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



 
 TRANSFORMING THE DEPARTMENT OF DEFENSE FINANCIAL MANAGEMENT: A STRATEGY 
                               FOR CHANGE

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

                                HEARING

                               before the

                   SUBCOMMITTEE ON NATIONAL SECURITY,
                   VETERANS AFFAIRS AND INTERNATIONAL
                               RELATIONS

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED SEVENTH CONGRESS

                             SECOND SESSION

                               __________

                              JUNE 4, 2002

                               __________

                           Serial No. 107-198

                               __________

       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
                              WASHINGTON : 2003

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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
STEVEN C. LaTOURETTE, Ohio           ELIJAH E. CUMMINGS, Maryland
BOB BARR, Georgia                    DENNIS J. KUCINICH, Ohio
DAN MILLER, Florida                  ROD R. BLAGOJEVICH, Illinois
DOUG OSE, California                 DANNY K. DAVIS, Illinois
RON LEWIS, Kentucky                  JOHN F. TIERNEY, Massachusetts
JO ANN DAVIS, Virginia               JIM TURNER, Texas
TODD RUSSELL PLATTS, Pennsylvania    THOMAS H. ALLEN, Maine
DAVE WELDON, Florida                 JANICE D. SCHAKOWSKY, Illinois
CHRIS CANNON, Utah                   WM. LACY CLAY, Missouri
ADAM H. PUTNAM, Florida              DIANE E. WATSON, California
C.L. ``BUTCH'' OTTER, Idaho          STEPHEN F. LYNCH, Massachusetts
EDWARD L. SCHROCK, Virginia                      ------
JOHN J. DUNCAN, Jr., Tennessee       BERNARD SANDERS, Vermont 
JOHN SULLIVAN, Oklahoma                  (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 National Security, Veterans Affairs and International 
                               Relations

                CHRISTOPHER SHAYS, Connecticut, Chairman
ADAM H. PUTNAM, Florida              DENNIS J. KUCINICH, Ohio
BENJAMIN A. GILMAN, New York         BERNARD SANDERS, Vermont
ILEANA ROS-LEHTINEN, Florida         THOMAS H. ALLEN, Maine
JOHN M. McHUGH, New York             TOM LANTOS, California
STEVEN C. LaTOURETTE, Ohio           JOHN F. TIERNEY, Massachusetts
RON LEWIS, Kentucky                  JANICE D. SCHAKOWSKY, Illinois
TODD RUSSELL PLATTS, Pennsylvania    WM. LACY CLAY, Missouri
DAVE WELDON, Florida                 DIANE E. WATSON, California
C.L. ``BUTCH'' OTTER, Idaho          STEPHEN F. LYNCH, Massachusetts
EDWARD L. SCHROCK, Virginia

                               Ex Officio

DAN BURTON, Indiana                  HENRY A. WAXMAN, California
            Lawrence J. Halloran, Staff Director and Counsel
                  J. Vincent Chase, Chief Investigator
                           Jason Chung, Clerk
                    David Rapallo, Minority Counsel

                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on June 4, 2002.....................................     1
Statement of:
    Friedman, Stephen, chairman, Department of Defense Financial 
      Management Study Group, HE Marsh & McLennan Capital, Inc.; 
      Lawrence J. Lanzillotta, Principal Deputy Under Secretary 
      of Defense, Deputy Under Secretary Defense for Management 
      Reform, Office of the Under Secretary of Defense, 
      accompanied by Tina Jonas, Deputy Under Secretary of 
      Defense for Financial Management, Office of the Under 
      Secretary of Defense.......................................     7
    Schmitz, Joseph E., Inspector General, accompanied by Robert 
      Lieberman, Deputy Inspector General, Department of Defense; 
      Gregory Kutz, Director, Financial Management and Assurance 
      Team, accompanied by Randolph C. Hite, Director, 
      Information Technology Systems Issues, U.S. General 
      Accounting Office; and Franklin C. Spinney, Jr., Tactical 
      Air Analyst, Department of Defense.........................    52
Letters, statements, etc., submitted for the record by:
    Friedman, Stephen, chairman, Department of Defense Financial 
      Management Study Group, HE Marsh & McLennan Capital, Inc., 
      prepared statement of......................................    11
    Kutz, Gregory, Director, Financial Management and Assurance 
      Team, prepared statement of................................    68
    Lanzillotta, Lawrence J., Principal Deputy Under Secretary of 
      Defense, Deputy Under Secretary Defense for Management 
      Reform, Office of the Under Secretary of Defense, prepared 
      statement of...............................................    26
    Lieberman, Robert, Deputy Inspector General, Department of 
      Defense, prepared statement of.............................    56
    Shays, Hon. Christopher, a Representative in Congress from 
      the State of Connecticut, prepared statement of............     3
    Spinney, Franklin C., Jr., Tactical Air Analyst, Department 
      of Defense, prepared statement of..........................   100


TRANSFORMING THE DEPARTMENT OF DEFENSE FINANCIAL MANAGEMENT: A STRATEGY 
                               FOR CHANGE

                              ----------                              


                         TUESDAY, JUNE 4, 2002

                  House of Representatives,
Subcommittee on National Security, Veterans Affairs 
                       and International Relations,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 10:05 a.m., in 
room 2154, Rayburn House Office Building, Hon. Christopher 
Shays (chairman of the subcommittee) presiding.
    Present: Representatives Shays, Schrock, Kucinich, and 
Tierney.
    Staff present: Lawrence J. Halloran, staff director and 
counsel; J. Vincent Chase, chief investigator; Dr. R. Nicholas 
Palarino, senior policy advisor; Kristine McElroy and Thomas 
Costa, professional staff members; Sherrill Gardner, detailee, 
fellow; Jason M. Chung, clerk; David Rapallo, minority counsel; 
and Earley Green, minority assistant clerk.
    Mr. Shays. Good morning. I apologize for keeping you all 
waiting. I like to start on time, so I do apologize. Last 
Friday, the Office of Management and Budget, OMB, transmitted 
the 2002 financial management report to Congress. According to 
that report, the largest impediment to removing the disclaimer 
from the governmentwide financial statements remains the 
Department of Defense DOD's serious financial management 
problems. These problems are pervasive, complex, longstanding 
and deeply rooted in virtually all business operations 
throughout the Department. More than 1 year ago, David Walker, 
the Comptroller General and head of the General Accounting 
Office, GAO, sounded a similar alarm. He told our subcommittee 
DOD suffered pervasive weakness in its financial management 
systems, operations and controls, including an inability to 
compile financial statements that comply with generally 
accepted accounting government accounting principles.
    Today, at the urging of our ranking member, Mr. Kucinich, 
the subcommittee asks the Defense Department GAO, the DOD 
Inspector General, IG and others to describe current strategies 
and challenges in bringing a world class financial management 
system worthy of a global military enterprise. In the doing of 
great things, small things matter. Each one of the $373 billion 
to be spent this fiscal year by the Pentagon, seals a bond of 
trust between taxpayers and the citizen soldiers sworn to 
defend our way of life. Each must be accounted for.
    Twentieth century processes and systems built by accretion 
during the haze of the cold war will never give the President, 
the Congress or the public the clarity and perspective required 
to marshal scarce resources against 21st century threats. The 
urgency of the war on terrorism demands financial management 
systems as smart as our weaponry. We cannot afford a margin of 
error, militarily or fiscally.
    One year ago, the Department released a study setting out 
specific strategies to include financial management in the 
sweeping transformation of U.S. Defense institutions. In the 
long-term, the plan calls for broad structural changes in 
establishment of a standardized architecture for DOD business 
processes. At the same time, the plan calls for pilot projects 
to model cost savings ideas and chip away at institutional and 
cultural resistance among and between defense agencies in the 
military service branches.
    As we will hear from GAO and the Department of Defense IG, 
this is not the first ambitious reform plan launched by a new 
administration charting a course over the fiscal and political 
horizon. Previous plans floundered in the shallowest of 
changing priorities and management neglect. But the Secretary 
of Defense and the DOD comptroller have committed to a 
sustained far reaching effort to reform and transform Pentagon 
financial management into a precision tool of policy 
formulation, program execution and detailed accountability.
    Today, we ask our witnesses to measure progress to date to 
evaluate year and long-term measures of success and describe 
the daunting challenges that remain on the path toward modern 
auditable financial management systems at DOD. We appreciate 
their joining us this morning and we look forward to all their 
testimony.
    [The prepared statement of Hon. Christopher Shays follows:]

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    [GRAPHIC] [TIFF OMITTED] T6569.002
    
    Mr. Shays. At this time, I would like to call on Mr. 
Kucinich, the ranking member of this committee and the driving 
force behind this hearing.
    Mr. Kucinich. I want to thank the chairman for his 
indulgence and his cooperation in putting together this 
critical hearing, and I want to thank all the witnesses who are 
here today for appearing before this committee and also welcome 
my colleague, Mr. Tierney. Today marks the eighth hearing this 
subcommittee has held relating to the Department of Defense's 
financial management or mismanagement problems during the 107th 
Congress. The Subcommittee on Government Efficiency, Financial 
Management and International Relations, chaired by 
Representative Horn, has also held hearings on the subject.
    The House Armed Services Committee also has heard testimony 
about the Pentagon's accounting troubles. So has the Senate 
Armed Services Committee and other Senate panels, but we 
needn't stop there. Since the Chief Financial Officers Act of 
1990 which established basic financial reporting requirements 
for Federal agencies took effect, this subcommittee has held 
dozens of hearings on the Defense Department's financial 
mismanagement difficulties.
    In all these sessions no matter who has testified, 
comptroller general, the Inspector General, the chairman of 
Independent Commissions such as Mr. Friedman, who is with us 
today, the message has been constant that the Defense 
Department's financial mismanagement situation or management 
situation is in shambles. That no major part of the Defense 
Department has ever passed the test of an independent audit, 
that the Pentagon cannot properly account for trillions of 
dollars in transactions.
    I want to run that by you one more time; that the 
Department of Defense cannot properly account for trillions of 
dollars in transactions. That's no less than six Pentagon 
functions, more than any other government agency are at high 
risk of waste, fraud and abuse, and show little prospect for 
improvement, that the Department of Defense writes off as loss, 
tens of billions of dollars worth of intransit inventory, and 
that it stores billions worth of spare parts it doesn't need, 
that it will take nothing less than a complete transformation 
and culture at the Defense Department and a full commitment at 
the highest levels of leadership at the Pentagon to fix the 
situation.
    Has the Defense Department culture been transformed? Is 
Pentagon leadership committed to rectifying this problem? In my 
estimation, no. In 1995, Department of Defense Comptroller John 
Hammery promised a Senate Armed Services subcommittee that he 
would take comprehensive action to sort out the accounting 
mess. Well, no real progress was made.
    Six years and $1 billion in wasted taxpayers' money later, 
we had a remarkably similar statement from Secretary Rumsfeld 
during his confirmation hearing. Mr. Rumsfeld told Senator Byrd 
that balancing the Pentagon's books would be among the top 
priorities of his tenure. Once more in hindsight, the statement 
appears to be lacking. The Pentagon's books, of course, are a 
disaster. The Office of Secretary, despite the chairman's 
request inexplicably refused to send DOD comptroller, Dov 
Zakheim, to testify before this subcommittee, which has direct 
oversight over the Pentagon's management policies. If cleaning 
up the books are so important to the Department, why isn't the 
Pentagon's top accounting official here to talk about it?
    More importantly, the Pentagon still insists a preposterous 
8 to 10-year timeframe for obtaining a clean audit. Can anyone 
fathom the chairman of commercial enterprise insisting to his 
shareholders that he needs a decade before its books are 
auditable? After all this country has been through, through the 
shame and sham of the Enron debacle, together with its 
colleagues in the accounting industry, notably Arthur Andersen, 
you look at that context and it pales when up against this mess 
at the Pentagon.
    And there is also a question, Mr. Chairman, which is really 
beyond the scope of this meeting, but at some point would bear 
looking into, if the Department of Defense's accounting process 
is so jumbled and inexplicable, why wouldn't there be symmetry 
in so many of these defense contractors? Why wouldn't their 
books also be screwed up since so much of accounting is 
transactional analysis? Think about that. And we will talk 
about that later.
    Meanwhile the administration has requested, and Congress 
will likely authorize one of the largest single-year increases 
in defense budget authority in the history of the world. Given 
its legendary problems, how can the Defense Department 
shareholders, the American taxpayers, be sure that the 
Department will spend this extra money on a measure that will 
increase security? As Chuck Spinney will tell us today, they 
can't. The truth is without proper accounting practices in 
place and accurate planning, there simply cannot be any rhyme 
or reason to the administration's defense budget request and 
there can be no way of ensuring that extra taxpayers dollars 
allocated to the Department of Defense will be spent 
appropriately.
    In his written testimony, Mr. Spinney will put it starkly. 
At the Pentagon he tells us, quote, both links are broken. The 
historical books cannot pass the routine audits required by law 
and planning data systematically misrepresent the future 
consequences of current decisions. The double breakdown in 
these information links makes it impossible for decisionmakers 
to assemble the information needed to synthesize a coherent 
defense plan that is both accountable to the American people 
and responsive to the changing threats, opportunities and 
constraints of an uncertain world.
    Personally Mr. Chairman I do not believe the Department of 
Defense will fix this broken unsustainable system on its own. 
What motivation does it have? Despite its routinely dreadful 
performance, Congress almost never rejects a Pentagon request 
for more money. The time has come for Congress to treat the 
Department of Defense as the market treats any commercial 
enterprise. Just as investors withhold their supply of capital 
to a company that fails to meet its expectations, Congress must 
refuse to supply additional funds to the Pentagon until its 
books are in order.
    During recent consideration, the defense authorization bill 
for fiscal 2003, I drafted an amendment that would prevent 1 
percent of the budget of any component of the Defense 
Department from being obligated if that component does not pass 
the test of an independent audit. This amount is small enough 
not to adversely affect the critical work conducted by our 
Armed Forces, especially given the impending defense budget 
increase. And though a modest proposal, this amount is large 
enough to send a firm message from Congress that the status quo 
is unacceptable.
    Though the House Committee on Rules blocked this amendment, 
the upcoming appropriations cycle offers another opportunity 
for Members of Congress to exercise our constitutional 
oversight responsibilities. I hope, Mr. Chairman, that our 
subcommittee and members of this subcommittee who, like me, 
have gained considerable firsthand knowledge of the Pentagon's 
failings, will join me in this effort. In the meantime, we have 
the opportunity to add to this body of knowledge, and in 
particular, hear from Mr. Spinney what at DOD's financial 
mismanagement means for the way we're able to defend our 
country. Whether the highest levels of Pentagon leadership 
which apparently deemed this hearing too inconsequential to 
send a representative absorb the message remains to be seen. I 
want to thank the Chair for his indulgence.
    Mr. Shays. I thank the gentleman, Mr. Tierney.
    Mr. Tierney. I am going to pass on a statement Mr. 
Chairman. I think the parameters of the meeting have been ably 
set out by you and Mr. Kucinich.
    Mr. Shays. Thank the gentleman. We have two panels, two 
excellent panels. We have Mr. Stephen Friedman, chairman, 
Department of Defense Financial Management study group. He is 
with Marsh & McLennan Capital, Inc. Mr. Lawrence J. 
Lanzillotta, principal Deputy Under Secretary of Defense, 
Deputy Under Secretary Defense for Management Reform, Office of 
the Under Secretary of Defense. Accompanying him is Ms. Tina 
Jonas, Deputy Under Secretary of Defense for Financial 
Management, Office of the Under Secretary of Defense.
    I would invite you to stand and we will swear you in.
    [Witnesses sworn.]
    Mr. Shays. Our witnesses have responded in the affirmative. 
Our practice is to do 5 minutes and then roll over another 5 
minutes. So you will see the light go halfway through--you will 
see the light turn red at 5 minutes and then we'll turn it back 
on green again for another 5 minutes. And we will have two who 
will be providing testimony. And all three of you will be 
participating in the questions. And so we'll start with you, 
Mr. Friedman.

STATEMENTS OF STEPHEN FRIEDMAN, CHAIRMAN, DEPARTMENT OF DEFENSE 
FINANCIAL MANAGEMENT STUDY GROUP, HE MARSH & McLENNAN CAPITAL, 
INC.; LAWRENCE J. LANZILLOTTA, PRINCIPAL DEPUTY UNDER SECRETARY 
   OF DEFENSE, DEPUTY UNDER SECRETARY DEFENSE FOR MANAGEMENT 
 REFORM, OFFICE OF THE UNDER SECRETARY OF DEFENSE, ACCOMPANIED 
BY TINA JONAS, DEPUTY UNDER SECRETARY OF DEFENSE FOR FINANCIAL 
      MANAGEMENT, OFFICE OF THE UNDER SECRETARY OF DEFENSE

    Mr. Friedman. Thank you very much, sir. Thank you, sir. 
Early in 2001, the Secretary of Defense asked if I would lead a 
task force to study and make recommendations concerning 
financial management transformation at the Department of 
Defense. We very quickly put together a group, selected a very 
capable consultant and waded into the process. The process was 
neither an audit nor an exercise in fingerpointing. It was 
really designed to come up with hard recommendations.
    We worked under a substantial sense that we should move 
quickly because there was an urgent desire to start 
implementing recommendations. The event it was possible to move 
very quickly and make recommendations with the high degree of 
confidence, and this is why: There had been numerous prior 
studies done of the Pentagon's financial management. I think 
both the chairman and the ranking minority member have alluded 
to them. They were highly consistent in terms of their 
criticisms and their diagnoses and the other thing that was 
highly consistent was the lack of effective widespread 
followup. We also found an enormous degree of consistency in 
our interviews with then present and past DOD senior officials 
and high consistency when we spoke to various consultants that 
we interviewed in the process of selecting the one we 
ultimately chose.
    Additionally, many of the conditions that we saw there were 
to members of our panel were not unusual as things that would 
have occurred in the private sector many decades ago. Certainly 
totally unparallel as to what exists in the private sector 
today.
    In the end, we were very taken by a comment that David 
Packard, the legendary business man and former Deputy Secretary 
of Defense made back in the 1980's, that we all know what needs 
to be done. The only question is why aren't we doing it?
    So this is a very--this is a very target-rich environment 
for criticisms. What I would like to do is quickly tell you 
what we found, tell you why we believed it was that way and 
make some recommendations. Our full panoply of recommendations 
are spelled out in my report and the testimony I submitted, and 
there won't be time for that.
    I do want to say that my remarks and the facts that I 
allude to are, as of April 2001, when our task force submitted 
its report and my understanding is that there is widespread 
agreement within defense on the conclusions and 
recommendations. But that, you will have to hear from the DOD 
officials. What we found, DOD was unable on a regular basis to 
produce timely, reliable and relevant financial reports. 
Clearly unable to meet the requirements of the CFO Act of 1990. 
Timely is self-defining. Reliable, to us, meant accurate 
numbers that could be confirmed by an audit, clearly crucial 
for the credibility and stewardship of an organization, but not 
enough. Managers don't run a major complex enterprise off the 
audited numbers. They really need management information 
systems, and that was where relevant came in. Numbers that 
would be useful to managers, numbers that would be useful to 
tracking costs, enabling benchmarks, it is an axiom in 
management that if you can't measure it you can't manage it. 
You have to be able to answer the question ``how am I doing?'' 
in a specific way, simplistic level. If you don't know how much 
it costs to maintain and cut the grass at a military base, it's 
very hard to know if your efficiency is improving or someone 
else could do it more effectively.
    Going along with this, we found clearly a lack of 
widespread recognition of the benefits that good financial 
information could provide in managing the enterprise more 
efficiently and we're providing in the private sector. Lack of 
an authoritative plan enterprise architecture was notable. Here 
you have the most complex enterprise in the world, the most 
stovepiped, and there was really a lack of an overarching and 
authoritative plan, and I want to emphasize ``authoritative,'' 
the ability to insist that certain things be done right.
    We found that the way business was being conducted, there 
was no real time line or cost estimates for reaching CFO Act 
compliance. It was over the horizon. It was just as someone 
said, not really in my lifetime. There was just no--there were 
no hard estimates. In addition to the credibility, numerous 
studies whether by the businessmen for national security [BNS], 
the Defense Science Board, others had pointed out the vast 
amounts of money that would be saved if modern financial 
management techniques were employed. BNS made a conservative 
estimate in a recent study of $15 to $30 billion annually. The 
conservative was the chairman's judgment. He felt it could be 
more. And there are--our task force thought of the weapons 
systems, the service readiness, the benefits to servicemen that 
would cover and clearly that was crucial.
    Now, why? First of all, this is not an excuse but a fact, 
the Pentagon systems were set up to deal with budget and 
appropriations accounting, which is a form of checkbook 
accounting. It is, in many ways, more complex, at least to 
visitors from the private sector like me it is, and it's very 
different from GAAP, which they're being required to have in 
place.
    Under the budgetary accounting as they had set it up, there 
was a lack of central data repository and just takes months to 
calculate things, like the total cost of ownership of a 
military track vehicle, for instance. Very, very important, the 
systems that grew up over the decades, hundreds and hundreds of 
feeder systems typically were at the service or lower levels 
were old, roughly 80 percent of the systems were not in the 
control of the DOD's central financial management. These feeder 
systems funneled information to DOD's central financial and 
accounting systems. Over the years, standardization and 
compatibility had not been mandated. These really couldn't 
speak to each other. On a very simplistic level, which is 
frankly the only level which I really get my arms around it, if 
you had a service person, let's say her name was Corporal Mary 
Jane Smith. If Corporal Smith was Smith, M.J. or Smith, Mary 
Jane, that makes a difference. If you add her birthdate, 
January 1, 1970, is that January 1, 1970, is it 1/1/70? 
Obviously these are highly simplistic examples but those 
vocabulary differences which seep into the business practices 
of the units meant that what you had was essentially something 
like a U.N. where many different languages were being spoken 
and you really have two choices in that situation.
    You can either standardize the language, insist that 
certain things be expressed in certain common ways or you could 
translate and translation was, for the most part, the approach 
that they were taking. And that was an unfortunate approach, a 
bad compromise because it meant a huge sink of human resources 
at work and a constantly new workload because as new practices 
came in, the workarounds had to increase.
    So year after year, in the absence of an authoritative 
plan, the central financial management worked toward what was, 
at the time, most publicized problems. Some additional issues: 
DOD has some exceedingly convoluted business practices. If you 
look at pictograms of some of the processes, whether in travel 
service or service travel or procurement, they just have many 
more steps than would be the norm in the private sector, and by 
``private sector,'' I do not mean just corporations, I mean 
other entities that have not been shielded from competition and 
have to be effective at cost controls, such as hospitals or 
universities. Overly complex reporting requirements that have 
led to many, many reports that probably could have been 
streamlined and simplified.
    Now the pertinence of all this is when you have many excess 
steps----
    Mr. Shays. If you could finish in 1 minute. Thank you.
    Mr. Friedman. When you have a lack of steps of interface 
like that, you essentially have a giant whisper down the 
valley. So in closing, I would say our recommendations came 
down to the importance of having a blueprint, continuity of 
Secretary of Defense, urgency for this process, a focused 
sunset effort, and then working with DOD on its human capital 
strategy for developing the internal skill sets to meet with 
these challenges. Thank you.
    Mr. Shays. Thank you.
    [The prepared statement of Mr. Friedman follows:]

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    Mr. Shays. Mr. Lanzillotta--do I say your name correctly?
    Mr. Lanzillotta. Thank you, Mr. Chairman, and members of 
the committee. I am pleased to be here today to update you on 
the financial management reform within the Department of 
Defense. I have a short summary of my written statement that I 
have already submitted to the committee. Financial management 
reform and overall management reform in the Department of 
Defense are key in the need for transformation of America's 
defense posture.
    Mostly transformation is about changing the way we think 
about military capabilities to ensure that we are able to 
counter more decisively 21st century threats, most notably, 
terrorism. However, in streamlining the overall Defense 
Department's support structure, its management and 
infrastructure and organization, it is critical to free up 
resources necessary to carry out this transformation. The 
support structure must be responsive to our fighting forces and 
leadership and be as efficient as possible.
    What makes transformation different and historic is that 
Secretary Rumsfeld and the entire leadership team are moving to 
change the fundamental culture of the Department. The 
Department is focusing on the big picture to get to the root of 
the problem and carry out reform that will endure and engender 
other improvements. The culture change is being advanced by 
Secretary Rumsfeld and is evident in his actions to reform 
business practices and the supporting financial management 
systems. Our approach has been an important distinguishing 
feature from past endeavors. Most significantly our financial 
management reform is leadership driven. This is a top down 
effort. Past reforms were bottom up that was a piecemeal 
approach, which only yielded marginal change and were unable to 
achieve the needed cultural changes in the comprehensive 
solution.
    Dividing the problem into smaller pieces seemed like a 
reasonable solution, but it just became just as inexecutable as 
the past solutions. General reform cannot simply be left to 
functional staffs. Reflecting this, Secretary Rumsfeld and the 
three service secretaries and the Department's entire senior 
staff are deeply involved in overhauling financial management. 
Leading Secretary Rumsfeld's financial management reform is my 
boss, Under Secretary of Defense, Dov Zakheim. Directing and 
overseeing this reform is Ms. Tina Jonas, who sits off to my 
left, who is the first-ever Deputy Under Secretary of Defense 
for Financial Reform. She is with me today.
    The Comptroller's Office is already being reorganized and 
realigned to better address this problem. It was new and it's 
new to this administration to put assets totally devoted toward 
doing this problem. We added a Deputy Under Secretary and we 
realigned the Comptroller's Office to have not only a 
directorate that dealt with this, but a program management 
office that deals directly with this problem. Besides being 
leadership driven, would also distinguish our reform as its 
comprehensive centerpiece, seamlessly linking our reengineering 
business practices and our financial information systems.
    DOD's financial management can only be put right by 
reengineering our business practices and developing an 
overarching architecture to provide the information needed to 
guide and account for management decisions. Development of an 
enterprise-wide architecture will be driven by the needs of the 
Department's decisionmakers for timely and reliable information 
and reengineering the Department's business practices.
    Additionally, a well-designed business management system 
will enable us to produce not only relevant management 
information, but also auditable compliant financial statements 
and to fulfill other financial information management 
requirements. Our reform efforts are drawing on private sector 
enterprise. This includes not only the expertise brought into 
the office by Secretary Rumsfeld and the service secretaries 
and many of his leadership team, but also the establishment of 
direct links to private industry.
    Shortly after he took office, Secretary Rumsfeld called 
upon some of our most capable minds in private and public 
financial worlds to describe processes for fixing DOD financial 
management. The committee has already heard from Mr. Friedman, 
who led some of our initial efforts. Mr. Friedman's 
qualifications are well known to this committee. Last year he 
produced a study that became a guidepost for the Department's 
efforts in improving financial management information.
    Following his recommendations proposed by Mr. Friedman and 
his team, the Secretary focused his reform on overhauling the 
current disjointed complex DOD financial and nonfinancial 
business systems. Beyond this initial input, private sector 
expertise remains key to our reform. For example, the Defense 
Business Practice Implementation Board is giving us insight and 
independent recommendations. We believe the design of our 
defense-wide architecture will benefit from substantial private 
sector input. Supporting the Department's financial management 
overhaul are several reforms that likewise will seek a cultural 
change in how the Department does business. The Department's 
efforts will focus on performance-based budgeting and other 
features outlined in the President's management agenda.
    DOD leaders need to be given greater freedom to manage. 
Reporting requirements and other administrative burdens must be 
reduced. These and other reforms, like financial management 
change, will require strong support from the Congress.
    In closing, Mr. Chairman, I want to reiterate Secretary 
Rumsfeld's support and determination for transforming business 
processes within the Department. We are advancing a cultural 
change in how we do business in a comprehensive overhaul of our 
management and financial business systems. I thank the 
committee for its continued interest in our management reform. 
We will need strong support from Congress to achieve historical 
transformation we seek. We also need ongoing strong partnership 
with the General Accounting Office, Office of Management and 
Budget, the Department's Inspector General. Together we can 
create the world class business infrastructure that is needed 
to revitalize and transform America's defense posture.
    Mr. Shays. Thank you very much.
    [The prepared statement of Mr. Lanzillotta follows:]

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    Mr. Shays. Ms. Jonas, I think before we start, I would like 
you to explain that chart so we don't think it's wallpaper.
    Ms. Jonas. Mr. Chairman, when we came in, I got to the 
Department in April of last year. And when we came in, of 
course we had Mr. Friedman's study available to us and a 
plethora of GAO and IG reports to tell us generally that there 
was a concern about our systems and our financial accounting 
infrastructure, but we did not know the full extent of the 
problem. The only documentation that existed was a report that 
was provided to Congress called an improvement plan. That 
document suggested that there were 167 critical financial 
systems. So we decided to make sure that we had the facts 
straight and in July, the Secretary mandated the development of 
a program management office and began the Financial Management 
Modernization Program.
    Over the several months after that memo was issued, we 
discovered the full scope and breadth of the problem. There are 
1,127 different financial and nonfinancial feeder systems on 
this board. It represents a specific data base of information. 
It's not just a picture. But this is--what they call this is 
the development of what they call an ``as-is'' inventory. This 
is what our current business environment, our accounting 
environment looks like, and as you can see, it is quite 
complex.
    So on that board, you'll see some of the colors represent 
the different systems I think we may have provided the 
committee. For example, we've got property management systems, 
inventory systems, budget formulation systems, acquisition 
systems, personnel and payroll systems represented on that 
board. We do have a key to that.
    Mr. Shays. We do have a copy of that. I want Mr. Kucinich 
to start the questioning process. I want to set this up to 
understand, is there an axis--is there anything--is there a 
sense of order to these squares or could you have arranged them 
any way you wanted?
    Ms. Jonas. It does represent a particular data.
    Mr. Shays. Is there a flow-through?
    Ms. Jonas. Well, what you see, those black lines represent 
financial transactions or interfaces between the various 
systems. So we have approximately 3,500 interfaces. What this 
illustrates, Mr. Chairman, is that it is impossible to be 
accurate or timely with this type of business environment. 
People wonder why we can't get a clean audit statement. You 
know, the further you get out from one of the core accounting 
systems, the more likely it is that an error will have been 
made.
    Mr. Shays. Well, I have questions specifically about this. 
Let me just understand, when did both of you join the 
Department of Defense? Have you been there a long time?
    Mr. Lanzillotta. Tina and I actually came on the same day, 
and it's been a year and a month.
    Mr. Shays. Let me get some housekeeping out of the way and 
then we will go with Mr. Kucinich for 10 minutes. We'll do 10-
minute rounds and come back. Ask unanimous consent that all 
members of the subcommittee be permitted to place an opening 
statement in the record and the record remain open for 3 days 
for that purpose. Without objection so ordered.
    And ask further unanimous consent ask all witnesses be 
permitted to include their written statements in the record. 
Without objection so ordered.
    And so, Mr. Kucinich, you have 10 minutes, and Mr. Tierney 
will go with 10 minutes and then I'll do 10 and then we'll keep 
going around.
    Mr. Kucinich. I thank the Chair and the witnesses to Mr. 
Lanzillotta. Secretary Rumsfeld has indicated that implementing 
financial reform could take as long as 8 more years. Wouldn't 
you agree this is an extremely long period of time in which 
violations of the Constitution itself comes into question, to 
remain out of compliance with Federal accounting statutes, and 
most importantly, to operate without the ability to make 
rational planning decisions? I am sure you are familiar with 
Article 1, Section 9, Clause 7 of the Constitution, a regular 
statement and account of the receipts and expenditures of all 
public money shall be published from time to time.
    Mr. Lanzillotta. Secretary Rumsfeld is not pleased he has 
to wait any period of time. He would like this financial 
management and get this thing done as soon as possible. The 
problem, I think, as Tina brought forth, is the complexity of 
the systems that we got in and dealt with. You know, we have 
right now on financial transactions and systems that we're 
dealing with, 1,127 systems that we're trying to make them 
compliant. The best way to do that is the approach that I think 
the Department, and I think it's been recommended by Mr. 
Friedman and GAO and IG and everybody else that we have sought 
guidance from, is to develop this enterprise, this 
architecture. That way we can develop an overall plan to become 
compliant and provide not just clean auditable statements but 
also the management information that the Department needs.
    Mr. Kucinich. How do you justify 8 years? How do I go back 
and tell my constituents that this $400 billion a year 
enterprise it's going to take them 8 years to straighten out?
    Mr. Lanzillotta. I am not pleased with the timeframe. I 
think we can probably do it faster. And I think there will be 
successes along the way. We have some successes now and we hope 
to have more successes. I think when you talk about 8 years, 
that you talk about total 100 percent. If you look at Gillette 
and some of the major corporations of the United States that 
did similar activities, and, of course, I don't know where we 
stack up on the Standard & Poor's 500, but I suspect the first 
200 of them at least, the UK took 4 years, Gillette took 4 
years, Hershey took almost 3 years and these are individual 
efforts that took 3 years. We're not happy that we found the 
complexity of the problem that we found. We're trying to deal 
with it in an orderly way and we have sought input from 
everybody we could to try to do this.
    Will it take 7 years? It may. That's a reasonable estimate, 
and I think the GAO thinks it's a reasonable estimate. Do we 
hope to do it faster? Yes. Some of the criticism that we have 
taken is that our plan is too aggressive.
    Mr. Kucinich. Wouldn't it be a lot easier for your task if 
the--if Pentagon spending was just frozen so you could get the 
books in order instead of bringing in more cash that is going 
to be a lot harder to follow?
    Mr. Lanzillotta. Sir, it would be easier for me. It 
certainly would be.
    Mr. Kucinich. I want to ask you about the repercussions of 
taking this long. I'm sorry to cut you off. I got a lot of 
questions here. Mr. Friedman, I have heard it indicated by 
Secretary Rumsfeld and by yourself that these reforms that you 
are recommending could take $15 billion to $30 billion 
annually--could save that much once it's finally implemented. 
Let's invert that rational for a moment. Isn't the Pentagon 
losing at least that much every year that you don't have those 
reforms in place.
    Mr. Friedman. The numbers that I cited were from the 
Businessmen for National Security, and it was 15 to 30. I 
believe the Secretary at one point mentioned a target of 5 
percent; is that right? There are large amounts of money and no 
one can be precise that would be saved if modern business 
practices were in place. I don't think anyone who has looked at 
the Department of Defense has disputed that.
    Mr. Kucinich. What I would like to say, though, since you 
put it that way, I think it's equally valid to put it another 
way, and that is when you don't have those reforms in place, 
that it could be costing the American taxpayers anywhere from 
$15 to $30 billion annually not having the reforms in place, 
and that could be anywhere from $120 billion to $240 billion 
over the next 8 years. Isn't the inverse true?
    Mr. Friedman. I think that's right. That money could be 
used for other taxpayer purposes or used for defense purposes, 
weapon systems, advancing readiness, service peoples' benefits.
    Mr. Kucinich. I want to ask Ms. Jonas, you indicated in a 
meeting with one of my staffers that one of the problems, at 
least in terms of incentives is with us, if Congress keeps 
appropriating more and more money despite these horrendous 
practices, what's the incentive for the Pentagon to reform?
    Ms. Jonas. Well, I think the Secretary is trying to create 
the incentive. I think Steve just referred to the general 
thought. You know, just as an example, the Department spends--
has spent about $2 million a month on interest penalties that 
we pay because we don't pay on time. So I am--currently we have 
measurements that we are tracking this to reduce that.
    Mr. Kucinich. Run that by us again.
    Ms. Jonas. The Department pays approximately $2 million a 
month on interest because we don't pay on time. This is under 
the Prompt Payment Act. So we have since January of this year, 
we have had metrics and measures that Steve referred to where 
we track and are----
    Mr. Kucinich. Who do you pay the interest to?
    Ms. Jonas. Contractors. I mean we are paying about $11 
billion. It's a small percentage and a lot better than the 
other government agencies, but it illustrates the point. And I 
make it to people in the building all the time because clearly 
when they're looking for money for reprogrammings or other 
programs, this is an area where if we improve our process and 
our performance, we can save money and become more efficient. 
So those are the types of things we're using and I've got about 
125 different measures that we're now using to improve our 
performance.
    Mr. Kucinich. If a contractor knows they're going to get 
interest on the amount of money that's not being paid, there's 
an incentive for them not to press for payment, isn't there?
    Mr. Lanzillotta. I don't think that would be the case, sir. 
Every contractor that's come to me, both in this job and my 
previous job, they want to be paid on time. If they're not on 
time, they want to be paid earlier. The incentive is just the 
opposite. They don't want to have to finance their receivables 
and they don't want us to be late in paying them. I find that 
to be opposite from my experience.
    I would like, sir, if I could, clarify my last statement, 
making it easier for us in the Department to fix the financial 
systems would fix the financial systems, but it would neglect 
our primary mission of national security. Our requirements 
aren't driven by budgetary increases. Pay raises is a very 
definite number that comes to mind, and we know exactly what 
that requirement is. We don't want to stop on flying hours. We 
know exactly what that requirement is, steaming days, OPTEMPO. 
Stopping the systems and no funding for these requirements, 
although it would be easy to fix the financial management, but 
it would be like throwing the baby out with the bath water 
because our problem is complicated in the fact that when we 
prepare our statements, only 20 percent of those systems 
actually would go to fixing financial statements. The other 80 
percent are what's called feeder systems. So when we look at 
this problem, we have to look across the entire Department to 
get this fixed.
    Mr. Kucinich. One of the things I am wondering as we go 
through this thing, Mr. Chairman, and the importance of this 
hearing is that so we don't get drawn into this maze without 
asking some obvious questions, how can the American people be 
assured that our national security is solid when the accounting 
system which is the basis of it because you're talking about 
how the money's spent, is totally fouled up?
    I mean, there always has to be some symmetry about these 
things. You cannot have an accounting system that's broken down 
like this, and at the same time, tell the American people that 
this country's national security can be assured. I mean, that's 
what I don't get, Mr. Chairman. I mean, we're here and have 
these hearings all the time. I mean, the real question here is 
the relationship between the breakdown in accounting and the 
relationship between this country's ability to defend itself, 
because, you know, we're selling the American people a phony 
bill of goods here is what it amounts to. Nobody in the private 
sector could ever get away with this for too long. Enron proved 
that. So I'm wondering, to go back to Mr. Friedman, you know, 
the next panel--is that 10 minutes, Mr. Chairman?
    Mr. Kucinich. I will ask one question here of Mr. Friedman 
and I thank the Chair. In the next panel, Mr. Franklin Spinney 
will testify. He's described the Pentagon's financial 
management crisis involving two fundamental problems. First, 
the historical books cannot pass routine audits required by 
law; and second, planning decisions systematically misrepresent 
the consequences of future decisions.
    Mr. Friedman, do you agree that these are two problems the 
Pentagon currently suffers from? And finally, I would like to 
read just one section of his testimony and see if you can 
respond. He says low ball cost estimates breed like 
metastasizing cancer cells throughout the entire defense 
program. By its numbers hide the future consequences of current 
policy decisions permitting too many programs to get stuffed 
into the outyears of long-range budget planning. This sets the 
stage for an affordable budget bow waves repeating costs and 
cycles of cost growth and procurement stretch-outs decreasing 
weights of modernization in older weapons, shrinking forces and 
continuing pressure to bail out the self destructing 
modernization program by robbing the readiness accounts.
    Mr. Friedman. As far as the historical books, I think 
that's self evident because they have not gotten--they have not 
been able to get a clean audit opinion and a clean audit 
opinion is not readily on the horizon. I am not sure--the last 
comment he made is beyond the purview of our group.
    Mr. Kucinich. I thank the Chair for this extra time period. 
Thank you.
    Mr. Shays. I am just trying to count the matrix. Mr. 
Tierney. Excuse me, if you would just be able to tell me, I 
have two different charts here. Why would I have more than one 
chart?
    Ms. Jonas. One of them may be more updated, and I think 
probably the one with the additional systems on it----
    Mr. Shays. Can I tell you, I tell my staff to do this, but 
I would always put dates on it. There's no date.
    Ms. Jonas. Certainly.
    Mr. Shays. OK.
    Mr. Tierney.
    Mr. Tierney. Thank you, Mr. Chairman. The--you know, this 
is more than a little bit disturbing, but it's not the first 
time we've been around this block, so I suppose we shouldn't be 
surprised.
    Let me just--first of all, there was an insinuation that 
one of the things that works in industry is competition. So, 
Mr. Friedman, let me ask you, what is going to replace 
competition as the driving motivational factor in the 
Department of Defense in moving toward this reform?
    Mr. Friedman. Well, for one thing, as numbers improve and 
as the Secretary and his senior people are given good metrics, 
they're going to be able to measure--they will be able to 
measure things and determine, this is how well you've done this 
particular function today; now let's see you do it better down 
the road.
    Another thing--and this is something our committee felt--
the incentives to managers in the Defense Department were 
really very different than the private sector. If you looked at 
a manager's incentives, he hasn't gotten any material bonus for 
doing a better work. It's hard to measure whether he's, in 
fact, done better work. It's very hard for him to discharge an 
employee that he considers to be incompetent; and at the end, 
when he looks at it, there aren't the incentives to really 
stick his neck out and do anything other than manage the 
budget. So we think that should be changed.
    I think that the--I think that there are various processes 
for comparing to the private sector and making clear 
comparisons of cost effectiveness there, and those should be 
utilized. So there are plenty of ways to stimulate this, but 
the overarching one that people constantly came back to is, 
there must be continuity in this effort.
    If people there in the Defense Department believe this is 
the flavor of the month and that their bosses are going to be 
leaving in whatever the actuarially measurable time is, a year 
and a half for senior people and then this will not be a 
continuing priority, you will not have the sustained effort. On 
the contrary, if you enforce the continuity, hopefully you 
won't be asking the same questions of someone in my seat 6 or 8 
years from now.
    Mr. Tierney. Well, hopefully. I mean, I just looked at 
Secretary Rumsfeld and Deputy Secretary Wolfowitz. They've been 
around this game before. They are some of the people coming 
back into the cycle. So they've had one bite of the apple years 
ago; and here we are coming back a second time, and we're still 
dealing with the same issues here.
    Tell me, you know, to the extent that you talk about pay 
scales or incentives like that to attract, in the military, I 
mean, you have promotion or no promotion. You don't think 
that's adequate enough, the pay scale increases or changes that 
go with that? Isn't that the structure militarily, you reward 
it that way?
    Mr. Friedman. We consistently heard, as a criticism of the 
ability to perform and get where we all want to get, the fact 
that pay scales have fallen sharply behind the private sector, 
that the Department does not have the skill sets that it needs 
to accommodate to what is modern in the 21st century, that 
people were trained in many systems that we're trying to move 
away from, and that we need more advanced-degree professionals, 
more people who are trained in business practices; and so I--we 
came to believe that change was needed there.
    We did not have time to study the IRS. My understanding is 
that some real ability to break pay scales was afforded to 
Commissioner Rossotti, and I think one thing that ought to be 
explored is bringing in midcareer professional experts to work, 
people who don't plan to work for retirement, but as a matter 
of patriotism and other things, would like to try to work on 
this problem.
    Mr. Tierney. Mr. Lanzillotta, what is the Department doing 
in that respect?
    Mr. Lanzillotta. Civilian reform, civilian pay table reform 
and military pay table reform has been under way for a long 
time. Dr. Chu last year, or 2 years ago, started on the 
military pay table reform and tried to target these--on the 
military these midtermers to try to get them to stay so the 
Department doesn't lose their expertise.
    I will agree that on the civilian side we have to do more. 
As the latest example, yesterday crossed my desk a lieutenant 
colonel that was getting out, and we wanted to have him stay on 
board and hire him. He had an offer that he delivered to us 
from another corporation to sit down there, and they are 
willing to pay to him more than I'm being paid, you know. So to 
give him an adequate compensation or a comparable package, we'd 
have had to bring him on at the SES-3 level.
    Mr. Tierney. It's sort of ironic, isn't it, that this 
individual is involved with a system that looks like this, and 
yet private industry, which we think is part of the solution, 
is going to hire him. I don't get it.
    Mr. Lanzillotta. There are--you know, there isn't one 
person individually that's responsible for----
    Mr. Tierney. Oh, no. I think it takes a whole peck of 
people to----
    Mr. Lanzillotta. We are trying now to come over there and 
put in overarching architecture and put some order to this. 
This isn't really a statement or a solution, but this is really 
a statement of the problem--of the complexity of the problem 
that we're dealing with. You know, what we hope to do with the 
architecture that we're putting into place is, next time we 
come over here, we can show you a mapping of the systems that 
are much more orderly and do provide that management 
information. The Department is trying to get there as soon as 
they can.
    Mr. Tierney. Let me ask you, when is the next time we 
should invite you over to get that then, because I'm looking 
here, and I notice that back in 1998, the Inspector General 
told us that this would all be set and ready to go in 2003, and 
here we are and we're not ready yet. So could you give me just 
a rough idea of when you think it is that you'd be able to come 
back to us with a more understandable chart and some ideas of 
where we ought to go with this thing?
    Mr. Lanzillotta. Well, we're at the will of the committee. 
I mean, when the committee wants to have us come over for any 
type of----
    Mr. Tierney. I don't want to bring you back for no reason. 
They told us back in 1998, the Department of Defense remains 
unable to comply with the various laws requiring auditable 
financial statements; the Department hopes to complete the 
fielding of systems capable of complying with Federal 
accounting standards by fiscal year 2003.
    So I guess my question to you is, it's 2003, and obviously 
we're not there yet. When can we expect to have systems capable 
of complying with Federal law?
    Mr. Lanzillotta. In April 2003 we're going to produce the 
blueprint. In 2003, we'll begin prototyping and testing of the 
solution. In 2005, we'll deploy--or start to deploy the 
Department-wide solution from the architecture. Any of those 
dates that the committee would want us to come back, we'd 
certainly be willing to do.
    Mr. Tierney. The other question--I still have some more 
time. The other question I had was, Mr. Friedman indicated that 
one of the issues was a readier ability to discharge weak 
performers. Do you have any report to us as to what is being 
done about that issue or what you need in order to be able to 
address that issue?
    Mr. Lanzillotta. I'm probably not the right person to ask 
that question to. I really haven't studied what options are 
available. We recently went out with the task force and 
informed the commanders of the various options that are 
available, both military and civilian, to address weak 
performers, and they include a wide variety of tools. I just 
don't really feel qualified to----
    Mr. Tierney. Who would be able to tell us that, because I'm 
curious if these people aren't performing, why--particularly in 
a military environment--they haven't been shuffled someplace 
else to do something they aren't qualified to do?
    Mr. Lanzillotta. I don't want to leave you with the 
misperception that we have willing nonperformers out there that 
we know about that----
    Mr. Tierney. I'm not saying it's willful or anything. It's 
just that in private industry that I'll familiar with in over 
20 years, if somebody can't do the job, you find another place 
for them, and I'd like to know who would tell me in this 
organization, Department of Defense, whether that is being done 
or to what extent it is being done; and why it's not being 
done, if it's not being done, and what's going to be done about 
that fact?
    Mr. Lanzillotta. Well, that falls within Personnel and 
Readiness. I can't give you any facts. I have no facts today 
that I could give you as to where we stand on that.
    I could provide something for the record if----
    Mr. Tierney. No, no. You've given me the people that we 
need talk to. That's all.
    Mr. Friedman, what is the extent of that problem as it 
impacts this situation that you outlined?
    Mr. Friedman. Well, I will just--I'll just pass on 
something anecdotal.
    Talking to someone in the personnel area that asked the 
question, let's assume you have an individual who's in the 
bottom 5 percent of your performance group and who is just 
believed to be incompetent at doing this. How long would it 
take--to use your phrase, ``segue that person'' into doing 
something--something else outside of the Department?
    I was told that in perhaps the best circumstance, it might 
take a year; when in other circumstances it might take, I was 
told, 18 months. I was given a very--when I asked how much time 
it would take of the supervisor's time to effect that 
departure, I honestly forget the amount of time, but it was at 
least a month spread out over that year or 18 months with 
panels, reviews, et cetera; and what I was told was that for 
practical purposes, therefore, it's just not a useful 
expenditure of a supervisor's time, because that supervisor 
would just be spending an unacceptable amount of their time 
working with that individual. So they will try to do what they 
can to transfer them and----
    Mr. Tierney. How much--as a percentage of the work force 
that is involved in this process that we're talking about, how 
many--or how much of a percentage of those people do you think 
fall in the category of not meeting the mark, not being up to 
the job?
    Mr. Friedman. I think that's an exceedingly pertinent 
question, because enterprises are about people and culture. I 
don't believe that anyone can give you an answer to that 
question, because my impression is that you do not have the 
personnel review processes in place to make those tough 
judgments on people and then to mentor them.
    It's not just about firing people. It's about trying to 
develop a personal development plan, which is part of what I 
meant by a human capital strategy.
    Mr. Tierney. So it sounds to me, Mr. Chairman, that if we 
want to followup on this, some of the people we want to talk to 
might be the personnel people, because they seem to be a part--
a significant part of this issue.
    But I know my time is up. Thank you for that.
    Mr. Shays. We'll have a second round here.
    Starting my first round of questions, the--this is the most 
up-to-date chart here?
    Ms. Jonas. That's correct.
    Mr. Shays. But that chart is different from this chart and 
different than this chart. So, you know, it's just not, 
frankly--I mean, it does illustrate some, but it just--it just 
would have been nice to have an up-to-date chart if this is the 
chart you want to show us and not show us these; and it just 
strikes me that this chart won't be up to date next week. And I 
don't criticize you for that, but it won't be. There will be 
something within one of those blocks that you'll realize there 
is another element of something.
    Ms. Jonas. Mr. Chairman, this is a living data base, and it 
is astounding, because I think at the beginning of this year, 
we started--our notion was about 600-some-odd systems. So I 
apologize for the lack of dates on the documentation, but it is 
a weekly----
    Mr. Shays. Well, I know--and because of that, that's why 
you need the dates, that's all, because it's just going to 
constantly change. And in one of them, you see a tremendous 
amount of interaction in a core right around here, and in 
another one, you see just a tremendous amount of activity along 
a band.
    This, to me, is probably the best explanation of why we 
haven't succeeded in the past, but it--I'm just trying to--
we've had eight hearings on this. Mr. Horn has had countless 
hearings on this issue, another subcommittee dealing with 
financial management, on all different government agencies. The 
fact that we know that the failure to be able to audit any 
account--any part of it, you have a tremendous amount of 
inefficiencies.
    You have a misuse of resources. You are buying things that 
you don't need and destroying things you may need and storing 
things you don't need, even within an inventory. We learned in 
other parts of the hearing, we had a contaminated mask--they 
weren't contaminated; they just didn't function--and they stuck 
the masks in with their other inventory, and then couldn't 
track which ones were the bad masks. So in a sense, then, all 
the masks came into question.
    So we--I'm going to add something else. This would put 
people's lives in danger.
    I mean, every element of this is--just cries out for a 
solution, and the--I made a point, under the Clinton 
administration, of not blaming them for this, because there was 
a Bush administration before there was a Clinton 
administration, et cetera, et cetera.
    And I'm just eager to know from you, Mr. Friedman--I'm not 
clear, as I want to be, as to why we didn't have really any 
success. I mean, we have had no success. Is that accurate?
    Mr. Friedman. I can't measure precisely how things stood in 
2001 as versus 3 years earlier or 6 years earlier. I think that 
there probably were some successes along the way. When you--
when we spend time talking to numerous people, there were 
definitely areas in which people had made progress.
    This was not a situation in which we felt people didn't 
care about good financial management. This wasn't people being 
slothful. It was essentially the lack of--the lack of the tools 
and the lack of the skill sets and the lack of the high 
priority; and I think some of the--some of the successes were 
then dwarfed by the complexities of new issues that came up. 
This was what I meant earlier when I said that absent an 
authoritative plan, i.e., one that had teeth and that was 
enforced with the power of the SecDef behind it, new issues of 
nonstandardization were constantly arising. So, to me, it's 
almost like the legend of the fellow pushing the huge boulder 
up the hill. He'll make progress and then he'll hit something 
and then it will come down a ways.
    Mr. Shays. Well, let me ask you, when you say there's 
successes, do I take one of those blocks and say someone was 
empowered to fix their system and they fixed it, but it didn't 
interface with the rest of the system? Is that basically kind 
of--Ms. Jonas--Ms. Jonas, let me ask you, is this your 
responsibility primarily?
    Ms. Jonas. The development of this program, the financial 
management modernization program and the enterprise 
architecture which will be delivered in 2003, the six prototype 
sites that we'll do in 2004 and our implementation is my day-
to-day responsibility.
    Mr. Shays. Mr. Lanzillotta, do you have the authority to go 
to any unit within any of the branches and basically say this 
has got to change?
    Mr. Lanzillotta. Dr. Zakheim does have that authority, 
under the CFO act.
    Mr. Shays. Who does?
    Mr. Lanzillotta. Dr. Zakheim, my boss, does have that 
authority to go through, and he has issued out a lot of policy 
guidance, and we can provide that for the record to the 
services about the steps we've taken.
    Just to clarify a point, sir, on your last question to Mr. 
Friedman, I think the problem--there was two approaches that 
were taken to try to improve financial management in the 
Department. The last approach, that it's such a huge and 
dynamic problem as we've outlined here, that the previous 
administrations, both Republican and Democrat, decided to try 
to take it in small pieces, they decided to look at 
environmental liability to see if they couldn't advance the 
ball in one area--what became, you know, apparent through Mr. 
Friedman's study.
    And as we looked at this problem, the small pieces, trying 
to bring the small pieces together wasn't going to work. There 
had to be an overarching architecture or plan that people were 
marching to, although it is much easier to take a bite of the 
apple one at a time.
    Mr. Shays. I mean, I don't know why they're mutually 
exclusive. I mean, it would seem to me he would be doing this, 
he would be breaking it up into little parts, he would be doing 
all of the above.
    Mr. Lanzillotta. They are not mutually exclusive, you're 
right, sir, but what was missing was the overall plan, the 
overall architecture, of where they were trying to get to; that 
wasn't there. And so, when an individual program manager was 
trying to develop the standards and get his system fielded, you 
know, he didn't have the standards, the overarching plan, of 
what he was trying to do.
    Mr. Shays. Let me ask you, though, if I had someone from 
the previous administration or the one before that 
administration--I mean, this committee has--I've been here 16 
years, or 15 years, and I'm trying to--I'm trying to think of 
what, you know, they told us. What they told us seemed to make 
sense, and you know, I felt they had an overall plan. I mean, 
they wouldn't--I don't think they would agree that they didn't 
have an overall plan.
    Mr. Lanzillotta. What I meant in overall plan, you know, 
previous administrations had a financial management improvement 
plan where they laid out--tried to lay out a concept of 
operation of how they were going to do it; but the enterprise 
architecture, there was never a blueprint for what the systems 
were to look like. There was never a blueprint for, you know, 
what it is we were trying to accomplish departmental-wide.
    When you look at the payment of contracts, you know, how 
many systems were involved in the payment of contracts, and 
where we lose the auditability is not that we can't account for 
the money, but as these systems don't interface properly and it 
takes manual input, then that's when you have to go back and 
verify every entry all over again; and it's a problem of 
interfacing in the systems. And so that's the part that was 
missing.
    Mr. Shays. OK. You know, I've been--I looked at one of the 
questions that staff has prepared, and they gave me an opening 
statement about it. It said DOD's fiscal year 2003 technology 
IT budget request is over $26 billion, and I leaned over to 
Vinny, and I said, Vinny, you don't need $26 billion. You know, 
you don't need $26 billion.
    And the reason--I just came back from Russia. They're 
spending $7 billion for their entire budget. Now, admittedly, 
their whole defense structure now is nuclear. I mean, it's--I 
say ``whole.'' I mean, their ships don't go out to sea. Their 
armies don't use live ammunition. Their planes don't fly. And--
but we're talking just--is that accurate, $26 billion?
    Ms. Jonas. I can certainly provide that for the record, but 
that sounds about right to me. I know it was----
    Mr. Shays. It just astounds me. I mean--and, you know, 
we're being asked--I've voted for the defense budget over a 
number of years. I voted against them in part because I didn't 
think I should support a defense budget that you couldn't 
audit.
    Now, I just felt like it was too hard for me to--I didn't 
think I could support a defense budget where we don't ask the 
Europeans to pay more and that we haven't used it to have a 
more rapid deployed military. I mean, we can't use our--our 
Special Forces are being overworked right now and so on. So, I 
mean, there were a lot of reasons.
    And now I voted for it because we're at war, and I'm saying 
I'm not going to look a military person in the eye and say I 
voted against their budget. But I guess just saying to you 
that--I'm going to have a second round of questions--we've 
spent billions of dollars on information systems. Are you 
telling me that those information systems weren't able to 
interact with each other?
    Ms. Jonas. Certainly this schematic shows that there are 
big problems.
    Mr. Shays. No, no. That doesn't show whether--all of these 
could interact. That doesn't show that they can't interact.
    Ms. Jonas. Not in an efficient fashion, Mr. Chairman.
    Mr. Shays. One of the other things that this doesn't do, 
among other things, it doesn't show me weights. One of those 
blocks could be huge compared to the others. So, I mean, I 
think you're going to have some fun really figuring out how 
you're going to make this even be, you know, more helpful to 
you.
    You're not looking at the right chart, if you're going to 
ask--that's even a different one than I have.
    Mr. Kucinich. Actually, Mr. Chairman----
    Mr. Shays. That's mine?
    Mr. Kucinich. No. This is not yours. This is a different 
one than you have. Do you have the----
    Mr. Shays. Yeah. I have two others. Let me just see if 
that's--yeah, that's the same.
    Mr. Kucinich. Actually, is it my turn?
    Mr. Shays. Yeah, you've got it.
    Mr. Kucinich. Thank you, Mr. Chairman.
    You know, I've actually been studying this very carefully, 
and what I've found out, Mr. Chairman, that this, while it 
appears to be a study of the various financial transaction 
systems of the Department of Defense, if you'll look at this 
closely, you'll really study it--I think you've seen it 
before--it's actually a test for color blindness, and if you 
study it even closer and you're not color-blind, you'll see 
that the pattern of these boxes that are green spell out the 
word ``sucker.''
    Look at it closely. You'll see it. I'm absolutely positive 
that if you're not color-blind, you'll see that word show up 
very clearly.
    The Inspector General found that in fiscal year 2000 alone, 
$1.2 trillion in department-level accounting entries were 
unsupported because of documentation problems, or improper 
because the entries were illogical or did not follow generally 
accepted accounting principles.
    Does anyone here on the panel have any background in law 
enforcement at all? Well, I'm going to ask Mr. Zakheim's direct 
representative, isn't such an environment wide open for 
possibilities of theft and fraud and embezzlement and things 
like that?
    Mr. Lanzillotta. There's a difference. Of course, fraud is 
never tolerated. You know, the threshold for fraud is zero, and 
when we find that out, I mean, we take the steps necessary to 
address that. Unsupported transactions in themselves, you know, 
that's a different story. That's not necessarily fraud.
    You know, I can't go over here and testify to $1.3 billion 
worth of unsupported adjustments. Unsupported adjustments in 
themselves are not----
    Mr. Kucinich. Could I ask you this question? How would you 
know--if you can't audit your books, how would you even know if 
it was fraud?
    Well, I'll ask another question. I don't want to trouble 
you with that one.
    The Department of Defense, according to this GAO report, 
the latest update in January 2001--is that the latest? Yeah. In 
2001, they list 22 areas of high-risk operations, and one of 
things they say, the Department of Defense cannot properly 
account for and report on its weapons--weapons systems and 
support equipment. They also say, the Army did not know the 
extent to which shipped inventory had been lost or stolen 
because of weaknesses in its inventory control procedures and 
financial management practices. They also say, the Navy was 
unable to account for more than $3 billion worth of inventory 
being shipped, including some classified and sensitive items.
    What's the possibility that materiel, paid for by the 
American taxpayers, is ending up in the hands of groups that 
may not be particularly friendly to the United States of 
America? Do you know what the possibility is? And in this kind 
of accounting system, isn't it quite possible that you could 
have all kinds of military equipment ending up in the hands of 
people who are not authorized to have such equipment?
    Mr. Lanzillotta. In the--sir, in the realm of the 
possibility, you know, I can never give a certification to this 
for sure. I know of no incident where that's ever occurred or 
it's ever been brought to my attention----
    Mr. Kucinich. But if you can't audit it and you can't 
account for it, you don't know where it's going. Isn't that 
fact?
    Mr. Lanzillotta. We are caught in a situation of--we 
understand the problem. What we're charged with is trying to 
fix it.
    Mr. Kucinich. But wait a minute. I just want to make this 
point, that the administration has declared that fighting 
terrorism is the most important thing in this country right 
now. An additional $50 billion has been appropriated. There's a 
total of $400 billion for the Department of Defense. By the 
year 2007, that's going to exceed 50 percent of all of our 
discretionary spending, and if what we're concerned about is 
terrorism, wouldn't it be the highest priority to get this 
accounting system straightened out so that--you don't know--
here it says, ``can't account for and report on weapons 
systems, do not know the extent to which shipped inventory has 
been lost or stolen, unable to account,'' with the Navy, ``for 
more than $3 billion worth of inventory being shipped.''
    You don't know. I mean, admit it, you do not know, and in 
that environment it becomes critical as a matter of national 
security to get a handle on this accounting system. You don't 
know where the weapons are going. You don't know if the United 
States has them in their hands or if somebody else has it. 
We've got this huge military machine, and we have no control 
over it whatsoever. It has a life of its own, and it's losing 
all kinds of materiel, and you don't know where it is; and you 
want to hope that it's not in the wrong hands, but you cannot 
guarantee the American people it's not in the wrong hands.
    And yet our whole budget is aimed at making sure that we 
defend this country. What a crazy, screwed-up system.
    Mr. Shays. Mr. Tierney.
    Mr. Tierney. Let me just talk for a second. I notice that, 
a while back, the corporate information management program in 
the late 1980's was attempted, and after about 8 years and $20 
billion, that whole effort was abandoned. And one of the 
reasons that the GAO, General Accounting Office, said it was 
abandoned was that there was resistance between the Department 
of Defense components and a lack of sustained commitment to the 
program. It said some military departments did not want to 
participate in this corporate information management, believing 
their financial management systems were superior to those that 
were being proposed by the CIM.
    Do you still, Mr. Lanzillotta, see--or Mr. Friedman, or 
both of you, do you still see that kind of intransigence or 
misbehavior, I guess I would call it, on the part of people in 
the different branches?
    Mr. Lanzillotta. I believe now that the moons are all 
aligned. We have the highest support for fixing financial 
management than I think the Department has ever had. I think 
that there's no daylight between the Secretary of Defense's 
position and each of the service secretaries.
    I understand that there were--before that, there weren't--
that couldn't necessarily be said. Improvement of the financial 
management systems, the management information systems, is one 
of the Secretary's highest priorities. The priority is there. I 
think that this fell for different reasons, but I'll take the 
GAO's comments.
    Mr. Tierney. Well, just stepping away from the Secretary 
for a second, because I don't think we're here to beat up on 
any particular Secretary over the last 30 years or whatever, 
but I'm really talking about the idea of, is there one force or 
one branch--let me ask Mr. Friedman.
    In your study, did you see the one branch or one force or 
one group of officers, without naming names or anything, that 
was more intransigent on these issues than others? Is there one 
section of the service that we have to be more concerned about?
    Mr. Friedman. We didn't have a sense of that, sir. The 
notion that people would think their own way of doing things is 
better is not unique to DOD. It exists in every stovepipe 
bureaucracy I've seen, and it certainly exists in business 
enterprises.
    The answer to it, the cure to it is, there has to be an 
empowered individual, whether it's the CIO, the CFO, whoever, 
the chief executive officer says he is going to ensure 
standardization; and the phrase they use in the Pentagon is, it 
has to have finger-in-the-chest urgency. It's got to be one of 
the high priorities.
    I think a very interesting point is that the Defense 
Department actually did get the job done in Y2K. There was--our 
interviews indicated there was a clear understanding that this 
was a crisis that had to be faced. It had a high priority. 
People were brought together, and there was centralized 
decisionmaking that there couldn't be leniency of figure out 
your way of doing it. So it can get done.
    Mr. Tierney. I guess it's a good point. I would expect 
then, in that case, people who got promoted and people who got 
demoted and people who went up and down based on how well they 
were responding to that Y2K problem--and it brings me back to 
my earlier issue which we can't solve here--is why that doesn't 
happen to people that don't do their job now. I think that's 
probably the whole of the hearing.
    Mr. Friedman, you did mention that you need more 
commercial-like practices for the private sector, partnering of 
activities which are not inherently governmental. Can you 
expand on that concept a little for us, give us some examples?
    Mr. Friedman. Sure. If you look at the private sector, you 
will see that very imminent enterprises--General Motors 
outsources billions and billions of dollars of its annual 
processing for accounts payable, accounts receivable, payroll; 
Microsoft outsources much of it financial and accounting; 
PriceWaterhouse, Travel Systems, BP Amoco, on and on and on, 
there is a--my understanding is, there is a government target 
to do more of this. The processes for doing this, if you read 
the report that was prepared by a panel led by the Comptroller 
General of the United States, the processes for doing this 
are--``convoluted'' would be an understatement, and this, we 
were told by individual after individual, acts as a deterrent 
to effectively getting private sector partnering done; and it 
means that when it is done, it is a long and laborious time 
period.
    I know that is an issue of some controversy. It was an 
issue of some controversy on the Comptroller General of the 
United States panel. But that is what the private sector is 
doing, and it's got to be determined at a pay grade above mine 
as to whether that's something that should be made more 
efficient.
    Mr. Tierney. You've certainly got all the jargon down, pay 
grade above yours----
    Mr. Friedman. Oh, yeah.
    Mr. Tierney. You've learned something going the other way. 
Are those statutory impediments to your knowledge, or are they 
regulatory or just----
    Mr. Friedman. My understanding is that it is--it is an OMB 
circular, A-76, that governs this, and I think the Department 
has recommended various changes. The Comptroller General has 
panel-recommended certain changes. It was beyond our purview to 
look into this in detail, but we looked at it enough to 
recognize that this was--this was an issue.
    Mr. Tierney. Thank you.
    Mr. Shays. Thank you. I would just--just a few questions 
here. The--going with the $26 billion request for IT, whether 
it's 26 or 24--how do we feel assured that it's going to be 
spent in a wise way, given the mess you've got to deal with?
    Mr. Lanzillotta. Mr. Chairman, requirements are out there, 
and they're determined without--you know, without the use--we 
know what the requirements are, and when we determine the 
budget, we know what the requirements are. Like when we built 
the architecture in the contract, we went out and received 
outside input, and we got requirements that were developed, and 
we knew how much this architecture to develop was going to cost 
us----
    Mr. Shays. I'm not understanding a bit of what you're 
saying to me right now. I don't know how that's an answer to my 
question.
    You're saying--you have built this incredible case that 
makes me understand that the task is unbelievably difficult and 
challenging, and that we've got an 8-year plan. And you don't 
have the plan in place, correct? Because this is really the way 
it is, not the way it should be.
    Is that right, Ms. Jonas?
    Ms. Jonas. Mr. Chairman, we do have a plan----
    Mr. Shays. No. That's not the question I asked. Is this 
the--is this the example of what exists today or what you 
want----
    Ms. Jonas. That is correct. This is the current state of 
our environment.
    Mr. Shays. OK. Now, do you have another graph of a chart 
that shows me what you want the world to be like?
    Ms. Jonas. A month ago an award was given to IBM to come in 
to develop what we've been talking about----
    Mr. Shays. The answer would be no, correct?
    Ms. Jonas. That is something that is part of----
    Mr. Shays. I don't--this is the--you answer my question, 
and then I'm happy to let you expand or put these--this isn't a 
trick. This is--we want the committee to know what we need to 
know, and you have the information to share with us.
    But I want the answer first: Do you have a plan in place, 
as we speak, that would--you could put side--you know, 
alongside this and say, this is the way we want the world to 
look?
    Ms. Jonas. We do not know what we want the world to look 
like. We do not have that, sir.
    Mr. Shays. OK. But what else did you want me to know?
    Ms. Jonas. The point of the development of an enterprise 
architecture which will be delivered over the course of the 
next year does have specific milestones and delivery points. 
For example, what we're asking our contractor to develop for us 
is--after this as-is development is made, what is a transition 
plan, and what should we look like in the future. That--that 
entire process will be completed within 1 year.
    Mr. Shays. Yeah. It just strikes me, though, that $26 
billion is so much money. I mean, obviously I guess some of it 
is just a machine that gets your paychecks out. So some of this 
is--but it's still $26 billion, and Russia's budget is $7 
billion, and so I'm just concerned.
    Have you developed metrics that Congress can use to assess 
your progress, and do you have the ability to assess your own 
progress here?
    Ms. Jonas. Yes--the answer to that is yes. We do have 
internal metrics. We have deliverables at specific timeframes 
within this year. The first--we're on schedule and had a first 
deliverable Sunday of last week. We will have another 
deliverable in 90 days. We would be very happy to share that 
with the committee.
    Mr. Shays. And describe to me what you mean by a 
``deliverable.''
    Ms. Jonas. The contractor is expected--as part of this 30-
day--or task delivery, they're supposed to tell us exactly how 
they will manage their work over the next year. So, for 
example, because we were able to get so much work on an as-is 
environment done during the time we were waiting for our 
appropriation, much of the work that the contractor will be 
embarking on is business process reengineering.
    In other words, it is apparent to the committee that this 
is completely inefficient. It is way too complex. We do spend 
too much money. So how do we refocus, reengineer our processes 
that will create some efficiency and will be able to allow us 
to----
    Mr. Shays. The question of how you do that, and it's the 
question of what you're doing right now that I have a question 
about.
    Describe to me one of those icons, and tell me--pick a 
simple one, and pick a really difficult one in there. Just--you 
know, in other words, if you just went up to the board and you 
said, this one here represents, you know, this mammoth 
undertaking in which three branches are connecting here, to one 
that's very simple. In other words----
    Ms. Jonas. Well, for example, the brown icons represent 
inventory systems. So we are working with the Acquisition and 
Technology folks, headed by Secretary Aldridge, to integrate 
those systems into an enterprise architecture.
    Mr. Shays. So you're basically--you're going to be able to 
say, DOD-wide, that you want an information system that can 
interface with each other and tell you the same information?
    Ms. Jonas. That's correct.
    Mr. Shays. OK.
    Now, that, I would think, you would have done before you 
came. I mean, that isn't--I'm making the assumption that was 
being set up. That was not a goal of the----
    Ms. Jonas. Not to my knowledge, Mr. Chairman.
    Mr. Shays. You know, the sad thing is, we're losing Mr. 
Horn; and Mr. Horn, when we talked about 2002--excuse me, the 
year 2000--he would meet with each department. He would grade 
each department, and he was a--we found that he was a real 
stimulus for some action among the--I just--you know, this 
committee spends a lot of its time now on terrorist issues, and 
I hope we have a committee that's going to be really pushing 
you all.
    Before we close, just so--because you're going to come back 
sometime again soon--I want you to pick one of these--was the 
inventory one a simple one? That seems to me to be fairly 
simple.
    Ms. Jonas. That's simple or, for example, the personnel and 
payroll systems.
    Mr. Shays. OK.
    Ms. Jonas. Let's see here. Do I have this on here?
    Mr. Shays. Yeah. On the top left.
    Ms. Jonas. Yeah. That's an area where we think we can get 
some real efficiency. There are--excuse me.
    We understand that there are over 102 personnel in payroll 
systems here. Clearly, this is inefficient; and so we're 
working with Dr. Chu's organization, which is the----
    The Chairman. So I would see 102 up in that board if I 
wanted to count to green?
    Ms. Jonas. Yes.
    Mr. Shays. What I'm still asking though is to show me one 
of those icons that really represents your most challenging 
effort.
    Ms. Jonas. Well, of course--I mean, I think they're equally 
challenging. Our----
    Mr. Shays. Not every one of these has the same weight. They 
don't. Even within the colors, they don't have the same weight.
    Ms. Jonas. Well, the bulk of the ones in the center are----
    Mr. Shays. For instance, is the payroll in the Army going 
to be more difficult than the payroll in the Department of--in 
the Navy? Is there one that you just look at and you say, 
``Good grief?''
    Ms. Jonas. We say ``good grief'' a lot, Mr. Chairman. I 
can't today say specifically which one I would say----
    Mr. Shays. OK. I just will reiterate.
    It seems to me you're still trying to understand the 
problem, and so anything you're doing right now is a hope and a 
prayer, maybe a little bit more, that it will fit into this 
overall plan, which isn't yet developed, and yet we're still 
spending a tidy sum of money each year with IT, for instance.
    So, any comment you want to make?
    Mr. Lanzillotta. Mr. Chairman, I just want to clear one 
misperception.
    The $26 billion also includes Command and Control IT 
systems that are devoted toward weapons systems and aren't 
necessarily even a part of this problem. It could be the 
digitization between an F-15 or an F-16 and a tank.
    Mr. Shays. Well, that's a very important point. So what is 
that $26 billion?
    Mr. Lanzillotta. That represents the total----
    Mr. Shays. I understand. So what should--what should the 
number be as it relates to this issue?
    Ms. Jonas. Mr. Chairman, our current estimate for what 
we're spending over the 5-year plan is between $4 and $5 
billion.
    Mr. Shays. No. And that's for--does that include someone 
getting out the payroll?
    Ms. Jonas. Yes.
    Mr. Shays. OK. It's $4 and $5 billion.
    Well, we could go a long time. We have another panel. Shall 
we get to the next panel? Yeah.
    Are there any closing comments that any of you want to 
make?
    Ms. Jonas. Thank you, Mr. Chairman. We appreciate the 
opportunity to be here.
    Mr. Shays. Well, we like--I'm sorry. Thank you for saying 
that.
    We would like to play a positive role in this. I think my 
colleague's frustration is that we're spending so much money 
now for--our budget is gigantic. It's crowding out other 
important issues, and it just seems like we've really run out 
of time. And so it's kind of on your watch, and I think my 
frustration--and I don't use that word often--is that I had the 
sense Secretary Rumsfeld was--this was going to be his highest 
priority.
    And it's not his highest priority now, it's the war on 
terrorism; and I'm just hopeful that you all still feel 
empowered to take decisive action.
    I'm going to make an assumption, unless you tell me 
differently, that you have all the power--your office has all 
the power necessary to make any change you need to make. Is 
that accurate?
    Mr. Lanzillotta. The CFO has that power.
    Mr. Shays. OK. So that won't be an excuse.
    OK, thank you very much. Appreciate it a great deal.
    Can you all just stay a second more, because my staff is 
just--just please sit down a second. I'm sorry. When you say 
you have all the power, I would just like my staff to ask this 
question.
    Mr. Chase. When you said that the Comptroller has all the 
authority to implement this system, does the Comptroller 
control--or does he control the purse strings that would allow, 
as an example, the Department of the Air Force, to go forward 
and purchase or develop a new system?
    Mr. Lanzillotta. I'll have Kenny expand on that. The 
Comptroller has issued several memorandums and guidance that 
deal expressly with that issue. The Secretary has delegated the 
authority necessary for Dr. Zakheim to carry out this mission. 
All ultimate authority rests with the Secretary, and maybe that 
could explain it. She has more detail on the memorandums that 
have been issued.
    Ms. Jonas. One important policy memorandum that Dr. Zakheim 
has issued over the last year is the ability to stop the 
development of systems. We are doing reviews on many of the 
systems on this board, including meaning many Navy systems, 
defense logistic systems, and that is quite a bit of a change. 
He is frequently using his ability to hold up reprogrammings, 
if necessary, to do what it takes, using the budget as a little 
bit of a hammer to get the right incentives to the system.
    Mr. Tierney. Just one followup on that.
    What would Congress do if it wanted to incentivize prompt 
action and capable action on this that wouldn't interfere with 
our defense mechanisms, but would give somebody a real sting to 
know they'd better get this done?
    Ms. Jonas. We've actually received, Mr. Tierney, a lot of 
support from Congress. The Senate acted last year to help us on 
the arresting of many of these systems. We've gotten support 
from the House in this regard. If we may reserve some--that 
opportunity, I might get back to you, but I think right now 
we've gotten substantial support from the Congress.
    Mr. Tierney. But it seems to me that we just keep feeding 
the beast, and cross your fingers. I think that's, you know, 
not something I'd feel comfortable doing.
    At what point do we stop giving billions and billions and 
billions of dollars every year to this group without saying, 
hey, we're taking some chunk of that away from you until we see 
that you deserve it? And what is it that we'd take away that 
wouldn't hurt our defense posture, but would certainly give 
people a good kick in the can?
    Ms. Jonas. Well, certainly with respect to what we're doing 
in the financial management modernization program, we are 
stopping spending on certain systems.
    Mr. Tierney. Can you followup and put that information into 
the record as to which system you're stopping and----
    Ms. Jonas. Absolutely. Yes, indeed.
    For example, I mean, some of the Navy pilot programs and 
enterprise resource planning programs are--we've arrested the 
development on those.
    I'd be happy to provide that for the record.
    Mr. Tierney. Any weapons and acquisition programs that 
you're doing that with?
    Ms. Jonas. That's not my purview, but maybe Mr. Lanzillotta 
can----
    Mr. Tierney. Mr. Lanzillotta, how about any weapons 
systems?
    Mr. Lanzillotta. I'm not sure I understand your question, 
sir. Are you talking about Crusader?
    Mr. Tierney. Well, we just said this--they take away the 
name tag and I forget your name; I'm sorry. But they were just 
saying that they are stopping payment on some systems or some 
plans in order to get the incentive to move forward, accounting 
plans or whatever. Are we doing anything with respect to 
weapons systems that are over budget and behind schedule and 
otherwise having problems with their accountability to give 
them the incentive to straighten out?
    Mr. Lanzillotta. We have several of those systems that just 
certified to Congress on the Nunn-McCurdy breaches. There were 
six of them. The DPG calls for further studies that will be 
going on this summer on five or six other intensively managed 
programs that we're looking at.
    I'm really outside my realm here to talk about weapons 
systems. That would be better addressed to the Under Secretary 
for AT&L.
    But the short answer to the question is, yes, we are 
looking at weapons systems too.
    Mr. Tierney. Would you followup on the record then with 
regard to those six and then the five programs that you just 
spoke about.
    Mr. Lanzillotta. On the Nunn-McCurdy breaches?
    Mr. Tierney. Right. And what they are and what's happening 
with them.
    Mr. Shays. Thanks to all.
    Thank you, Mr. Lieberman. Oh, sorry. We already have our 
new list out.
    We have Joseph Schmitz, Inspector General, Department of 
Defense, accompanied by Mr. Robert Lieberman, Department of 
Defense; Mr. Gregory Kutz, Director of Financial Management and 
Assurance Team, U.S. General Accounting Office, accompanied by 
Mr. Randolph Hite, Director of Information Technology Systems 
Issues, General Accounting Office; and Mr. Franklin C. Spinney, 
Jr., Tactical Air Analyst, Office of Program Analysis and 
Evaluation, Department of Defense.
    If you'd stay standing, I'll swear you in.
    [Witnesses sworn.]
    Mr. Shays. Note for the record, our witnesses have 
responded in the affirmative.
    We're going to get started right away. Mr. Schmitz, you're 
on.

STATEMENTS OF JOSEPH E. SCHMITZ, INSPECTOR GENERAL, ACCOMPANIED 
 BY ROBERT LIEBERMAN, DEPUTY INSPECTOR GENERAL, DEPARTMENT OF 
   DEFENSE; GREGORY KUTZ, DIRECTOR, FINANCIAL MANAGEMENT AND 
  ASSURANCE TEAM, ACCOMPANIED BY RANDOLPH C. HITE, DIRECTOR, 
INFORMATION TECHNOLOGY SYSTEMS ISSUES, U.S. GENERAL ACCOUNTING 
  OFFICE; AND FRANKLIN C. SPINNEY, JR., TACTICAL AIR ANALYST, 
                     DEPARTMENT OF DEFENSE

    Mr. Schmitz. Thank you, Chairman Shays and Ranking----
    Mr. Shays. Your mic is not on.
    Mr. Schmitz. How about now?
    Thank you, Chairman Shays and Ranking Member Kucinich. This 
is my first appearance before our congressional committee since 
my Senate confirmation as the Inspector General of the 
Department of Defense. I'm not an accounting expert, but I am a 
constitutional expert, and I am a taxpayer; and tax dollar 
accountability is fundamentally a constitutional issue.
    I was very pleased that Ranking Member Kucinich referred to 
Article I, Section 9, of the Constitution which requires that, 
``No money shall be drawn from the Treasury, but in consequence 
of appropriations made by law; and a regular statement and 
account of the receipts and expenditures of all public money 
shall be published from time to time.''
    In layman's terms, to paraphrase a former Congressman from 
Illinois and now the Secretary of Defense, every dollar the DOD 
spends was earned by a hard-working American taxpayer. I would 
only add that every taxpayer is entitled by the Constitution to 
a full accounting of each dollar spent.
    The financial management audits prepared by my office help 
to fulfill that important constitutional function. Those audits 
help to inform the Department, the Congress and the American 
taxpayers. In that regard, I look forward to working with this 
subcommittee and the other committees of Congress to ensure 
that the preparation of financial management audits and all 
Inspector General work products conform to the highest 
standards of transparency, accuracy and integrity.
    I'd be glad to answer any questions about how I plan 
generally to carry out this commitment.
    This morning, however, I'm accompanied by Robert Lieberman, 
my deputy. Bob has testified many times before this committee, 
and as the former Assistant Inspector General for Auditing, has 
a much deeper understanding of the many challenges facing the 
Department in the area of financial management. Accordingly, 
I've asked Bob to present his statement and to be available to 
answer any questions you might have. And with your indulgence, 
Mr. Chairman, I'd like to now invite Mr. Lieberman to present 
his testimony.
    Mr. Shays. Well, let me just say it would be your testimony 
on his behalf. OK? He's speaking for you, correct?
    Mr. Schmitz. He's my deputy. That's correct.
    Mr. Shays. Well, first, let me welcome you. I understand 
why you wouldn't have a statement, given that you've been here 
such a short period of time. It's good that you're here.
    Mr. Lieberman, if you have a statement, we'd be happy to 
hear it.
    Mr. Lieberman. Good morning, Mr. Chairman, Mr. Kucinich.
    Perhaps it appears ironic today, but at one time, the 
Department of Defense was the leader in adapting new financial 
management concepts for government agencies. Its planning, 
programming and budgeting system was widely emulated; and it 
led the way in computerizing large payroll contractor payment 
and accounting operations.
    Unfortunately, the uncontrolled proliferation of 
nonstandard systems and processes for performing both finance, 
and nonfinancial functions eventually created a host of 
problems now plague managers. Those include an inability to 
consistently produce either useful day-to-day financial 
information or commercial-type financial statements on a 
quarterly, semiannual or even annual basis. The limited 
capabilities of current systems create and perpetuate 
inefficiencies across the spectrum of DOD business activities.
    The Chief Financial Officers Act of 1990 and related 
legislation brought the financial reporting problems of most 
Federal agencies, including DOD, to light. For over a decade, 
we have reported that the lack of adequate financial reporting 
systems and a variety of internal control problems preclude 
favorable audit opinions on most DOD year-end financial 
statements.
    Strictly in terms of audit opinions on the reliability of 
DOD's most recent financial statements, unfortunately, I am 
unable to report progress for the DOD-wide or major component 
funds since your last hearing on this subject.
    As in previous years, we recently issued an unqualified 
clean opinion for the military retirement fund statements. 
Disclaimers of opinion were necessary for all other major 
funds, however, because of serious deficiencies in the 
reporting systems and other internal control problems. It will 
be several years until the management initiatives described by 
your first panel are likely to result in the drastically 
improved financial reporting that will earn clean audit 
opinions.
    My written statement highlights a sampling of audit reports 
for the last 12 months. They illustrate the breadth of the DOD 
financial management challenge which includes needed 
improvements in day-to-day operations like paying contractors 
or collecting debts.
    Is the Department focused on the challenge? Certainly the 
senior leadership is. Also, for the first time in the 12 years 
since the Chief Financial Officers Act was enacted, I believe 
the executive and legislative branches are on the same page in 
terms of what needs to be done to transform DOD financial 
management.
    We have long advocated focusing primary attention on the 
system weaknesses that are at the core of the DOD financial 
reporting problems. Section 1008 of the Defense Authorization 
Act for fiscal year 2002 did just that.
    Also, by rejecting the notion that any financial statements 
compiled by special efforts which bypass or override our 
official accounting systems are worth their high costs or 
constitute progress, Congress has appropriately insisted on 
fundamental, not superficial, reform. The initiatives announced 
by the Department over the past year appear to be highly 
compatible with the course mandated by section 1008 and clear 
indicators to transform DOD financial management, not just 
tinker with it.
    In IG reports and testimony in the past several years, we 
had expressed concern that the cost of the Chief Financial 
Officers Act compliant effort was unknown, performance measures 
were lacking. There was no sense of consistently strong 
leadership, and there was no assurance that managers would get 
more useful financial information even if year end financial 
statements received favorable auditable opinions.
    The Department is now trying to be responsive to those 
concerns. We believe that the new effort to establish a 
comprehensive financial system architecture is a necessary and 
long overdue step.
    There are undeniable risks. Development of the architecture 
could take much longer than anticipated. The end product might 
leave numerous unresolved issues, especially about process 
changes. The cost to implement the architecture might be 
prohibitively expensive or the DOD might lack the discipline to 
stick to its blueprint.
    The DOD does not have a good track record for deploying 
large information systems that fully meet user expectations, 
conform with applicable standards, stay within budget estimates 
and meet planned schedules. Nevertheless, we are cautiously 
optimistic.
    The Department has taken a major step forward by finally 
accepting the premise that the financial improvement effort 
needs to be treated as a program with all the management 
controls that a very large program should have. Those include a 
master plan, well-defined management accountability, full 
visibility in the budget, regular performance report financing 
and resources permitting robust audit coverage.
    Mr. Shays. Let me just interrupt you. You mean we haven't 
been doing that in the past? I mean, with the other plans, when 
we had hearings, I thought all of those things were there.
    Mr. Lieberman. No, sir, I think the plans were consistently 
deficient in all of these aspects over the years. We always had 
a reasonable top-level vision of where we wanted to go, but the 
details of the implementation were always lacking.
    Mr. Shays. OK.
    Mr. Lieberman. We believe that now DOD is making a good-
faith effort to create a stronger management structure for the 
improvement effort. We look forward to assisting with timely 
and useful auditable advice as we did during the year 2000 
conversion, another huge system challenge that was successfully 
addressed, as was discussed earlier this morning.
    In closing, since I plan to retire from Federal service 
this summer, I would like to thank you for the courtesies 
accorded to me over the many years of hearings and other dialog 
on defense issues. Hearings such as this one today are 
absolutely essential if all stakeholders in DOD financial 
management improvement are to remain, as I suggested before, on 
the same page.
    Mr. Tierney, I think your question to the first panel about 
what can be done to incentivize the Department can be answered 
in part by saying that congressional hearings like this on a 
regular basis are enormously helpful in that regard.
    That concludes my summary, sir.
    Mr. Shays. Well, that's a shocker, that you're planning to 
retire. You didn't get our permission first? You just did it on 
your own?
    You have been before this committee on countless occasions, 
and you have always been a superb witness, and your service to 
your country has been pretty extraordinary. So I have to 
process what you just told me and see if we give you permission 
to carry it out. We have a lot more power than you realize.
    [The prepared statement of Mr. Lieberman follows:]
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    Mr. Shays. Mr. Kutz.
    Mr. Kutz. Mr. Chairman and members of the subcommittee, 
unlike Mr. Lieberman this is my first time before your 
subcommittee, so it's a real pleasure for me to be here to 
discuss DOD financial management which we believe is a very 
important topic.
    The recent success of our forces in Afghanistan has shown 
once again that, as demonstrated, our military forces are 
second to none. However, that same level of excellence is not 
evident in many of DOD's business processes, including the 
topic of today's hearing, financial management. DOD's financial 
management problems date back decades, and previous attempts at 
reform have largely proven unsuccessful.
    Problems with financial management at DOD go far beyond its 
finance and accounting systems, as you saw earlier. This 
network of business systems was not designed but rather evolved 
over time into an overly complex and error-prone operation, as 
you saw on the previous poster board, with little 
standardization across the Department, multiple systems 
performing the same tasks, data stored in multiple systems and 
substantial manual data entry.
    Many of the systems in operation today date all the way 
back to 1950's and 1960's technology. Past reform efforts have 
not succeeded despite good intentions, and the intentions that 
led to those reform initiatives remain largely unchanged. As a 
result, today you have a fundamentally flawed financial 
management systems environment and a weak overall internal 
control environment.
    Our testimony today has two parts: first, the root causes 
of the inability to effectively reform business operations; 
and, second, what we believe are the key elements to reform.
    First, we believe the underlying causes of the chronic 
financial and business system problems at DOD include lack of 
sustained top-level leadership and accountability, cultural 
resistance to change and service parochialism, lack of results-
oriented goals and performance measures and inadequate 
incentives for seeking change.
    Let me briefly touch on two of these, leadership and 
culture. In our executive guide to world-class financial 
management, the leading organizations that we've studied, 
including General Electric, Pfizer and Boeing, all had 
identified leadership as the most important factor in making 
cultural change in establishing effective financial management.
    DOD's past experience has suggested that top management has 
not had a proactive, consistent and continuing role in leading 
financial management reform. Sustaining top management 
commitment to performance goals is a particular challenge for 
DOD. In the past, the average 1.7 year tenure of the 
Department's top political appointees has served to hinder 
long-term planning and follow-through.
    Cultural resistance to change and military service 
parochialism have also played a significant role in impeding 
past reform efforts. One reason for the proliferation of 
systems you saw earlier is the stovepiped approach that has 
allowed the services and DOD agencies to develop redundant 
solutions to business needs. For reform to succeed, all of the 
parts of DOD will need to put aside their parochial interests 
and focus on Department-wide solutions to financial management 
reform.
    The second point we have is related to key elements 
necessary for reform. Our written statement discusses what we 
believe are seven of these elements, and I will briefly touch 
on two now.
    First, the financial management challenges must be 
addressed as part of a comprehensive, integrated, DOD-wide 
business process. Reform effort and improvement strategy cannot 
be developed in a vacuum. Financial management is a cross-
cutting issue that affects all of the organization's business 
processes.
    Currently, as has been mentioned earlier, DOD has six of 
our 22 high-risk, agency-specific areas in the government, 
including system modernization and inventory management. In 
addition, our two governmentwide high-risk areas, human capital 
strategy and computer security, are also relevant to DOD. These 
interrelated management challenges must be addressed using an 
integrated, enterprise-wide approach.
    Second, establishing and implementing an enterprise-wide 
financial management architecture will be essential for the 
Department to effectively manage its modernization efforts. The 
Clinger-Cohen Act requires agencies to develop, implement and 
maintain an integrated system of architecture. Such an 
architecture can help ensure that the Department invests only 
in integrated, enterprise-wide business solutions.
    Building systems without an architecture is like building a 
house without a blueprint. And the stakes are high. As you 
mentioned, Mr. Chairman, for fiscal year 2003, DOD's total IT 
investment budget, which includes business process reform, is 
$26 billion. Without an architecture, DOD risks spending 
billions of dollars to perpetuate the existing complex, 
stovepiped, high-maintenance environment that exists today.
    In summary, the key elements necessary for financial 
management reform outlined in our testimony are consistent with 
the findings of the DOD Financial Management Transformation 
Report as discussed by Mr. Friedman. As we have testified many 
times over the past few years, we agree with the study group's 
vision for financial management, which is delivering relevant, 
reliable and timely financial information on a routine basis to 
support management decisions.
    Today, the momentum exists for reform and DOD has taken 
some actions that are consistent with a number of the key 
elements that I outlined earlier, but the real question remains 
will this momentum continue to exist tomorrow, next year and 
throughout the years that will be necessary to deal with these 
cultural systems and human capital challenges. For our part, we 
will continue to work constructively with DOD and the Congress 
on these very important matters.
    Mr. Chairman, this ends my statement.
    With me is Randy Hite, Dave Warren and Paul Francis; and we 
would all be happy to answer questions.
    Mr. Shays. Were they all sworn in? Just the people who were 
sworn in.
    [The prepared statement of Mr. Kutz follows:]
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    Mr. Shays. Mr. Spinney.
    Mr. Spinney. Thank you, Mr. Chairman.
    Can you hear me now?
    Before beginning, I would like to state for the record that 
I am presenting my own views. I am not representing any of the 
views of the Defense Department.
    Mr. Shays. You're on this panel because of this reason. 
You're on this panel, as opposed to being a representative.
    Mr. Spinney. I just wanted that in the record.
    Mr. Shays. It is in the record, and we're delighted to have 
you.
    Mr. Spinney. Mr. Lieberman's comment about the PPBS is 
particularly germane, in my view. The PPBS is the Planning, 
Programming and Budgeting System and is the major financial 
management system for the entire Department of Defense.
    Basically, all your systems should feed into that data 
base, because that's the data base we use to try to provide a 
coherent plan for the future, and I don't think you can 
separate the financial management problems from the plan for 
the future and the budget now before Congress.
    Could I have slide A, please?
    Slide A shows the current situation before Congress. The 
vertical line is the link between the past and the future. The 
rising bar shows you how much money we're going to ask for; 
and, as you can see, most of that money was put into place 
during the summer program review last year before the war on 
terrorism started. The red ribbon on the top is the difference 
that occurred after September 11th.
    Today's budget should accurately reflect the future 
consequences of those decisions. In other words, when you prove 
this year's budget, you're buying into that plan; and that plan 
should accurately reflect what you bought into. It should also 
reflect the consequences of past decisions. In other words, 
today's decisions should be linkable to the past.
    Could I have the next slide, B?
    This is the basic problem as I see it. We can't divorce the 
financial management problem from these links between the 
future and the past. The left-hand box has been accurately 
summarized. I basically agree with everything that's been said. 
The right-hand box is what I want to talk about today.
    Our planning system--and I have studied this for years. I 
did my first analysis of this as an Air Force officer in 1973.
    What happens is we have a structural bias to understate the 
future consequences of decisions. The easiest way to understand 
that is by looking at cost estimates for new procurement. It 
goes far beyond that, and I want to use that as an example. The 
end result is, as the program unfolds, production rates get cut 
back, we have continuing pressure to reduce readiness, our 
forces get older over time, infrastructure gets mismatched from 
a shrinking force structure and eventually pressure builds to 
increase the defense budget and we have sort of a boom-and-bust 
cycle. I want to use the F-18 as an example of how this process 
works to illustrate it.
    Slide C, please.
    This slide shows you the comparison between our plans for 
F-18 procurement and our actual production of F-18 procurement, 
most of which took place during the large budget increases in 
the 1980's. The lines represent the plans. The bars represent 
what actually happened. What you can see is we progressively 
overestimated future production quantities, and that bias to 
overestimate continued year after year after year. This is a 
product of the Planning, Programming and Budgeting System. It's 
like a moving picture of it.
    Next slide.
    The next slide is an analogous slide for the procurement 
budgets that were associated with that production program. Now 
what is interesting here again, the lines represent the plans 
and the bars represent what was actually appropriated in terms 
of money to buy the planes in the previous slide. What this 
shows you is that we actually appropriated more money in the 
early part of the program than was initially planned. So the 
program stretch-outs on the previous slide can't be associated 
with budget cuts. We have program projection stretch-outs. That 
raises budgets. Well, that didn't happen here.
    This is a very typical example, although it's clearer than 
most. That's why I'm using it.
    We can use the production data and the budget data to 
calculate costs, which is shown on the next slide. I won't go 
into the construction. It's been validated by GAO audit. 
Basically suffice to say that the heavy line with the balls 
represents the actual average cost over time as a function of 
the total production produced. The lines are the analogous 
depiction for the plan. In other words, the lines are what we 
said would happen. And, as you'll see, I have a box that 
highlights preproduction cost estimates. They are way low. 
Costs on the F-18 went down. They just didn't go down as far as 
we said they would. In fact, the actual costs were twice as 
much as predicted. Now if you multiply these kinds of pressures 
by hundreds of programs, what you have is what--when Mr. 
Kucinich read that phrase in my report, metastasizing cancer 
inside the system.
    The next slide shows how the overall FYDP changes over 
time. This is the boom-and-bust cycle that I talk about in more 
detail. The lines are all the FYDPs since it was introduced in 
1961.
    By the way, this chart is in current dollars. No way to 
remove inflation. What you see is, after Vietnam, we saw a 
gradual ratcheting up as programs grew in cost over time. And 
I'm sure you've all sat in hearings about weapons cost growth. 
This is what happens in the budget. You also have growing 
readiness costs in here as well, and eventually you buildup a 
head of steam and it leaps off into deep space.
    Then we saw a retrenchment very similar to the 1970's, and 
now we see the beginnings of an expansion, which brings me to 
the crux of the point. If, in fact, we're on the cusp of 
repeating another episode like we did in the early 1980's and 
we can't account for what's about ready to happen, this is 
going to unfold over the next decade. At the end of this next 
decade you all know that's when the baby boomer is starting to 
retire and there's going to be all sorts of other pressures 
impinging on us. That's why I don't think we can take 8 years 
to solve this problem. We have to move out right now and try to 
anticipate these problems and put together a decisionmaking 
process that can essentially sense these things ahead of time 
and avoid them.
    The final part of my statement, which I won't go into here, 
basically describes a way I thought about doing this. There is 
no magic bullet, but it's a way that gets at these issues.
    That concludes my statement.
    [The prepared statement of Mr. Spinney follows:]
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    Mr. Shays. Thank you all very much, and we'll start with 
Mr. Kucinich.
    Mr. Kucinich. I want to thank the panel, and I want to 
thank in particular Mr. Spinney for his very thorough and 
incisive testimony that you had laid out in its presentation to 
this committee in its totality.
    Mr. Spinney, there was one point in your written testimony 
I think that was particularly important. You point out that, 
because of misestimations of the unit cost of weaponry by the 
Pentagon planners, production rates end up being lower than 
anticipated. This in turn leads to a lower replacement rate, 
which, if I understand correctly, means that not enough 
equipment is purchased in a timely manner to replace all the 
older equipment targeted for retirement. The result of all this 
is an increase in the average age of equipment, meaning that 
the equipment costs more to operate ultimately. Then you're 
left with a shrinking force structure.
    Have I described this sequence correctly?
    Mr. Spinney. Yes, sir.
    I would add one thing to that. One reason why the 
production slips is, as the costs of the weapons go up, they 
get progressively more complex. So we have a complexity induced 
factor in the cost growth as well, and over time what we have 
is an aging force that's getting more complex at the same time. 
So the interaction between growing complexity and growing age 
has a multiplier effect and drives up the costs much faster 
than either one would alone.
    I have a lot of data to back that up, by the way.
    Mr. Kucinich. Why does it drive up that cost?
    Mr. Spinney. Well, more complex pieces of equipment are 
obviously more expensive to operate, but they also age in a 
less gracious way, so to speak. Their costs grow faster than 
simple planes.
    I have data, for example, showing an A-10, which is a 
relatively simple, plane and if you compare that with an F-18, 
which is a relatively complex plane, and if you look at the 
cost growth over time as a function of age, you will see that 
the F-18 grows at a much more rapid rate than the A-10. That's 
a perfectly reasonable expectation.
    The key point here is as our equipment gets more and more 
expensive over time, even though we are not replacing it at the 
sustainable rate, the force is getting more complex.
    Mr. Kucinich. So you have less planes in this example.
    Mr. Spinney. Absolutely. We have a shrinking force, a more 
complex force and an older force; and the operating budgets go 
through the roof.
    Mr. Kucinich. Where does this end up, where we have one 
plane?
    Mr. Spinney. That's what Norm Augustine used to like to say 
tongue in cheek. Basically, I call it the death spiral. Our 
forces go down over time. And this has been going on since 1957 
or so. There have been blips in between.
    A key point to understand here that I should have made in 
my chart showing the budget is that budget that's growing in 
the future is supporting a force today that is between 50 and 
60 percent as large as it was in the 1980's and it's probably 
25 percent of what it was in the 1970's and the 1960's.
    Mr. Kucinich. So the American people are paying more and 
getting less defense, is that what you're saying?
    Mr. Spinney. Yes, sir. It's a much more complicated thing.
    Mr. Kucinich. Now in your testimony you demonstrate that a 
major factor in all of this is the planners' gaming strategy, 
you call it front loading, where the planners and the 
contractors lowball their estimates of how much a weapon will 
cost in the outyears of production. Your contention is that, 
once these outyears are reached and the true costs of 
production become evident, there's no longer the political will 
to cancel the program and so production rates are stretched 
out. Is that a right interpretation of what you're saying?
    Mr. Spinney. That's correct, and that is because the 
political engineering process that follows the front-loading 
process and the political engineering process basically is 
aimed at spreading the production base around the country to 
build as much constituent pressure to support the program as 
possible.
    Mr. Kucinich. What we're talking about, you know, rather 
than upgrading equipment, what we're buying with our defense 
dollars is an older, smaller force that's more expensive to 
maintain?
    Mr. Spinney. Yes, sir. And our plans will actually show you 
that age will continue increasing in the future. Secretary 
Rumsfeld acknowledged this fact obliquely in his testimony 
before the Senate Armed Services Committee this year.
    Mr. Kucinich. So we're talking about a readiness crisis 
that Pentagon officials keep pointing to and keep citing as a 
justification for increased defense spending.
    Mr. Spinney. Yes, sir. I would say it is of our own making. 
The problems start at the Pentagon. We get a lot of help from 
Congress. But it's not--a lot of this happens because people 
are coming through the system so rapidly and getting at the 
point that the other Congressman was making, Congress Tierney, 
that we don't have the kind of corporate memory. So a lot of 
people come in and they go along with this stuff in the short 
term and they don't really get the big picture until they 
leave.
    Mr. Kucinich. I am listening to your explication here and 
what it suggests to me is, despite what the administration 
claims--or any administration for that matter--in this case 
they have an extra 45 to $50 billion Congress is going to be 
providing to the Department of Defense next year to provide 
that money. But based on what you say there's no--what's the 
possibility of American people getting extra security out of 
this? What does this do?
    Mr. Spinney. There's no way you can answer the question.
    Mr. Kucinich. So you can't answer it.
    Mr. Spinney. Nobody can.
    Mr. Kucinich. You can't back it up when you say you're 
going to have more security.
    Mr. Spinney. No, sir. Well, I think a better way to say it 
is, if you look at the details of that plan, can you have a 
reasonable expectation that the building blocks of that plan--
which, by the way, are output oriented in the PPBS, at least in 
theory--there is absolutely no guarantee that those things 
will, in fact, unfold over time.
    Mr. Kucinich. How will fixing the Pentagon's books overcome 
this--change the outcome?
    Mr. Spinney. Fixing the books is a necessary condition. It 
isn't a sufficient condition. And that's really the way I view 
this problem, which is very different; and I'm coming from a 
different perspective than the earlier witnesses, particularly 
on the first panel.
    The way I view this problem is that we have to provide 
better information; and, in this case, the best is the enemy of 
the good. We can take action today to really improve our 
information in the short term if we did a crash program, in my 
opinion. That wouldn't fix all the accounting problems that 
were discussed earlier. But the key thing is to put together a 
budget that more realistically reflects the future consequences 
of today's decision, which is the decision to appropriate that 
budget. We can do that I think probably in 12 to 18 months if 
we put our minds to it.
    The real thing we have to do is we have to set up a 
decisionmaking process that basically forces these 
uncertainties out on the table so the decisionmakers, when 
they're trying to decide and evolve what their priorities are, 
can basically make a selection based on these uncertainties.
    I am not explaining this very well. I tried to lay that out 
in the second half of my testimony, but the crucial thing here 
is to provide enough reliable insight into the consequences of 
a decision so you can account for them before the fact; and I 
submit that the way to do that is through some sort of 
contingency planning.
    Mr. Kucinich. In the few minutes I have remaining in this 
round I just want to go through some questions that occurred as 
a result of reading your testimony. You have mentioned defense 
power games and front loading and political engineering. 
Looking at that, do you really mean to suggest that defense 
planners and contractors misrepresent the costs of your weapons 
programs and seek to spread subcontracts around the Nation to 
ensure the survival of those weapons programs?
    Mr. Spinney. Oh, I think it is very deliberate. Yes, sir. I 
have talked to many contractors about this; and, of course, 
they won't come up and testify that they do that, but they have 
told me they do it.
    Mr. Kucinich. And that means Congress is part of it.
    Mr. Spinney. Yes, sir. Congress is going along with it.
    I had a conversation with one corporate vice president. He 
was an executive vice president of a major aerospace company, 
and I took him through the whole front loading argument. It was 
part of a 5-hour lecture that I had that we give to the entire 
staff, the company.
    Basically, his bottom line is, he says, look, we have to do 
this. Because if we come clean, we won't get the contract 
because everybody else is doing it; and that's the dilemma. And 
the same thing exists inside the Pentagon. Because there's a 
constant competition for resources, you have different factions 
fighting with each other to try to do what they think is best.
    I am not talking about malevolent behavior here, but they 
naturally try to win the competition, so they tend to be overly 
optimistic. And the basic argument that you make when you do 
that is, if I don't do this, I'm going to lose the battle.
    When I was in the Air Force on the air staff in the early 
1970's as an internal Air Force thing to force the senior 
officials to try to consider what lower budgets would do, how 
they would come up with a list of the kind of programs they 
want to cut, you couldn't get them to do it.
    Mr. Kucinich. You know, this testimony and this hearing 
kind of reflects on President Eisenhower's warning about the 
dangers of the military industrial complexes. Because what's 
happened here is that this just isn't about an administration. 
This is about the Congress. This is about a system which has 
now run amuck, and we're starting to see how it can have a 
material effect on the eroding of the quality of our democracy 
because we don't have sufficient funds to take care of health 
care in America. We don't have sufficient funds for education. 
We don't have sufficient funds for housing. We're told that 
we're challenged with our retirement funds. So when you look at 
all of those issues which relate to a democratic society and 
its maintenance and support, this problem that you're 
describing, Mr. Spinney, has profound implications for this 
country.
    Thank you.
    Mr. Shays. Thank you.
    Mr. Tierney.
    Mr. Tierney. Thank you, and I thank all of you for your 
testimony.
    Let me just ask, Mr. Kutz, sir, the policy that was just 
discussed of trying to spread around the contractors' work 
throughout the country on the notion that it would build 
political support for a particular weapons system or program, 
have your reviews evidenced any sign of that, that it was 
decisions made on anything other than a contractual basis or 
sound business judgment?
    Mr. Kutz. That's a little outside my area of expertise, but 
certainly as one of our high-risk areas in acquisition 
management we have seen some of the things that Mr. Spinney 
talked about from the standpoint of effect and results at the 
end of the day. I'm not sure we have gotten to the bottom line 
of some of the causes of some of those things, but certainly 
our high-risk talks about more program than budget and 
certainly a history of programs coming in with lower estimates 
than reality and you get less weapons at the end of the day--
and we have our expert here on acquisition, if you want more 
from a GAO perspective.
    Mr. Tierney. I guess either he or you can talk a little 
about how the contracts are spread out around the country and 
whether there's a pattern that develops or whether it just 
seems that every competition for a contract ends up that way, 
that somebody in each part of the country makes that some part 
of the system.
    Mr. Kutz. Certainly, factually, a lot of the major weapons 
systems have contractors, whether they be major contractors or 
subcontractors, all over the country. That is certainly factual 
from what we've seen.
    Mr. Tierney. Generally you try to have your supply sources 
closer to your manufacturing sources or whatever, and that 
seems to cut across the grain. It would be, as a business guess 
on my part, at least, that it's not sound business judgment 
that's driving that but something along the line of political 
support. But you never did an analysis of that or anything?
    Mr. Kutz. Our other witness wasn't sworn in, and I don't 
know if you want to have him sworn in to have him comment on 
that.
    Mr. Shays. I'd be happy to do that. Anyone else you may be 
asking?
    [Witness sworn.]
    Mr. Tierney. Please identify yourself, also, as you speak.
    Mr. Francis. Good morning. My name is Paul Francis, and my 
main area of expertise is in the acquisition area.
    I think, Mr. Tierney, in response to your question, we 
don't look at that specifically when we're looking at a weapons 
system, but we have on occasion in the past in response to 
requests looked at individual weapons and where the contracts 
are spread; and I'd say our information tracks pretty well with 
Mr. Spinney's that the subcontracts get spread over quite a 
number of States.
    Mr. Tierney. Have you ever analyzed that from the 
perspective of whether that raises the cost of the overall 
weapons system or not? Seems to me that, by spreading them out 
that way, transportation, delivery, other costs all seem to go 
up. Must have an impact on the overall cost of the program.
    Mr. Francis. I think that's probably true that the cost of 
transportation will go up.
    I think, arguing on the other side, is the prime contractor 
would say they want to go to the supplier that has the most 
expertise. So, in the long run, there's probably a tradeoff 
there.
    Mr. Tierney. Thank you.
    Mr. Spinney. May I make a comment on that?
    I did an in-depth study of the C-130, which is a very 
simple airplane built in a huge factory in Georgia; and they 
contracted out aft fuselage sections. Now all this was 
stringers and sheet metal that could easily have been made in 
the factory, and they had them produced in various factories in 
different locations and then would bring them together and 
assemble there. There was all this extra space. The quality of 
the work was exactly the same.
    I was in the factory, and I saw them sort of messing around 
with their production line, twisting them around. I asked the 
blue collar worker--I said, why are you doing this? This is a 
dumb way to run a production line.
    He said, well, it just came in from the shipping dock; and 
we have to move it around to do it.
    I said, you mean to tell me that they shipped this in here?
    He said, yes, sir.
    So I said, it's cheaper to build aft fuselage sections in 
State X and then ship them to the State of Georgia and assemble 
them.
    He said, no, no way at all. We did this for political 
reasons. It's understood on the production line.
    That's my point. And I might add that the cost of the C-130 
H--it went into production in 1969, if my memory recalls 
correctly--in today's dollars, taking out the effects of 
inflation, I believe its cost was about $11 million a copy. By 
1993, when we produced our last C-130 H, virtually identical to 
the first one in today's dollars, taking out the effects of 
inflation, we are paying $41, $42 million for a C-130.
    Mr. Tierney. Is there something--a study--along the line of 
trying to determine whether or not it makes good business 
judgment versus good political judgment to spread these 
contracts around? Is there something in the purview or 
abilities of GAO to do a report on?
    Mr. Francis. I think that would be kind of a touchy 
subject, especially on the political side.
    I think we could probably take a look at whether it makes 
business sense and what the business case is for doing that. I 
don't think we would take on the political side.
    Mr. Tierney. Maybe perhaps something on the idea of what 
percentage of contracts do get their work spread out over 
multiple States and then what the business case is for that 
versus what a sound business case is or not.
    Mr. Francis. Certainly, I believe we can get the data on 
that.
    Mr. Tierney. If I could just ask anybody on the panel, 
maybe starting from my left all the way over, who wants to 
respond to this, earlier, we talked about incentives. What can 
Congress do to provide an incentive? Which is kind enough of 
you to say that having regular hearings or meetings would be 
one incentive, but beyond regular committee meetings of 
oversight, what financial incentive might we have that would 
hit the pocketbook of the Department of Defense where it would 
not hurt our defense posture or abilities but would stimulate 
action on getting better acquisition programs as well as better 
financial accountability in reform of that program?
    Mr. Schmitz, I'll exempt you if you are too recent on the 
scene to have an opinion on that, but, Mr. Lieberman.
    Mr. Lieberman. Well, I think, sir, that the Congress should 
insist on very explicit milestones. Gets back to this idea of 
what is the road map and does everybody understand whether 
progress is being made or not. And the release of money can be 
tied to these milestones. That's the way the Department runs 
its investment projects.
    There's no reason why the authorizing and appropriating 
committees, for example, cannot expect the Department on a 
periodic basis, certainly annually with the President's budget, 
to lay out exactly whether progress has been made or not. And 
then you have the power of the purse--you can make the decision 
of whether you want to keep funding those projects that are 
slipping.
    Right now, the problem has been this myriad--the chart is 
gone, but the myriad of systems, many of which have money being 
spent on them right now to modernize them or change them or 
replace them. There's inadequate visibility to the Congress in 
terms of which of these are making progress and which aren't; 
and even though some of these projects are reviewed in-depth by 
various congressional committees, it's not in the context of 
this overall financial management improvement plan.
    So my suggestion would be hold the Department's feet to the 
fire in terms of revealing to the Congress exactly what this 
blueprint is that they're now formulating. And over time there 
has to be sustained interest. If interest drops off after 1 or 
2 years, the probability of the Department's interest dropping 
off is astronomically decreased.
    Mr. Tierney. Thank you.
    Mr. Kutz. I would say two things. The oversight is 
definitely one. Consistent congressional oversight such as this 
gets the Department's attention, but the other thing that gets 
their attention is money. And certainly with respect to the $26 
billion we talked about, a large chunk of that--and I don't 
think anyone knows exactly which piece of that goes to the 
business systems.
    Mr. Shays. I just want to verify that 26 was all 
information systems. So that's in all the weapons systems. So 
that number of $4 billion was probably closer to being the 
accurate number.
    Mr. Kutz. There's a document that supports the $26 billion 
that's about six inches deep that we haven't quite gotten into 
the details of it, but it is a large portion of the 26. I don't 
know what, though, is related to business systems.
    But what happened--and, again, I think what Mr. Lieberman 
says is right on target with respect to they are spending money 
as we speak on systems that are going to perpetuate that 
stovepipe environment that you saw there and they do not have 
control yet of all the projects going around. There are buckets 
of money all over the Department that are being spent on IT 
improvements or upgrades that are not being controlled properly 
at this point, and that is one of the reasons to get the 
architecture in place and to put those controls in place.
    Now we are talking about external incentives, obviously, 
internal incentives. But one of the things Mr. Hite can 
elaborate on that the Internal Revenue Service had, the 
Appropriations Committee I think got quite frustrated with some 
of the disasters they had back in the early to mid 1990's with 
tax system modernization; and they actually developed an 
investment technology account that all the money went into that 
had significant scrutiny before it was spent on systems 
modernization. Now with DOD whether that will be practical or 
not I don't know. But certainly at IRS it provided more 
visibility. With that money, you could see actually what was 
being spent on maintaining systems at IRS versus developing new 
systems at IRS. So that is one idea to consider.
    Mr. Tierney. Let me make sure I am getting this right. So 
what we might do is take the IT money and set it in an account 
and then say that, before any of it is spent in this next 
fiscal year, some appropriate person or entity would have to 
make a determination that money was being spent either in 
moving toward the reformed final product or obtaining something 
that is necessary to that end.
    Mr. Kutz. Incremental business cases would have to be 
developed to support the spending of that money with oversight 
from Treasury and OMB, GAO and the Congress.
    Mr. Hite can maybe elaborate a little bit on that, too, 
because he's involved with IRS.
    Mr. Hite. The scenario that's in place not only at IRS but 
also in place in Customs and there is legislation being 
proposed to put in place at INS with regard to their entry-exit 
system recognizes that trying to build large, monolithic 
systems over many years is very complex and difficult to 
predict and you end up waiting years and years and years before 
you realize you didn't get what you expected. It cost a lot 
more, and we're not near where we need to be.
    So what you do is you take that large, monolithic goal and 
you break it into incremental pieces. Then, through the 
legislation, the agencies are required to put together 
expenditure plans that says incrementally what they intend to 
do and what they intend to get for their money. They have to 
submit this to the Congress through the Department, in the case 
of IRS through the Department of Treasury, and OMB and reviewed 
by GAO; and we offer advice and counsel to the Congress in its 
decision on the release of the funds that have been 
appropriated.
    It's through these incremental expenditure plans that you 
measure and you have awareness as to whether or not you are 
progressing toward the desired end and don't have to wait many 
years to realize that you're not making the progress that you 
desire.
    Mr. Tierney. Doesn't that also address the fact of money 
being spent on systems that are going nowhere toward that other 
plan? That is sort of like money being spent to maintain a 
system, but it has nothing to do with the other plans, and 
nobody reports it as being moving toward that goal or not.
    Mr. Hite. Well, absolutely, because the conditions that 
have been written into law--and we work with the committees in 
doing this--make explicit, for example, that the expenditures 
have to be in alignment with the enterprise architecture. 
Because if they're not, then you don't have a justifiable basis 
for what you're doing.
    Mr. Tierney. Thank you.
    Mr. Spinney? We were doing a left to right, as to what 
might be a good way to incentivize some positive action in 
terms of this financial accountability reform or, in the case 
of things you testified to, stimulate action without hurting 
our defense in terms of having a good procurement system and a 
good expenditure system.
    Mr. Spinney. I am not a financial manager. I have to answer 
your question from the perspective of a program planner; and, 
basically, I think you have to hit the system over the head 
with a club. The--it's going to take a long time to fix these 
financial systems under anybody's estimate with the best of 
intentions. At the same time, we have to provide the Congress 
with a budget each year; and we are talking big, big money; and 
we are making decisions that have implications reaching far, 
far into the future. A decision to buy a new aircraft carrier 
is basically a commitment for spending money over 40 to 50 
years, maybe longer.
    So what we need to do is we need to do something in the 
near term to provide better management level information that 
can be used in the PPBS to support the Secretary when he's 
putting together a program plan. These plans that we're 
producing now are just not connected to the real world, and we 
have to figure out a way of connecting them.
    My view is the best way to do that is to force the OSD and 
service bureaucracy in the Pentagon to put together some 
contingency plans at lower budget levels so we can smoke out 
the costs of the real programs. The data won't be the best in 
the world. But if we basically made it a top-priority effort, 
we could assemble the information.
    I have seen how the bureaucracy can work; and if you crack 
the whip, it can happen.
    Mr. Shays. Mr. Spinney, you have a perspective, being 
inside. Unfortunately, when you told your anecdote you lost 
some credibility with me, because you and I know that if you 
went into any plant and asked any blue collar worker at that 
plant whether it would be more efficient to make it in this 
plant or make it somewhere else he would say it's more 
efficient to make it in this plant. So, you know, it is--that 
person has no sense of the cost of the product.
    Mr. Spinney. That was confirmed by management.
    Mr. Shays. I am just going to say to you, Mr. Spinney, when 
you told that story, that's not relevant. If you have another 
story to tell, then that is relevant.
    The problem you're dealing with--right now, we are looking 
at two issues. One is, you're looking at a political issue of 
whether Congress, the White House, the administration choose to 
disguise the cost of programs by taking a 5-year budget and 
spreading it out over 8 years and keep pushing off the product; 
and we all know that's happening. We make every product and 
every program more expensive because we don't face up to its 
true costs in the period of time we're going to budget it. We 
then stretch it out, and then we make it more expensive to 
build, and each year they have to readjust their--the producer 
has to remanufacture, reproduce his budget or their budget to 
reflect different costs.
    But that's a political thing. We do it--right up here we do 
it, and it's wrong.
    But that's one issue. The other issue is the issue of 
whether we have a system in place, irrespective of politics and 
political decisions, that will tell us honest information; and 
the primary interest that I have in this hearing is do we--even 
if we want to be straightforward about it, do we have a system 
in place? And we don't.
    I want to ask you, Mr. Lieberman, what are the underlying 
causes for the failure of the previous management decisions? I 
mean, I interrupted you, which is not my general practice in 
the middle of a statement, but I mean I have been at other 
hearings where you've testified and others have testified and 
we're told what they're going to do. So what's different about 
this one as opposed to all the other hearings in terms of what 
the administration says?
    Mr. Lieberman. Well, I think there are a number of 
differences.
    First of all, this Secretary of Defense is the first 
Secretary that I can remember--and I can remember quite a few 
of them--who actually has come out repeatedly saying that the 
financial management system is badly broken, needs to be fixed, 
and he expects it to be fixed, and he is willing to spend money 
to fix it. Even though a lot of money has been spent in the 
past, there has been denial about how much this is costing. To 
this day, nobody can tell you exactly how much money is being 
spent to improve financial systems. This is one of our 
criticisms of DOD's plans over the last several years.
    Mr. Shays. Let me ask you then, so that when the $26 
billion, which is the first number we were using and then 
brought down to $4 billion, you think it's somewhere in between 
that $4 to $26 billion?
    Mr. Lieberman. Some fraction of that. It's probably some 
part of the $4 billion is being spent specifically to upgrade 
systems so that they will do a better job in terms of complying 
with accounting standards, for example.
    DOD, because of congressional requirements, finally started 
about 4 years ago providing a plan, a financial management 
improvement plan, to the Congress which was voluminous. It was 
this thick. But nowhere in there could you find a flat 
statement about how much it was going to cost to achieve CFO 
act compliance, nor could you find how much was in the budget 
in any given year and whether there was any difference in terms 
of are they fully funding this improvement plan or not.
    Still, to this day, the Department can't tell you how much 
this is going to cost, because we're now at the point of 
stepping back and creating an entirely new blueprint. Once the 
blueprint is created, it has to be costed out in terms of how 
much money is going to be necessary.
    But I digress slightly. Secretary Rumsfeld was willing to 
put up almost $100 million in the 2003 budget and Congress 
appropriated that amount to do this enterprise architecture 
exercise; and that's the first time any large, visible chunk of 
money has gone into a DOD budget for financial management 
improvement ever. So we are at least facing reality.
    Mr. Shays. I am just concerned that when you leave the 
Inspector General's office are you looking to get a job with 
Rumsfeld?
    Mr. Lieberman. Well, thank you very much.
    I do think that Dr. Zakheim certainly has very clear 
marching orders that, unlike previous comptrollers, he's not 
supposed to just be worrying about the budget. He's supposed to 
be worried about this financial management improvement effort. 
He's doing things that sound mundane, but they are the things 
that were not done in the past. That is, there will be an 
explicit, detailed plan. At least we're spending an awful lot 
of money to have such a plan created; and, hopefully, we're 
going to get our money's worth. There will be explicit 
performance measures. There will be the kind of milestones I 
was referring to earlier. They will be able to show you a chart 
that says, this is where we're trying to get to. Matter of 
fact, they ought to be able to show you a series of charts 
showing you every 6 months where they're supposed to be in 
order to get to that end state.
    Mr. Shays. Which strikes me as really what we should do. 
Depending on what Mr. Horn does and his committee, we should 
just schedule a meeting every 4 months or hearing every 4 
months where they come in and give us an update. That would 
probably be the biggest incentive.
    Other comment? I interrupted you. Are you all done?
    Mr. Lieberman. I would sum up just by saying there is now a 
management structure to run this whole thing like a program 
with someone in charge with a clear idea of exactly what needs 
to be done, much better chance of accountability being 
possible. If the milestones are not being met 6 months from 
now, a year from now, 2 years from now, you can terminate 
contracts. You can replace DOD officials. You can have the 
wherewithal to grab hold of the situation and control it. And 
all of that, I think, is new.
    Then, finally, the departments--the military departments 
seem to be more on board than they were 2 years ago. They must 
be kept on board. They must not be allowed to not play in the 
game.
    Mr. Shays. Do you believe that the comptroller has all the 
authority necessary to accomplish these reforms?
    Mr. Lieberman. He's going to need reinforcement from the 
Secretary of Defense from time to time. He can have all the 
authority in the world on paper and there will be times there 
will be centrifugal forces here and you will have very 
important people in the military departments resisting his 
priorities. So he's going to need to be able to go down the E-
Ring to the Secretary and get continued very strong support.
    He's also going to need help from the chief financial 
officer, who we have not mentioned throughout this hearing, 
even though we are talking about what's fundamentally a systems 
problem. If you look at the charter of the CIO on--based on the 
Chief Informations Officers Act--you would say, well, gee, 
there's somebody who is the czar of information systems and 
that person should be controlling this whole project.
    We have overlapping charters for these officials, and 
that's not necessarily bad because it means that they ought to 
be able to join forces and get things done. But I think the CIO 
community must play big time in this whole effort.
    Mr. Shays. The kind of issue Mr. Spinney was raising with 
regards to not properly accounting for the cost of a weapons 
system, which is legion in this government and has been for a 
number of years, at least for the last 20, is whatever we do 
with an accounting system and our financial management won't 
necessarily change that fact, will it?
    Mr. Lieberman. Well, there are things that can be done that 
will help. We issued a report earlier this year talking about 
the lack of a standard cost accounting system to track costs 
throughout the life-cycle of weapons systems. The department 
has a variety of systems attempting to do that right now. I'm 
not sure if some of them are probably some of the icons on that 
chart. But we do not have one that is standard that top 
management can rely on.
    So one of the ways you get smarter about estimating future 
costs is to understand current and past costs better, and 
that's one of those many IT improvements that still needs to be 
done. Hopefully, there's some money in that $26 billion to move 
forward with that particular system.
    But I would commend that particular IG audit report to the 
committee's attention. It showed a circumstance in which the 
Department had declared victory without having won the battle 
in terms of that system.
    Mr. Shays. What I would like to do is have Mr. Schrock take 
the Chair.
    Mr. Lieberman, I hope this committee will be invited to any 
celebration of your service to our country because you have 
been an extraordinary--you have been a wonderful man to work 
with. We have trusted you implicitly. We get straight answers. 
We think you have been extraordinarily competent, and you've 
made a difference in government. We all salute you for that, 
and I am going to think of another hearing that I can get you 
to come to before you retire.
    Mr. Lieberman. I deeply appreciate that.
    Mr. Shays. I am going to have Mr. Schrock take the chair, 
and you may have some questions.
    I thank Mr. Kucinich for suggesting we have another 
hearing; and what I would like to do is, I would like to, you 
know, put the administration on record that we will have 
another hearing before the end of the year, just to see how 
we're doing, because I do think that the incentives that Mr. 
Tierney is really wrestling with--I mean, one of them is just, 
you know, the cost and accountability, how you're doing.
    I thank all of our witnesses for being here, and we'll 
continue with Mr. Schrock. Thank you.
    Mr. Schrock [presiding]. Before I turn to my colleagues on 
the right, I'm sorry I'm late. Believe it or not, I was 
watching this in snippets as I was on my way up from Virginia 
Beach. Don't ask me how, but I was.
    This is not a new problem. I worked in the five-sided 
building across the river for several years when I was in 
active duty as a Naval officer, and these are the same 
discussions we had then.
    I think the thing that makes me happy is that this 
Secretary of Defense and this administration realizes--I can't 
believe that Ms. Jonas is the first-ever Deputy Under Secretary 
of Defense for Financial Management. You would think that was 
something that we would have had in place a long time ago in 
the Pentagon.
    And Mr. Spinney said it best when he said, everything is 
done for political reasons. Man, you hit the nail straight on 
the head on that one, and it all rests right up here. And that 
mentality has got to change as well, and I think that's why we 
have the situation we have over there.
    And Mr. Lieberman said, we have got to hold the 
Department's feet to the fire. That's not a bad idea either.
    But we've all got to work together on this thing, because 
it's not going to get better if we just have these hearings and 
nothing substantive comes out of it.
    So I appreciate your sitting here putting up--taking the 
barbs that we hand you all, but we've got to be partners in 
this thing as well.
    Mr. Kucinich.
    Mr. Kucinich. I thank the Chair.
    In Mr. Lieberman's comments earlier, he was theorizing that 
our present Secretary of Defense is going to be taking us on 
some new--in some new directions that would help resolve these 
long-standing problems. And, you know, we can all hope for 
that.
    If you read the GAO report on Department of Defense 
financial management, in the category, Mr. Kutz, where you 
speak of long-standing financial management problems and items 
of reform, you state, over the last 12 years the Department has 
had several broad-based initiatives. You speak of the defense 
reform initiative, which in your reports did not meet the 
expected timeframes and goals: the Defense Business Operations 
Fund which, according to your report, inherited their 
predecessor's operational and financial reporting problems with 
respect to the working capital funds, and the Corporate 
Information Management program, which was expected to save 
billions of dollars by streamlining operations. And you cite 
that by 1997--you said that the benefits of this were not 
widely achieved after 8 years of effort, spending $20 billion, 
and that eventually this initiative was abandoned.
    Now, I might ask you, sir, do you see any cultural problems 
with the Department of Defense here that might work against 
this administration?
    Mr. Kutz. Absolutely, I believe that's probably the No. 1 
nut to crack here with respect to resolving these issues.
    I don't know if Ms. Jonas or Mr. Lanzillotta would have 
testified to that here, but I think there's a lot of battles 
that go on inside the Pentagon about issues such as funding for 
technology investment or putting in place basic internal 
controls over various programs.
    Just something as simple as--and I testified before 
Chairman Horn several times. Their credit card programs over 
there, which there's nothing wrong with the actual systems 
there. That's a matter of people and internal controls; people 
simply aren't following good controls in many cases that are in 
place. We're paying monthly credit card bills with nobody 
actually reviewing the bill, so we find ourselves paying for 
things that the government shouldn't be paying for.
    So, yeah, culture would seem to be the hardest issue to 
deal with here. I think there's a lot of people that probably 
are trying to wait this out and hope that this too will pass, 
and that's true in many departments in the Federal Government, 
and it's just going to take a lot of effort by the leadership 
to----
    Mr. Kucinich. How do you change an institutional culture 
that spends money, that has a blank check basically, that is 
getting less and less for its dollar, and that is spread out 
all around the United States by virtue of a contracting program 
that is quite political; and my guess is, through campaign 
fund-raising, probably has an element that helps to ground it 
in the institution as well? What's your idea on that? I mean, 
you've obviously thought about it. What would you do if you 
were king? Of course, we don't have those things, but if you 
were, what would you do?
    Mr. Kutz. I would suggest one of the things earlier that 
you should do is have periodic hearings on this subcommittee 
and make it clear to the Department that you mean business with 
respect to this and that you're not going to go away. That 
certainly is one thing.
    What Mr. Hite and I talked about earlier with respect to 
the business systems here, the Congress having better control 
and better transparency with respect to how that money is being 
spent is another action. Again, it's the oversight in some 
cases; you know, hearings like the ones we've had on the credit 
cards that have gotten a lot of attention. That gets the 
Department's attention. Money, oversight and certainly negative 
publicity get their attention.
    Mr. Kucinich. Well, you know, Mr. Spinney, you made some of 
the same points you're making today when you testified in front 
of Congress in 1983; is that correct?
    Mr. Spinney. Yes, sir.
    Mr. Kucinich. And what was the response of the Defense 
Department officials at your insistence that the Pentagon work 
immediately to clean up its books?
    Mr. Spinney. Basically my criticism was dismissed because 
it was historical, like the F-18 analysis that I showed; and 
the argument was made that we have reforms in place that will 
change this thing. And at that time they were referring to what 
were known as the Carlucci initiatives, which I'm sure Bob 
Lieberman remembers, which have--you know, are in the dust bin 
of history now. And the specific quote made by David Chu at the 
time, who was my boss's boss's boss, was that ``I urge 
patience.''
    Mr. Kucinich. Well, you know, to quote that great 
philosopher Yogi Berra, ``It's deja vu all over again.'' You 
know, we've got, 20 years ago, the Pentagon urging patience, 
the Comptroller's office urging the same thing today.
    Final question, has the Pentagon, in your estimation--I 
just want to put this on the record--has the Pentagon's 
financial management practice worsened or improved in the past, 
patient 20 years?
    Mr. Spinney. I can't speak to the question of the 
disbursements which have been adequately covered by the other 
witnesses--in both panels, for that matter. I can speak from 
the perspective of the PPBS, which is something I've examined 
in detail since the 1970's. And, again, I want to emphasize, 
this is the top-level financial management information system 
in the Pentagon, and I can say without reservation that it is 
far worse today than it's ever been.
    Mr. Kucinich. Well, we can end on that, but also if it's a 
new beginning, as we hope for, according to some of the 
testimony here----
    Mr. Spinney. May I make one elaboration on that, though?
    Mr. Kucinich. Sure.
    Mr. Spinney. It's important to understand this 
administration has inherited this problem. I think it's really 
important to understand that we basically squandered a decade 
in the 1990's. The end of the cold war gave us an opportunity 
to put our house in order, and we had 20 years to do it, 
because the baby boomers start hitting the old folk's homes 
around 2010. We blew the first 10. We're out of time; we've got 
to move out now.
    Mr. Kucinich. Yeah. And I would say that any of the 
discussion that this committee has had today, that I've noticed 
was not trying to say, well, you know, this is in the lap of 
this administration; except that, you know, we have an 
administration which is in charge, and they're challenged to do 
something about it. The failure of the previous administration 
to do something about it is no excuse, and the failure of the 
administration and administrations previous to that, no excuse.
    There's a point at which the American taxpayers have to 
ask, what kind of national defense am I getting for the money 
which I'm paying in my taxes?
    You know, it's interesting--Mr. Chairman, you know, all of 
us on occasion will hear from one of our constituents who gets 
audited by the IRS, and, I mean, think about this now. One 
single taxpayer gets audited by the IRS; and the IRS has a lot 
of good auditors, and they will sharpen that pencil and they 
will take a look at the return and they will go over it line by 
line, and you know what? If there's an extra penny to get out 
of it, they will find it. I have no question about it.
    And the cartoons of years ago of a Joe Taxpayer walking 
around in a barrel--you know, there are people who feel some 
sympathy with that condition, and yet on one hand, while the 
taxpayers of this country will get reamed if they misstate 
their taxes by even a fraction, look at this, $2.3 trillion. 
They can't even keep track of it.
    Why is it that the Department of Defense is not subject to 
the same type of scrutiny, thank you, that the average taxpayer 
would be subject to by our own government?
    I mean, it's clear here that we have a system which is in 
need of both quantitative and qualitative transformation, and 
we're looking at perhaps a new structure at some point, you 
know, promoting the--or to provide for the common defense is a 
foundation of this country, and the people of this country have 
a right to expect that the country will be defended, but our 
accounting is indefensible.
    Mr. Schrock. Let me--and Mr. Kucinich, let me make a 
comment on that.
    You know, at the Pentagon, when I worked there, it was--if 
a Colonel Spinney said something, well, if you don't like it, 
wait long enough, he'll get transferred and he's out of there. 
And that's been the mentality: They're going to go away 
eventually, and then the hierarchy that's there all the time 
will just continue to do business as usual. That is the 
problem, and I really believe that Donald Rumsfeld came there 
to transform that.
    He got sidetracked on September 11th, but I think he's 
going to get back on that track again. And if there's ever a 
Secretary of Defense in history who has the ability to do it 
and do it successfully, it's Donald Rumsfeld; and I think he 
will. And we need to support him as much as we possibly can, 
because that mentality was there when I was there as a 
lieutenant, and it's there when I'm a Congressman. I never 
could have guessed that would be the case, but it is.
    Do you have anything else?
    Mr. Kucinich. I want to thank the Chair for the opportunity 
to ask these questions, and I want to thank all of the 
witnesses for lending their experience with this system to this 
committee. Thank you.
    Mr. Schrock. Thank you. And I guess if there are no more 
questions, let me thank you all for coming too. We do need to 
invite you back more often. We need to hear these stories over 
and over and over again, until these things get resolved; and 
I, for one--I wish they'd have this on a Wednesday. Members 
travel back here on Tuesday, so it's kind of hard to get 
everybody here, but I think every Member needs to be here to 
hear what you all have said, and maybe next time we can do it 
on a Wednesday when they're here again.
    Thank you very much for being here and sharing with us, and 
that's it. The committee will rise.
    [Whereupon, at 1:09 p.m., the subcommittee was adjourned.]

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