[House Hearing, 107 Congress]
[From the U.S. Government Publishing 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
____________________________________________________________________________
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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
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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?
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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:]
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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.
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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:]
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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:]
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