administration issued their fiscal year 2000 audited financial 
statements on November 30, 2000, 2 months after the fiscal year 
end. Other agencies should follow their lead so that we would 
then be able to issue the consolidated financial statement 
audit no later than the end of the calendar year.
    Many agencies undertake tremendous efforts lasting 5 months 
or more to produce audited financial statements as of a date 
and period ending months earlier. The need for such time-
consuming procedures often represents nothing less than heroic 
efforts on behalf of the people who are involved. Both by 
agency and contractor personnel, these procedures primarily 
result from inadequate financial management systems and poor 
controls.
    A majority of the unqualified opinions discussed above, 
meaning the 18, were obtained through expending significant 
resources, the use of extensive ad hoc procedures and making 
billions of dollars in adjustments to derive financial 
statements months after the end of the fiscal year.
    In addition, many of the agencies who received qualified 
opinions, or disclaimers of opinion, also had a number of 
heroic measures undertaken and spent millions of dollars in 
order to be able to get to where they were. It is important to 
note that the biggest heroic effort is probably related to the 
consolidated financial statement audit itself; and the 
dedicated professionals of the Treasury Department, of OMB and 
GAO who are to be commended for their efforts in trying to make 
this happen.
    However, it is also important to understand that heroic 
efforts must be combined with sustained efforts to improve 
agencies' underlying financial management systems and control. 
If agencies continue, year after year, to rely on significant, 
costly and time-intensive manual efforts to achieve or maintain 
unqualified opinions, without making these underlying systemic 
improvements, it can serve to mislead the public as to the true 
status of an agency's financial management capabilities. In 
this case, an unqualified opinion would become an 
accomplishment without much substance.
    Stated differently, we need a substantive victory, not a 
superficial one. Winning the battle is getting a clean opinion 
on the financial statements. We must win the war. The war is 
getting a clean opinion on the financial statements, no 
material control weaknesses, no compliance problems, and to 
have systems, controls and procedures such that agencies have 
timely, accurate and useful information to make informed 
decisions day to day, not just focusing on today, but also 
anticipating tomorrow. This is absolutely essential.
    The past 4 years have included extensive cooperative 
efforts and considerable attention by the agency chief 
financial officers, inspectors general, Treasury, OMB officials 
and the GAO. From the outset, all parties involved understood 
the formative challenges that were ahead. As we previously 
reported, they face the need to overcome decades of neglect in 
addressing serious financial management and internal control 
problems across government.
    I am pleased to say that in the past few weeks I have met 
with Secretary of the Treasury, Paul O'Neill, and OMB Director 
Mitch Daniels to discuss the need for aggressive action to 
accelerate progress in financial management reform. I am 
heartened that they strongly support these efforts, and that 
support is clearly evidenced by their personal statements 
brought before the committee today.
    We have already agreed to cooperatively pursue developing 
short and long-range strategies and operational plans with key 
milestones for addressing the problems that have prevented us, 
the GAO, from expressing an opinion on the U.S. Government's 
consolidated financial statements. Therefore, at this juncture, 
with the benefit of several years of experience by the 
government, and having the required financial statements 
subject to audit, it is appropriate to focus particular 
attention on the most serious obstacles to achieving an 
unqualified opinion on the consolidated financial statements.
    These obstacles include, No. 1, financial management 
problems at specific agencies that have not been able to 
produce auditable financial statements, especially the 
Department of Defense and the Department of Agriculture; two, 
problems in resolving difficulties in reconciling intra-
governmental transactions, transactions between government 
agencies; three, information system security weaknesses that 
affect agencies across government and not only affect the issue 
of accountability but also national security and personal 
privacy; and, four, the need to modernize agency financial 
management systems to ensure that they routinely provide 
timely, accurate and useful information for managing operations 
day to day.
    Irrespective of the unqualified opinions on their financial 
statements, many agencies do not have timely, accurate and 
useful financial information and sound controls to make 
informed decisions and to ensure accountability on an ongoing 
basis. This is what the ultimate goal of financial management 
reform legislation was when it was enacted in the 1990's.
    As we look ahead, it is essential for the government to 
begin strengthening its financial reporting to make more 
meaningful information available to the Congress, other 
policymakers, and the American people. Financial reports must 
continue to strive to further report our long-range financial 
commitments and contingencies which will be useful in 
highlighting the long-range fiscal challenges facing the Nation 
due to the demographic trends that we face and escalating 
healthcare costs.
    Also, enhanced reporting in certain key areas, including 
performance information, focusing on results and outcomes that 
the American people understand and can identify with will be 
central to managing government operations more efficiently, 
effectively and economically and in supporting the Government 
Performance and Results Act.
    In addition, enhanced disclosures on the government's most 
valuable asset, its own employees, or human capital, is needed 
to draw further attention to the need to revamp Federal 
strategic human capital management and assess the government's 
capability to perform its missions in the future.
    In closing, Mr. Chairman, I want to underscore the 
importance of the President and the new administration 
emphasizing and giving priority to, No. 1, addressing the 
problems preventing us from being able to express an opinion on 
the government's consolidated financial statements; No. 2, 
having effective internal control; and, No. 3, modernizing 
Federal financial management reporting and related systems as 
we move forward.
    As I stated at the outset of my testimony today, my recent 
meetings with Treasury Secretary O'Neill and OMB Director Mitch 
Daniels have been most encouraging. I look forward to working 
closely and cooperatively with them and the dedicated career 
staff of GAO, OMB, Treasury and others in order to develop 
these short and long-range plans and strategies in order to 
solve the problems and win the war.
    Finally, I think it is important to reemphasize the 
importance of the efforts of this committee in particular, and 
the Congress in general, to conduct periodic oversight in this 
area. Having effective financial management and reporting is 
critical. While the U.S. Government doesn't have to worry about 
bondholders like the private sector, and State and local 
governments do, and while the U.S. Government doesn't have a 
stock price, and therefore there are not market conditions that 
absolutely mandate that it must have audited financial 
statements, we must have them in order to maintain the 
confidence and respect of the American people. We must also 
have them in order to make sure that we have the underlying 
systems, controls, and mechanisms to make sure that we are 
making informed decisions; and that we are maximizing the 
economy, efficiency and effectiveness of the Federal Government 
for the benefit of the American people and assuring 
accountability over trillions of dollars of resources and 
assets.
    Mr. Chairman, I can assure you that I and the dedicated 
professionals at GAO stand ready to do our part, and we thank 
you for your interest and efforts.
    Thank you, Mr. Chairman.
    Mr. Horn. Well, we thank you, because you have an 
outstanding staff, and we have worked with it for over 6 years, 
and you have done a very fine job in trying to pull these parts 
together.
    [The prepared statement of Mr. Walker follows:]
    [GRAPHIC] [TIFF OMITTED] T6938.001
    
    [GRAPHIC] [TIFF OMITTED] T6938.002
    
    [GRAPHIC] [TIFF OMITTED] T6938.003
    
    [GRAPHIC] [TIFF OMITTED] T6938.004
    
    [GRAPHIC] [TIFF OMITTED] T6938.005
    
    [GRAPHIC] [TIFF OMITTED] T6938.006
    
    [GRAPHIC] [TIFF OMITTED] T6938.007
    
    [GRAPHIC] [TIFF OMITTED] T6938.008
    
    [GRAPHIC] [TIFF OMITTED] T6938.009
    
    [GRAPHIC] [TIFF OMITTED] T6938.010
    
    [GRAPHIC] [TIFF OMITTED] T6938.011
    
    [GRAPHIC] [TIFF OMITTED] T6938.012
    
    [GRAPHIC] [TIFF OMITTED] T6938.013
    
    [GRAPHIC] [TIFF OMITTED] T6938.014
    
    [GRAPHIC] [TIFF OMITTED] T6938.015
    
    [GRAPHIC] [TIFF OMITTED] T6938.016
    
    [GRAPHIC] [TIFF OMITTED] T6938.017
    
    [GRAPHIC] [TIFF OMITTED] T6938.018
    
    [GRAPHIC] [TIFF OMITTED] T6938.019
    
    [GRAPHIC] [TIFF OMITTED] T6938.020
    
    [GRAPHIC] [TIFF OMITTED] T6938.021
    
    [GRAPHIC] [TIFF OMITTED] T6938.022
    
    [GRAPHIC] [TIFF OMITTED] T6938.023
    
    [GRAPHIC] [TIFF OMITTED] T6938.024
    
    [GRAPHIC] [TIFF OMITTED] T6938.025
    
    [GRAPHIC] [TIFF OMITTED] T6938.026
    
    [GRAPHIC] [TIFF OMITTED] T6938.027
    
    [GRAPHIC] [TIFF OMITTED] T6938.028
    
    [GRAPHIC] [TIFF OMITTED] T6938.029
    
    [GRAPHIC] [TIFF OMITTED] T6938.030
    
    Mr. Horn. We will have the testimony of Mr. Hammond before 
we go to questions on panel one.
    So, Mr. Hammond, Undersecretary for Domestic Finance, 
Department of the Treasury, and a frequent witness here, we are 
glad to see you back, although as I passed the Treasury 
yesterday it looks like some of the place is still burned. When 
are we going to solve that problem? The Treasury Departmnet is 
the second oldest building in Washington.
    Mr. Hammond. And, as you can expect with the second oldest 
building in Washington, it is going through some major 
renovations; they keep finding more interesting things as they 
knock down a wall here and move a partition there. It is going 
to be in really great shape when it is all done, but, I am 
afraid it is about a 5-year process going forward.
    Mr. Horn. Well, we are glad to hear your testimony. You 
have a major role in this. I agree with the Comptroller 
General. As I mentioned to you, the Secretary of the Treasury 
and I chatted about this yesterday, and he means business on 
people meeting those deadlines next year.
    Mr. Hammond. Thank you, Mr. Chairman. I am very pleased to 
appear today again to discuss the financial report of the U.S. 
Government, and I would like to thank you for your focus and 
continuing support of improving Federal Government financial 
accountability and reporting.
    I ask that my written statement be included in the record 
in its entirety.
    The Department of the Treasury is dedicated to producing 
useful governmentwide financial statements and has devoted 
considerable resources to this effort. Further evidencing this 
commitment, as you mentioned, Secretary O'Neill has submitted a 
written statement for the record for this hearing as well 
evidencing his strong support.
    Mr. Horn. Without objection, that will be put in the record 
at this point.
    Mr. Hammond. Thank you.
    While we are pleased again to issue the fiscal year 2000 
financial report on time this year, actually we are a day 
early, reporting not fully reliable financial results 6 months 
after the close of a fiscal year is simply not good enough. 
Working with the Federal community, we have made incremental 
progress each year, but incremental progress may not prove to 
be sufficient.
    Treasury, in conjunction with OMB and the GAO, will conduct 
a comprehensive review of the financial statement production 
process. While we have made significant progress in performing 
the consolidation, the remaining challenges warrant a fresh 
look.
    Additionally, later this year Treasury will implement the 
first phase of our multiyear revamping of governmentwide 
central accounting systems and processes for reporting budget 
execution information. This is a critical first step toward 
improving overall Federal financial management.
    Within Treasury, the Financial Management Service is 
primarily responsible for producing these statements; and on a 
personal note I would very much like to thank all the people at 
Treasury and FMS who have really worked tirelessly to produce 
this year's report and the improvements that we are talking 
about.
    This past year we continued to focus on three critically 
important areas: first, ensuring that the financial information 
reported to us by the program agencies is consistent with the 
information in the agency's own financial statements; second, 
identifying, reconciling and eliminating intra-governmental 
transactions; and, third, assisting the agencies in reconciling 
their fund balances with Treasury records.
    We also worked to modernize and improve the systems used to 
report both the budget execution information and the accrual-
based information contained in this report.
    It is essential that the information received from the 
agencies be consistent with the information presented in their 
financial statements. Our auditors, GAO, reported this year, 
however, that they could not fully verify the information 
provided to us as consistent with the information in agency-
level financial statements. This finding comes in spite of a 
process that requires agency chief financial officers to 
prepare, and inspectors general to review, a detailed 
comprehensive worksheet that crosswalks the data submitted to 
Treasury to individual line items on the agency's audited 
financial status. Clearly, this process needs to be reviewed.
    Additional improvements have been made in the accuracy of 
the 2000 opening net position balances. Over the last year, 
Treasury worked very closely with program agencies to reach 
agreement on opening balances. Last year, the unexplained 
opening balance differences were approximately $70 billion. 
This year, the unexplained differences for all agencies are 
approximately $8 billion, evidencing improvement but, 
nonetheless, not an acceptable result.
    We continue to take actions that improve data accuracy. A 
clear indication of progress was a reduction in the number of 
adjustments submitted during our review process from 575 for 
the previous year to 280 this year. The audits of the agency's 
financial statements have disclosed that the agencies continue 
to have difficulties identifying transactions with each other 
so that the transactions can be reconciled or eliminated for 
governmentwide reporting. If these transactions are not 
eliminated, total government assets, liabilities, revenues and 
expenses are misstated by the net amount of these transactions.
    For the second year in a row, we were able to resolve the 
intra-governmental elimination issue for borrowing and 
investment transactions between program agencies and either the 
Bureau of the Public Debt or the Federal Financing Bank, a 
subset of the total governmental elimination issue. We lack 
specific explanations this year for only about $3 million in 
such transactions out of a total of more than $2 trillion 
outstanding.
    This past year we also focused on addressing elimination 
issues regarding transactions between the program agencies and 
the Office of Personnel Management and the Department of Labor 
as well as the buying and selling transactions between agencies 
themselves. While we still have considerable work to do, we 
were able to significantly reduce the unexplained differences. 
We will work with agencies to formulate additional guidance 
based on the progress made this year.
    With regard to buying and selling transactions between 
Federal agencies, Treasury has been working with the 
consultants to develop a buy-sell model that allows for 
eliminating such transactions. This model produced significant 
improvements this year, and we hope that next year the 
information will be sufficient to justify that the buy-sell 
transactions are immaterial at the governmentwide level.
    Treasury continues to assist agencies in reconciling their 
fund balance amount with the amount reported to them. Today, 
the discrepancies most often are a result of timing differences 
and are resolved in a few monthly cycles.
    In order to capitalize on improvements over the next few 
years, program agencies' reconciliations of fund balances must 
be a management priority and a routine ongoing accounting 
function. Agencies have made much progress in 
institutionalizing the process. To further facilitate this, 
Treasury is redesigning its systems to simplify the process to 
improve the availability of the data.
    As you have heard, the current State of Federal financial 
reporting is not satisfactory. I am confident that a creative 
and committed effort by Treasury, program agencies, OMB, the 
CFO council and GAO, combined with adequate funding, can result 
in breakthrough changes.
    In the short-term, we will make the changes that can be 
made to improve the preparation of the financial report. For 
the long-term, we are taking considerably more aggressive 
action.
    Our most critical short-term challenges remain in three 
areas pertaining to preparation of the report. In the area of 
intergovernmental transactions at the request of the principal 
agencies, the joint financial management improvement program 
has initiated an effort to better define the problems and 
identify areas for focused attention. That is a beginning.
    Additionally, we must fully develop the process for a 
complete reconciliation of the budget results with the 
financial statements' results of operations. We will also 
provide comparative financial statements at the appropriate 
time. And, one other area where usefulness can be dramatically 
improved is in the content of our reports; and we will reach 
out to stakeholders to find out what they believe is most 
useful.
    Recently, we modified our systems and processes to provide 
agencies with easier and quicker access to certain budgetary 
information through the Internet. Agencies can now obtain Web-
based access to important accounting information. As we roll 
this out governmentwide over the next 7 months, we are 
confident that this will go a long way toward assisting 
agencies with reconciling their fund balances and outline our 
approach to long-term solutions for redesigning the 
governmentwide accounting process.
    We continue to improve our Standard General Ledger based 
reporting systems. Just as manufacturers reject components that 
do not meet specifications, our new reporting systems reject 
reports that do not meet specifications of the U.S. Standard 
General Ledger. As agencies move toward SGL-compliant 
accounting systems, the reports will continue to improve.
    The FACTS II system, jointly developed with OMB, became 
fully operational with year-end 1999 reporting. FACTS II loads 
the prior year results directly into the budget formulation 
process, which helps budget offices ensure that the budget 
process begins with what actually happened the previous year.
    Improving financial management and accountability is a top 
priority for Treasury, and we are prepared to take a lead role. 
We will work closely with OMB and program agencies to raise the 
bar in financial management improvements.
    As I mentioned at the beginning of my testimony, Treasury, 
OMB and GAO will reevaluate the process we use to prepare the 
governmentwide financial statements. Our review may indicate 
that it may not be workable, within 30 days of completing 
agency financial statements, to produce the financial report, 
complete the consistency evaluation, and obtain an audit 
opinion.
    Our goals include: accelerating the timeframes for issuing 
year-end audited financial statements, providing for 
comparative reporting, and moving toward the preparation of 
quarterly statements by program agencies. We will also consider 
new ideas such as audit committees and the use of pro forma 
financial statements with budget submissions.
    Our ultimate success will be achieved when we reliably and 
accurately report on the distinctly different financial 
activities of many agencies of government as if they were one 
entity, and do so in a timeframe and a manner that is truly 
useful.
    Thank you, Mr. Chairman. That concludes my formal remarks. 
I will be happy to take questions.
    Mr. Horn. Well, we thank you, and we hope that some of the 
optimism in your statement will come to reality next year.
    [The prepared statement of Mr. Hammond follows:]
    [GRAPHIC] [TIFF OMITTED] T6938.033
    
    [GRAPHIC] [TIFF OMITTED] T6938.034
    
    [GRAPHIC] [TIFF OMITTED] T6938.035
    
    [GRAPHIC] [TIFF OMITTED] T6938.036
    
    [GRAPHIC] [TIFF OMITTED] T6938.037
    
    [GRAPHIC] [TIFF OMITTED] T6938.038
    
    [GRAPHIC] [TIFF OMITTED] T6938.039
    
    [GRAPHIC] [TIFF OMITTED] T6938.040
    
    [GRAPHIC] [TIFF OMITTED] T6938.041
    
    [GRAPHIC] [TIFF OMITTED] T6938.042
    
    Mr. Horn. We now have the Honorable Mitch Daniels, 
Director, Office of Management and Budget. Mr. Daniels.
    Mr. Walker. I don't know if he is here yet, Mr. Chairman. 
You may want to go into Q and A.
    Mr. Horn. We have him as the second panel. I don't know 
what ``here'' and ``there'' did on the scheduling, so we will 
go to questions then. It would have been better if we had all 
three of you there.
    So, let's start with Mr. Putnam, and then I will do it 
after 10 or 15 minutes, and then he will do it again.
    Mr. Putnam. Thank you, Mr. Chairman. I thank the gentlemen 
for their testimony.
    One of the problems that Mr. Walker highlighted was that of 
resolving difficulties and reconciling intergovernmental 
transactions and the information system security weaknesses. 
After we have come out of the year 2000 and spent--I don't even 
know if we know, because we don't have auditable statements, 
how much we spent to get everybody Y2K ready, presumably that 
means we upgraded to the latest and best and most effective 
computer and information technologies. What are the outstanding 
information security issues, how can we address those and what 
do you presume the cost of those upgrades to be?
    Mr. Walker. Let me take a shot, Mr. Putnam.
    First, you are correct that there was a tremendous amount 
of financial and human resources focused on the Y2K effort, 
which was a date certain, so you had to get it done by a 
certain date. In fact, quite frankly, I think that is evidence 
of how the government mobilized on a governmentwide basis, and 
it was a success story, where we actually avoided any major 
disruptions associated with Y2K.
    While clearly there were some supplemental benefits that 
were achieved through those expenditures with regard to trying 
to upgrade a number of existing information technology systems 
and capabilities, the fact of the matter is that we still have 
throughout government too many systems that are legacies of the 
past; too many systems that are freestanding, non-integrated; 
too many systems that are designed based upon the individual 
wants of various entities, whether it be the numerous entities 
within the Department of Defense or the Agriculture Department, 
rather than looking at it on an enterprise-wide basis to really 
have an enterprise-based architecture that is focused on the 
needs of the entity as a whole, where you only have to enter 
the data once and where you have much more reliability not only 
from the standpoint of computer security but also for the 
accuracy of the information.
    I don't have a particular estimate. I don't know, Jeff, if 
you do, of some of the estimates of the magnitude and the 
economics associated with it as it relates to dollars.
    Mr. Steinhoff. I have been told that roughly one-half of 
capital spending at the Federal, State and local level is on 
IT. At the Federal level this year, it is projected to be $40 
billion. At the heart of all of the issues, all of the problems 
on the chairman's chart today, are poor systems. Y2K fixed one 
part. It dealt with that date issue. But it did not deal with 
the underlying systems problems. We are going to have to make a 
major investment. It must be done in a very wise manner.
    Mr. Putnam. Let me follow-up on that, because it occurs to 
me, and I am new to this process, but in the State legislature 
every year, every single year, we spent a fortune on 
information technology, and we fell further behind. Corporate 
people know that. Today you buy it, then it is obsolete. There 
has to be some better-coordinated way for us to get on top of 
that issue.
    I would ask, if Congress were to pose the question, exactly 
what is the figure that all the Federal Government spends on 
information technology? Would that even be a determinable 
number?
    Mr. Steinhoff. I would want to get back to you on that, but 
the number that I have heard is that $40 billion will be in the 
budget this year.
    Mr. Walker. That is probably the hard dollar number, rather 
than necessarily the costs associated with all the people who 
are working on information technology. We will review that, Mr. 
Putnam, and get back to you.
    [Note.--The publication entitled, ``The 2000 Financial 
Report of the U.S. Government,'' may be found in subcommittee 
files.]
    Mr. Walker. I do think it is important to note that in 
order for us to be able to make sure that, ultimately, Federal 
managers and leaders have timely, accurate and useful 
information to make informed decisions day to day, a big part 
of that is going to be to upgrade the existing systems that are 
out there and to integrate them while we are also dealing with 
security issues and related matters.
    In that regard, I might add, in the private sector, 
frankly, things would not be done the way that sometimes they 
are done in the government. You have to have a mechanism at the 
very top where somebody can say yes or no on a systems project, 
either yes, you are going to do it, or no, you are not going to 
do it, based upon an overall master plan, based upon an 
enterprise-based architecture meeting certain minimum 
standards. In addition, you have to be able to have control of 
the money.
    Therefore, I think, among other things, what that means is 
we do need a Federal CIO. In addition to that, the CIO's in the 
individual departments and agencies need to have more input on 
whether or not systems are going to move forward or not based 
upon an enterprise-based architecture and ought to have more 
authority on whether or not money is going to be spent. 
Because, all too frequently, what ends up happening, it happens 
in the private sector, too, if you don't control it, you have a 
number of different individuals and entities come up with what 
they want, and they will end up having their own individual 
initiatives under way to try to design systems that they want, 
which is far in excess of what they need, but they are not 
integrated with or consistent with the overall enterprise 
architecture and plan.
    This is a particular challenge at the Defense Department, 
and I expect in the not-too-distant future I will be making 
some recommendations about what needs to be done to try to deal 
with that.
    Mr. Putnam. Is the current congressional budgeting and 
appropriations process effective in helping to accomplish the 
overall efficiency goals? In other words, by having an annual 
budget and the requirements for the agency submissions for 
requests, the President's submission of his budget, the 
timeliness of our budget process, which is then followed by the 
actual appropriations process, are there congressional reforms 
that could be made that would support your efforts to increase 
efficiency? And in the course of that, if you would, comment on 
the prospect of a multiyear or 2 year Federal budget.
    Mr. Walker. Well, I do think we need to do things 
differently, not only in the executive branch in certain 
regards, but also the legislative branch; and I do think we 
need to look at the mechanisms that are in place for reviewing 
and approving the undertaking and funding of major projects.
    For example--I will give you one example. Yesterday, I had 
a meeting with 18 inspectors general, a State auditor and 
county and local auditors. One of the reasons I did that is I 
pulled them all together for 2 days in Washington to talk about 
mutual challenges, of which we have a number.
    One of our mutual challenges is in the area of computer 
security; and one of our mutual challenges is in the area of 
how you get control of all these IT expenditures. One of the 
things I found is, as many times is the case, sometimes the 
States are way ahead of the Federal Government. Sometimes the 
Federal Government is a lag indicator.
    In this regard, there were several of the States that 
talked about the fact that not only do they have a CIO but they 
have a council mechanism in place that, before any major IT 
projects can be funded or undertaken, they have to be reviewed 
and approved by a body of qualified parties, independent 
parties, and they have the authority to say yes or no. And if 
they say no, there is no money that goes for that project.
    I am happy, we at the GAO will be happy to think about some 
of the things we think make sense in this area not only from 
the standpoint of the executive branch, but also for the 
legislative branch as well. But I think changes have to occur 
on both ends of Pennsylvania Avenue.
    Mr. Horn. Very good. Thank you. I agree with you 
completely.
    Does the gentleman have some more questions on this one, or 
do you want to go to another?
    Mr. Putnam. If I may.
    Mr. Horn. Please.
    Mr. Putnam. Is it possible, considering the nature of the 
duties and responsibilities of the Federal Government, the 
security issues, the secrecy issues that are part and parcel of 
budgets like the Department of Defense, recognizing that we 
have a long way to go to become better, but is it possible at 
the end of the day in a perfect world for the U.S. Government 
to produce a true, clean financial statement that comports with 
traditional accounting standards?
    Mr. Walker. Yes, that is possible. I fully expect that it 
will end up happening during my term of office, which I have 
12\1/2\ years left. I would like for it to happen early in my 
term of office.
    But, I think what is important, Mr. Putnam, and I think it 
is an excellent question, is that it is not just getting a 
clean opinion. That can be a superficial victory. We need to be 
able to deal with the substance, not just the form. We need to 
make sure that we have the right kind of systems, strong 
controls, appropriate compliance mechanisms, and we need to 
have the data now, not 5 to 6 months after the end of the year. 
Because, you know, managers have to be able to make decisions 
not only about resources today, but anticipating problems for 
tomorrow. It is not just oversight, it is foresight that we 
need this information for.
    So, yes, I think we can get there. I think we will get 
there, and I think I am encouraged by the fact that the 
Secretary of the Treasury, the Director of OMB and myself, who 
are the three principals of the joint financial management 
improvement program, have agreed to get together to try to come 
up with a game plan to help us get there. That is the first 
time that happened. I was pleased they accepted my proposal on 
that, and I am looking forward to getting together to do that.
    Mr. Hammond. If I could add to that a little, I think it 
has always historically been a matter of emphasis. If you look 
at other areas of financial reporting in the Federal 
Government, you find that there is reason for great optimism.
    We report budget results within 15 workdays of the end of 
the fiscal year. Those are reliable. We report daily cash 
positions in less than 24 hours, showing all the cash activity 
for the previous day. We report on the entire public debt 
outstanding within 3 working days of the close of the previous 
month, and that is done on a financial accounting basis.
    So, I think there is potential--and we have seen evidence 
of doing this in a reliable form. The question now is emphasis 
and making sure that the systems today match the needs of 
financial accounting going forward.
    Mr. Walker. If I can followup on Don's point, a couple of 
things. No. 1, the Federal Government historically has been 
focused on two things when you are dealing with accounting, 
cash--and cash is important no matter what sector you are in--
and, second, the budget. There are all kinds of systems that 
exist out there, and have existed out there for years, where 
people watch their budget, because, either they want to make 
sure they spend it all or make sure they don't violate the 
applicable limits, obviously. So there is a lot out there 
already on the budget side.
    But what has not been out there, and there was no legal 
requirement for it to really be out there until the new 
financial management reforms came into place, were the 
traditional accounting systems that resulted in accrual-based 
financial statements that resulted in periodic reporting like 
the State and local governments have had for years and like the 
private sector has had for decades.
    I also think it is important to note that GAO does give 
clean opinions, despite some rumors to the contrary. In fact, 
we have given a clean opinion on the Bureau of Public Debt for 
several years, the FDIC for several years, and, for the first 
time, gave a clean opinion for the Internal Revenue Service 
financial statements this year, although they, like many other 
agencies, have numerous material control weaknesses, meaning 
the IRS has significant compliance problems, and so they have 
still got these underlying problems.
    It is possible, I think we will get there, but it is going 
to take the combined efforts of a number of parties, and some 
time to get us to where we need to be--and some money too, I 
might add.
    Mr. Putnam. Thank you, Mr. Chairman. I might propose to the 
Ways and Means Committee we could make a lot of money by 
letting individual CPAs around the country bid on the right to 
audit the IRS.
    Mr. Horn. We will have Commissioner Rossotti this coming 
week, and I am sure you can pose that question.
    Any other items you want to pursue?
    Mr. Putnam. I will let you go ahead.
    Mr. Horn. Let me ask about the trustee reports. The 
Comptroller General has been on some of those boards in his 
career, Social Security, Medicare, and the administration has 
issued its annual trustee reports on Social Security and 
Medicare in time for certain information to be included in the 
government's financial report. Last year, the GAO emphasized 
the need for the trustee reports to be released prior to the 
statutory date of April 1st, so that information could be 
included in the government's financial year. The administration 
issued these reports on March 19, 2001, and therefore, current 
information was included in the government's financial report. 
What do you believe should be done?
    Mr. Walker. Well, first, I want to acknowledge progress for 
this year, and I want to thank Don and the others that were 
involved in trying to make sure that this happened.
    What we do have is what I would call a subsequent events 
footnote in the consolidated financial statements this year 
that provides information, summary information, from the most 
recent trustee's report of Social Security and Medicare, and 
compares it to the financial statement information.
    I think that is a positive step, first step.
    I do think, however, over time what needs to happen is we 
need to have the updated--the full updated information dealing 
with the Social Security and Medicare trustees' information in 
the notes to the financial statements, the consolidated 
information.
    In addition, I think over time what we need to do is that 
we need to issue the consolidated financial statement report 
and our audit much quicker; and in order to make that happen, 
it means that, over time, the Social Security and Medicare 
trustees are going to have to start issuing numbers as of 
September 30, which is fiscal year end, rather than as of 
December 31, which is calendar year. I think that is doable.
    I have had some informal conversations with some of the 
actuaries. But I think that we need to enhance the disclosures, 
we need to accelerate the timeframe, and we need to make sure 
that we have more than a subsequent events note in there, that 
we have more fuller disclosure of information in there than is 
the case now.
    Mr. Horn. I take it you would favor audited reports out of 
the trustees?
    Mr. Walker. I think we have to recognize--I think the 
projections, and that is what they are, the projections that 
the Social Security and Medicare trustees do should be subject 
to some type of audit procedures. At the same point in time, 
there are limits as to what those procedures should be and what 
they can be.
    Obviously, when you are dealing with historical financial 
information, then the degree of confidence that one should 
expect to be attained and that can be attained through auditing 
procedures is much higher. When you are dealing with projection 
information, I think that there needs to be an independent 
review of such things as, are the methods generally acceptable, 
are the assumptions reasonable, is the math proper? Because 
last year, not this year, but last year, Medicare actually had 
to reissue its numbers because there was a material 
misstatement in the numbers. I think that is something that we 
have to try to avoid.
    The other thing I think we have to recognize is that--I 
would argue that, if you are looking at American citizens, that 
probably some of the most important information in this 
consolidated financial statement report is not the value of 
assets the Federal Government has but the projected financial 
condition of the Social Security and Medicare programs on which 
they are counting. I think it is critically important that when 
we look to consolidate this report and make sure it maximizes 
its usefulness that we think about it from the standpoint of 
the citizenry, because that is ultimately who we are serving. I 
think it is important that we continue to make progress there.
    Mr. Horn. You recently testified before the Senate 
Committee on the Budget that the government today is moving 
from balancing the budget to balancing the fiscal risk. As you 
point out, this increases the importance of providing Congress 
and policymakers with timely, accurate and useful financial 
administration and information for use in deliberations 
involving long-range fiscal policy challenges facing our 
Nation.
    What do you see as some of the fundamental fiscal 
challenges that do face the Nation?
    Mr. Walker. Well, if I can use a couple of boards, Mr. 
Chairman, I will be happy to oblige you on that. I appreciate 
that question. I didn't know if I would get to use them or not, 
but this question gives me a chance.
    Mr. Walker. Right now, we all recognize--right now we are 
living in a time of surpluses. However, we know two things for 
certain. While surplus projections cannot be totally relied 
upon, we need to do them, they have to be based on a number of 
assumption. There are two certainties.
    First, we know we face a demographic tidal wave because the 
people are already alive. We know that the first baby boomers 
are going to start retiring in 2011, that is when they reach 
65; some may retire earlier, some later, but the first one 
reaches 65 in 2011, which is just beyond the 10-year projection 
period. We also know that health costs are again on the rise at 
a much faster rate than historically has been the case.
    What this simulation will show you, this is a GAO 
simulation, it will show you that if Congress saves every penny 
of the Social Security surplus, but if either through tax cuts 
or spending increases, all of the ongoing budget surplus is 
spent or consumed one way or the other, this is our future in 
2030 and 2050. By year 2030, we will have to cut discretionary 
spending by about 50 percent. And by----
    Mr. Horn. By 15, was it?
    Mr. Walker. 50. And by year 2050, we won't have any main or 
discretionary spending, or money to pay Medicare and Medicaid. 
Now, that is pretty dramatic. Now, these are based upon the 
growth rates of CBO, which is pretty healthy growth.
    The fact is that we need to recognize that while we are in 
good shape today, we have major challenges in the long-run. So 
it is very important that we have financial statement 
information, and, I would argue budget information. More 
information has to be made available through the budget process 
to think about the long-term implications of current decisions, 
because there are certain things that we might be able to 
afford today, but we are not going to be able to sustain 
tomorrow. And it also means that we need to get on with 
reforming entitlement programs, because it is only going to get 
tougher the longer the time passes in that regard.
    I am pleased to see, by the way, in the financial 
statement, the management discussion analysis, that there was 
recognition of that fact as well in this year's financial 
report.
    Don, do you want to comment?
    Mr. Hammond. Well, I think an analysis of the flows within 
government is a very important element of financial reporting. 
For these reports to be useful, they have to provide not only 
the data, but also some benchmarks of analysis to indicate how 
these things measure up. We tried to do some of that this year 
for, I think in many senses the first time, and there is 
obviously more that can be done.
    Mr. Walker. Real quickly, Mr. Chairman, this chart shows 
what happens to Social Security and Medicare in the outyears. 
Right, now the blue, we are in times of surplus; the red, 
obviously, is times of deficit. Look how rapidly that 
accelerates starting shortly after baby boomers begin retiring.
    The key on the entitlement programs, by the way, in our 
view is not solvency, it is sustainability. It is what 
percentage of the budget and what percentage of the economy do 
these programs represent? Solvency is a legal issue more than 
anything else; it is not an economic issue. It does not have 
economic substance. We need to focus on economic substance 
rather than legal solvency.
    Mr. Horn. Any thoughts on that, Secretary Hammond?
    Mr. Hammond. I am afraid that is out of the range of my 
expertise. We have some very bright people at Treasury who deal 
with some of the more important issues revolving around Social 
Security.
    Mr. Horn. Why don't we have the question put to them, and 
respond, and put it at this point in the record?
    Mr. Hammond. We would be happy to.
    Mr. Horn. Great.
    Mr. Walker. I am pleased to say that I think in the 
management discussion analysis portion that was done by 
Treasury, that they do acknowledge that sustainability is in 
question, yes.
    Mr. Horn. One of the problems in this town is that OMB 
often has some economic figures, and CBO on the Hill and 
Congress has others. How can we get that balance where 
everybody agrees these are the numbers?
    Mr. Walker. Well, first, if you look at the 10-year 
projections that are currently being used for the basis of the 
current debates in Congress about tax cuts, spending and other 
types of activities, the projections or the assumptions that 
are being used by OMB and CBO are remarkably similar. I mean 
they are very, very close, probably closer than they have about 
ever been. Obviously, we need to have those kinds of 
projections, because we need to have something to be able to 
try to make some informed judgments. At the same time, I think 
we have to recognize that the further out you go, the less 
certainty there can be with regard to what those projections 
are.
    I would, however, reinforce that these projections, I 
think, have a higher degree of reliability. Why? Because they 
deal with people, and we know the people are going to be here, 
and in the case of Social Security, we know what the promises 
are. Now, healthcare cost increases are a wild card. We don't 
really know that, but we do know they are going up, and we do 
know that our current system doesn't have effective means of 
controlling those healthcare costs.
    Mr. Horn. Are there any other charts from the Comptroller 
General?
    Mr. Walker. Well, I will show you one more that emphasizes 
what I mean. Thank you, Mr. Chairman.
    I think this depletes the inventory after this.
    One of the disclosures that we have, which I do appreciate 
the Treasury Department's support and OMB's support to get this 
in here this year, is to talk about the difference between what 
historically had been in there, which is the prior year's 
report. And the most recent report that just gets issued about 
the same time as the consolidated financial statements. This 
year I think it got issued on March 19; last year it got issued 
1 day after we issued the consolidation financial report, and 
we all looked foolish, frankly.
    This shows you how significantly things can change in 1 
year. This is the HI program or so-called Part A of the 
Medicare program, which is only part of the program. And you 
can see it is good news and bad news, what happened in this 
latest report that was issued on March 19.
    The good news is from a solvency standpoint it looks like 
we are more solvent, and we are, based on these projections, 
that the date by which you have a situation where HI is going 
to have a negative cash-flow has been extended from 2010 to 
2016. And, in fact, the Trust Fund is not expected to run out 
of assets until 2029, which is 4 years later than last year.
    However, if you look below that line, you find that the 
long-range situation is much worse. The numbers are self-
evident. But the one that I would bring to the fore is that the 
unfunded liability, which is not on here, the unfunded 
liability of the promises that have been made but are not 
funded for in just Part A of Medicare alone in the last year 
have gone up from $2.6 trillion to $4.6 trillion. And that is 
just Part A of Medicare, that doesn't count SMI.
    This is very important information. This is very important 
information that ultimately we need to make sure is not 
relegated to a footnote and that we end up increasing the 
prominence and the timeliness of some of this information.
    Mr. Horn. Well, we thank you. And get us a set of the 
materials so we can put it in the record of this hearing. And 
that will be, I am sure, looked at by quite a few people. We 
put it in parens, part A, which I think would clarify it a 
little bit.
    The Director is here, so we will have him come out and make 
his presentation, and I would like for both of you to stay 
here. He is in our lounge here and watching what you are doing. 
So if you both will stay, we will have some decent dialog, 
questions and answers with all of you.
    We will put in the record at the beginning of this hearing 
the opening statement of the ranking Democrat, Ms. Schakowsky.
    And we will also have, I believe, Secretary O'Neill's 
statement.
    Mr. Putnam. Mr. Chairman, will the record be open for 
several days for testimony?
    Mr. Horn. Yes, 7 days, for anybody that wants to put in 
testimony.
    I am going to swear in the Director.
    Is this your first appearance after your confirmation, or 
have you been to a few other ones?
    Mr. Daniels. There have been a few other opportunities.
    Mr. Horn. Mr. Daniels, you say you have the truth, the 
whole truth and nothing but the truth on your testimony. 
Anybody behind you from OMB, we will swear them in too, so 
whatever you would like on it.
    [Witnesses sworn.]
    Mr. Horn. OK.
    Mr. Daniels. With the Chair's pleasure, I will read, then, 
a short statement.
    Mr. Horn. Well, we would like to limit it to about 15 
minutes.
    Mr. Daniels. I was thinking 5.
    Mr. Horn. Of course, would like to see a dialog here. That 
is how we learn things. Not that your statement isn't very 
learned.
    Mr. Daniels. It was already my plan to abbreviate what we 
submitted for the record.

STATEMENT OF MITCH DANIELS, DIRECTOR, OFFICE OF MANAGEMENT AND 
                             BUDGET

    Mr. Daniels. As the committee might imagine, our priority 
has been and is for at least the next several days to deliver 
to the Congress the President's budget. But we are already 
embarked on the design and construction of what we hope will be 
an ambitious management reform agenda, and we did give the 
outlines of that in the President's budget blueprint at the end 
of February. Along with the top career professionals at OMB, 
our new team spent Saturday, on St. Patrick's Day, in a day-
long review of management issues and opportunities facing the 
Federal Government, and we are at work on a strategy and a 
prioritization among those that we intend to present to the 
Congress later on this year, and hold ourselves accountable for 
achieving.
    We note that over the last decade, Congress has built a new 
legislative framework for financial management performance 
measurement, better and more effective government generally, 
and we know this morning's emphasis is on financial management, 
certainly a prerequisite of sine qua non of much of the rest of 
the progress we hope and intend to make.
    I reviewed the earlier testimony and it noted directly that 
the Federal Government has made some progress in this area 
recently. We can all be glad about the growth in the number of 
agencies who have been able at least to secure the designation 
of having clean audits, and it is I think our expectation, as 
yours, that within the next few years, all agencies will 
achieve that status. I guess I would simply note that my view 
of that is only a first step, not to be equated with sound 
financial management. Audits are a means and a tool, not an end 
to themselves. Clean opinions are important and, as I said, a 
prerequisite to public accountability, but in and of themselves 
do not translate into good government.
    As we have seen already, agencies can get the good 
housekeeping seal of a clean audit opinion while remaining in a 
state of unsatisfactory management status. Some of the agencies 
on Comptroller Walker's high-risk list, with problems of high-
risk, have passed their audits and have passed for years.
    I looked at the three that you have given your A grade on 
the subcommittee's report card--and, incidentally, I commend 
you for not joining the society-wide tendency to grade 
inflation, Mr. Chairman. You obviously reserved that grade for 
what you saw as the best, but two of those three have very, 
very substantial problems, visible for us all to see. One has 
been on the GAO high-risk list every year for over a decade. 
The other has difficulty, to say the least, in estimating the 
future costs of its most significant program which has 
experienced a 50 percent, that is to say, a $4 billion increase 
or overrun only noted in the last few years. Those are your 
best performers.
    I also note in these first weeks of looking at this issue 
that a clean opinion has sometimes been accomplished only at 
the--only through a process that my colleagues describe as 
heroic, or--I guess others have also made this observation. It 
tells me nothing, other than at least for one point in time, 
for 1 day, that a given agency had books that seemed to 
reconcile and balance. But, until that agency can generate 
similarly reliable information on a consistent basis, 
quarterly, monthly, maybe more often, I don't think any of us 
can rest or take too much comfort.
    I suppose I will just close by saying that progress ought 
to be noted, some satisfaction ought to be taken. But I think 
we have to, as I know this committee does, keep that in full 
perspective, and a celebration ought to be postponed until we 
are sure there is a meaningful and lasting quality to these 
achievements. This administration is ready and eager to try to 
take the next step in what all parties, I know, recognize as a 
long-term exercise.
    I thank you for this opportunity to be here, Mr. Chairman, 
and welcome your questions.
    [The prepared statement of Mr. Daniels follows:]
    [GRAPHIC] [TIFF OMITTED] T6938.043
    
    [GRAPHIC] [TIFF OMITTED] T6938.044
    
    [GRAPHIC] [TIFF OMITTED] T6938.045
    
    Mr. Horn. I will yield to Mr. Putnam to question both 
individually. If the others would like to get up here so we can 
get a dialog, and see if there are different perspectives 
between the Comptroller General of the Treasury and OMB.
    Mr. Putnam.
    Mr. Putnam. Thank you, Mr. Chairman. I appreciate Mr. 
Daniels' and Mr. Walker's comments that a clean audit is not an 
end unto itself, but the sound management practices that 
produce it are really what we are after, and I am pleased that 
the President has made a priority of holding agency heads 
accountable.
    How does he intend to do that? What practices will occur? 
What consequences will take place as a result of continued lack 
of management controls?
    Mr. Daniels. I am glad to hear you use the word 
``consequences,'' Congressman, because ultimately there have to 
be these, and this is an issue that ranges beyond simply the 
subject that engages our attention this morning. All too often 
the finding of inadequacy, for instance in the financial 
management context, or of failure of performance, which could 
relate to programmatic evaluations, has no consequences at all. 
We are intent at our agency on linking performance to the 
budget process, beginning this year, and we have an OMB-wide 
effort on now to make that real. I think this is the next 
essential step in a process that Congress has begun over the 
last several years with the passage of several important pieces 
of legislation, and we intend to be very serious about it.
    Mr. Putnam. Could you go into some detail on this move 
toward performance-based budgeting? We will actually, if 
accomplished, have an opportunity to--for the legislative 
branch as policymakers to say, for example, for $800 million a 
year we can meet 80 percent of the need for children on free or 
reduced lunch, for $100 million we can meet 100 percent of the 
need, and we will be able to quantify those policy differences 
and the performance that each investment renders?
    Mr. Daniels. Well, 1 fine day, I hope we can. In the near-
term, I would like to believe that at least we could begin the 
process of identifying, for example, among similar or even 
duplicative programs, which are performing best, which are 
performing most poorly, so that Congress at least would have 
the information necessary to redeploy funds from weak to strong 
performers. We are not even there yet. Of course, it may prove 
a challenge for the political process to take that last step of 
imposing consequences, because that has not always been the 
result, even on those occasions in the past when clear evidence 
of failed performance was available.
    Mr. Putnam. Has the administration, through its new agency 
and department heads, undertaken a thorough strategic review of 
the mission of their agencies and given these new agency heads 
the opportunity to develop their mission and identify 
responsibilities that may have been given to them by the 
Congress, or have grown into their roles through time and 
evolution and bureaucratic creep and everything else, that they 
would like to devolve their agencies or departments so that we 
could then address it in the legislative branch?
    Mr. Daniels. I think an honest answer is there hasn't been 
time yet. Many of our departments and agencies, as you know, 
have only one or two or a handful of the President's appointees 
in place. Now, strategic plans have been required of agencies 
and departments, and that is a starting point that provides a 
template, at least; and we use, for instance, the document that 
we found waiting for us at OMB as a starting point. But I would 
say, simply using that one example, that it was--it was not 
more than that, and we intend to make it considerably more 
specific and considerably more programmatic before we embrace 
it and seek to act on it.
    Mr. Putnam. The agency's financial statements this year 
reported improper payments of over $20 billion. This number is 
not even complete. GAO continued to find that most agencies 
have not estimated the magnitude of improper payments in their 
programs, nor have they comprehensively addressed the issue.
    This is the part--I mean, this is really the core of the 
issue. When people get mad about government, it is the fact 
that we are still sending checks to people who have been dead 
for 3 years, it is the fact that we continue to buy $800 toilet 
seats and all of these kinds of things. I really don't want to 
sound like the Pollyanna citrus grower from Florida that I am, 
but when you come into this business and you look at the 
magnitude of government and how we throw commas and zeroes 
around and mistake billions for trillions on a regular basis, 
that is the core of the cynicism about government and the 
reluctance of the American people to believe that we have our 
act together up here, and that the agencies have their act 
together, and that the people who are hardworking employees of 
those agencies have their act together.
    What is being done and what can we do more of to get our 
hands around that?
    Mr. Daniels. I share your sense and the public's sense of 
dissatisfaction, or even fury at the findings.
    Mr. Horn. We have to find a microphone that does work for 
you.
    Mr. Daniels. My technical assistant here has perhaps 
addressed the problem.
    Mr. Horn. He has 12\1/2\ years to go.
    Mr. Daniels. I was observing that--I was certainly 
supporting the Congressman's observation that this is a subject 
that the public rightly finds unsatisfactory, and we do too. 
And although we have not made our final selections of those 
management problems, we will attack it in this first year or 
second year of the administration. I am prepared to guarantee 
you that erroneous payments will make the cut. The 
Comptroller's reports have highlighted this for quite some 
time, extrapolated to the whole government even conservatively, 
those findings would lead to a stunning amount of money now.
    Granted, erroneous payments do include under as well as 
overpayments. Granted, that some care and caution has to be 
undertaken to make sure that reducing overpayments or 
mispayments does not so encumber the system that beneficiaries, 
rightful beneficiaries, are unduly penalized. But those 
observations cannot get in the way, I think, of an all-out 
assault on this area.
    We have to--as regards this entire realm of management 
problems which my defense-minded friends would call a target-
rich environment, you know, I think we have to be very, very 
selective, and that is the process we are about now.
    I once heard Secretary George Shultz ask rhetorically, why 
does the Frenchman kiss the lady's hand? And his answer was, 
``Because he has to start somewhere.'' And you know, I think we 
have to be very mindful of the fact that we have to go after 
the big opportunities, not only for purposes of making sure we 
get something done, but I think also that we can learn from 
each experience and become better and more effective as we move 
on to the next and the next.
    Mr. Horn. Let me give you two examples, and perhaps the 
Comptroller General can get into that one, too. The HCFA, the 
Health Care Financial Administration of Medicare--and the 
Comptroller General's team has looked at that for a long time, 
it has some real risk problems. We have intermediaries between 
the healthcare thing, we have the actual client and the 
doctors, and we really need to take a look at that, which 
nobody has done either up here or in the administration that I 
can recall.
    My second example that worries me every year is the 
Columbus, OH Army operation where they are putting out 
processing of contracts and payments and so forth. They have 
just been off the wall. Now, I think they have improved it 
quite a bit and they are not completely off-the-wall anymore. 
But that is the kind of thing that can really cause difficulty 
when they don't have the right level of personnel, and that is 
part of the problem.
    Go ahead, Mr. Walker.
    Mr. Walker. Well, first I think it is important to know 
what improper payments are and what they aren't. You know, in 
some cases, there are things that clearly are improper 
expenditures of taxpayer funds, where you are paying somebody 
who is deceased where you are paying twice, where you are 
paying for services that weren't rendered, etc. In some cases, 
they represent payments where there is a lack of adequate 
documentation, and you don't know whether or not it was a 
justified payment or not. But, I do think we can recognize 
that, whether you be in the public sector or the private 
sector, the whole principle that you must measure something in 
order to manage it. And therefore, one of the first things that 
we need to do is to try to measure these improper payments, 
have control mechanisms to try to avoid them.
    One example is HCFA, the Health Care Financing 
Administration. We worked with them to come up with a 
methodology to measure estimated improper payments. They then 
began to take steps to manage them. Their improper payments 
have gone down from approximately $23 billion in 1996 to about 
$11.9 billion in fiscal year 2000; still too high, but that is 
considerable progress.
    I think we also have to recognize that it is not just the 
systems and the controls, since we can have some perverse 
incentives. And one of the things that we are working with the 
Congress on, and this came up in the hearing before Chairman 
Shays, another subcommittee of this committee, we have some 
perverse incentives in the law. For example, there is something 
called the Prompt Payment Act, which says that if the Federal 
Government does not pay a payment within a certain number of 
days, the Federal Government has to pay interest. On the other 
hand, if there has been a double payment, under the current law 
the contractor doesn't have to tell you they have been paid 
twice; and, in fact, if they don't tell you and they hold onto 
the money for a considerable period of time, they don't have to 
pay interest or penalty for having done that. That doesn't make 
a lot of sense to me.
    Part of this comes back to our system where we have--where 
we need to have systems that can do data matching, and there 
are some issues there that we may need to look at, some 
possibly statutes, too, because of the privacy issues. There 
have been certain barriers that have been raised. Lots of times 
what we want to do is to do matching, match deceased lists 
against payments, and sometimes you run into barriers as to 
whether or not you are able to do that because of, ``privacy 
concerns.''
    So this is on our radar screen. I am encouraged to hear 
that Director Daniels is saying that this is going to make 
their shortlist. I hope our high-risk list also makes the 
shortlist, that would be one of the objectives, because I think 
that would be a real accomplishment as well. Thank you.
    Mr. Horn. You mentioned the word ``privacy,'' and that is 
one of the questions I want to ask the Director.
    The issue of privacy is obviously very important to the 
average citizen and to many of us here in Congress. Whether it 
is privacy with the Internet, in their homes, or in regard to 
medical records, people obviously don't want that put out in 
the public domain. As you are aware, Congress delegated to the 
previous administration the authority to develop and promulgate 
regulations relating to the medical privacy rules and, in fact, 
such rules were developed prior to the end of that 
administration.
    I would like to know, and I think all of us up here would 
like to know, what is the administration's position on the 
medical privacy regulations that were developed by the previous 
administration? There are a number of privacy-related proposals 
floating around both the House and Senate, as well as in many 
committees with different jurisdictions.
    When we put the Hutchinson bill through the Government 
Reform Committee, it went to the floor, and we had the popping 
out of different--the Commerce Committee in particular and 
others, and they said, oh, we will take care of it. Well, they 
haven't taken care of it for 5 years. And what we wanted to do 
was get the best brains that the President and the leaders of 
the Senate and the House could put together to see what the 
options were and what is happening in other parts of the world.
    The European Community has mandated that its member 
countries will have a privacy law. Now, that is going to be a 
problem in the terms of economic data moving back across the 
Atlantic, and I have suggested to about four or five of the 
Prime Ministers over there, why don't you get a team of people, 
your CEOs in your firms in Europe and our CEOs in the United 
States, and get the impact of this before we do something 
crazy.
    So I am just curious where we are on that, because it needs 
some coordination within the executive branch as well.
    Mr. Daniels. That regulation, proposed regulation, is under 
review, as you know, along with all of those which were 
inherited from the latter stages of the previous 
administration. And it is a matter of some urgency and high 
priority, and I think you can look forward to some action on it 
in the not-too-distant future.
    There are a lot of interests to be balanced here. We got 
into this subject by talking about one of them, which is the 
occasional conflict between fiscal responsibility and accuracy 
and individual privacy, but there are other dimensions to the 
problem, as you know full well, in the health care, medical 
context; some privacy protective regulations that could 
frustrate another societal goal, which is medical research. It 
could even interfere with the clinical process and the 
patient's ultimate well-being.
    So all of those things are being looked at very carefully. 
The paramount value I am sure that will be applied to that is 
individual privacy, but we have to make sure to find ways to 
protect that in a way that allows other important goals, such 
as care of the public dollar to proceed also.
    Mr. Horn. Any thoughts, Mr. Walker?
    Mr. Walker. I do think it is important, Mr. Chairman, that 
in addition to protecting the privacy of individuals, that we 
also recognize that in order to make sure that we are 
minimizing improper payments and that we are fighting fraud, 
that does occur, especially in the healthcare industry. We have 
had a number of cases there. We have to make sure that there 
are mechanisms in place such that entities like the inspectors 
general and the GAO and those that are trying to safeguard the 
public's money have reasonable access to do things like data 
matching and to do analyses and investigations to try to make 
sure that taxpayer funds are only spent for bona fide expenses.
    Mr. Horn. Let me pose another question here that a lot of 
us feel very strongly about. I don't expect you to really know 
this bill number, but it is H.R. 616 that would establish a 
separate Office for Management and Budget in the Executive 
Office of the President. The reason I advocate this change is 
that since assuming this chairmanship about 7 years ago, it was 
very clear to me, after dozens of hearings, and now 200 
hearings, we have management issues that aren't being faced up. 
And that isn't a matter of party, it isn't a matter of liberal 
or conservative or anything else, it is simply the fact that 
when President Nixon put the M in OMB, I was an enthusiastic 
booster of that. I thought, ``hey, this is great.'' We can use 
the budget to get their attention in Cabinet departments and 
deal with some of these management tasks.
    My friends in the senior civil service over the last 5 or 6 
years before I came here, they said, ``Steve, you are kidding 
yourself.'' It isn't happening. The budget just squeezes out 
everything.
    I think that is true, even though we have balanced budgets 
now, that we need to get a focus on the management. Y2K is one 
that everybody knows, that I started in April 1996. They 
weren't doing a thing. They had a system for management. 
Nothing ever was done there. The gentleman retired. Then years 
later, he was pulled out, made assistant to the President, and 
it worked. But you had to get focus on it, and there wasn't 
focus. They were 2 or 3 years behind.
    And I just would like to get your thoughts on this. Should 
there be an Office of Management where you have somebody with 
the Comptroller General's background? That is exactly what we 
need in that spot, not a budget person, but someone who knows 
what big corporate operations are, big governments are, and how 
we could better serve the people by performance budgets, as Mr. 
Putnam noted, and what they have done in New Zealand. I have 
taken a long look at that. It is worth looking at it.
    Two socialist governments, in Australia and New Zealand, 
about the same time said, how are we going to get this job 
done? We can't pay the bills. We need to better know which 
programs are not working and get rid of those.
    Now, in our country, Oregon comes to closest on this, South 
Carolina has been working on that, Minnesota has also been 
working on that. When we went to New Zealand to check what they 
were doing, they had followed Mrs. Thatcher's look at her own 
British Isles, and then they kept it going, and it still is, 
where Ambassadors have to account for everything, including the 
art on the walls.
    A friend of mine who was an ambassador from New Zealand 
said, I am going to send the paintings back to them, they are 
not going to take in my budget. So you had to start to think 
about what do you do with the people's money.
    So I would be interested to know what your feeling is on 
that.
    Mr. Daniels. My attitude for now, Mr. Chairman, is that I 
would not support that legislation, but I am not closed-minded 
to it, and I don't dispute for a moment your point that this 
has perhaps never been a sufficient priority in the past for 
either party. I would be willing to revisit my opinion on that 
question after some decent interval in which we will try very, 
very hard to realize the initial intent of assigning management 
responsibility to the same office that holds the purse strings, 
in a way, of the executive branch.
    I would salute, and have in the past, the previous 
administration for taking one step, I think, in that direction 
by unifying within OMB budget and management responsibilities. 
That, at least in theory, brings together in one place the 
agency's resources directed at management, and its clout or 
its, let's say, persuasive interaction with departments and 
agencies at the budgetary level.
    So my attitude is, though, what is important is that the 
job get done. And if we cannot make better progress under this 
scheme after some reasonable period of time, you will not find 
me territorial at all about this. I would worry that free-
floating anywhere else in the government you wouldn't--this 
function would not be any better off, it wouldn't have any 
greater clout or any greater influence than, at least in 
theory, it can today.
    I would say that I hope there is something--I won't forget 
the bill number--661 happens to be the number of billions of 
dollars that we have proposed in discretionary spending in this 
year's budget, and----
    Mr. Horn. I won't say we are clairvoyant, but it is H.R. 
616.
    Mr. Daniels. Well, it is not just a good mnemonic for me. 
Let me suggest another linkage.
    One reason I think that management has been consistently 
crowded out over the last few years is that the budget process, 
as it happens in the Congress, between Congresses and 
administrations, has just grown, grown, grown until it is an 
almost 24/7, 365 day a year exercise. It has been so 
disorderly, so chaotic, so disrespectful of its own stated 
rules that it does devour the time of all concerned.
    A major theme of President Bush's budget was to try to move 
back in the direction of an orderly budget process to live 
within the confines of the Budget Enforcement Act and perhaps 
to add a couple other reforms that might allow these basic 
decisions to be made in a more efficient way. If that happened, 
I guarantee you would have a major impact in terms of freeing 
our time and attention and resources to work on the rest of our 
assignments, starting with management.
    My last observation is that we will take your counsel and 
study carefully some of these other examples of which I am only 
dimly aware: New Zealand, Australia and so forth. I would 
observe that these are all Parliamentary Systems, and I don't 
think it is entirely accidental, because I think you know from 
your experience that whatever the shortcomings of past 
administrations, of the executive branch, in managing its 
affairs, Congress plays a role too. Just as fiscal reforms and 
spending reforms tend to run into severe opposition in 
Congress, so do management reforms. And there are a number of 
them that we intend to advance, consolidation of agencies and 
of programs and so forth, that make eminent sense from a 
management standpoint but do collide with political realities, 
because they can't be done unilaterally the way I used to be 
able to do it in the corporate world.
    Mr. Horn. I just suggest that perhaps on the strategic 
plans of these agencies, that we would--and I have told our own 
committee chairmen on authorization and the cardinals on the 
committees, that when we have that dialog, it ought not to be 
staff and staff; it ought to be the people the President has 
selected as reflecting his views; namely, you and others that 
are key people in making government work. We need on those, 
say, once-a-year affairs, to sit down around the table and talk 
to each other, those that are elected here to handle the budget 
through appropriations or whatever the authorizations are for 
policy matters. And I would just hope that we could get the 
right people around the table and then say, you know, that 
isn't the way we interpreted the law. Why don't you take a look 
at it?
    I would like your--Comptroller General, I would like your 
views on the Office of Management, what you think. You have had 
some outstanding risk conflicts that you have put out with 
every new Congress, hopefully. I think that people will read 
them and do something about it. Well, we are trying to do that.
    Mr. Walker. From a conceptual standpoint, Mr. Chairman, I 
believe that it would be preferable to beef up the M in OMB, 
give it the amount of resources that it needs in order to do 
its job, for it to take the lead on strategic planning, 
financial management, information technology, and human capital 
on a government-wide basis, and the interrelationship, 
obviously, having to work with the Cabinet, with the deputy 
secretaries; obviously having to work with other parties such 
as OPM in the case of the people area. But, I think from an 
intellectual standpoint, that if they had the right players and 
enough resources, they would have the ability to be able to 
link and leverage the budget process.
    I also would add that in addition to leveraging the budget 
process, something can and should be done quicker than that, 
and that is the issue of making sure that agencies have their 
performance measurement and reward systems, not just for their 
executives, but cascading down to other fellow employees, also 
linked to the strategic plans and the outcomes that are 
desirable in the strategic plans.
    We know that human beings will end up being motivated based 
upon how they are measured, and I think a vast majority of 
public servants are well-intentioned capable people who want to 
do a good job, and I think that we need to help them to be able 
to do that.
    The last thing I would say, Mr. Chairman, is that I think 
because of the long-range fiscal challenges that I put up 
before on the boards, that now is the ideal time that 
government should be asking two fundamental questions. First, 
what should government do in the 21st century? And, how should 
government do business in the 21st century?
    On the first, that I think calls for a fundamental 
reassessment of departments, agencies, and programs, obviously 
in some priority order, to ask the question: Why are they here? 
Why did we put them in place? Are the factors that caused them 
to be put in place still relevant? What priority are they for 
today and tomorrow, not for yesterday? That is going to take a 
cooperative effort between the legislative branch and the 
executive branch because, as Director Daniels said, you have to 
make sure you deal with both ends of Pennsylvania Avenue to get 
things done there.
    On the other hand, on how government does business, making 
it more results-oriented, focused on outcomes that matter to 
the American people, maximizing performance and assuring 
accountability, I think OMB is in an ideal position to take the 
lead on that, working with the parties that I mentioned before, 
and obviously we will continue to try to play a constructive 
approach in trying to help get those kinds of results for the 
American people.
    Mr. Horn. Well, I think your wisdom is very good and I am 
glad the Director will keep an open mind on this. It seems to 
me if you people could get together every couple of weeks, I 
think it would be worthwhile to have it happen. This is the one 
chance, when you get a new administration full of enthusiasm, 
to get things done. I think it will mean that you will be able 
to get people that want to help you, doing things the right 
way.
    As I suggested, the kind of background the Comptroller 
General had is, to my judgment, exactly who ought to be the 
Director of an Office of Management. We had about a dozen or 
two during President Eisenhower's time. He was the first one 
that looked around the whole White House and Executive Office 
of the President to say, this place is just not staffed. He was 
used to vast forces, armies, whatnot, and he just couldn't 
believe what he saw. So he started to--President Truman put two 
people over in what is now the Eisenhower Building and said, 
look through the Congressional Record every day. That was the 
beginning of at least something down there.
    And President Eisenhower put in an Office of Liaison with 
Congress, a good management group in the Bureau of the Budget 
at that time, who, if you wanted a law written or a corporate 
government function, which a number were, or working with the 
TVA, which all the line agencies up here hated and all that, 
but a lot of good things were done. They were done by able 
people without a partisan lilt. They were just people that were 
excellent professionals.
    And that is what we ought to get on this, people that are 
professionals, that will take direction. But we need people I 
think, like you do, to get people who can get things done, 
because otherwise nobody is going to face up to it. You need to 
get a good deputy secretary in most of these agencies, and that 
would certainly help, but they need coordination.
    Mr. Daniels. I couldn't agree more, Mr. Chairman. As you 
and I have discussed, we are searching for the best person, 
people, we can. In fact, we have, I think, set the 
specifications at a level that means it has taken a little time 
to find--to try to find the right leader and supporting cast.
    I couldn't agree more that if we could get David Walker to 
take this on, then the problem would be two-thirds solved. He 
is one of the finest people in American government.
    Mr. Horn. We could clone him.
    Mr. Walker. For the record, Mr. Chairman, I have a good 
job, but I appreciate the compliment. And cloning is illegal in 
the United States.
    Mr. Daniels. I know I would get shelled up here if I even 
attempted to steal him away from his congressional 
responsibilities. But we have visited on multiple occasions, 
and we have used his high-risk list as a starting point for our 
own target selection, and we will continue to do that.
    He has his responsibilities which are not the same, we 
know, as ours; but there is this very strong convergence that 
you mentioned. And, to the limits of what is appropriate, I 
want the relationship between our two organizations to be 
tight.
    Mr. Horn. Well, we thank you for coming. There are some 
other questions we might submit, if we could, from either the 
minority or the majority, that--some Members couldn't make it 
here.
    So I want to now thank the staff that put many of these 
things together, and there is also a statement from Chairman 
Burton which will go into the record at this point.
    I'd like to thank the staff for their work on this. J. 
Russell George, staff director and chief counsel, standing over 
there; Dianne Guensberg is a professional staff member, 
detailee from the General Accounting Office; Bonnie Heald, 
director of communications; Earl Pierce, professional staff; 
Matthew Ebert, policy advisor; Grant Newman, assistant to the 
committee; Bruan Homm, intern.
    On the minority staff, Mark Stephenson, professional staff; 
Jean Gosa, minority clerk; and our two faithful court 
reporters, Bob Cochran and Julie Bryan. Thank you very much.
    Mr. Walker. Mr. Chairman, if I can, just before you put the 
gavel down, just for the record, I would like to publicly thank 
many of the GAO professionals who were part of the GAO 
financial statement audit. I hate to mention names, but just a 
few who are with me here today: Jeff Steinhoff, Gary Engel, 
Linda Calbom, Greg Kutz, Steve Sebastian, McCoy Williams, and 
Phil Calder are among the many dedicated GAO professionals that 
tried to make this happen; and, again, to mention the Treasury, 
OMB, and other public servants who also were part of this 
process.
    Thank you, Mr. Chairman.
    Mr. Horn. Well, we thank you, and their names will be in 
the record. If you would like to add some from the Treasury or 
the Office of Management and Budget we would be glad to put it 
in the hearing record.
    Thank you very much.
    [Whereupon, at 11:55 a.m., the subcommittee was adjourned.]
    [The prepared statements of Hon. Dan Burton, Hon. Janice D. 
Schakowsky, and Paul O'Neill follow:]
[GRAPHIC] [TIFF OMITTED] T6938.046

[GRAPHIC] [TIFF OMITTED] T6938.047

[GRAPHIC] [TIFF OMITTED] T6938.048

[GRAPHIC] [TIFF OMITTED] T6938.049

[GRAPHIC] [TIFF OMITTED] T6938.031

[GRAPHIC] [TIFF OMITTED] T6938.032

                                   -