[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]



         WASTE, FRAUD, AND ABUSE IN FEDERAL MANDATORY PROGRAMS

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

                                HEARING

                               before the

                        COMMITTEE ON THE BUDGET
                        HOUSE OF REPRESENTATIVES

                      ONE HUNDRED EIGHTH CONGRESS

                             FIRST SESSION

                               __________

             HEARING HELD IN WASHINGTON, DC, JUNE 18, 2003

                               __________

                            Serial No. 108-9

                               __________

           Printed for the use of the Committee on the Budget


  Available on the Internet: http://www.access.gpo.gov/congress/house/
                              house04.html


                                 ______

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                        COMMITTEE ON THE BUDGET

                       JIM NUSSLE, Iowa, Chairman
CHRISTOPHER SHAYS, Connecticut,      JOHN M. SPRATT, Jr., South 
  Vice Chairman                          Carolina,
GIL GUTKNECHT, Minnesota               Ranking Minority Member
MAC THORNBERRY, Texas                JAMES P. MORAN, Virginia
JIM RYUN, Kansas                     DARLENE HOOLEY, Oregon
PAT TOOMEY, Pennsylvania             TAMMY BALDWIN, Wisconsin
DOC HASTINGS, Washington             DENNIS MOORE, Kansas
ROB PORTMAN, Ohio                    JOHN LEWIS, Georgia
EDWARD SCHROCK, Virginia             RICHARD E. NEAL, Massachusetts
HENRY E. BROWN, Jr., South Carolina  ROSA DeLAURO, Connecticut
ANDER CRENSHAW, Florida              CHET EDWARDS, Texas
ADAM PUTNAM, Florida                 ROBERT C. SCOTT, Virginia
ROGER WICKER, Mississippi            HAROLD FORD, Tennessee
KENNY HULSHOF, Missouri              LOIS CAPPS, California
THOMAS G. TANCREDO, Colorado         MIKE THOMPSON, California
DAVID VITTER, Louisiana              BRIAN BAIRD, Washington
JO BONNER, Alabama                   JIM COOPER, Tennessee
TRENT FRANKS, Arizona                RAHM EMANUEL, Illinois
SCOTT GARRETT, New Jersey            ARTUR DAVIS, Alabama
J. GRESHAM BARRETT, South Carolina   DENISE MAJETTE, Georgia
THADDEUS McCOTTER, Michigan          RON KIND, Wisconsin
MARIO DIAZ-BALART, Florida
JEB HENSARLING, Texas
GINNY BROWN-WAITE, Florida

                           Professional Staff

                       Rich Meade, Chief of Staff
       Thomas S. Kahn, Minority Staff Director and Chief Counsel



                            C O N T E N T S

                                                                   Page
Hearing held in Washington, DC, June 18, 2003....................     1
Statement of:
    Hon. David M. Walker, Comptroller General, U.S. General 
      Accounting Office..........................................     7
    Robert S. McIntyre, Director, Citizens for Tax Justice.......    55
Prepared statement and additional submission of:
    Hon. John M. Spratt, Jr. a Representative in Congress from 
      the State of South Carolina................................     5
    Mr. Walker:..................................................
        Prepared statement.......................................    12
        Response to Mr. Brown's question regarding global 
          prescription drug pricing..............................    39
        Response to Mr. Wicker's question regarding the National 
          Performance Review.....................................    42
        Response to Mr. Edwards' question regarding Canadian 
          prescription drugs.....................................    43
        Response to Mr. Edwards' question regarding net interest 
          on the Federal debt....................................    45
        Response to Mr. Scott's question regarding how much it 
          will cost to ``fix'' EIC...............................    49
    Mr. McIntyre.................................................    58
    Hon. J. Gresham Barrett, a Representative in Congress from 
      the State of South Carolina................................    66
    Associated Builders and Contractors..........................    67
    The Independent Budget.......................................    68

 
         WASTE, FRAUD, AND ABUSE IN FEDERAL MANDATORY PROGRAMS

                              ----------                              


                        WEDNESDAY, JUNE 18, 2003

                          House of Representatives,
                                   Committee on the Budget,
                                                    Washington, DC.
    The committee met, pursuant to call, at 10 a.m. in room 
210, Cannon House Office Building, Hon. Jim Nussle (chairman of 
the committee) presiding.
    Members present: Representatives Nussle, Shays, Ryun, 
Schrock, Brown, Putnam, Brown-Waite, Hensarling, Diaz-Balart, 
McCotter, Barrett, Garrett, Franks, Hulshof, Wicker, Spratt, 
Baldwin, Neal, Edwards, Scott, Ford, Baird, Davis, and Emanuel.
    Chairman Nussle. Good morning. I would like to call the 
Budget Committee to order. Today the Budget Committee will hear 
from the General Accounting Office on its efforts to identify 
waste, fraud and abuse in the Federal Government. Our witness 
is the Honorable David M. Walker, the Comptroller General of 
the U.S. General Accounting Office or, as some refer to it, 
``the Government Accountability Office.'' We are trying to get 
that name changed for you, General. We will see how we do.
    General Walker, I want to thank you for being here and 
welcome you back to the committee. You have been here many 
times and we appreciate the work that you and the GAO does on 
our behalf.
    I have some slides I would like to go through. The first 
slide, as you can see from this chart, since 1995, overall 
government spending has increased nearly 41 percent, or at 
about 4.4 percent a year. This is total government spending. 
The second chart shows that non-Social Security mandatory 
programs, in particular, have grown at about 37.4 percent since 
1995, about 4 percent each year. If you look at individual 
budget categories, overall education spending has grown at 82 
percent. Veterans mandatory spending has grown at 49 percent. 
Medicare mandatory spending has grown at 55 percent. Medicaid 
has grown at 77 percent.
    Now with the economic boom and the budget surpluses of the 
late 1990s, Congress spent very generously and government 
programs grew by leaps and bounds. But while these important 
programs expanded, we did not ask that Congress expand our 
oversight responsibilities at the same rate that the government 
was increasing these programs. As a result, we now have a 
government that spends at about $69,000 per second; more, 
certainly, than the average family makes, in many instances, in 
a year. Let me repeat that, the Federal Government now spends 
$69,000 per second. And if you look at the chart, you will see 
that this kind of pace has been going on when it comes to 
spending increases for quite some time. As it expands out, 
obviously, we are going to have a problem.
    We have massive government agencies with massive 
responsibilities and obligations. As everybody in this room and 
everybody in America knows, it is unconscionable, but it has 
many different varying amounts of bureaucratic waste, fraud and 
abuse within its agencies. Certainly, this is not a new 
problem, but the question is why is it allowed to continue?
    As we know from GAO reports--and there are hundreds and 
thousands of them, and I know that General Walker will discuss 
many of them today--many government agencies cannot even 
account for much of their own budgets. In many cases, agencies 
are punished if they don't spend the entire budget or if they 
uncover waste or inefficiencies. The more they waste, the more 
they get. There is absolutely no incentive to find savings. It 
is wrong and it needs to change.
    Everyone has heard the, ``if you don't use it, you will 
lose it'' adage, that has been around for quite sometime. There 
is no family business in America that would operate that way, 
certainly no family operates that way.
    We are going to focus on the mandatory or entitlement 
spending side of this today for many reasons. I want to show 
you the spending breakdown for the Federal budget. As you can 
see from this chart, 55 percent of overall spending is what we 
call mandatory. Another way to say that is it is automatic. It 
continues every year, not subject to appropriations, there is 
no built in process of review, it is automatic. It just 
continues typically with large annual increases in the budget. 
Certainly the Appropriations Committee has got to do their job. 
Appropriations have increased at astronomical rates as well on 
the discretionary side. But to just look at the discretionary 
side would miss over half of the budget responsibility. And as 
we know from General Walker, GAO reports, IG reports and 
elsewhere, billions of these dollars are wasted every year.
    So we are holding the hearing today as another step in the 
process that we started back in March, when we passed the 
budget, that required every authorizing committee in both the 
House and Senate to identify means of eliminating waste, fraud 
and abuse within their jurisdiction by September 2 of this 
year. The goal we set for each committee was to find one penny 
on the dollar in savings for each dollar that they spend. We 
understand that they might find a little less, some might find 
even a little more, but this is a goal and I think a worthwhile 
starting point.
    And last month, this committee joined the House Republican 
leadership and committee chairmen in publicly announcing our 
determination to change this tolerance, and we did so as a 
leadership and committee chairs for a reason. Oftentimes in the 
past, this has been an individual effort or project; one 
individual Member or group of Members. I think it is different 
when committee chairs and leadership join in this process. We 
stand committed and ready to do the hard work to ensure that 
government spends taxpayers' dollars more responsibly. I want 
to applaud the committees who have already begun this effort, 
including the House Veterans' Affairs, and Government Reform 
committees; both the Commerce and Ways and Means committees 
have waste, fraud and abuse hearings scheduled, and I believe 
it is a good start.
    Just last night, the Ways and Means Committee in a somewhat 
unprecedented way, included a title within the Medicare 
modernization bill that passed last night at 11:30. It was a 
waste, fraud and abuse title. It got very little fanfare, no 
discussion and actually, interestingly enough, no complaints in 
part because this is a bipartisan approach. As a result of the 
Ways and Means Medicare mark, $33 billion will be eliminated 
from the Medicare program that has been wasted or fraudulently 
applied.
    So today we continue the process to help in this effort and 
we are going to hear from the General Accounting Office. We are 
also going to take a different new step. We have all heard 
stories of government waste in education, agriculture, 
Medicaid, Medicare. My own constituents have told me many 
stories, and yours as well, and we want to hear these stories. 
So today we are going to invite the American public to be part 
of this process. We are unveiling a link at our Web site, 
www.budget.house.gov., which will provide the public an outlet 
to report their observations of government waste.
    I don't want anyone to think that, just because we are 
running billion dollar deficits, or that billion dollars is 
what we talk about often in Washington, that if you have a 
story that involves only $100, or $1,000, that isn't 
worthwhile. We want to hear it all, because all of this money 
adds up; the nickels and dimes become dollars very quickly. At 
the end of the day, we may find only $10 million or $10 
billion, but every dollar that we find that is better spent is 
dollars that is not wasted, that is hard earned by the 
taxpayers.
    And let me be clear, this is not a Republican or Democrat 
effort. This can and should be a bipartisan effort. This 
affects us all and all of our constituents can be part of this. 
We can enter into a blame game. The Democrats have evidence and 
charts showing how this is all a Republican plot and the 
Republicans have charts that can show why this is all because 
of the Democrats. And we can continue to go through historical 
efforts to show how the other party is totally to blame. That 
would be interesting but it would be a waste of time. And just 
like we should not waste money, we really don't need to waste 
time either. We can disagree on policy and how best to get the 
economy going, but we really don't need to disagree on whether 
or not waste within the Federal Government is something that we 
can work together to eliminate.
    So I appreciate the work that Mr. Walker and his team 
continue to do in this effort. We need to pay attention to what 
the GAO says when their little blue books come out. We need to 
do more than just allow them to sit on a shelf and collect 
dust, and we will do that as part of this process.
    Thank you. I want to turn to Mr. Spratt for any comments he 
would like to make.
    Mr. Spratt. Thank you, Mr. Chairman, General Walker and Mr. 
McIntyre. We very much appreciate not only your coming but the 
efforts you have put into the preparation of your testimony, 
because we too are interested in eliminating waste, fraud and 
abuse from government spending. In fact, the Clinton 
administration opened its administration with the National 
Performance Review making government smarter and cost less. By 
his calculation $100 billion was saved. That may be hype but 
nevertheless significant savings were ferreted out and 
implemented. We as Democrats have passed in the past and 
Democratic Presidents have signed into law bipartisan measures 
to reform government, beginning going back to acts like the 
Inspector General Act of 1978, which has surely paid dividends 
and does every day, and the Government Performance and Results 
Act of 1993.
    We have reservations about a formalistic approach that 
gives percentage numbers to different committees of 
jurisdiction. In response to the chairman's charts, we would 
like to make it clear that one of the reasons those mandatory 
costs are going up is that a substantial component consists of 
the medical health care entitlements. And as the population 
gets older, the cost of health care goes up. We all experience 
that in our own individual lives. We are experiencing that 
collectively in our society today.
    The fact of the matter is 77 million baby boomers are 
marching toward their retirement as we meet today. They begin 
retiring in the year 2008 and start drawing Medicare in the 
year 2011, and there is nothing we can do to make that tide 
recede. They are born and they are going to demand their 
benefits. When they do, we will eventually double the number of 
beneficiaries on Social Security and Medicare, and that is why 
we are concerned about what you are doing to the revenue base 
of the Federal Government. We think you are diminishing the 
revenue base to the point where it cannot sustain the Medicare 
program or the Social Security program or these programs that 
the population of this country come to depend upon and care 
deeply about.
    We think as you drain away government revenues, you are 
also driving the deficit higher and higher. It is likely to be 
over $400 billion this year unless we take drastic steps to 
reverse the course that we are now on, likely to be over $400 
billion over the next 10 years. That means $4 trillion in 
additional debt. I don't know if we have the chart available, 
but there is something we began to call the debt tax--not the 
death tax--that is today--the debt tax, because as we 
accumulate this debt you can see what happens to debt service.
    We have indeed enjoyed the savings over the last 4 years. 
From 1997-2000, we paid off $400 billion of government debt. As 
a result of that and a result of the fact that the government 
for 8 consecutive years--the deficit was declining. We were not 
crowding out private borrowers. Interest rates went down. Debt 
service has dropped from over $250 billion to about $170 
billion this year. That is a $70 [billion] to $80 billion 
dividend we have been able to use for other purposes or at 
least charge up to savings in the Federal Government. That 
won't last long, not at the rate we are accumulating debt 
today.
    We are also concerned, let me say, about the scope of this 
inquiry. First of all, we are looking at the spending side of 
the ledger today. We should look at the tax side, too. We 
haven't had a good cleaning out of the closet, a good scrub 
down of the tax code since 1986. And as a result, it is full of 
accretions, of special interest provisions, targeted provisions 
that are really an embarrassment to the point they have reached 
today.
    We have a witness today, Mr. McIntyre, from Citizens for 
Tax Justice, who will direct our focus on the tax code because 
we think there is plenty of tax expenditures that ought to be 
examined and reconsidered. Under expatriation provisions now, 
which American corporations are moving to Bermuda, buying a 
telephone and setting up a mailbox and claiming they are now 
domesticated in Bermuda. We are allowing something outrageous 
like that to happen and doing nothing about it. That too should 
be a topic of our concern.
    We are very concerned--this is a worthwhile exercise and I 
commend the chairman for undertaking it, but I hope we don't 
treat this as a red herring, to divert our attention from the 
serious problem of accumulating deficits and mounting debt. 
Whatever we are able to accomplish through the efforts we 
undertake, there is no way the net outcome of this is going to 
be the eradication of the debt we are now accumulating. We have 
to do something else about tax policy and about spending policy 
other than just ferret out waste and abuse.
    Having expressed all these concerns, let me say that we 
stand ready to work with you to define waste, fraud and abuse 
and to wipe it out. We welcome you, Mr. Walker, and look 
forward to your testimony and appreciate your efforts. And we 
welcome Mr. McIntyre from Citizens for Tax Justice and look 
forward to his testimony.
    Mr. Chairman, I have a full statement which I will offer 
for the record.
    [The prepared statement of Mr. Spratt follows:]

  Prepared Statement of Hon. John M. Spratt, Jr., a Representative in 
               Congress From the State of South Carolina

    We strongly support efforts to eliminate waste, fraud, and abuse 
from government spending. Indeed, the Clinton administration initiated 
the National Performance Review, which is supposed to have saved more 
than $100 billion. Democratic Congresses have passed and Democratic 
presidents have signed into law bipartisan measures to reform 
government, laws like the Inspector General Act of 1978 and the 
Government Performance and Results Act of 1993.
    We do have reservations, however, about the approach taken in the 
budget resolution conference report. The conference report requires the 
authorizing committees to recommend changes in laws within their 
jurisdictions that would eliminate waste, fraud, and abuse, and produce 
budget savings totaling $132 billion in outlays over 10 years. Each 
committee is instructed to find savings of approximately 1 percent of 
the net cost of all mandatory spending within its jurisdiction. These 
recommendations can then be used in formulating future budget 
resolutions.
    We are concerned that the approach taken in the conference report 
takes us back to the formula-driven reductions to mandatory spending 
included in your budget resolution and then rejected. These cuts 
started at $470 billion in the chairman's mark, were reduced to $265 
billion before floor consideration, and have been reduced again to $132 
billion. Not only has the total changed, but committees are required 
now just to recommend these changes, rather than to pass legislation 
implementing them.
    The arbitrary nature of these cuts is one concern. Their scope is 
another. The fastest rising spike in the budget will soon be interest 
on the national debt. At the beginning of 2001, the Congressional 
Budget Office projected that the interest costs would fall below zero 
in 2009. Instead, by current staff estimates, net interest costs in 
2011 will be $368 billion--$348 billion more than projected by the Bush 
administration in 2001, and $464 billion more than projected by CBO.
    Another concern is that your approach does nothing to address 
waste, fraud, and abuse in the tax code, a problem that our second 
witness will address. And by focusing on reductions in mandatory 
spending only, you also neglect waste, fraud, and abuse on the 
discretionary side of the budget, as in the Department of Defense, 
which represents about half of all discretionary funding.
    In any event, the $132 billion in savings that the plan aims to 
generate will not come close to solving our Nation's fiscal problems 
which in large measure have been created by the tax cuts passed in 
2001, 2002, and 2003. In January 2001, CBO and OMB projected a $5.6 
trillion surplus. But this March, CBO projected if the President's 
budget is adopted a total deficit of $1.8 trillion over the period 
2004-13. This deficit total excludes such costs as the occupation and 
reconstruction of Iraq, as well as the cost of correcting the 
Alternative Minimum Tax. These will make the overall picture even 
bleaker. The $132 billion is less than 10 percent of what is needed to 
close even a conservative estimate of the budget gap that we face.
    Finally, we are concerned that the current approach may, in the 
end, threaten vital services to the American people. We recognize that 
the instructions to the authorizing committees state that the required 
levels of savings should be found solely through eliminating waste, 
fraud and abuse. But past efforts to identify waste, fraud, and abuse 
such as President Reagan's Grace Commission have often identified not 
true waste or fraud, but rather policy changes that would, in fact, 
reduce benefits received by individuals or businesses. Similarly, in 
the past when GAO has been asked to identify mandatory budget savings, 
some of the options they have identified have included such steps as 
increasing cost-sharing for beneficiaries and revising eligibility 
rules.
    We stand ready to work in a bipartisan way to reduce wasteful and 
fraudulent government spending. But this work must be done carefully 
and responsibly.
    We welcome the Comptroller General, Mr. Walker, and look forward to 
his testimony, and we welcome Mr. McIntyre, and look forward to his 
testimony.

    Chairman Nussle. I thank the gentleman. I need to report to 
Mr. Spratt and to other members of the committee that if you 
are worried about accumulating deficits and debt, you may want 
to pay attention to what happened last night on the Ways and 
Means Committee. The minority offered an amendment, a 
substitute amendment drug plan. And if you remember, the 
minority budget that Mr. Spratt wrote accommodated a $528 
billion drug plan, which was a little more than, of course, the 
majority plan that passed, which was 400 billion. The Blue Dog 
Coalition offered a $400 billion drug plan. But last night the 
minority offered a $1 trillion drug plan.
    So don't worry about the fact that it busted our budget, it 
busted both of your budgets put together. So if you are worried 
about deficits and debt, as I said, we can talk about blaming, 
we can talk about who is at fault, that is fine, we can do 
that, and we will get probably nowhere. Today I think we can, 
in a bipartisan spirit, not as a red herring, even if it is a 
dollar--may be a red herring to some, but it shouldn't be 
wasted. We are going to hear about some egregious waste that, 
no, totally won't eliminate the national debt, but I do think 
that if we don't start working on this together, there won't be 
much that we will be able to do together in a bipartisan way.
    So I am worried about the deficit and debt as well, but I 
think people have got to start concerning themselves with what 
they are doing. And if you bust your own budget, not our 
budget, forget our budget, I know you didn't vote for ours. You 
don't want ours and that is fine, but I think it would be 
hypocritical to suggest that you shouldn't at least stick 
within the budget that you wrote, which unfortunately the 
majority of Democrats last night on the committee did not do. 
And at some point in time, I think that is what is going to 
come back to haunt us in the long-term. Our tax cuts fit within 
a budget. You didn't like it, but you proposed tax cuts in your 
budget.
    We can keep going on this all day, but I am willing to at 
least move on and talk about waste, fraud and abuse today. But 
if you want to keep talking about national debt tax and all of 
this, I am going to unleash all of us and we can all have a 
great debate today about who is at fault and who historically--
and we can go back to Reagan, Carter, Clinton and everybody 
else. So I would rather stick to waste, fraud and abuse, hear 
from the witness and start talking about how we are going to 
eliminate it.
    Mr. Spratt. Let me respond, Mr. Chairman. We proposed $528 
billion. And further, a provision out of your budget resolution 
dealing with transportation; namely, the idea that if more 
revenues are generated they can be devoted to that particular 
program area than more user fees generated under the highway 
program and they are paid into the Highway Trust Fund, and your 
budget resolution allowed an increase. So we stipulated if the 
Ways and Means Committee came up with up to $200 billion of 
additional tax measures, identified to the Medicare 
prescription drug proposal, that could be added to the $528 
billion. The net cost of the budget would still have been $528 
billion. We did it frankly because we didn't think you could 
offer anything that was worthy of a name in the way of 
prescription drug coverage for less than that. And as you look 
at the package that is coming down the pike now, coming out of 
your committee last night, it appears to me that what you are 
proposing is that beneficiaries pay $4,000 of their own money 
in premiums, copayments, deductibles and a gap for the first 
$5,000 of coverage. So I think what is coming down validates 
our concern that if you are going to be for prescription drug 
coverage, you have to step up to the plate and pay the price.
    Let us not forget you have got on the floor today a total 
repeal of the estate tax. In the second 10 years after the 
repeal is fully phased in, by our calculation, that will mean a 
reduction in Federal revenues of $820 billion. That will pretty 
well pay the cost of prescription drug coverage under even the 
proposal made last night.
    Chairman Nussle. Well, let us see, 1 trillion minus 528 
plus 200 is 728. You are still missing $300 billion. Again, if 
we want to keep having this debate, you are adding $300 billion 
to the national debt with your proposal, even under the best 
calculation of your budget. And you know we can keep having 
this discussion and debate all day. I would rather move to 
waste, fraud and abuse.
    Mr. Walker, welcome, we are pleased to receive your 
testimony on waste, fraud and abuse and hopefully we can get to 
the Medicare debate on the floor this week and carry this on at 
some point in the future. Mr. Walker, welcome.

  STATEMENT OF THE HON. DAVID M. WALKER, COMPTROLLER GENERAL, 
 U.S. GENERAL ACCOUNTING OFFICE; ACCOMPANIED BY BILL SCANLON, 
MANAGING DIRECTOR, HEALTH CARE; PAUL POSNER, MANAGING DIRECTOR, 
   BUDGET AND INTERGOVERNMENTAL RELATIONS; AND SUSAN IRVING, 
               DIRECTOR, FEDERAL BUDGET ANALYSIS

    Mr. Walker. Thank you, Mr. Chairman, Ranking Member Spratt 
and members of the committee. It is a pleasure to be here to 
talk to you about this important topic. Let me say that I 
believe that this hearing is a positive first step, but 
obviously just a first step, toward dealing with a major 
challenge that we all have to come to grips with in the months 
and years ahead. I am pleased to appear on behalf of the GAO. 
And, Mr. Chairman, with your permission and the committee's 
permission, I would like for my full thick statement to be 
inserted into the record. I am going to use these PowerPoint 
slides to touch on some highlights if that is OK.
    If we can, let us go to the first slide. Next. Thank you. 
    
    
    It is important to note that if you look at the composition 
of Federal spending for fiscal 2003, including the 
supplemental, only 39 percent of the total Federal budget is 
represented by discretionary spending. By that, I mean 39 
percent is represented by what you, as members, can vote on and 
have some control over, through the regular appropriations 
process; 7 percent is represented by interest on the Federal 
debt, which is clearly mandatory in anybody's term and 54 
percent is represented by other mandatory programs. So in total 
61 percent--and if you excluded the supplemental, 64 percent--
would be mandatory.
    Now how does that compare, because everything has to be put 
in context. In 1963, when John F. Kennedy was President, 
roughly two-thirds of all Federal spending was discretionary. 
It has now flipped. Roughly two-thirds of all Federal spending 
is now mandatory and the trend is continuing. And so mandatory 
programs must be part of any examination, although it is not 
the whole issue.
    Next, please.

   FIGURE 2.--EXAMPLES OF OTHER ENTITLEMENTS, MANDATORIES AND DIRECT 
                                SPENDING

     Crop insurance
     Commondity credit corporation
     Food stamps
     Child nutrition
     Federal, military, and civilian retirement
     Federal unemployment benefits
     Social Services Block Grant [entitlement to the 
States]
     Vaccine injury
     Veterans pension and compensation
     Payments to States from forest service receipts

    I think it is also important to call attention to the range 
of mandatory programs, in addition to interest on the Federal 
debt, which is obviously mandatory, Social Security, Medicare, 
Medicaid, which we all know of as mandatory, there are a number 
of other items that are deemed to be mandatory. These include 
items such as crop insurance, food stamps, Federal unemployment 
benefits. These are in effect on auto pilot. So it is not just 
the big programs that we all know about talk about.
    Next, please.

                FIGURE 3.--TALK ABOUT 3 LEVELS OF REVIEW

     Addressing vulnerabilities to fraud, waste, abuse 
and mismanagement;
     Improving economy, efficiency and effectiveness;
     Reassessing what government does: fundamental re-
examination of programs, policies, activities and processes.

    In GAO's view there are three levels that Congress is going 
to have to ultimately deal with in order to address our large 
and growing fiscal gap. At the first level, which is the 
subject of this hearing, is addressing vulnerabilities to 
fraud, waste, abuse and mismanagement. We should have zero 
tolerance for fraud, waste, abuse and mismanagement, but in the 
largest, most complex, the most diverse, and arguably the most 
important entity on the face of the Earth--the U.S. 
Government--it will never be zero. Nevertheless, we should have 
zero tolerance and do whatever we can to absolutely minimize 
it. It will, however, never be eliminated. But even if we do 
everything that we can do, which we should and we must, we also 
need to move to the next level, improving the economy, 
efficiency and effectiveness of Federal programs and that won't 
be enough. We also have to look at reassessing what the 
government does, how the government does business and in some 
cases who does the government's business in the 21st century. 
Because what we now have is a building of the base over decades 
and we are going to have to start looking at the base. And I 
will come back to that.
    Now the first category: Addressing vulnerabilities with 
regard to fraud, waste, abuse and mismanagement. In my 
testimony, I give specific examples based upon GAO's work in 
areas dealing with Medicare, Medicaid, the earned income tax 
credit, food assistance, DOD, improper payments, credit card 
abuse, student financial aid and a variety of others where 
there are clearly opportunities to make progress on fraud, 
waste, abuse and mismanagement. There is real money involved. 
We need to take various steps, but they in and of themselves, 
are not going to be enough to come close to solving our 
problem, but that doesn't mean we shouldn't take the necessary 
steps


    Next, please.
    This represents a summary of GAO's high risk list, which is 
not just dealing with fraud, waste, abuse and mismanagement but 
it is also addressing economy, efficiency, effectiveness, and 
it is also reexamining some of the basic roles of government. 
We update this list every 2 years. We are becoming more 
strategic about it, and we are adding items that not only have 
to be dealt with by the executive branch but also the 
legislative branch.
    Next, please.
    The next category is improving economy, efficiency and 
effectiveness, and in my testimony I note there are at least 
four dimensions to this. There is better targeting of existing 
programs, whether they be grant programs, flood insurance, the 
Social Security pension offset. There is consolidation of 
certain programs where we have too many players on the field. 
By definition that means you are going to have economy, 
efficiency and effectiveness problems such as food safety, 
homeland security grants, and rural housing assistance. We can 
also look at what we can do to achieve better cost recovery, 
real full absorption costing in areas like public power, child 
support enforcement. We also need to look at areas of cross-
cutting or horizontal Federal activities where there is a 
tremendous opportunity for savings such as Federal real 
property. The Federal Government has a tremendous amount of 
excess real property. It is not just DOD, not just the Postal 
Service, it is the VA and many civilian agencies that have 
built up a tremendous amount of excess real property before the 
technology age that we need to fundamentally review and 
reassess because not only can we save money through not having 
to spend on maintenance, security and protection, but we can 
hopefully realize some asset recovery values as well.
    The next slide shows certain key questions that need to be 
asked about every program and policy periodically, and these 
are the questions.
    The next, please.

                        FIGURE 7.--KEY QUESTIONS

     Is the program targeted appropriately?
     Does it duplicate or even work at cross-purposes 
with related programs and tools?
     Is it financially sustainable? Are there 
opportunities for instituting appropriate cost sharing and 
recovery from nonfederal parties including private entities 
that benefit from Federal activities?
     Can efficiency be increased through reengineering 
or streamlining processes or restructuring organizational role 
and responsibilities?
     Are there clear goals, measures and data with 
which to track progress, benefits and costs?

    And then last but certainly not least with regard to the 
three major categories, a fundamental reassessment of what does 
the government do, how does the government do business, and who 
does the government's business based upon 21st century 
realities. In reality what we have now is we have built up a 
number of programs, policies, functions and activities over the 
past several decades and the assumption is that the base is OK. 
The base is not OK. The base is unsustainable. Due to known 
demographic trends and rising health care costs, we face large 
and growing deficits that must be addressed. This means you are 
going to have to look beyond fraud, waste, abuse and 
mismanagement, including the mandatory programs, to economy, 
efficiency, effectiveness and move on to make some tough 
choices on the proper role of government. Just 2 weeks ago when 
I spoke to a group of Ph.D. economists, including some past 
chairs of the Council of Economic Advisers, I asked them 
whether they believe that we were going to grow our way out of 
the long-range problem, and nobody raised their hand--nobody. 
Tough choices will be required. We need to start with fraud, 
waste, abuse and mismanagement. We need to move on to economy, 
efficiency and effectiveness. And we ultimately have to 
reassess what is the proper role of government.
    Next, please.
    This is an example of the different tools that government 
has to achieve policy. The government has tax incentives. They 
need to be reexamined, too. There are a lot of tax incentives 
that have been in the base that may or may not make sense and 
may not be affordable or sustainable going forward. There are 
tax incentives, loan guarantees, regulations, discretionary 
spending, mandatory spending, direct loans.
    This is an example of the education and labor budget. 
Namely, of all the different tools the government has in order 
to try to achieve a desired policy objective. I would 
respectfully suggest that many of those tools haven't been 
reviewed in years, and it is time that we do that.



    Last but certainly not least, health care. I would 
respectfully suggest that our health care is the biggest 
domestic policy challenge. It is not just cost, it is access, 
it is quality, it is affordability, sustainability, and a 
variety of issues. If you look at health care in fiscal 2000--
and it has gotten worse since then--72 percent represented 
mandatory outlays, 8 percent discretionary, 20 percent tax 
expenditures, over $99 billion per year in tax expenditures for 
health care, which is a permanent difference. Unlike pensions 
where people ultimately pay tax on their pensions--it is just a 
matter of when, and at what effective tax rate--people never 
pay tax on the value of their health care insurance. In 
addition that value is not in either the Social Security or the 
Medicare wage base.
    So the fact of the matter is, Mr. Chairman, in summary, we 
face large and growing fiscal imbalances that we must address. 
There are three tiers, first fraud, waste, abuse and 
mismanagement, including the mandatory programs. We must make 
progress there. Secondly, economy, efficiency and 
effectiveness, when we have a range of opportunities. And last 
but not least and probably the biggest amount of money but the 
toughest to do is fundamentally reassessing the base on the tax 
and--both discretionary and mandatory--and rationalizing 
government for the 21st century. It is heavy lifting but it 
must be done. I have 10\1/2\ years left in my term. I look 
forward to working with you along with my GAO colleagues to try 
to get it done.
    [The prepared statement of Mr. Walker follows:]

      Prepared Statement of David M. Walker, Comptroller General, 
                     U.S. General Accounting Office

    This is a work of the U.S. Government and is not subject to 
copyright protection in the United States. It may be reproduced and 
distributed in its entirety without further permission from GAO. 
However, because this work may contain copyrighted images or other 
material, permission from the copyright holder may be necessary if you 
wish to reproduce this material separately.
    Mr. Chairman, Mr. Spratt, members of the committee. It is a 
pleasure to be here today as you deal with one of your important 
obligations--to exercise prudence and due care in connection with 
taxpayer funds. No government should waste its taxpayers' money, 
whether we are operating during a period of budget surpluses or 
deficits. Further, it is important for everyone to recognize that 
waste, fraud, abuse, and mismanagement are not victimless activities. 
Resources are not unlimited, and when they are diverted for 
inappropriate, illegal, inefficient, or ineffective purposes, both 
taxpayers and legitimate program beneficiaries are cheated. Both the 
administration and the Congress have an obligation to safeguard 
benefits for those that deserve them and avoid abuse of taxpayer funds 
by preventing such diversions. Beyond preventing obvious abuse, 
government also has an obligation to modernize its priorities, 
practices, and processes so that it can meet the demands and needs of 
today's changing world. More broadly, the Federal Government must 
reexamine the entire range of policies and programs--entitlements, 
discretionary, and tax incentives--in the context of the 21st century.
    Periodic reexamination and revaluation of government activities has 
never been more important than it is today. Our Nation faces long-term 
fiscal challenges. Increased pressure also comes from world events: 
both from the recognition that we cannot consider ourselves ``safe'' 
between two oceans--which has increased demands for spending on 
homeland security--and from the U.S. role in an increasingly 
interdependent world. And government faces increased demands from the 
American public for modern organizations and workforces that are 
responsive, agile, accountable and responsible.
    As everyone on this committee knows well, only about 36 percent of 
the Federal budget--and even less if you look only at programmatic 
spending--is discretionary. The rest is direct or mandatory 
spending.\1\
    In addition, we can't forget about tax incentives. I make this 
point to reinforce the fact that efforts to assure prudent use of 
taxpayer funds, efforts to guard against fraud, waste, abuse and 
mismanagement, and efforts to improve economy, efficiency and 
effectiveness cannot focus solely on discretionary appropriations but 
must also encompass mandatory programs and tax policy, including tax 
incentives.
    Direct, or mandatory, spending programs are by definition assumed 
in the baseline and not automatically subject to annual congressional 
review as are appropriated discretionary programs. Nonetheless, a 
periodic reassessment of these programs, as well as tax incentives, is 
critical to achieving fiscal discipline in the budget as a whole. 
Moreover, such a review can help ascertain whether these programs are 
protected from the risk of fraud, waste and abuse and are designed to 
be as cost effective and efficient as possible.
    As you know, the Budget Resolution directs GAO to prepare a report 
identifying ``instances in which the committees of jurisdiction may 
make legislative changes to improve the economy, efficiency, and 
effectiveness of programs within their jurisdiction.'' My testimony 
draws in part on some of the items that will be included in that 
report.
    Today I want to talk about program reviews, oversight, and 
stewardship of taxpayer funds on several levels:
     First, it is important to deal with areas vulnerable to 
fraud, waste, abuse and mismanagement. Payments to ineligibles drain 
resources that could otherwise go to the intended beneficiaries of a 
program. Everyone should be concerned about the diversion of resources 
and subsequent undermining of program integrity.
     Second, and more broadly, policymakers and managers need 
to look at ways to improve the economy, efficiency and effectiveness of 
Federal programs and specific tax expenditures. Even where we agree on 
the goals of programs, numerous opportunities exist to streamline, 
target and consolidate to improve their delivery. This means looking at 
program consolidation, at overlap and at fragmentation. For example, it 
means tackling excess Federal real property--whether at home or abroad. 
It means improved targeting in both spending programs and tax 
incentives--in some cases, spreading limited funds over a wide 
population or beneficiary group may not be the best approach.
     Finally, a fundamental reassessment of government 
programs, policies, and activities can help weed out programs that are 
outdated ineffective unsustainable, or simply a lower priority than 
they used to be. In most Federal mission areas--from low-income housing 
to food safety to higher education assistance--national goals are 
achieved through the use of a variety of tools and, increasingly, 
through the participation of many organizations, such as State and 
local governments and international organizations, that are beyond the 
direct control of the Federal Government. Government cannot accept as 
``givens'' all of its existing major programs, policies, and 
operations. A fundamental review of what the Federal Government does, 
how it does it, and in some cases, who does the government's business 
will be required, particularly given the demographic tidal wave that is 
starting to show on our fiscal horizon.
  addressing vulnerabilities to fraud, waste, abuse and mismanagement
    Programs and functions central to national goals and objectives 
have been hampered by daunting financial and program management 
problems, exposing these activities to fraud, waste and abuse. These 
weaknesses have real consequences with large stakes that are important 
and visible to many Americans. Some of the problems involve the waste 
of scarce Federal resources. Other problems compromise the ability of 
the Federal Government to deliver critically needed services, such as 
ensuring airline safety and efficiently collecting taxes. Still others 
may undermine government's ability to safeguard critical assets from 
theft and misuse.
    In 1990, GAO began a program to report on government operations we 
identified as ``high risk.'' This label has helped draw attention to 
chronic, systemic performance and management shortfalls threatening 
taxpayer dollars and the integrity of government operations. Over the 
years GAO has made many recommendations to improve these high-risk 
operations. We discovered that the label often inspired corrective 
action--indeed 13 areas have come off the list since its inception. For 
each of these areas, we focus on (1) why the area is high-risk; (2) the 
actions that have been taken and that are under way to address the 
problem since our last update report and the issues that are yet to be 
resolved; and (3) what remains to be done to address the risk.
    In January of this year we provided an update for the 108th 
Congress, giving the status of high-risk areas included in our last 
report [January 2001] and identifying new high-risk areas warranting 
attention by the Congress and the administration.\2\ GAO's 2003 high-
risk list is shown in Attachment I. Lasting solutions to high-risk 
problems offer the potential to save billions of dollars, dramatically 
improve service to the American public, strengthen public confidence 
and trust in the performance and accountability of our national 
government, and ensure the ability of government to deliver on its 
promises.
    In addition to perseverance by the administration in implementing 
needed solutions, we have noted that continued congressional interest 
and oversight, such as that exemplified by this hearing today are of 
crucial importance. The administration has looked to our 
recommendations in shaping governmentwide initiatives such as the 
President's Management Agenda, which has at its base many of the areas 
we have previously designated as high risk.
    Clearly progress has been made in addressing most of the areas on 
our current high risk list, both through executive actions and 
congressional initiatives. However, many of these problems and risks 
are chronic and long standing in nature and their ultimate solution 
will require persistent and dedicated efforts on many fronts by many 
actors. Some will require changes in laws to simplify or change rules 
for eligibility, provide improved incentives or to give Federal 
agencies additional tools to track and correct improper payments. 
Continued progress in improving agencies' financial systems, 
information technology resources and human capital will be vital in 
attacking and mitigating risks to Federal program integrity. Some areas 
may indeed require additional investments in people and technology to 
provide effective information, oversight and enforcement to protect 
programs from abuse. Ultimately, a transformation will be needed in the 
cultures and operations of many agencies to permit them to manage risks 
and foster the kind of sustained improvements in program operations 
called for. Continued persistence and perseverance in addressing the 
high risk areas will ultimately yield significant benefits for the 
taxpayers over time. Finding lasting solutions offers the potential to 
achieve savings, improved service and strengthened public trust in 
government.
    I will now address some specific areas and examples from both our 
high risk work and other program reviews that illustrate both the 
problems facing us and the opportunities for congressional and 
executive actions to better safeguard taxpayer funds.\3\

                           IMPROPER PAYMENTS

    Improper payments include inadvertent errors, such as duplicate 
payments and miscalculations; payments for unsupported or inadequate 
supported claims; payments for services not rendered; payments to 
ineligible beneficiaries; and payments resulting from outright fraud 
and abuse by program participants and/or Federal employees. Recently, 
agencies' financial statements also have begun to identify and measure 
the wide range of improper payments involved in many activities 
throughout government. Agency financial statements for both fiscal 
years 2002 and 2001 identified improper payment estimates of 
approximately $20 billion. OMB recently testified that the amount of 
improper payments was closer to $35 billion annually for major benefit 
programs. This range may be indicative of the fact that it is hard to 
get a handle on the precise total. Furthermore, as significant as these 
amounts are, they do not represent a true picture of the magnitude of 
the problem governmentwide because they do not consider other 
significant but smaller programs and other types of agency activities 
that could result in improper payments. In reviewing fiscal year 2002, 
agency financial statements of the 24 CFO Act agencies, we found 
references to improper payments in 17 agencies and 27 programs. 
Unfortunately, not all of them provided information on the amount of 
such payments. In the Federal Government, improper payments occur in a 
variety of program activities, including those related to contractors 
and contract management, such as defense; healthcare programs, such as 
Medicare and Medicaid; financial assistance benefits, such as Food 
Stamps and housing subsidies; and tax refunds.

                          THE MEDICARE PROGRAM

    The sheer size and complexity of the Medicare program makes it 
highly vulnerable to fraud, waste and abuse. In fiscal year 2002, 
Medicare paid about $257 billion for a wide variety of inpatient and 
outpatient health care services for over 40 million elderly and 
disabled Americans. To help administer claims the Centers for Medicare 
& Medicaid Services (CMS) contracts with 38 health insurance companies 
to process about 900 million claims submitted each year by over 1 
million hospitals, physicians, and other health care providers. 
Although CMS has made strides, much remains to be done. We have 
recommended actions in a number of specific areas, including:
     Reducing Improper Payments: Since 1996, annual audits by 
the Department of Health and Human Services' Office of the Inspector 
General have found that Medicare contractors have improperly paid 
claims worth billions of dollars--$12.3 billion in fiscal year 2002 
alone. CMS has been working to better hold individual contractors 
accountable for claims payment performance and help them target 
remedial actions to address problematic billing practices. Program 
safeguard activities have historically produced savings. In the past 
CMS has estimated a return of over $10 for every dollar spent in this 
area.
     Monitoring managed care plans: In 2001 auditors found that 
59 of 80 health plans had misreported key financial data or had 
accounting records too unreliable to support their data, but CMS did 
not have a plan in place to resolve these issues.
     Improving financial management processes: Despite a 
``clean'' opinion on its financial statements, CMS financial systems 
and processes do not routinely generate information that is timely or 
reliable and do not ensure confidentiality of sensitive information.
     Collecting debt: At the end of fiscal year 1999, over $7 
billion of debt had accumulated on contractors' books as accounts 
receivable that were neither collected nor written off. While Medicare 
contractors have referred eligible delinquent debt to the Treasury for 
collection, CMS continues to face challenges in ensuring that 
contractors consistently make these referrals and is working to address 
this.
     Reducing excessive payments for services and products: 
These hurt not only the taxpayers but also the program's beneficiaries 
who are generally liable for copayments equal to 20 percent of 
Medicare's approved fee. Excessive payments have been found for
     Home health care or skilled nursing facility care: 
Medicare pays as much as 35 percent more than providers' costs for home 
health care and 19 percent more for skilled nursing facility care. 
Unfortunately, CMS has not adopted our recommendation that would 
minimize excessive payments to some home health agencies.\4\
     Medical products: Medicare's payment approaches lack the 
flexibility to keep pace with market changes. Payments for medical 
equipment and supplies are through fee schedules that remain tied to 
suppliers' historical charges to the program. Evidence from two 
competitive bidding projects suggests that competition might provide a 
tool that facilitates setting more appropriate payment rates that 
result in program savings
     Outpatient drugs: Medicare pays list prices set by drug 
manufacturers, not prices providers actually pay. In September 2001, we 
reported that in 2000 Medicare paid over $1 billion more than other 
purchasers for outpatient drugs that the program covers. CMS has not 
acted upon our recommendations in this area.\5\
Medicare excessive payments: outpatient drugs
    In some cases, Medicare's payments were so high that the 
beneficiaries' copayments alone exceeded the purchase price available 
to the provider.
    In 2001:
     Medicare paid $3.34 per unit for Ipratropium bromide 
although it is widely available for $0.77 per unit;
     Medicare paid $588 for leuprolide acetate although it was 
widely available at a cost of $510.

                          THE MEDICAID PROGRAM

    Medicaid, which pays for both acute health care and long-term care 
services for over 44 million low-income Americans, has been subject to 
waste and exploitation. In fiscal year 2001, Federal and State Medicaid 
expenditures totaled $228 billion. The Federal share was about 57 
percent, representing 7 percent of all Federal outlays. Medicaid is the 
third largest social program in the Federal budget (after Social 
Security and Medicare) and the second largest budget item for most 
states (after education).
    CMS, in the Department of Health and Human Services (HHS) is 
responsible for administering the program at the Federal level, while 
the states administer their respective program's day-to-day operations. 
The challenges inherent in overseeing a program of Medicaid's size, 
growth, and diversity, combined with the open ended nature of the 
program's Federal funding, puts the program at high risk. Inadequate 
fiscal oversight has led to increased and unnecessary Federal spending. 
GAO has made recommendations in a number of areas, such as:
     Curb State financing schemes: Such schemes inappropriately 
increase the Federal share of Medicaid expenditures. For example, some 
states have created the illusion that they made large Medicaid payments 
to providers while in reality they only made temporary electronic funds 
transfers that the providers were required to return to them. In some 
cases, states have used Federal payments for purposes other than 
Medicaid. Although Congress and CMS have repeatedly acted to curtail 
abusive financing schemes, states have developed new variations. Each 
has the same result: some of the state's share of program expenditures 
is shifted to the Federal Government. Curbing abusive State practices 
is of increasing importance today since states are under budgetary 
pressures. Experience shows that some states are likely to look for 
other creative means to supplant State financing, making a compelling 
case for the Congress and CMS to sustain vigilance over Federal 
Medicaid payments.
    Curbing states' exploitative practices can yield substantial 
savings. CMS' 2001 regulation to close one significant loophole that 
was being increasingly used by states to generate excessive Federal 
Medicaid payments, referred to as the upper payment limit, is estimated 
to save the Federal Government $55 billion over 10 years, and a related 
2002 CMS regulation is estimated to yield an additional $9 billion over 
5 years. To reduce these and other exploitative schemes and to better 
ensure that Federal funds were used to reimburse providers only for 
Medicaid-covered services actually provided to eligible beneficiaries, 
we recommended in 1994 that the Congress enact legislation to prohibit 
making Medicaid payments to a government-owned facility in excess of 
the facility's costs. To date, no action has been taken.
    The figure below shows one state's arrangement to increase Federal 
Medicaid payments inappropriately.
Address inappropriate provider claims
     The improper payments that states have identified suggest 
that--with augmented and consistent effort--States have the potential 
to save Medicaid millions of dollars. An estimate of savings from cost 
recoveries for the State of Washington alone, for example, was over $9 
million in Medicaid funds during fiscal year 2002 through its hospital 
and physician audits.
     Our review of certain Medicaid services provided to 
children through their schools also demonstrates the importance of 
heightened scrutiny over Medicaid expenditures. In one State alone, 
there were $324 million in disallowed claims involving school-based 
services for a 3 1/2 year period ending in fiscal year 2001. Some 
claims were for service not covered by Medicaid or for services 
provided to non-Medicaid-eligible children.
Improve Federal and State agency controls over payments
    CMS does not have a sound method for states to identify areas at 
high risk for improper Medicaid payments. Also, in our June 2001 
review, we noted that no State requested the full amount of Federal 
funds available for antifraud efforts due to a reluctance to put up 
State matching funds.

                        IMPROPER PAYMENTS AT DOD

    Ensuring prompt, proper, and accurate payments continues to be a 
challenge for the Department of Defense (DOD). DOD managers do not have 
the important information needed for effective financial management, 
leading DOD to overpay contractors by billions of dollars over the past 
8 years. In our past reports, we have noted that (1) contractors were 
refunding hundreds of millions of dollars to DOD each year for a total 
of about $6.7 billion between fiscal year 1994 and 2001; (2) DOD made 
overpayments due to duplicate invoices and paid invoices without 
properly and accurately recovering progress payments; (3) contract 
administration actions had resulted in significant contractor debt or 
overpayment; (4) DOD and contractors were not aggressively pursuing the 
timely resolution of overpayments or underpayments when they were 
identified; and (5) DOD did not have statistical information on the 
results of contract reconciliation. In May 2002, we reported that DOD 
has various short-term corrective actions underway that appear to be 
having positive results. However, cost increases, performance issues, 
or schedule delays have beset two of DOD's key long-term initiatives: 
the Defense Procurement Payment System, which is intended to be DOD's 
standard contract payment system, and the Standard Procurement System, 
which is intended to be DOD's single, standard system to support 
contracting functions and interface with financial management 
functions. GAO has recommended that DOD take a number of steps 
including developing controls over contractor debt and overpayments.

                EARNED INCOME CREDIT (EIC) NONCOMPLIANCE

    For tax year 2001, about $31 billion was paid to about 19 million 
EIC claimants. Although researchers have reported that the EIC has 
generally been a successful incentive-based antipoverty program, IRS 
has reported high levels of EIC overpayments going back to 1985. IRS's 
most recent study, released in 2002, estimated that between $8.5 and 
$9.9 billion should not have been paid out to EIC claimants for tax 
year 1999.
    Administering the EIC is not an easy task. The IRS has to balance 
its efforts to help ensure that all qualified persons claim the credit 
with its efforts to protect the integrity of the tax system and guard 
against fraud and other forms of noncompliance associated with the 
credit. Further, the complexity of the EIC may contribute to 
noncompliance. The EIC is among the more complex provisions of the tax 
code, which can contribute to unintentional errors by taxpayers. In 
addition, unlike other income transfer programs, the EIC relies more on 
self-reported qualifications of individuals than on program staff 
reviewing documents and other evidence before judging claimants to be 
qualified for assistance.
    Early in 2002, the Assistant Secretary of the Treasury and the IRS 
commissioner established a joint task force to seek new approaches to 
reduce EIC noncompliance. The task force sought to develop an approach 
to validate EIC claimants' eligibility before refunds are made, while 
minimizing claimants' burden and any impact on the EIC's relatively 
high participation rate. Through this initiative, administration of the 
EIC program would become more like that of a social service program for 
which proof of eligibility is required prior to receipt of any benefit.
    According to IRS, three areas--qualifying child eligibility, 
improper filing status, and income misreporting (i.e., 
underreporting)--account for nearly 70 percent of all EIC refund 
errors. Although the task force initiative is designed to address each 
of these sources of EIC noncompliance, many of the details about its 
implementation are still to be settled. A significant change to the 
initiative was announced just this past Friday, June 13, when IRS said 
that its pilot effort to precertify the eligibility of qualifying 
children for the EIC would not include requesting claimants to show 
their relationship to the qualifying child. Because planning and 
implementation for the EIC initiative will proceed simultaneously, its 
success will depend on careful planning and close management attention.
    Congress has already focused oversight attention on the EIC 
initiative and continued oversight can help ensure that the initiative 
balances efforts to reduce EIC overpayments with continued efforts to 
maintain or increase the portion of the EIC eligible population that 
receives the credit. Further, Congress can consider making the several 
definitions of children in the tax code more uniform. The differing 
definitions contribute to the complexity taxpayers face and complexity 
is widely believed to contribute to errors taxpayers make in claiming 
the EIC. As early as 1993 we had suggested that Congress consider 
changes that would have made the definitions for children more similar 
for several tax purposes. More recently, IRS's Taxpayer Advocate, the 
Joint Committee on Taxation, and the Department of the Treasury have 
made proposals as well.
EIC problems
     IRS estimated in 2002 that of the $31.3 billion in earned 
income credits claimed by taxpayers in tax year 1999, about $8.5 
billion to $9.9 billion, should not have been paid.
     This level of noncompliance has remained relatively 
unchanged even after a 5-year effort to reduce it.

                       COLLECTION OF UNPAID TAXES

    Collecting taxes due the government has always been a challenge for 
IRS, but in recent years the challenge has grown. In testimonies and 
reports we have highlighted large and pervasive declines in IRS' 
compliance and collections programs. For example, between 1996 and 2001 
the programs generally experienced larger workloads, less staffing, and 
fewer number of cases closed per employee For the last several years, 
Congress and others have been concerned that the declines in IRS's 
enforcement programs are eroding taxpayers' confidence in the fairness 
of our tax system putting at risk their willingness to voluntarily 
comply with the tax laws. Because of the potential revenue losses and 
the threat to voluntary compliance, the collection of unpaid taxes is a 
high risk area.
    A key to reversing these trends and ensuring compliance with the 
tax laws is continuing to modernize IRS's management and systems. Such 
change is required across IRS. IRS needs to acquire and analyze data on 
noncompliance by continuing to implement the National Research Program 
as planned. IRS needs to reengineer it compliance and collection 
programs. Reengineering depends, in turn, on successfully modernizing 
business information systems by implementing recommended management 
controls. IRS needs to implement its planned centralized cost 
accounting system in order to strengthen controls over unpaid tax 
assessments. Because of their magnitude, these efforts are a major 
management challenge. IRS has tried to increase enforcement staffing. 
However, the hiring of additional staff has been delayed by factors 
such as unbudgeted cost increases.
Uncollected taxes
    By the end of fiscal year 2002, IRS had deferred collection action 
on about one out of three collection cases and had an inventory of $112 
billion of known unpaid taxes with some collection potential.

                      STUDENT FINANCIAL ASSISTANCE

    The Department of Education's student financial assistance programs 
disburse about $65 billion annually. Education also manages a $267 
billion loan portfolio. Millions of dollars in loans and grants have 
been disbursed to ineligible students because of internal control 
weaknesses. While the default rate on student loans has come down 
substantially, the dollars in default remain high.
    Education has made progress on improving its financial management; 
however it needs to implement corrective actions to ensure that 
relevant, reliable accounting information is available. Over the years, 
Education has spent millions to integrate and modernize its many 
financial aid systems in an effort to provide more information and 
better service to customers--students, parents, institutions, and 
lenders. However Education did not have an enterprise architecture\6\ 
and it lacked the ability to track students across programs. Education 
also faces challenges in maintaining program integrity, specifically 
ensuring that information reported on student aid applications is 
correct and that adequate internal controls exist to prevent erroneous 
and improper payments of grants and loans. To improve the integrity of 
the financial aid programs, Education should (1) continue to coordinate 
with the Internal Revenue Service to verify income information reported 
on student aid applications, (2) provide clear policy and guidance on 
the effect of using tax provisions on student aid awards, and (3) 
implement controls to limit improper disbursements of grants and loans.
    For example, in 2001, $21.8 billion remained in default. 
Education's Office of Federal Student Aid (FSA) draft fiscal year 2002 
performance plan specified the goals it had for default management; 
however, it included only limited information about the strategies to 
achieve those goals. Without giving additional details on its 
strategies for default recovery and prevention, it is not clear how FSA 
will determine whether it has achieved its default management goals. 
Finally, while Education has set up voluntary flexible agreements with 
four of its guaranty agencies, it is in the process of assessing 
whether they have been successful in lowering default and delinquency 
rates.

Fraud in student aid programs
     The owner, registrar, director of education, and other 
employees at The Training Center, a computer and travel school in 
Michigan, were indicted for falsifying documents to illegally obtain 
student financial aid. The indictment included an $875,000 forfeiture 
to recover the funds these individuals illegally received.
     An investigation at Beacon Career Institute in Florida 
(BCI) revealed a major Pell Grant case that defrauded Education of over 
$720,000. The former BCI administrator and other BCI officials created 
false documents to justify the disbursement of these grants. They were 
ordered to pay restitution totaling $1,778,472 and sentenced to prison.
     A former instructor at Piedmont College of Hair Design in 
South Carolina pled guilty and was ordered to pay restitution of 
$27,000 for Pell Grant fraud. Her actions caused over $300,000 in Pell 
Grants to be given to ineligible students.
     One individual in Los Angeles, who was convicted of 
student aid fraud, conducted weekly seminars for parents and students, 
charging $300 for the programs at which he advised and assisted them in 
preparing student aid applications that deliberately misstated their 
income or dependency status. The potential loss to the government from 
his actions was about $800,000.

                        FOOD ASSISTANCE PROGRAMS

    Each day, one in every six Americans receive nutrition assistance 
through 1 or more of the 15 programs administered by the U.S. 
Department of Agriculture (USDA). In fiscal year 2002 Congress 
appropriated about $38.8 billion--nearly half of USDA's budget--to 
provide children and low-income adults with access to food, a healthful 
diet, and nutrition education through programs such as Food Stamps, 
school breakfast and school lunch programs.) USDA continues to face 
serious challenges in ensuring that eligible individuals receive the 
proper benefits from the food assistance programs administered by its 
Food and Nutrition Service.
    In fiscal year 2001, the Food Stamp Program alone provided 17.3 
million individuals with more than $15.5 billion in aid. About 149,000 
authorized retail outfits accept food stamps. A program this large and 
this decentralized is vulnerable to problems and we have made 
recommendations in a number of areas, including:
    Erroneous payments: USDA estimated that for fiscal year 2001 
erroneous payments totaled about $1.4 billion--about $1 billion in 
overpayments and just under $400 million in underpayments. This is an 
error rate of about 9 percent.
     To deal with the complexity of the Food Stamp Program and 
the high error rate, the Farm Security and Rural Investment Act of 2002 
contained a number of administrative and simplification reforms, such 
as allowing states to use greater flexibility in considering the income 
of recipients for eligibility purposes and to extend simplified 
reporting procedures for all program recipients.

Misuse of benefits
    Individuals sometimes illegally sell their benefits for cash--a 
practice known as trafficking. In its most recent report on trafficking 
[March 2000] USDA estimated that about 3.5 cents of every dollar of 
food stamp benefits issued each year from 1996-98 was trafficked by 
stores--about $660 million.
     Storeowners generally do not pay the financial penalties 
assessed for trafficking. For example, we reported in May 1999 that 
USDA and the courts collected only $11.5 million, or about 13 percent, 
of the $78 million in total penalties assessed against store owners for 
violating food stamp regulations from 1993 through 1998.\7\ Better use 
of information technology has the potential to help USDA minimize 
fraud, waste, and abuse in the Food Stamp Program. The Food and 
Nutrition Service has taken some actions to implement our 
recommendations, such as assisting states in the use of EBT data to 
identify traffickers and has other actions under way.

Other nutrition programs also suffer from fraud and abuse
     For example in fiscal year 2001 the Child and Adult Care 
Food Program (CACFP) provided subsidized meals for a daily average of 
2.6 million participants in the care of about 215,000 day care 
providers and received $1.8 billion in fiscal year 2002. In response to 
our November 1999 recommendation\8\ and reports by the USDA OIG, 
legislation was enacted in June 2000 to strengthen CACFP management 
controls and to reduce its vulnerability to fraud and abuse. As a 
result, the Food and Nutrition Service has intensified its management 
evaluations at the State and local levels and has trained its regional 
and State agency staff on revised management procedures.
    National School Lunch Program provided nutritionally balanced, low-
cost or free lunches for over 27 million children each school day in 
more than 98,000 public and nonprofit private schools and residential 
child care institutions. Past reports have disclosed that the number of 
children certified as eligible to receive free lunches in this program 
was 18 percent greater than the estimated number of children eligible 
for this benefit. Furthermore, in its strategic plan for fiscal years 
2000 through 2005, USDA specifically identified the challenge it faces 
in ensuring that only eligible participants are provided benefits in 
the National School Lunch Program. USDA has taken some initial steps to 
develop a cost-effective strategy to address this integrity issue, such 
as pilot testing potential policy changes to improve the certification 
process.

Child and Adult Care Food Program
     To identify potentially fraudulent or abusive claims, 
reimbursement claims are reviewed, but the reviews are not foolproof. 
For example, one State we visited used several methods to evaluate the 
soundness of claims, but a State reviewer found that the reviews did 
not catch a $5,000 overpayment to a day care home sponsor. In this 
case, the claim for reimbursement had jumped in 1 month to $7,000, from 
an average monthly claim of $2,000.
     FNS has not effectively directed states' efforts to 
control fraud and abuse. In fiscal years 1997 and 1998, only 23 of FNS' 
47 management evaluations directly evaluated the states' implementation 
of required controls over reimbursements to sponsors and providers. 
Almost half of these reviews found serious problems, including the 
failure of some states to conduct any administrative reviews of 
sponsors or providers.

                           CREDIT CARD ABUSE

    We and a number of Inspectors General have identified improper and 
fraudulent use of purchase cards as well as control weaknesses in 
numerous agencies such as the Departments of Agriculture, Defense, 
Education, Housing and Urban Development, Interior, and the Federal 
Aviation Administration. Identified problems include weaknesses in the 
review and approval processes, lack of training for cardholders and 
approving officials, and ineffective monitoring. These weaknesses 
created a lax control environment that allowed cardholders to make 
fraudulent, improper, abusive, and questionable purchases. Similarly, 
we have found that a weak control environment contributed to 
significant abuse and potential fraud in the use of travel cards in the 
Department of Defense.
    For instance, in March 2003, we reported that weaknesses in FAA's 
purchase card controls resulted in instances of improper, wasteful, and 
questionable purchases, as well as missing and stolen assets. These 
weaknesses contributed to $5.4 million of improper purchases. This 
included 997 transactions totaling $5.1 million associated with 
purchases that were split into two or more segments to circumvent 
single purchase limits. In addition, over half of the asset purchases--
such as computers and other equipment--that we examined had not been 
recorded in FAA's property system, increasing the risk of loss or 
theft. As a result, FAA could not locate or document the location of 
over a third of the items. These missing items totaled almost $300,000. 
In separate internal reviews, one FAA location identified over 800 
items, totaling almost $2 million, that were lost or stolen in fiscal 
years 2001 through 2002. Given systemic weaknesses in FAA's property 
controls, the actual amount of missing or stolen equipment FAA-wide 
could be much higher. We made a total of 27 recommendations to 
strengthen FAA's internal controls and compliance in its purchase card 
program, decrease wasteful purchases, and improve the accountability of 
assets in order to reduce vulnerability to improper and wasteful 
purchases. These included requiring centralized receiving of 
accountable assets and sensitive property items, improving physical 
security over the storage of computer related equipment, and following 
up on missing property items.
    Poor oversight and management of travel card programs led to high 
delinquency rates costing millions in lost rebates and increased ATM 
fees. For example, as of March 31, 2002, we found that over 8,000 Navy 
cardholders had $6 million in delinquent debt. During the period of our 
reviews, over 400 Air Force, 250 Navy, and 200 Army personnel committed 
potential bank fraud by writing three or more nonsufficient (NSF) fund 
checks to the Bank of America. Also, many cardholders used their cards 
for inappropriate purchases, such as cruises and event tickets. Our 
review of Air Force travel cards, for example, found documented 
evidence of disciplinary actions in less than half of the cases 
reviewed where cardholders wrote NSF checks, or their accounts were 
charged off or placed in salary offset. We made several recommendations 
to DOD and the Air Force, including providing sufficient training to 
agency program coordinators to promote proper oversight of the travel 
card program, including effective monitoring for inappropriate 
transactions; reviewing the security clearances of cardholders with 
financial problems; and strengthening procedures for canceling cards of 
employees leaving the service. DOD and the Air Force concurred and said 
that they had actions under way to address many of them.

Purchase card abuses
     At Education, a purchase cardholder made several 
fraudulent purchases from two Internet sites for pornographic services. 
The name of one of the sites--SlaveLaborProductions.com--should have 
caused suspicion when it appeared on the employees' monthly statement.
     At HUD, we found improper purchases totaling about $1 
million where HUD employees either split, or appeared to have split, 
purchases into multiple transactions to circumvent cardholder limits.
     At the two Navy units we reviewed, we identified over 
$11,000 of fraudulent purchases including clothing from Nordstrom, as 
well as improper, questionable, and abusive purchases, such as rentals 
of luxury cars and purchases of designer and high-cost leather goods 
such as leather purses costing up to $195 each.

           EXAMPLES OF ABUSIVE AIR FORCE TRAVEL CARD ACTIVITY
------------------------------------------------------------------------
                                                             Approximate
            Category              Examples of    Number of      dollar
                                    vendors    transactions     amount
------------------------------------------------------------------------
Cruises.........................  Carnival,              70       31,000
                                   Celebrity,
                                   Norwegian,
                                   and
                                   Princess
Gambling........................  Global Cash            79       14,000
                                   Access
Sports, concerts, and other       Dallas                223       31,000
 events.                           Cowboys,
                                   Backstreet
                                   Boys, and
                                   other
                                   Ticketmast
                                   er
                                   purchases
Gentlemen's clubs...............  Cheetah's             187       32,000
                                   Lounge,
                                   Deja-vu
                                   Showgirls
------------------------------------------------------------------------


  HUD SINGLE-FAMILY MORTGAGE INSURANCE AND RENTAL ASSISTANCE PROGRAMS

    HUD manages about $550 billion in insurance and $19 billion per 
year in rental assistance. The department relies on a complex network 
of thousands of third parties to manage their risk. We have made 
recommendations in a number of areas:
     Reducing rental subsidy overpayments: HUD estimates that 
rental subsidy overpayments in fiscal year 2000 were $2 billion--over 
10 percent of total program expenditures. A significant portion of this 
overpayment is attributable to tenants' underreporting of income. We 
have recommended steps to improve data sharing between HUD and the 
Department of Health and Human Services to help identify unreported 
income before rental subsidies are provided.\9\ HUD needs to ensure 
that its rental housing assistance programs operate effectively and 
efficiently, specifically that assistance payments are accurate, 
recipients are eligible, assisted housing meets quality standards, and 
contractors perform as expected.
     Reduce risk of losses in the single family housing 
program: HUD also needs to reduce the risk of losses in its single 
family housing program due to fraud, loan defaults, and poor management 
of foreclosed properties. Ineligible buyers sometimes fraudulently 
obtain loans, or loans are made on properties actually worth less than 
the loan amount, increasing the risk of default and losses. In 
addition, foreclosed properties are not always secured and maintained 
in a timely fashion and their condition can deteriorate, resulting in 
lower sales prices and limiting FHA's ability to recover its costs. 
HUD's IG has reported that fraud in the origination of mortgages of 
single-family properties continues to be the most pervasive problem 
uncovered by its investigations. We have reported on weaknesses in 
HUD's oversight of mortgage lenders and have made recommendations aimed 
at strengthening HUD's processes for approving and monitoring lenders 
and holding them accountable for poor performance.\10\ We have also 
recommended that HUD adopt a foreclosure process more like that used by 
other entities to better ensure that properties do not deteriorate and 
that it recoups more of its losses when the houses are sold.\11\ HUD 
needs to improve the management and oversight of its single-family 
housing programs to reduce its risk of financial losses.
     Improve acquisition management and monitoring of 
contractor performance. Contractors are responsible for managing and 
disposing of HUD's inventory of single-family and multifamily 
properties--properties that had a combined value of about $3 billion as 
of September 30, 2001. Our review of HUD's files and disbursements 
indicates that its oversight processes have not identified instances in 
which contractors were not performing as expected. Weaknesses in HUD's 
acquisition management limit its ability to readily prevent, identify, 
and address contractor performance problems. Without a systematic 
approach to oversight and adequate on-site monitoring, the department's 
ability to identify and correct contractor performance problems and 
hold contractors accountable is reduced. The resulting vulnerability 
limits HUD's ability to assure that it is receiving the services for 
which it pays.
Fraud in FHA Program
     A joint investigation between HUD's Inspector General and 
the Federal Bureau of Investigation uncovered a 20-person property 
flipping scheme in Chicago, IL, that resulted in 21 indictments and 
convictions and 12 jail sentences.
     The use of fraudulent documentation to qualify borrowers 
for FHA-insured mortgages had led to criminal indictments and 
convictions in several other communities.

HUD contractor performance oversight
    In one case, HUD paid $227,500 to have 15,000 square feet of 
concrete replaced; however, we determined that only about one-third of 
the work HUD paid for was actually performed.\12\

              IMPROVING ECONOMY, EFFICIENCY, EFFECTIVENESS

    Important as safeguarding funds from fraud, waste, abuse and 
mismanagement is, I believe that for long-lasting improvements in 
government performance the Federal Government needs to move to the next 
step: to widespread opportunities to improve the economy, efficiency 
and effectiveness of existing Federal goals and program commitments. 
The basic goals of many Federal programs--both mandatory and 
discretionary--enjoy widespread support. That support only makes it 
more important for us to pay attention to the substantial opportunities 
to improve their cost effectiveness and the delivery of services and 
activities. No activity should be exempt from some key questions about 
its design and management.
    GAO's work illustrates numerous examples where programs can and 
should be changed to improve their impact and efficiency. Today I want 
to touch on some of these areas and highlight some significant 
opportunities for program changes that promise to improve their cost 
effectiveness. I recognize that many of these will prompt debate--but 
that debate is both necessary and healthy.
Key questions for program oversight
     Is the program targeted appropriately?
     Does the program duplicate or even work at cross purposes 
with related programs and tools?
     Is the program financially sustainable and are there 
opportunities for instituting appropriate cost sharing and recovery 
from nonfederal parties including private entities that benefit from 
Federal activities?
     Can the program be made more efficient through 
reengineering or streamlining processes or restructuring organizational 
roles and responsibilities?
     Are there clear goals, measures and data with which to 
track progress, benefits and costs?

                               TARGETING

    Our work has shown that scarce Federal funds could have a greater 
impact on program goals by improving their targeting to places or 
people most in need of assistance. Poorly targeted funding can result 
in providing assistance to recipients who have the resources and 
interest to undertake the subsidized activity on their own without 
Federal financing. Moreover, lax eligibility rules and controls can 
permit scarce funds to be diverted to clients with marginal needs for 
program funds.
     Grant programs: Many Federal grant programs with formula 
distributions to State and local governments are not well targeted to 
places with high needs but low fiscal capacity. As a result, recipients 
in wealthier areas may enjoy higher levels of Federal funds than harder 
pressed areas. Better targeting of grants offers a strategy to reduce 
Federal outlays by concentrating reductions in wealthier communities 
with comparatively fewer needs and greater capacity to finance services 
from their own resources. For such mandatory programs as Medicaid, 
Foster Care and Adoption Assistance, reimbursement formulas can be 
changed to better reflect relative need, geographic differences in the 
cost of services and State bases.
     Flood insurance losses: Repetitive flood losses are one of 
the major factors contributing to the financial difficulties facing the 
National Flood Insurance Program. Approximately 45,000 buildings 
currently insured under the National Flood Insurance Program have been 
flooded on more than one occasion and have received flood insurance 
claims payments of $1,000 or more for each loss. These repetitive 
losses account for about 38 percent of all program claims historically 
(currently about $200 million annually) even though repetitive-loss 
structures make up a very small portion of the total number of insured 
properties--at any one time, from 1 to 2 percent. The cost of these 
multiple-loss properties over the years to the program has been $3.8 
billion. One option that would increase savings would be for FEMA to 
consider eliminating flood insurance for certain repeatedly flooded 
properties.
     Medicare Incentive Payment Program: The Medicare Incentive 
Payment program was established in 1987 to provide a bonus payment for 
physicians to provide primary care in underserved areas. However, 
specialists receive most of the program dollars, even though primary 
care physicians have been identified as being in short supply. 
Shortages of specialists, if any, have not been determined. Moreover, 
since 1987 the Congress generally increased reimbursement rates for 
primary care services and reduced the geographic variation in physician 
reimbursement rates. HHS has acknowledged that structural changes to 
this program are necessary to better target incentive payments to rural 
areas with the highest degree of shortage. For example, if the 
program's intent is to improve access to primary care services in 
underserved rural areas, the bonus payments should be targeted and 
limited to physicians providing primary care services to underserved 
populations in rural areas with the greatest need.
     Social Security Government Pension Offset Provision: The 
Social Security Administration (SSA) administers the Government Pension 
Offset (GPO) provision requiring benefits to be reduced for persons 
whose Social Security entitlement is based on another person's Social 
Security coverage (usually a spouse's). The GPO prevents workers from 
receiving a full Social Security spousal benefit in addition to a 
pension from government employment not covered by Social Security. 
However, the law provides an exemption from the GPO if an individual's 
last day of State/local employment is in a position that is covered by 
both Social Security and the State/local government's pension system. 
In a recent study, we found instances where individuals performed work 
in Social Security covered positions for short periods to qualify for 
the GPO last day exemption. The practices we identified in Texas and 
Georgia alone could increase long-term benefit payments from the Social 
Security Trust Fund by $450 million.\13\ In our report and testimony on 
this topic we presented a matter for congressional consideration that 
the last-day GPO exemption be revised to provide for a longer minimum 
time period, and the House has passed necessary legislation that is 
pending in the Senate.

                             CONSOLIDATION

    GAO's work over the years has shown that numerous program areas are 
characterized by significant program overlap and duplication. In 
program area after program area, we have found that unfocused and 
uncoordinated programs cutting across Federal agency boundaries waste 
scarce resources, confuse and frustrate taxpayers and beneficiaries and 
limit program effectiveness.
     Food Safety: The Federal system to ensure the safety and 
quality of the Nation's food is inefficient and outdated. The Food 
Safety and Inspection Service within USDA is responsible for the safety 
of meat, poultry, eggs, and some egg products, while the Food and Drug 
Administration under HHS is responsible for the safety of most other 
foods. USDA, FDA and 10 other Federal agencies administer over 35 
different laws for food safety. The current system suffers from 
overlapping and duplicative inspections, poor coordination and 
inefficient allocation of resources. The Congress may wish to consider 
consolidating Federal food safety agencies under a single risk-based 
food safety inspection agency with a uniform set of food safety laws.
     Grants for Homeland Security: GAO identified at least 16 
different grant programs that can be used by the Nation's first 
responders to address homeland security needs. These grants are 
currently provided through two different directorates within the 
Department of Homeland Security, the Department of Justice, and the 
Department of Health and Human Services and serve State governments, 
cities and localities, counties, and others. Multiple fragmented grant 
programs create a confusing and administratively burdensome process for 
State and local officials and complicate their efforts to better 
coordinate preparedness and response to potential terrorist attacks 
across the wide range of specialized agencies and programs. In 
addressing the fragmentation prompted by the current homeland security 
grant system, Congress should consider consolidating separate 
categorical grants into a broader purpose grant with national 
performance goals defining results expected for the State and local 
partnership.
     Rural housing assistance: USDA and HUD both provide 
assistance for rural housing, targeting some of the same kinds of 
households in the same markets. The programs of both agencies could be 
merged, using the same network of lenders. A consolidation of these 
programs building off the best practices of both programs would improve 
the efficiency with which the Federal Government delivers rural housing 
programs.

                             COST RECOVERY

    The allocation of costs that once made sense when programs were 
created needs to be periodically reexamined to keep up with the 
evolution of markets. In some cases, private markets and program 
beneficiaries can play greater roles in financing and delivery of 
program services.
     Public Power: The Federal Government began to market 
electricity following the construction of dams and major water projects 
primarily from the 1930s to the 1960s. However, the restructured and 
increasingly competitive electricity industry suggests that a 
reassessment of the roles and missions of Federal subsidies is needed. 
Although the Power Marketing Administrations (PMAs) are generally 
required to recover all costs, in fact in some cases rates do not 
recover full costs incurred by the Federal Government in producing, 
transmitting and marketing Federal power. The Congress has the option 
of requiring the PMAs to sell their power at market rates to better 
ensure the full recovery of these costs.
     Child Support Enforcement: The Child Support Enforcement 
Program is to strengthen State and local efforts to obtain child 
support for both families eligible for Temporary Assistance for Needy 
Families (TANF) and non-TANF families. From fiscal year 1984-98, non-
TANF caseloads and costs rose about 500 percent and 1200 percent, 
respectively. While states have the authority to fully recover the 
costs of their services, states have charged only minimal application 
and service fees for non-TANF clients, doing little to recover the 
Federal Government's 66 percent share of program costs. In fiscal year 
1998, for example, State fee practices returned about $49 million of 
the estimated $2.1 billion spent to provide non-TANF services. To 
defray some of the costs of child support programs, Congress could 
require that mandatory application fees should be dropped and replaced 
with a minimum percentage service fee on successful collections for 
non-TANF families.

      BEYOND PROGRAM DESIGN: OPERATIONAL ECONOMY, EFFICIENCY AND 
                             EFFECTIVENESS

    Beyond program management, there are governmentwide areas where 
major savings could come from improving economy, efficiency and 
effectiveness. Today I would like to highlight one GAO thinks is so 
important that we added it to the high-risk list--the management of 
Federal real property.
    Excess and underused property and deteriorating facilities present 
a real challenge--but also an opportunity to reap great rewards in 
terms of improved structure and savings for the Federal Government's 
operations. In the U.S. Government's fiscal year 2002 financial 
statements show an acquisition cost of more than $335 billion for the 
Federal Government's real property. This includes military bases, 
office buildings, embassies, prisons, courthouses, border stations, 
labs, and park facilities. Available governmentwide data suggest that 
the Federal Government owns roughly one-fourth of the total acreage of 
the Nation--about 636 million acres.
    Underutilized or excess property is costly to maintain. DOD alone 
estimates that it spends about $3 to $4 billion per year maintaining 
unneeded facilities. Excess DOE facilities cost more than $70 million 
per year, primarily for security and maintenance.
    There are opportunity costs--these buildings and land could be put 
to more cost-beneficial uses, exchanged for needed property, or sold to 
generate revenue for the government. Table 1 below highlights excess 
and underutilized property challenges faced by some of the major real 
property-holding agencies.

                                TABLE 1.--EXCESS PROPERTY CHALLENGES AT SOME OF THE MAJOR REAL PROPERTY--HOLDING AGENCIES
--------------------------------------------------------------------------------------------------------------------------------------------------------
                     Agency                                                     Excess and underutilized property challenge
--------------------------------------------------------------------------------------------------------------------------------------------------------
DOD                                                 Even with four rounds of base realignment and closures that reduced its holdings by 21 percent, DOD
                                                   recognized that it still had some excess and obsolete facilities. Accordingly, Congress gave DOD the
                                                            authority for another round of base realignment and closure in the fiscal year 2002 defense
                                                                                                      authorization act, scheduled for fiscal year 2005
VA                                                      VA recognizes that it has excess capacity and has an effort underway known as the Capital Asset
                                                          Realignment for Enhanced Services (CARES) that is intended to address this issue. VA recently
                                                  completed its initial CARES study involving consolidation of services among medical facilities in its
                                                                                                                                                 Great Lakes Network (including Chicago) as well as expansion of services in other locations. VA
                                                  identified 31 buildings that are no longer needed to meet veterans' health care needs in this network,
                                                                                                                 including 30 that are currently vacant
GSA                                                 GSA recognizes that it has many buildings that are not financially self-sustaining and/or for which
                                                    there is not a substantial, long-term Federal purpose. GSA is developing a strategy to address this
                                                                                                                                          problem. The L. Mendel Rivers Federal Building in Charleston, S.C. is a prime example of a highly
                                                                                                           visible, vacant Federal building held by GSA
DOE                                                    After shifting away from weapons production, DOE had 1,200 excess facilities totaling 16 million
                                                  square feet, and the performance of its disposal program had not been fully satisfactory, according to
                                                     DOE's Inspector General. Facility disposal activities have not been prioritized to balance mission
                                                       requirements, reduce risks, and minimize life-cycle costs. In some cases, disposal plans were in
                                                                                                                conflict with new facility requirements
USPS                                              The issue of excess and underutilized property will need to be part of USPS's efforts to operate more
                                                    efficiently. Facility consolidations and closures are likely to be needed to align USPS's portfolio
                                                                                                          more closely with its changing business model
State                                             Although States has taken steps to improve its disposal efforts and substantially reduce its inventory
                                                       of unneeded properties, it reported that 92 properties were potentially available for sale as of
                                                    September 30, 2001, with an estimated value of more than $180 million. State has begun the disposal
                                                    process for some of these properties. State will also need to dispose of additional facilities over
                                                   the next several years as it replaces more than 180 vulnerable embassies and consulates for security
                                                     reasons. Security also has become a primary factor in considering the retention and sale of excess
                                                                                                                                               property
--------------------------------------------------------------------------------------------------------------------------------------------------------


    If the Federal Government is to more effectively respond to the 
challenges associated with strategically managing its multibillion 
dollar real property portfolio, a major departure from the traditional 
way of doing business is needed. Better managing these assets in the 
current environment calls for a significant paradigm shift to find 
solutions. Solutions should not only correct the long-standing problems 
we have identified but also be responsive to and supportive of 
agencies' changing missions, security concerns, and technological needs 
in the 21st century. Solving the problems in this area will undeniably 
require a reconsideration of funding priorities at a time when budget 
constraints will be pervasive.
    Because of the breadth and complexity of the issues involved, the 
long-standing nature of the problems, and the intense debate about 
potential solutions that will likely ensue, current structures and 
processes may not be adequate to address the problems. Thus, as 
discussed in our high-risk report, there is a need for a comprehensive 
and integrated transformation strategy for Federal real property. This 
strategy could address challenges associated with having adequate 
capacity (people and resources) to resolve the problems. The 
development of a transformation strategy would demonstrate a strong 
commitment and top leadership support to address the risk. An 
independent commission or governmentwide task force may be needed to 
develop the strategy. We believe that OMB is uniquely positioned to be 
the catalyst for identifying and bringing together the stakeholders 
that would develop the transformation strategy, drawing on resources 
and expertise from the General Services Administration, the Federal 
Real Property Council, and other real property holding agencies. For 
example, OMB could assess agency real property activities as part of 
the executive branch management scorecard effort. Congress will need to 
play a key role in implementing the transformation strategy's roadmap 
for realigning and rationalizing the government's real property assets 
so that the portfolio is more directly tied to agencies' missions. 
Without measurable progress and a comprehensive strategy to guide 
improvements, real property will most likely remain on the high risk 
list.

                    REASSESSING WHAT GOVERNMENT DOES

    I have talked about the need to protect taxpayer dollars from 
fraud, waste, abuse and mismanagement and about the need to take 
actions improving the economy, efficiency and effectiveness of 
government programs, policies, and activities. However, to meet the 
challenges of today and the future, we must move beyond this to a more 
fundamental reassessment of what government does and how it does it.
    In part this requires looking at current Federal programs--both 
spending and tax--in terms of their goals and results. Why does the 
program/activity exist? Is the activity achieving its intended 
objective? If not, can it be fixed? If so, how? If not, what other 
approaches might succeed in achieving the goal/objective? More 
fundamentally, even if a program/activity is achieving its stated 
mission--or can be ``fixed'' so that it does so--where does it fit in 
competition for Federal resources? Is its priority today higher or 
lower than before given the Nation's evolving challenges and fiscal 
constraints?
    It also requires asking whether an existing program, policy, or 
activity ``fits'' the world we face today and in the future. It is 
important not to fall into the trap of accepting all existing 
activities as ``givens'' and subjecting new proposals to greater 
scrutiny than existing ones undergo. Think about how much the world has 
changed in the past few decades and how much it will change in future 
years.
    One example of a disconnect between program design and today's 
world is the area of Federal disability programs--a disconnect great 
enough to warrant designation as a ``high risk'' area this year. 
Already growing, disability programs are poised to surge as baby 
boomers age, yet the programs remain mired in outdated economic, 
workforce, and medical concepts and are not well positioned to provide 
meaningful and timely support to disabled Americans. Disability 
criteria have not been updated to reflect the current state of science, 
medicine, technology and labor market conditions. Using outdated 
information, agencies--primarily SSA and VA--risk overcompensating some 
individuals while undercompensating or denying compensation entirely to 
others. Although Federal disability programs present serious management 
challenges and can be vulnerable to fraud or abuse, the overarching and 
longer-term challenge is to design a disability system for the modern 
world.
    We should be striving to maintain a government that is effective 
and relevant to a changing society--a government that is as free as 
possible of outmoded commitments and operations that can 
inappropriately encumber the future. The difference between ``wants,'' 
``needs,'' and overall ``affordability'' and long-term 
``sustainability'' is an important consideration when setting overall 
priorities and allocating limited resources.
    Finally, any reassessment of Federal missions and strategies should 
include the entire set of tools the Federal Government can use to 
address national objectives. These tools include discretionary and 
mandatory spending, loans and loan guarantees, tax provisions, and 
regulations. If we are evaluating Federal support for higher education, 
we need to look not only at spending but also at tax preferences. The 
same thing is true for health care. The figure below shows Federal 
activity in health care and Medicare budget functions in fiscal year 
2000: $37 billion in discretionary BA, $319 billion in entitlement 
outlays, $5 million in loan guarantees, and $91 billion in tax 
expenditures.
    Government must operate in the context of broader trends shaping 
the United States and its place in the world. These include:
     National and global response to terrorism and other 
threats to personal and national security.
     Increasing interdependence of enterprises, economies, 
civil society, and national governments--a.k.a globalization.
     The shift to market-oriented, knowledge-based economies.
     An aging and more diverse U.S. population.
     Advances in science & technology and the opportunities & 
challenges created by these changes.
     Challenges and opportunities to maintain & improve the 
quality of life for the Nation, communities, families & individuals.
     The increasingly diverse nature of governance structures 
and tools.

    In addition to the above trends, growing fiscal challenges at the 
Federal, State, and local levels are of great concern. Furthermore, 
rising health care costs and other health care related challenges 
(e.g., access, quality) are of growing concern crossing all sectors of 
the economy and all geopolitical boundaries.
    Government leaders are responsible and accountable for making 
needed changes to position the Federal Government to take advantage of 
emerging opportunities and to meet future challenges. Focusing on 
accountable, results-oriented management can help the Federal 
Government operate effectively within a broad network that includes 
other governmental organizations, nongovernmental organizations, and 
the private sector.

                           CONCLUDING REMARKS

    There is a Chinese curse that says, ``May you live in interesting 
times.'' We clearly do. I would prefer to see this not as a curse, but 
as a challenge and an opportunity.
    Tackling areas at risk for fraud, waste, abuse and mismanagement 
will require determination, persistence and sustained attention by both 
agency managers and Congressional committees. Large and complex Federal 
agencies must effectively use a mixture of critical resources and 
improved processes to improve their economy, efficiency, and 
effectiveness, Congressional oversight will be key.
    In view of the broad trends and long-term fiscal challenges facing 
the Nation, there is a need to fundamentally review, reassess, and 
reprioritize the proper role of the Federal Government, how the 
government should do business in the future, and, in some instances, 
who should do the government's business in the 21st century. It is also 
increasingly important that Federal programs use properly designed and 
aligned tools to manage effectively across boundaries work with 
individual citizens, other levels of government, and other sectors. 
Evaluating the role of government and the programs it delivers is key 
in considering how best to address the Nation's most pressing 
priorities. Periodic reviews of programs in the budget, on the 
mandatory and discretionary sides of the budget as well as tax 
preferences, can prompt a healthy reassessment of our priorities and of 
the changes needed in program design, resources and management needed 
to get the results we collectively decide we want from government.
    Needless to say, we at GAO are pleased to help Congress in this 
very important work.

                ATTACHMENT I.--GAO'S 2003 HIGH-RISK LIST
------------------------------------------------------------------------
                                                                 Year
                    2003 High-risk areas                      designated
                                                               high risk
------------------------------------------------------------------------
          Addressing Challenges In Broad-based Transformations
Strategic Human Capital Management\1\.......................       2001
U.S. Postal Service Transformation Efforts and Long-Term           2001
 Outlook\1\.................................................
Protecting Information Systems Supporting the Federal              1997
 Government and the Nation's Critical Infrastructures.......
Implementing and Transforming the New Department of Homeland       2003
 Security...................................................
Modernizing Federal Disability Programs\1\..................       2003
Federal Real Property\1\....................................       2003
         Ensuring Major Technology Investments Improve Services
FAA Air Traffic Control Modernization.......................       1995
IRS Business Systems Modernization..........................       1995
DOD Systems Modernization...................................       1995
                Providing Basic Financial Accountability
DOD Financial Management....................................       1995
Forest Service Financial Management.........................       1999
FAA Financial Management....................................       1999
IRS Financial Management....................................       1995
              Reducing Inordinate Program Management Risks
Medicare Program\1\.........................................       1990
Medicaid Program\1\.........................................       2003
Earned Income Credit Noncompliance..........................       1995
Collection of Unpaid Taxes..................................       1990
DOD Support Infrastructure Management.......................       1997
DOD Inventory Management....................................       1990
HUD Single-Family Mortgage Insurance and Rental Assistance         1994
 Programs...................................................
Student Financial Aid Programs..............................       1990
         Managing Large Procurement Operations More Efficiently
DOD Weapon Systems Acquisition..............................       1990
DOD Contract Management.....................................       1992
Department of Energy Contract Management....................       1990
NASA Contract Management....................................       1990
------------------------------------------------------------------------
Source: GAO

Notes: \1\Additional authorizing legislation is likely to be required as
  one element of addressing this high-risk area.

 Attachment II.--Selected Reports Regarding Specific Examples Cited in 
                               Testimony

    Erroneous payments, Misuse of benefits, Child and Adult Care Food 
Program (CACFP), National School Lunch Program:
    Food Assistance: WIC Faces Challenges in Providing Nutrition 
Services. GAO-02-142. Washington, DC: December 7, 2001.
    Food Stamp Program: Better Use of Electronic Data Could Result in 
Disqualifying More Recipients Who Traffic Benefits. GAO/RCED-00-61. 
Washington, DC: March 7, 2000.
    Food Assistance: Efforts to Control Fraud and Abuse in the Child 
and Adult Care Food Program Should Be Strengthened. GAO/RCED-00-12. 
Washington, DC: November 29, 1999.
    Food Stamp Program: Storeowners Seldom Pay Financial Penalties Owed 
for Program Violations. GAO/RCED-99-91. Washington, DC: May 11, 1999.
    Credit Card Abuse:
    Purchase Cards: Control Weaknesses Leave the Air Force Vulnerable 
to Fraud, Waste, and Abuse. GAO-03-292. Washington, DC: December 20, 
2002.
    Government Purchase Cards: Control Weaknesses Expose Agencies to 
Fraud and Abuse. GAO-02-676T. Washington, DC: May 1, 2002.
    FAA Purchase Cards: Weak Controls Resulted in Instances of Improper 
and Wasteful Purchases and Missing Assets. GAO-03-405. Washington, DC: 
March 21, 2003.
    HUD Single-Family Mortgage Insurance and Rental Assistance 
Programs:
    U.S. General Accounting Office, Financial Management: Strategies to 
Address Improper Payments at HUD, Education and Other Federal Agencies, 
GAO-03-167T (Washington, DC: Oct 3, 2002).
    U.S. General Accounting Office, Strategies to Manage Improper 
Payments: Learning from Public and Private Sector Organizations, GAO-
02-69G (Washington, DC: October 2001).
    U.S. General Accounting Office, Major Management Challenges and 
Program Risks, Department of Housing and Urban Development, GAO-01-248 
(Washington, DC: January 2001).
    U.S. General Accounting Office, HUD Management: HUD's High-Risk 
Program Areas and Management Challenges, GAO-02-869T (Washington, DC: 
July 24, 2002).
    U.S. General Accounting Office, Financial Management: Coordinated 
Approach Needed to Address the Government's Improper Payments Problems, 
GAO-02-749 (Washington, DC: Aug 9, 2002).
    DOD Improper Payments:
    U.S. General Accounting Office, Financial Management: Coordinated 
Approach Needed to Address the Government's Improper Payments Problems, 
GAO-02-749 (Washington, DC: Aug 9, 2002).
    U.S. General Accounting Office, Department of Defense: Status of 
Achieving Key Outcomes and Addressing Major Management Challenges, GAO-
01-783 (Washington, DC: June 25, 2001).
    Grant Programs:
    Formula Grants: Effects of Adjusted Population Counts on Federal 
Funding to States. GAO/HEHS-99-69. Washington, DC: February 26, 1999.
    Medicaid Formula: Effects of Proposed Formula on Federal Shares of 
State Spending. GAO/HEHS-99-29R. Washington, DC: February 19, 1999.
    Welfare Reform: Early Fiscal Effect of the TANF Block Grant. GAO/
AIMD-98-137. Washington, DC: August 22, 1998.
    Public Housing Subsidies: Revisions to HUD's Performance Funding 
System Could Improve Adequacy of Funding. GAO/RCED-98-174. Washington, 
DC: June 19, 1998.
    School Finance: State Efforts to Equalize Funding Between Wealthy 
and Poor School Districts. GAO/HEHS-98-92. Washington, DC: June 16, 
1998.
    School Finance: State and Federal Efforts to Target Poor Students. 
GAO/HEHS-98-36. Washington, DC: January 28, 1998.
    School Finance: State Efforts to Reduce Funding Gaps Between Poor 
and Wealthy Districts. GAO/HEHS-97-31. Washington, DC: February 5, 
1997.
    Federal Grants: Design Improvements Could Help Federal Resources Go 
Further. GAO/AIMD-97-7. Washington, DC: December 18, 1996.
    Public Health: A Health Status Indicator for Targeting Federal Aid 
to States. GAO/HEHS-97-13. Washington, DC: November 13, 1996.
    School Finance: Options for Improving Measures of Effort and Equity 
in Title I. GAO/HEHS-96-142. Washington, DC: August 30, 1996.
    Highway Funding: Alternatives for Distributing Federal Funds. GAO/
RCED-96-6. Washington, DC: November 28, 1995.
    Ryan White Care Act of 1990: Opportunities to Enhance Funding 
Equity. GAO/HEHS-96-26. Washington, DC: November 13, 1995.
    Department of Labor: Senior Community Service Employment Program 
Delivery Could Be Improved Through Legislative and Administrative 
Action. GAO/HEHS-96-4. Washington, DC: November 2, 1995.
    Flood Insurance Losses:
    Flood Insurance: Information on Financial Aspects of the National 
Flood Insurance Program. GAO/T-RCED-00-23. Washington, DC: October 27, 
1999.
    Flood Insurance: Information on Financial Aspects of the National 
Flood Insurance Program. GAO/T-RCED-99-280. Washington, DC: August 25, 
1999.
    Flood Insurance: Financial Resources May Not Be Sufficient to Meet 
Future Expected Losses. GAO/RCED-94-80. Washington, DC: March 21, 1994.
    Medicare Incentive Payment Programs:
    Physician Shortage Areas: Medicare Incentive Payments Not an 
Effective Approach to Improve Access. GAO/HEHS-99-36. Washington, DC: 
February 26, 1999.
    Health Care Shortage Areas: Designations Not a Useful Tool for 
Directing Resources to the Underserved. GAO/HEHS-95-200. Washington, 
DC: September 8, 1995.
    Social Security Pension Offset Provision:
    Social Security Administration: Revision to the Government Pension 
Offset Exemption Should Be Considered. GAO-02-950. Washington, DC: 
August 15, 2002.
    Social Security: Congress Should Consider Revising the Government 
Pension Offset ``Loophole''. GAO-03-498T. Washington, DC: February 27, 
2002.
    Food Safety:
    Food Safety: CDC Is Working to Address Limitations in Several of 
Its Foodborne Surveillance Systems. GAO-01-973. Washington, DC: 
September 7, 2001.
    Food Safety: Federal Oversight of Shellfish Safety Needs 
Improvement. GAO-01-702. Washington, DC: July 9, 2001.
    Food Safety: Overview of Federal and State Expenditures. GAO-01-
177. Washington, DC: February 20, 2001.
    Food Safety: Federal Oversight of Seafood Does Not Sufficiently 
Protect Consumers. GAO-01-204. Washington, DC: January 31, 2001.
    Food Safety: Actions Needed by USDA and FDA to Ensure That 
Companies Promptly Carry Out Recalls. GAO/RCED-00-195. Washington, DC: 
August 17, 2000.
    Food Safety: Improvements Needed in Overseeing the Safety of 
Dietary Supplements and ``Functional Foods''. GAO/RCED-00-156. 
Washington, DC: July 11, 2000.
    Meat and Poultry: Improved Oversight and Training Will Strengthen 
New Food Safety System. GAO/RCED-00-16. Washington, DC: December 8, 
1999.
    Food Safety: Agencies Should Further Test Plans for Responding to 
Deliberate Contamination. GAO/RCED-00-3. Washington, DC: October 27, 
1999.
    Food Safety: U.S. Needs a Single Agency to Administer a Unified, 
Risk-Based Inspection System. GAO/T-RCED-99-256. Washington, DC: August 
4, 1999.
    Food Safety: Opportunities to Redirect Federal Resources and Funds 
Can Enhance Effectiveness. GAO/RCED-98-224. Washington, DC: August 6, 
1998.
    Food Safety: Federal Efforts to Ensure the Safety of Imported Foods 
Are Inconsistent and Unreliable. GAO/RCED-98-103. Washington, DC: April 
30, 1998.
    Food Safety: Changes Needed to Minimize Unsafe Chemicals in Food. 
GAO/RCED-94-192. Washington, DC: September 26, 1994.
    Food Safety and Quality: Uniform Risk-based Inspection System 
Needed to Ensure Safe Food Supply. GAO/RCED-92-152. Washington, DC: 
June 26, 1992.
    Grants for Homeland Security:
    Federal Assistance: Grant System Continues to Be Highly Fragmented. 
GAO-03-718T. Washington, DC: April 29, 2003.
    Multiple Employment and Training Programs: Funding and Performance 
Measures for Major Programs. GAO-03-589. Washington, DC: April 18, 
2003.
    Managing for Results: Continuing Challenges to Effective GPRA 
Implementation. GAO/T-GGD-00-178. Washington, DC: July 20, 2000.
    Workforce Investment Act: States and Localities Increasingly 
Coordinate Services for TANF Clients, but Better Information Needed on 
Effective Approaches. GAO-02-696. Washington, DC: July 3, 2002.
    Fundamental Changes are Needed in Federal Assistance to State and 
Local Governments. GAO/GGD-75-75. Washington, DC: August 19, 1975.
    Rural Housing Assistance:
    Rural Housing Programs: Opportunities Exist for Cost Savings and 
Management Improvement. GAO/RCED-96-11. Washington, DC: November 16, 
1995.
    Public Power:
    Congressional Oversight: Opportunities to Address Risks, Reduce 
Costs, and Improve Performance. GAO/T-AIMD-00-96. Washington, DC: 
February 17, 2000.
    Federal Power: The Role of the Power Marketing Administrations in a 
Restructured Electricity Industry. GAO/T-RCED/AIMD-99-229. Washington, 
DC: June 24, 1999.
    Federal Power: PMA Rate Impacts, by Service Area. GAO/RCED-99-55. 
Washington, DC: January 28, 1999.
    Federal Power: Regional Effects of Changes in PMAs' Rates. GAO/
RCED-99-15. Washington, DC: November 16, 1998.
    Power Marketing Administrations: Repayment of Power Costs Needs 
Closer Monitoring. GAO/AIMD-98-164. Washington, DC: June 30, 1998.
    Federal Power: Options for Selected Power Marketing 
Administrations' Role in a Changing Electricity Industry. GAO/RCED-98-
43. Washington, DC: March 6, 1998.
    Federal Electricity Activities: The Federal Government's Net Cost 
and Potential for Future Losses. GAO/AIMD-97-110 and 110A. Washington, 
DC: September 19, 1997.
    Federal Power: Issues Related to the Divestiture of Federal 
Hydropower Resources. GAO/RCED-97-48. Washington, DC: March 31, 1997.
    Power Marketing Administrations: Cost Recovery, Financing, and 
Comparison to Nonfederal Utilities. GAO/AIMD-96-145. Washington, DC: 
September 19, 1996.
    Federal Power: Outages Reduce the Reliability of Hydroelectric 
Power Plants in the Southeast. GAO/T-RCED-96-180. Washington, DC: July 
25, 1996.
    Federal Power: Recovery of Federal Investment in Hydropower 
Facilities in the Pick-Sloan Program. GAO/T-RCED-96-142. Washington, 
DC: May 2, 1996.
    Federal Electric Power: Operating and Financial Status of DOE's 
Power Marketing Administrations. GAO/RCED/AIMD-96-9FS. Washington, DC: 
October 13, 1995.
    Child Support Enforcement:
    Child Support Enforcement: Clear Guidance Would Help Ensure Proper 
Access to Information and Use of Wage Withholding by Private Firms. 
GAO-02-349, March 26, 2002.
    Child Support Enforcement: Effects of Declining Welfare Caseloads 
Are Beginning to Emerge. GAO/HEHS-99-105. Washington, DC: June 30, 
1999.
    Welfare Reform: Child Support an Uncertain Income Supplement for 
Families Leaving Welfare. GAO/HEHS-98-168. Washington, DC: August 3, 
1998.
    Child Support Enforcement: Early Results on Comparability of 
Privatized and Public Offices. GAO/HEHS-97-4. Washington, DC: December 
16, 1996.
    Child Support Enforcement: Reorienting Management Toward Achieving 
Better Program Results. GAO/HEHS/GGD-97-14. Washington, DC: October 25, 
1996.
    Child Support Enforcement: States' Experience with Private 
Agencies' Collection of Support Payments. GAO/HEHS-97-11. Washington, 
DC: October 23, 1996.
    Child Support Enforcement: States and Localities Move to Privatized 
Services. GAO/HEHS-96-43FS. Washington, DC: November 20, 1995.
    Child Support Enforcement: Opportunity to Reduce Federal and State 
Costs. GAO/T-HEHS-95-181. Washington, DC: June 13, 1995.

                               End Notes

    \1\ While Social Security and Medicare are the largest direct 
spending or mandatory programs, this category also includes such others 
as farm price supports, insurance programs, food stamps, TANF block 
grants to the states, Federal civilian and military pension and health.
    \2\ U.S. General Accounting Office, High-Risk Series: An Update, 
GAO-03-119 (Washington, DC: January 2003).
    \3\ Attached to this testimony is a list of selected GAO reports 
related to the specific examples cited.
    \4\ U.S. General Accounting Office, Medicare Home Health: 
Prospective Payment System Will Need Refinement as Data Become 
Available, GAO-HEHS-00-9 (Washington, DC: April 7, 2000); and Medicare 
Home Health: Prospective Payment System Could Reverse Recent Declines 
in Spending, GAO-HEHS-00-176 (Washington, DC: Sept. 8, 2000).
    \5\ Medicare: Payments for Covered Outpatient Drugs Exceed 
Providers' Cost, GAO-01-1118 (Washington, DC: Sept. 21, 2001).
    \6\ Enterprise architecture is an institutional blueprint that 
defines in both business and technology terms the organizations current 
and target operating environments and provides a transition roadmap.
    \7\ U.S. General Accounting Office, Food Stamp Program: Storeowners 
Seldom Pay Financial Penalties Owed for Program Violations, GAO/RCED-
99-91. (Washington, DC: May 11, 1999).
    \8\ U.S. General Accounting Office, Food Assistance: Efforts to 
Control Fraud and Abuse in the Child and Adult Care Food Program Should 
Be Strengthened, GAO/RCED-00-12. (Washington, DC: Nov. 29, 1999).
    \9\ U.S. General Accounting Office, Benefit and Loan Programs: 
Improved Data Sharing Could Enhance Program Integrity, GAO/HEHS-00-19, 
(Washington, DC, Sept. 13, 2000).
    \10\ U.S. General Accounting Office, Single-Family Housing: 
Stronger Oversight of FHA Lenders Could Reduce HUD's Insurance Risk, 
GAO/RCED-00-112 (Washington, DC: April 28, 2000).
    \11\ U.S. General Accounting Office, Single-Family Housing: 
Opportunities to Improve Federal Foreclosure and Property Sales 
Processes, GAO-02-305 (Washington, DC: Apr. 17, 2002).
    \12\ U.S. General Accounting Office, Financial Management: 
Strategies to Address Improper Payments at HUD, Education and Other 
Federal Agencies, GAO-03-167T (Washington, DC: Oct. 3, 2002).
    \13\ We calculated this figure by multiplying the number of last-
day cases reported in Texas and Georgia (4,819) by SSA data on the 
average annual offset amount ($4,800) and the average retirees life 
expectancy upon receipt of spousal benefits (19.4 years). This estimate 
may over/under estimate costs due to the use of averages, the exclusion 
of inflation/cost-of-living/net present value adjustments, lost 
investment earnings by the Trust Funds, and other factors that may 
affect the receipt of spousal benefits.

    Chairman Nussle. I thank you, General Walker, for your 
testimony. Would you give us some examples that you find most 
egregious within this category? You have provided us with a 
long list of examples, but I was hoping that you would pull out 
a few that you thought were, in your opinion, from your 
experience, the most egregious examples of waste, fraud, abuse 
and mismanagement.
    Mr. Walker. Let me give you some examples. Whether or not 
they are egregious is in the eye of the beholder, but they all 
involve a lot of money, so I think that is the common 
denominator. There are several dimensions in Medicare. And to 
put it in proper context, Medicare's improper payments last 
year were estimated to be a little over $13 billion. That is a 
lot of money. It is important to note that not all improper 
payments represent waste, fraud, abuse and mismanagement. In 
some cases it is a situation where we paid twice and we 
ultimately recover down the road, but shouldn't have paid 
twice. Now that $13.2 billion roughly is way too high, but it 
is also down from about $24 billion several years ago. We are 
making some progress but we have a ways to go.
    As you can imagine, given the amount of money in Medicare 
and given the fact that most of Medicare is administered by 
third parties, there are tremendous opportunities for gaming 
and that is an area we need to stay on top of.
    Another example is we are not getting the best deal on 
Medicare. You would think Medicare would be getting the best 
prices. We are not always getting the best prices that one 
would expect we would get given the size of the purchaser we 
are. The Federal Government is not always going after people 
for debt collection either.
    On Medicaid: Medicaid represents a high risk area and is on 
a high risk list along with Medicare. Medicaid is a tremendous 
financial burden for States. It is probably one of their 
biggest and fastest growing financial burdens. States are 
trying to come up with innovative ways to increase their 
Federal payment. Some would call them schemes, and we 
constantly have to be vigilant to make sure that we are 
fighting against schemes that result in the Federal Government 
paying more than it should.
    Earned income tax credit, several billion dollars a year 
with regard to the earned income tax credit. Now in fairness, 
this is a dual issue. For one thing, it needs to be streamlined 
and simplified. It is just way too complex and we need to 
streamline and simplify it so people who are truly deserving of 
getting the unearned income tax credit can do so. On the other 
hand, we also need to have more aggressive enforcement to make 
sure that only those individuals who are truly eligible for the 
benefit receive it.
    Food assistance: In the food stamp programs and the school 
lunch programs, there is evidence that there are significant 
instances where individuals who are not eligible to receive 
benefits. Again, we want to make sure that the people who are 
eligible receive those benefits, but we got to have adequate 
transparency and appropriate enforcement and accountability 
mechanisms to make sure those who are not eligible in fact do 
not receive the benefits.
    So I am focusing Mr. Chairman, right now on the fraud, 
waste, abuse and mismanagement because that is the subject of 
this hearing. We have specific examples and I have several of 
my managing directors here who can drill down as far as you 
want to go on any of these topics.
    Chairman Nussle. I was amazed at--the travel card issue is 
just amazing. The examples of cruises being purchased, you know 
Carnival cruises, Celebrity cruises, Norwegian, Princess 
cruises. Again, these aren't going to add up to the national 
debt, but it is just amazing that this kind of thing continues 
to go on.
    Is there a common denominator that you find in these 
programs? In looking at these programs, are there common 
characteristics that are part of these programs that possibly 
one reform or another might help us? Do they tend to be more 
health programs? Do they tend to be--I guess I am looking for a 
common denominator and maybe you are not able to put it in that 
kind of a general term.
    Mr. Walker. Well, there are certain common elements I would 
say. First, I think we have to recognize that when you are 
talking about fraud, waste and abuse, the greatest 
opportunities are where the most money is. The other thing we 
can say is that for any system to work, whether it be a health 
care system, a corporate governance system, or weapons 
acquisition system, you really have to have three elements. You 
have to have incentives for people to do the right thing, 
transparency to provide reasonable assurance that people will 
do the right thing because somebody is looking, and appropriate 
accountability, which includes enforcement mechanisms with 
swift and sure penalties if people do the wrong thing.
    I would respectfully suggest that in health care we don't 
have the right incentives, transparency, and accountablity. We 
also don't have them in certain other areas, such as earned 
income tax credit. And I think part of the other problem it 
that a lot of these areas are very complex. There are pages and 
pages of rules and regulations. Anybody who, even in a good 
faith effort, is trying to comply, might find it extremely 
difficult to comply.
    Thirdly, I would say another common element, at least in 
the case of health care, is that most of the claims 
administration work is being done by third party 
intermediaries. Since most of the work is being done by third 
party intermediaries, we don't have adequate transparency about 
who is getting paid for what. And the user of the services, the 
beneficiary, may not necessarily even see the bill. They don't 
even know who is getting billed for what. So we don't have 
adequate checks and balances with regard to certain of these 
activities. So I think there are certain common elements.
    I would be remiss, given that I am from GAO, if I didn't 
talk about needing to make sure these agencies and programs, 
including the Medicare claims administration contractors, have 
appropriate internal controls in place to provide for the 
appropriate checks and balances. These internal controls 
minimize the possibility of improper payments in the first 
instance, rather than having to try to go back and recover 
after the money is already gone.
    Chairman Nussle. Thank you, General. David Walker has to 
leave by noon and we have a lot of good bipartisan interest in 
this hearing, so I am going to limit my time to the 5 minutes. 
I have other questions, but I know other members do as well.
    Mr. Spratt.
    Mr. Spratt. Let me direct your attention, General Walker, 
to one particular provision on page 8 of your presentation 
about outpatient drugs. You state there Medicare pays less 
prices set by drug manufacturers, not prices that providers 
actually pay. In September, 2001, we reported that in 2000, 
Medicare paid over $1 billion more than other purchasers in 
outpatient drugs that the program covers. CMS has not acted 
upon our recommendation, and you footnote that to a study which 
was September 21, 2001. No response at all. Any explanation as 
to why they wouldn't try to negotiate downward the prices?
    Mr. Walker. I could have Bill Scanlon, who is our Managing 
Director for Health Care, say what the latest status is. Let me 
give a comment now. First, we are supposed to be getting best 
price and we are not always getting best price. CMS is 
absolutely overwhelmed. They have more than they can say grace 
over. We could be making recommendations for CMS, as we could 
the IRS and others, probably about every week. Bill, where do 
they stand on this, please?
    Chairman Nussle. Identify yourself for the record, too.
    Mr. Scanlon. My name is Bill Scanlon, Managing Director for 
Health Care.
    CMS has taken some action to try and eliminate some of the 
disparities that existed between what the different contractors 
were paying for drugs. As General Walker indicated, we have 
delegated a large portion of the Medicare program to private 
contractors and there was some variation in of the payment 
rates they were offering, which was a source of excessive 
payment. But beyond that, we are still operating with the same 
system that we had in place in 2001, in which we were paying 
the prices that drug manufacturers post but no one necessarily 
pays.
    Mr. Spratt. Isn't it a fact that the Veterans 
Administration more or less dictates or administers the prices 
it will pay?
    Mr. Scanlon. The Veterans Administration operates under 
statute that provides for a Federal supply schedule price. What 
the Congress has done is to use the leverage of the Medicaid 
program and said that if a drug manufacturer wants to sell its 
drugs to Medicaid beneficiaries, then it has to agree to 
Federal supply schedule prices, which are the best price that 
the drug manufacturer offers any purchaser. The Veterans 
Administration, DOD, and public hospitals all get that price.
    Mr. Spratt. And it is substantially lower?
    Mr. Scanlon. Much, much lower.
    Mr. Spratt. Couldn't we save billions then if Medicare did 
the same thing?
    Mr. Scanlon. We need to think about how Medicare differs 
from the Veterans Administration in terms of the delivery of 
drugs, but we can save billions by taking into account what the 
market prices are that drugs are available for and have 
Medicare pay based on those prices.
    Mr. Spratt. Let me read you a provision that is in the 
prescription drug bill coming to the House floor shortly called 
noninterference. In carrying out its duties with respect to the 
provision of qualified prescription drug coverage to 
beneficiaries under this title, the Administrator may not, one, 
require particular formulary; two, interfere in any way in 
negotiations between PDP sponsors and drug manufacturers, 
wholesalers or other suppliers of outpatient drugs; and, three, 
otherwise interfere with the competitive nature providing such 
coverage through sponsors and organizations.
    Does that mean the Federal Government would have to tie its 
hands and not use the clout of 40 million Medicare 
beneficiaries and negotiate downward prices?
    Mr. Scanlon. It actually would tie the hands of the 
government less than today. Right now, the statute requires 
that the government pay on the basis of a price called the 
average wholesale price, which I indicated was not a price. The 
provision in the prescription drug bill would allow the 
operators of these drug plans the leverage to negotiate their 
prices. They will probably do better than we are doing today.
    Mr. Spratt. But they could do still better if they did what 
the Veterans Administration does, right?
    Mr. Scanlon. That certainly is the case. When you are using 
the leverage of the entire Medicaid population and the Medicare 
population you do have incredible leverage. You need to be 
sensitive to the fact that the deal that you are going to get 
when you bring in a lot more consumers is not going to be as 
good as the deal that the Veterans Administration is getting 
today.
    Mr. Walker. Let me touch on that if I can. Part of the 
problem that we have is that government tends to look in silos. 
VA wants to get the best deal it can get. DOD wants to get the 
best deal it can get. The government is paying--actually, as we 
all know, government has no money, government is a 
clearinghouse. So if the taxpayers are paying, then we need to 
figure out how we can act more collectively so we can leverage 
our purchasing power. What that might mean is that the 
government and the taxpayers get a better deal in the 
aggregate, but maybe each agency doesn't get the same deal and 
some won't get quite as good a deal as they are getting right 
now. On the other hand in the aggregate we are better off. We 
need to start acting that way, in the collective best interest 
of the country, of the taxpayers rather than everybody trying 
to maximize their own deal.
    Mr. Spratt. So Medicare should use the collective clout of 
40 million beneficiaries to negotiate prices with drug 
suppliers, wholesalers and manufacturers?
    Mr. Walker. Well, I would say that we need to use the 
collective power of Medicare, Medicaid, civilian health care, 
military health care, et cetera, which is a lot more than 40 
million in order to get the best deal possible.
    Mr. Spratt. Thank you very much.
    Chairman Nussle. Mr. Schrock.
    Mr. Schrock. Thank you, Mr. Chairman. Thank you, General, 
for being here. This is the topic I am not sure we are going to 
get our hands around and I have been sitting here thinking the 
many minutes we have sat here and it is $69,000 a second, and 
that is overwhelming to think about. And when I look at the 
list you have here on some of the things they are spent on, and 
I know that I am a big supporter of DOD but I am just getting a 
little tired of some of the things that are going on over there 
as well, that we have to get our hands around this.
    I noticed you had here--this sheet you provided us, the 
high risk list. And apparently there were some issues for 
managing large procurement operations more efficiently. And 
they said they apparently tried to change some of that in 1992, 
DOD contract management. I am here to tell you that it is not 
working. It is an absolute disaster. I don't care what they 
said they fixed in 1992. It is not working. DOD financial 
management I am not sure is working. Systems modernization, 
whatever. But when we come up with some of these programs to 
change it, it doesn't change, I think what is the point. How 
can we get our hands around it? And I read all these things. 
And if I worked for somebody--if I had people working for me 
who took credit cards and went to Cheetah's Lounge and Deja Vu 
Showgirls, I would fire them so quick it would make your head 
spin. I don't care whether they are civil servants or not, they 
would go. But are we keeping these people around? Are we 
getting rid of them? Are we trying to get them to pay back 
their visit to Cheetah's Lounge, wherever the devil that is?
    Mr. Walker. We and the IG are trying to follow up to find 
out what type of action is being taken. I think it is important 
to note that with regard to the cards issue, there are two 
sides of this coin. Clearly this is an example of fraud, waste 
and abuse for which we should have zero tolerance, and we need 
to be serious about dealing with offenders. At the same time, I 
think we also have to recognize that when we went to the 
purchase card system, we actually saved the taxpayers a lot of 
money in the aggregate because we eliminated a lot of paperwork 
and a lot people who pushed papers to be able to do that.
    So yes, we need to have zero tolerance, but we don't want 
to taint the fact that we saved a lot of money by using 
purchase cards.
    Mr. Schrock. I understand. I don't know if it is Mr. Spratt 
who said it or not, but I too am concerned about the offshore 
businesses and what is going on there and I don't know how we 
get our hands around it. I was part of the group that went to 
that press conference where we said we were going to reduce the 
budgets by 1 percent, and I think if we can't there is 
something horribly wrong with this government, if we can't cut 
it by 1 percent. But what I am afraid is they will cut meat 
instead of the fat; instead of trying to figure out where the 
waste, fraud and abuse is, that they won't do that. They will 
pick something that really needs to be done, and I don't know 
how you prevent that from happening.
    And in the past--I will tell you when I was in the Navy, 
and I have told this story a million times and people are going 
to get sick hearing it--I ran an operation in California and it 
got to be September time frame and the comptroller from my 
organization back at the Pentagon would call and say you have X 
number of dollars left. You darn well better spend it. I don't 
care what you spend it on, you better spend it, because if you 
don't you want get a plus-up next year. What nonsense is that? 
And I said I can't do that. He said you have to do it. I didn't 
and they didn't like it very much. I am here, so it didn't hurt 
me too bad. But that attitude goes on and on everywhere in 
government. How do we get our hands around that?
    Mr. Walker. Let's take DOD, for example, we have had a 
number of exchanges with regard to acquisitions. DOD is No. 1 
in the world in fighting and winning armed conflicts. They are 
the global gold standard. Nobody is even close. So we are an A-
plus in effectiveness. We are No. 1. DOD is a D in economy, 
efficiency, transparency and accountability, in part because 
they have not really focused enough efforts in building the 
basic management infrastructures that are necessary no matter 
who the Secretary of Defense is, and no matter who the 
President is.
    So we end up having a lot of waste, economy, and efficiency 
problems. I will give you two examples on DOD. In our view, DOD 
should absolutely have to follow commercial best practices with 
regard to contracting and weapons system's, both the design and 
acquisition, unless there is a clear and compelling national 
security reason not to. They don't do that. In form they do, in 
practice they don't. That is billions. In addition to that, 
believe it or not, we have something called the Prompt Payment 
Act, which says if we don't pay contractors on a timely basis 
we have to pay them penalties. On the other hand, if we overpay 
them and they don't tell us and they benefit from that 
overpayment for months or years, they don't even have to pay us 
interest. We need to think about how we can level the playing 
field on some of these things as well.
    Mr. Schrock. In the Pentagon--and I am not trying to pick 
on the Pentagon. Believe me, I worked there for a number of 
years, so I know some of the problems. They have certain people 
that are going to be there forever and ever. They see the 
uniform people come in and say we don't like them. We will just 
wade them out because in 2 years they are gone. They see the 
political appointees come in and they know they are only going 
to be there as long as the President is in office. And it just 
keeps getting worse and worse and worse. And I think that is 
what Secretary Rumsfeld is trying to get his hands around. He 
is getting pinged on a lot about it, but I think he is trying 
to get his hands around it. I am not sure how he ever does 
that.
    Chairman Nussle. I thank the gentleman, and I would like to 
take the Chair's prerogative to welcome State Representative 
Willard Jenkins and his wife Kay from Iowa.
    Mr. Emanuel.
    Mr. Emanuel. I would like to welcome him as well. First of 
all, I appreciate doing this hearing and your time in this and 
your perspective that you got to look at this from an aerial 
perspective, which is both on the waste, fraud and abuse side 
as well as on the economy and efficiency standard. First, I got 
two parts, one on the waste, fraud and abuse and then on the 
economy and efficiency. But my own view is that since we are 
now going to be in Iraq for a good time, I would hope your 
agency is looking at how we are spending our dollars, and there 
are two stories that come to mind.
    Last week the New York Times ran a story that we give 
people in Iraq $20 a day for no-show jobs who aren't showing 
up. I am from Chicago. We think we know something about no-show 
jobs. And there was an American official there in the article 
of the New York Times who said who could quibble with that. I 
would like to raise my hand. I could quibble with that. So I 
hope as we spend our time and resources in Iraq that you guys 
are going to spend your time looking at how we are spending our 
dollars.
    And I also bring your attention to a story over the weekend 
by AP that showed that Halliburton, which got a no bid contract 
which was originally set for $77 million is now running at $184 
million. That is for a no bid contract. So I don't know if it 
gets the label waste, fraud or abuse. I would hope that given 
that we are now on the ticket for $1.67 billion in Iraq, with 
the dollars going and it is only going to continue over the 
next 10 years, that your agency continues to look at how we 
spend our dollars in Iraq and make sure that not only are we 
getting the most out of it but that you are a watchdog because 
that should not become a bottomless pit to our operation.
    Second, to the issue of efficiency and economy, and I know 
this hearing is on the waste, fraud and abuse area, but as we 
are debating the prescription drug benefit and on the health 
care area, I look forward to the day in which we got free 
market principles, as it relates to the pharmaceutical area, as 
it relates to the area of our patent laws and the frivolous 
lawsuits pharmaceutical companies impose on generic companies 
that prevent generics. Wall Street Journal did a story last 
week that generics are bringing down the price of drugs and 
also bringing down health care inflation, that we could then 
get generics to market quicker, we would actually control 
costs. We would not have a captive market that allowed 
pharmaceutical companies to participate in frivolous lawsuits.
    Second, if our consumers were allowed to import from--like 
we do cars, steel, wheat, meat, other products, from Germany, 
France, England, other major industrial nations, we are--our 
consumers are paying and also the government as an agent is 
paying 30-300 times more than for the same drugs that people 
overseas are paying in Europe. And if we had the free market 
principle operate in that area, we would bring down the cost of 
drugs.
    And finally in the area of taxes, there isn't a single 
cancer drug or AIDS drug that hasn't been developed with U.S. 
taxpayer dollars, and yet we get no return on our investment. I 
worked in the investment area. The IR return on equity in the 
private sector is 30 percent. We don't even get 10 percent in 
this country. You know in the private sector world when you 
don't get a return like that you are called dumb money. And we 
treat the taxpayer money--no drug today in cancer, AIDS or any 
area is not developed without U.S. taxpayer backed research.
    I am not just talking about on the R&D scale. I am talking 
about directly out of NIH and so when we look at efficiencies 
and economy, we need to start looking, and allowing the free 
market principles to start operating in the pharmaceutical 
area. I would hope also your agency would begin to look at that 
area, give recommendations to how we can get the most out of 
our tax dollar.
    Mr. Walker. Let me address both topics. First Iraq: We are 
on the case. I announced about 2 months ago in front of the 
Armed Services Committee that under my own authority as 
Comptroller General that we were going to be doing work with 
regard to general contracting activities in Iraq, not targeting 
specific companies, but while nobody is off the radar screen, 
looking at all major activities, and we are doing that. We have 
two people in Iraq right now. We expect we will end up having 
more people come in periodically to do work in a range of 
areas, and we will be staying on the case. We are also 
coordinating our activities with the Inspector Generals of the 
Department of Defense and AID because we don't want to be 
duplicating efforts.
    I might also add for the record that our son Andy, who is a 
Marine Corps company commander, just came back from Iraq.
    Mr. Emanuel. Thank you for his service.
    Mr. Walker. Thank you.
    Secondly, on the drug issue, that is an example of the need 
for targeting. We already have a $5.8 [trillion]-$5.9 trillion 
gap between promised benefits and funded benefits under Part A 
of Medicare. That is just Part A, not Part B. So there is going 
to have to be targeting for prescription drugs no matter what 
because we already have a huge hole that we have to fill up.
    You made a good point about drug costs here. Our son lived 
in Yuma, which is right on the border with Mexico. People 
regularly went right across the border and bought the same 
exact drug for a big percentage discount from what people in 
Arizona bought it for. My personal view is there are a range of 
issues. They are very complex. It is probably our No. 1 
domestic policy challenge, and we are on that case as well.
    Mr. Emanuel. Thank you. I see my time is up. Thank you, Mr. 
Chairman.
    Chairman Nussle. Thank you.
    Mr. Brown.
    Mr. Brown. Thank you, Mr. Chairman, and thank you, General 
Walker, for coming and giving us such good insight on what is 
happening. It is a real refreshment to hear somebody who really 
has concern. I guess my point is not a question but what can we 
do in the legislature to help enforce some of the items that 
you have discovered?
    Mr. Walker. Well, first, I think it is critically important 
to conduct active and ongoing oversight of all major programs, 
policies and activities. We have a fiduciary obligation to the 
taxpayers to do that.
    Secondly, I think Congress needs to relook at all of GAO's 
matters for consideration that require legislation, and ask 
``why not.''
    Thirdly, I think the departments and agencies need to be 
held accountable as part of the oversight process for why they 
have not adopted GAO recommendations. Fortunately, 79 percent 
of the recommendations that we made 4 years ago have been 
adopted, but 21 percent haven't. Furthermore there are some 
areas where I think legislation is going to be necessary. For 
example, the imbalance between the fact that we have to pay 
penalties when we don't pay on time, but if we overpay somebody 
they don't even have to pay interest. I mean that is something 
that is going to take legislation. Those are a few examples.
    Mr. Brown. We mentioned about the high cost of medicine, 
and Gil Gutknecht who is member of this committee, and has been 
a big proponent of trying to find some equity in resolving the 
differences between Europe and Mexico and Canada, I guess, and 
the prices of medicine here. Do you have any recommendations 
along those lines that we might be able to get something moving 
rather than just keep talking about it?
    Mr. Walker. Well, we are doing work right now in that area. 
We are doing a great deal of work on health care because I 
believe that is our biggest domestic challenge. Basically what 
is happening is we are paying for most of the world's 
pharmaceutical R&D. Most of the world has price controls on 
prescription drugs. I am not saying that is good or bad. It is 
just a fact. As you know, there are pros and cons to price 
controls. We have had experience in our country with them. But 
the simple fact of the matter is that most of the rest of the 
world has price controls. We don't, and the effect of that is 
we have more innovation in prescription drugs in this country 
than anywhere in the world, but we also pay more than our fair 
share of the R&D for those drugs.
    One out of the box thought that I will throw out, is that 
we have all kinds of multilateral negotiations to deal with 
issues where there is a global benefit. Why aren't we engaging 
in some type of multilateral efforts to figure out how we can 
avoid undercutting innovation with regard to drugs have a more 
equitable allocation of associated costs on a global basis. I 
don't even know if that is on anybody's radar screen, but it is 
an important issue.
    Mr. Brown. What would it take for us to get there? We all 
know the problem. What is the solution?
    Mr. Walker. Well, let me think a little bit more on it and 
I will get back to you. I wish I had performance based comp.
    [The information referred to follows:]

    Mr. Walker's Response to Mr. Brown's Question Regarding Global 
                       Prescription Drug Pricing

    Consideration of a global prescription drug pricing agreement would 
involve a thorough understanding of the complex price controls and 
regulations in other countries as well as pharmaceutical pricing 
practices. Most pharmaceutical companies are large corporations that 
pursue global research and marketing strategies. The economies of drug 
pricing in multinational markets are exceedingly complex, and nation-
specific controls on prices or spending are only one of several factors 
these companies take into account. Multinational agreements on pricing 
may be an important tool to ensure equitable contributions to drug 
research and development, although they would require careful 
evaluation to prevent potential unintended consequences.

    Chairman Nussle. Ms. Baldwin.
    Ms. Baldwin. Thank you, Mr. Chairman. I would like, if you 
could, for you to briefly recap or summarize the factors that 
get a program on the high risk list. And I have follow-ups, so 
just a summary would be ideal.
    Mr. Walker. There are quantitative factors and there are 
qualitative factors that deal with whether or not somebody is 
on our high risk list. And I might add that this is on our Web 
site, which is www.gao.gov. It is a process that we went 
through about 3 years ago that included involving comments from 
the executive branch agency so that they thought we were being 
fair about this. On the quantitative side generally it has got 
to involve something that is a billion dollars or more at risk. 
Now a billion dollars is real money. Obviously we are concerned 
about things below that, but it has got to involve at least a 
billion dollars or more in money. On the qualitative side it 
has to deal with safety, security, service delivery, a variety 
of other factors, and it is all laid out in detail on that Web 
site.
    So we have criteria not only as to how you get on, but we 
also have criteria as to how you get off, which generally means 
that you have demonstrated a commitment. You have a plan. You 
have made substantial progress. You are not done yet, but we 
are convinced that you are taking it seriously. You have made 
enough progress. You have enough of a plan to where we believe 
ultimately you can be successful and that as a result sometimes 
programs and/or operations come off.
    Ms. Baldwin. Again, for clarity, your high risk list 
includes both mandatory and discretionary spending programs?
    Mr. Walker. That is correct. It includes both mandatory and 
discretionary. And it also includes both tax and spending. For 
example, the earned income tax credit is on there.
    Ms. Baldwin. And for further clarity, your presentation 
started with the three levels of inquiry vulnerable for abuse, 
fraud, the promise of efficiency, economy, effectiveness, et 
cetera. Can you be in a high risk category for any of those 
levels, or is it just relating to the abuse, fraud and waste?
    Mr. Walker. It can relate to one or all three. Quite 
frequently it is several of the elements. My personal view is 
that if you look quantitatively, the biggest money is in the 
third element, the second biggest money is in the second 
element, the least money is in the first element, which is 
fraud, waste, abuse and mismanagement. There is big money in 
all three.
    However, I think the other thing that you have to consider 
is the confidence of the public in government operation to the 
extent that the public sees things that they view as fraud, 
waste and abuse, even though it may not be as much money as 
economy, efficiency and effectiveness or the last tier, that 
can undermine public confidence and you can't really put a 
price tag on that.
    Ms. Baldwin. Well, I appreciate the point you have just 
made that the big money is in level three, and you know, so on, 
working backwards. Because as you know, the budget resolution 
section 301 requires the authorizing committees of this 
Congress to identify changes in law by September 2 of this year 
that would require or would result in a reduction of mandatory 
spending to eliminate fraud, waste and abuse. So we are talking 
about all three levels, one that probably will produce the 
lesser of the three levels, and we are only talking about the 
mandatory programs, not the discretionary programs.
    I sit on the Judiciary Committee in addition to this 
committee, and the mandatory spending under the oversight of 
the Judiciary Committee includes compensation for radiation 
exposure, the September 11 funds for victims, witnesses and 
expenses at trials, public safety officer death benefits and 
independent counsel. Are any of those on your high risk list as 
being particularly vulnerable for waste, fraud or abuse?
    Mr. Walker. Not at the present time.
    Ms. Baldwin. OK. Are any of them likely to be added to that 
list before September 2 when we are to report back on changes 
in law?
    Mr. Walker. No. But I think it is also important to note 
that we only issue our high risk list every 2 years. The most 
recent was January of this year. We won't issue another one 
obviously until January 2005. So no, we won't have added the 
areas you mentioned.
    Ms. Baldwin. Thank you.
    Chairman Nussle. Thank you.
    Mr. Wicker.
    Mr. Wicker. Thank you very much and I appreciate you being 
with us. Two questions: Mr. Spratt mentioned during his opening 
remarks the initiative of the Clinton administration right at 
the beginning of their term headed by Vice President Gore and 
opined that the savings might have been in the hundreds of 
millions of dollars. Have you had a chance to look back over 
that? Did we call it reinventing government? Something like 
that. And have you had----
    Mr. Walker. National Performance Review. It was focused on 
reinventing government. We have issued reports on it and it 
probably won't be a surprise that it saved more money than some 
argue, but not nearly as much as was claimed. So that is kind 
of the story of life. It is somewhat in the middle.
    Mr. Wicker. And what would that figure be and are we 
continuing to realize savings from it or did we sort of drop 
that?
    Mr. Walker. I will be happy to provide for the record or 
provide to you directly a copy of the report that we issued. I 
don't recall the details off the top of my head. But this is a 
never ending process. This is something where we can never be 
off the case. In addition, it is not just the executive branch, 
but also it is the legislative branch. There has to be active 
and ongoing and assertive oversight, and candidly I don't think 
Congress has done enough of that.
    Mr. Wicker. I think you are right. The latest report that 
you are talking about, when was it issued?
    Mr. Walker. Oh, it was issued early in the current 
administration, I believe. But I will provide the exact date 
for the record.
    Mr. Wicker. Do you recall if the National Performance 
Review dealt mostly with discretionary spending or did it get 
on over into the mandatory, which are the big ticket items?
    Mr. Walker. I believe it dealt with both, but it was 
primarily discretionary. But again I will provide more 
information for the record.
    [The information referred to follows:]

 Mr. Walker's Response to Mr. Wicker's Question Regarding the National 
                          Persformance Review

    GAO issued several products on the National Partnership for 
Reinventing Government, also known as the National Performance Review 
(NPR). We are providing a copy of a May 4, 2000, testimony on 
Management Reform: Continuing Attention Is Needed to Improve Government 
Performance, GAO/T-GGD-00-128. This testimony summarizes much of GAO's 
work on selected aspects of the NPR viewed from a governmentwide 
perspective. Our work on selected NPR initiatives, as well as our other 
related work on Federal management issues, suggests an overriding 
theme, as we discussed at this hearing today--successful reinvention is 
not an end--state, but rather an ongoing process that seeks continuous 
improvements in performance, efficiency, and effectiveness. We are also 
providing a copy of our July 1999 report on NPR's Savings: Claimed 
Agency Savings Cannot All Be Attributed to NPR, GAO/GGD-99-120. In that 
report, we found that some savings were overstated because OMB counted 
savings twice, and two of the estimates were reported incorrectly, 
resulting in claims that were understated.
    NPR encompassed a wide range of different initiatives during the 
years it existed. NPR's efforts ranged from focusing on specific agency 
reforms to major crosscutting efforts, such as those to downsize the 
Federal Government and to streamline acquisition and regulatory 
processes, and included recommendations on both mandatory and 
discretionary programs. For example, NPR recommended the Department of 
Health and Human Services pursue options to ensure that adequate 
investments are made to avoid unnecessary payments from the trust funds 
and that the National Aeronautics and Space Administration (NASA) 
improve its contracting practices. Although progress has been made in 
many of the areas that NPR focused on, more needs to be done. Both the 
Medicare program and NASA contract management, for example, have been 
on GAO's high-risk list since its inception in 1990 and continue to 
experience problems that must be resolved. Our work examining 
governmentwide management reform efforts points to the importance of 
combined efforts by agencies and executive branch leadership along with 
support and oversight from Congress.

    Mr. Wicker. OK. I appreciate that, and I look forward to 
it.
    My second line of questioning is concerning government 
payments for medical mistakes. For example, if an employee of a 
hospital administers the wrong medicine, causing harm to a 
patient, it is my understanding that if that patient is a 
Medicare recipient, Medicare pays for the wrong medicine that 
was administered first and then pays the cost of correcting 
that bit of medical malpractice. If a Medicare recipient goes 
in for an amputation and the physician amputates the wrong 
foot, for example, then Medicare would pay to go back in and 
pay to amputate the right foot. Have you looked into this, and 
do you have any idea how much we are spending as a Federal 
Government to correct medical errors?
    Mr. Walker. Dr. Bill Scanlon just confirmed my 
understanding. You are correct. Medicare does pay for it. We 
have not looked into it historically. That may be an area that 
either we or the IG for Health and Human Services ought to look 
into. As you might imagine, probably the area where we have the 
biggest supply and demand imbalance for request for work versus 
resources to do it is health care. But part of that is the way 
that Medicare is designed. It pays for services. And you know, 
you are putting your finger on a good point because it is not 
just the cost. Obviously in a couple of the examples that you 
gave, I would imagine there would be a lot of litigation 
associated with the error because of the personal harm done as 
well.
    Mr. Wicker. Well, and I think probably we are too 
litigious, and I voted for legislation to correct that and to 
sort of get the pendulum swinging back in the other direction. 
But I think there is no question that malpractice exists just 
as lawsuit abuse exists, and it just seems to me that there 
ought to be some way, where when it is clear that the provider 
itself has caused the damage, that the provider should not 
benefit monetarily from correcting that at the expense of the 
taxpayers. So I hope we will look into that.
    Mr. Walker. Well, I think it is an area worth looking into. 
I think the key is what you just said, ``when it is clear.'' 
How do you define that? In a circumstance as clear as the one 
that you posited, I think all reasonable people would agree, we 
shouldn't be paying twice. The question is, where do you draw 
the line.
    Mr. Wicker. I guess the first question would be how to 
start quantifying that. Maybe I have identified a problem that 
is so small that we don't need to look at it, but I frankly 
doubt that.
    Mr. Walker. Well, one of the things I will do when we go 
back is to find out whether or not things like the example that 
you gave activities, would be deemed to be an, ``improper 
payment.'' It would be interesting just to know that because 
CMS should observe the radar screen, no doubt about and then 
determine what, if anything, should be done legislatively. If 
it takes legislation or whether something can be done 
administratively.
    Mr. Wicker. Thank you very much.
    Chairman Nussle. Mr. Edwards.
    Mr. Edwards. Thank you, Mr. Chairman. Mr. Chairman, let me 
first just say to you I welcome a hearing on cutting waste, 
fraud and abuse. I think it is important. I don't think 
Congress has carried out its responsibility as well as it 
should regarding oversight, and I hope this will lead 
authorizing and appropriating committees into doing more 
oversight. I would also hope, Mr. Chairman, that considering 
since this committee last met we have had the deficit estimate 
soar and since our responsibility is to oversee the budget, 
considering that we now face the largest deficit in American 
history, that this committee could also have a hearing in the 
near future regarding the implications of $400 [billion] and 
$500 billion deficits over the next several years, where we 
could focus on spending taxes as well as waste, fraud and 
abuse.
    Mr. Walker, I would like to ask you this question. Perhaps 
Dr. Scanlon will need to come up. I will leave that to you. Is 
there a way we can determine or has there already been a study 
by the GAO to determine how much the government could save, how 
much taxpayers would save if all government expenditures for 
prescription drugs were paid at the Canadian level for those 
products?
    Mr. Walker. I am sure we haven't done a study on that.
    Mr. Edwards. Wouldn't it be possible, you know, say pick 
the top five or 10 most used drugs and fairly quickly be able 
to come up with some type of number?
    Mr. Walker. We could take a look at that from an 
illustrative standpoint to be able to demonstrate how much that 
might show.
    [The information referred to follows:]

   Mr. Walker's Response to Mr. Edwards' Question Regarding Canadian 
                           Prescription Drugs

       COMPARISON OF CANADIAN AND U.S. PRICES FOR SELECTED DRUGS

    Prices for drugs covered by the Ontario Ministry of Health and 
Long-Term Care in June 2003 are on average about 13 percent less than 
what a U.S. cash-paying customer (without any insurance coverage) would 
have paid in April 2002 for 2 commonly used generic drugs and 54 
percent less for 10 commonly used brand name drugs. (See attachment.) 
The U.S. cash-paying customer price represents the average of what an 
individual without insurance coverage would pay at 36 pharmacies GAO 
surveyed, but payments for individuals with insurance coverage in the 
United States would typically be less than the cash-paying customer 
price. Based on our review of three plans participating in the Federal 
Employees' Health Benefits Program (FEHBP), the average retail price 
negotiated by pharmacy benefit managers on behalf of the FEHBP plans in 
April 2002 would be about 58 percent below the cash-paying customer 
price for the 2 generic drugs and 19 percent below for the 10 brand 
name drugs.\1\ Thus, the Ontario Drug Benefit payment to pharmacies for 
the 2 generic drugs was on average significantly higher than the FEHBP 
payment, whereas the Canadian payment for the 10 brand name drugs 
remained on average significantly lower than the FEHBP payment. (See 
table 1.)
---------------------------------------------------------------------------
    \1\The three FEHBP plans we reviewed were Blue Cross and Blue 
Shield, the Government Employees Hospital Association, and PacifiCare 
of California. We previously reported that for the 4 generic drugs we 
reviewed the average retail price negotiated with the pharmacy benefit 
manager for the FEHBP plans was 47 percent below the cash-paying 
customer price and for the 14 brand name drugs reviewed the retail 
price for the FEHBP plans was 18 percent below the cash-paying customer 
price. Of the drugs included in the FEHBP study, 2 generic drugs and 4 
brand name drugs did not have comparable equivalent information in the 
Ontario Drug Benefit Formulary. See U.S. General Accounting Office, 
Federal Employees' Health Benefits: Effects of Using Pharmacy Benefit 
Managers on Health Plans, Enrollees, and Pharmacies (Jan. 10, 2003, 
GAO-03-196).

   TABLE 1.--COMPARISON OF U.S. CASH-PAYING CUSTOMER PRICES, 3 FEHBP PLANS' RETAIL PAYMENTS, AND ONTARIO DRUG
                                                BENEFIT PAYMENTS
                                                [In U.S. Dollars]
----------------------------------------------------------------------------------------------------------------
                                                                       Percent below cash-paying customer price
                                                                     -------------------------------------------
                                                   U.S. cash-paying      3 FEHBP plans'
                Drug description                    customer prices      average retail     Ontario drug benefit
                                                     (April 2002)        payments (April     payments (June 24,
                                                                              2002)                 2003)
----------------------------------------------------------------------------------------------------------------
Average of 2 generic drugs......................              10.53          4.38 (-58.4%)         9.12 (-13.4%)
Average of 10 brand name drugs..................              79.79         64.94 (-18.6%)        36.96 (-53.7%)
----------------------------------------------------------------------------------------------------------------
Source: GAO survey of 36 pharmacies in California, North Dakota, and the Washington, DC area; 3 FEHBP plans; and
  the Ontario Drug Benefit Formulary.



ATTACHMENT.--COMPARISON OF U.S. CASH-PAYING CUSTOMER PRICES AND ONTARIO DRUG BENEFIT PAYMENTS FOR SELECTED DRUGS
                                                [In U.S. dollars]
----------------------------------------------------------------------------------------------------------------
                                                                                    Ontario       Ontario drug
                                                                U.S. cash-paying      drug      benefit payment
                                                                    customer        benefit        as percent
      Drug\1\ (strength, number of capsules or tablets)         price,\2\ April   payment,\3\    different from
                                                                      2002          June 24,    U.S. cash-paying
                                                                                    2003\4\      customer price
----------------------------------------------------------------------------------------------------------------
Generic\5\
    Atenolol (50 mg, 30).....................................              11.60        13.30              14.7%
    Furosemide (40 mg, 30)...................................               9.47         4.95              47.8%
                                                              --------------------------------------------------
      Average of 2 generic drugs.............................              10.53         9.12              13.4%
Brand Name
    Celebrex (200 mg, 30)....................................              87.63        35.13              59.9%
    Celexa (20 mg, 30).......................................              76.89        35.13              54.3%
    Fosamax (70 mg, 4).......................................              76.31        33.43              56.2%
    Lipitor (10 mg, 30)......................................              74.02        43.63              41.1%
    Lotensin (20 mg, 30).....................................              36.26        23.71              34.6%
    Norvasc (5 mg, 30).......................................              50.45        35.86              28.9%
    Paxil (20 mg, 30)........................................              91.76        43.39              52.7%
    Premarin (0.625 mg, 30)..................................              27.32         7.71              71.8%
    Prevacid (30 mg, 30).....................................             140.90        53.35              62.1%
    Zocor (20 mg, 30)........................................             136.37        58.21              57.3%
                                                              --------------------------------------------------
      Average of 10 brand name drugs.........................              79.79        36.96              53.7%
----------------------------------------------------------------------------------------------------------------
Source: GAO survey of 36 pharmacies in California, North Dakota, and the Washington, DC area; 3 FEHBP plans; and
  the Ontario Drug Benefit Formulary.

Notes: \1\ Drugs were selected based on 4 generic drugs and 14 brand name drugs GAO reported on in Federal
  Employees' Health Benefits: Effects of Using Pharmacy Benefit Managers on Health Plans, Enrollees, and
  Pharmacies (Jan. 10, 2003, GAO-03-196). These 18 drugs were among the drugs with the highest expenditures or
  number of prescriptions dispensed based on data reported by the three Federal Employees' Health Benefit
  Program plans we reviewed. Of the drugs included in the study, 2 generic drugs and 4 brand name drugs did not
  have comparable equivalent information in the Ontario Drug Benefit Formulary.
\2\ Cash-paying customer prices represent the average prices for customers without any insurance or other third
  party coverage at 36 pharmacies surveyed in April 2002 by GAO in California, North Dakota, and the Washington,
  DC metropolitan area.
\3\ The Ontario Drug Benefit price is based on the ingredient cost found in the Ontario Drug Benefit formulary
  plus a 10 percent markup and a $6.47 (Canadian dollars) dispensing fee included in the Ministry of Health and
  Long-Term Care's payment. See Ontario Drug Benefit Act, http://192.75.156.68/DBLaws/Regs/English/960201--
  e.htm, downloaded on June 23, 2003.
\4\ Canadian dollars were converted to U.S. dollars based on an exchange rate of 0.736161 as of June 24, 2003.
  See http://www.xe.com/ucc/convert.cgi, downloaded on June 24, 2003.
\5\ For generic drugs, the Ontario Drug Benefit payments were the same regardless of manufacturer. Thus, we did
  not match Canadian and U.S. manufacturers for the generic drugs.


    Mr. Edwards. OK. I would appreciate that. Let me go to what 
I consider the biggest waste in the Federal Government and that 
is interest on the national debt. In your chart, Mr. Walker, 
you showed 7 percent of the government goes to interest on the 
national debt, and I consider that waste because it doesn't buy 
one college student a college loan or a Pell Grant. It doesn't 
train one Army soldier, it doesn't pave one highway. Could you 
tell me when you add net interest on the national debt? Would 
you define for me the difference between gross interest on the 
debt and net interest on the debt? Are you subtracting interest 
income when you use the 7 percent number? And if you do, that 
would really mean that we are going to continue to bring in 
interest income. It would really mean the debt payments, the 
interest from the debt, the debt tax is really greater than 7 
percent of the budget.
    Mr. Walker. I believe that is correct, and we will also 
provide those numbers. I think the key is that obviously we are 
not getting anything for interest on the debt now. And part of 
the question is what caused the debt to arise? What was the 
nature of the activity that caused it to rise? Then I think you 
would have to say whether or not there is any value, but 
clearly based upon our simulations it is large and growing and 
it is part of the----
    Mr. Edwards. I want to be sure we are not underestimating 
the already incredibly high cost to taxpayers, and it is a 
cost. It is an expenditure, one of the largest five 
expenditures in the Federal Government. I want to be sure we 
are not underestimating the cost of interest on the debt by 
using the definition of net interest, and I would welcome 
further information on that in the days ahead.
    [The information referred to follows:]

 Mr. Walker's Response to Mr. Edwards' Question Regarding Net Interest 
                          on the Federal Debt

    Gross interest is all interest paid by the government, including to 
governmental trust funds.
    Net interest is the net flow of interest payments to people and 
entities outside the Federal Government. It is gross interest minus 
interest paid to trust funds and minus a relatively small amount of 
interest received by the Federal Government.
    For 2002, the relationship between the two figure was as follows:

                        BREAKDOWN OF FEDERAL DEBT
------------------------------------------------------------------------
                                                             Billions of
                                                               dollars
------------------------------------------------------------------------
Gross interest.............................................          333
Less interest received by trust funds......................         -153
Less interest received.....................................           -8
                                                            ------------
    Net interest...........................................          171
------------------------------------------------------------------------
Source: Congressional Budget Office, ``The Budget and Economic Outlook:
  Fiscal Years 2004-2014.'' Figures may not add due to rounding.
The amount paid in interest is a function both of the amount of
  outstanding debt held by the public and interest rates. In its January
  2003 ``Budget and Economic Outlook,'' CBO reported that the average
  maturity of outstanding marketable debt has remained fairly constant,
  fluctuating between 5 and 6 years since 1985. At the same time, there
  have been some changes in the types of securities issued. Treasury has
  discontinued 30-year bonds and introduced a 4 week bill. As a result,
  the average maturity of outstanding debt has fallen from a little over
  6 years in December 2000, to 5\1/2\ years in September 2002. CBO also
  reported that interest-sensitive Treasury bills with a maturity of one
  year or less accounted for about 28 percent of all marketable debt.


    Mr. Edwards. Let me ask you this. Is most of our national 
debt funded on a short-term basis now compared to 10 or 20 
years ago?
    Mr. Walker. It is clearly a shorter term than it was. And 
of course we had a period of time where we thought we were 
going to pay it all off, and that didn't happen.
    Mr. Edwards. So if we assume, as Mr. Greenspan has said, 
that massive borrowing by the government will drive up interest 
rates, that will also drive up the cost of our borrowing to pay 
for the interest on our national debt. Has the GAO done any 
kind of analysis to assume if, for example, the long-term 
interest rates, the treasury bill interest rates went up 2 
percentage points what that would mean in extra expenditures by 
the taxpayers to pay for interest on the national debt?
    Mr. Walker. We haven't, but it is a very easy calculation 
to do. Let me also clarify my understanding of what this 7 
percent is--it is interest on debt held by the public. As you 
know, there is a substantial amount of debt that is held by so-
called trust funds which in reality aren't trust funds. They 
are really accounting devices. This 7 percent is just on debt 
held by the public.
    Mr. Edwards. And the interest on the debt, that 7 percent, 
one of the largest five programs in the Federal Government 
would actually go up dramatically if interest rates went up 
perhaps two full percentage points over the next couple of 
years because of our massive deficit spending, is that correct?
    Mr. Walker. It would go up, but probably the biggest threat 
is the size of the deficits that we are undertaking right now.
    Mr. Edwards. You could make some assumptions, make an 
assumption if interest rates go up 1 percent, 2 percent or 3 
percent how much that would mean in extra costs to the 
taxpayers for paying for that wasteful program, the interest on 
the national debt. I assume that could be just a simple 
mathematical calculation.
    My time is up. I thank you, Mr. Walker.
    Mr. Walker. Thank you.
    Chairman Nussle. We are expecting votes on the floor in the 
next 10 to 15 minutes, three of them, so we are going to need 
to adjourn at that point. Unfortunately, we are not going to be 
able to keep the hearing going because there will be three 
votes in a row.
    Mr. Shays.
    Mr. Shays. Thank you. First, Mr. Walker, let me thank you 
for the extraordinary work of the GAO. It is an invaluable tool 
and if there is any message in what I think we have learned in 
the last few years, it is to take the reports of the GAO and 
act on them. And I am pleased that we are beginning to try to 
get the authorizing committees, besides the Budget Committee 
and the appropriators, to look at this legislation, look at 
your reports, because much of it is mandatory spending that 
requires authorizing changes.
    I want to just first respond to the issue of the national 
debt. I believe the national debt is a crucial way of concern 
and the interest we pay on the national debt, and I believe the 
reason why you are seeing members on our side of the aisle 
focus on this issue is to reduce the debt by getting the 
economy moving again. It is a fact that the biggest contributor 
to the national debt is the decline in revenues, or the slowing 
of revenues. And if we could get revenues up to where they were 
in previous years, we would have no deficits and our national 
debt wouldn't keep increasing. So we are focusing our effort on 
looking at waste, fraud and abuse and getting this economy 
moving again.
    Let me just focus on two areas of waste, fraud and abuse 
that just bug the heck out of me and I don't hear it spoken of 
much on the other side of the aisle. One is something that I 
call, that is referred to as the earned income tax credit, 
which to me is a surprising word because I don't know what is 
earned about this tax credit. It is paid to people who pay no 
taxes. We understand from reports that you have done that the 
earned income tax credit, that $9.3 billion, or nearly 30 
percent of the total $31.3 billion claimed by taxpayers is 
erroneous. Is that number still a fact? It has been the last 5 
years.
    Mr. Walker. It is a realistic estimate on the percentage 
basis. Unfortunately, the IRS hasn't updated it, but they have 
taken a number of different steps to try to deal with it. We 
assume that it probably hasn't changed much.
    Mr. Shays. So for these individuals who pay no income tax, 
they pay other taxes but pay no income taxes, we are looking at 
nearly one-third of all of the so-called earned income tax 
credit being given out erroneously. How do we deal with it? 
What do we do about it?
    Mr. Walker. Well, I think there are two dimensions. First, 
I think one of the things that this is intended to do is to 
encourage and reward individuals who actually work and who are 
actually earning income and coming off of the welfare rolls, 
and that is something on which I think there probably can be 
bipartisan consensus, that we want to try to get people off of 
welfare into work. Also recognizing that we have some perverse 
incentives in our Federal system. As you are going to find out 
in a forthcoming report, one could argue that the best health 
care coverage we have is Medicaid, which is welfare for the 
indigent. So we have some perverse incentives. I think there 
are two answers.
    First, we need to streamline and simplify so that we can 
more effectively communicate who is eligible and who is not 
eligible for the earned income tax credit. Complexity is a 
problem. Second, the IRS needs to enhance its enforcement 
activities. But we have to have a balance. On the one hand, we 
want people who are eligible for the credit to be able to get 
it. On the other hand, we do not want people who are not 
eligible to benefit from it. It is a combination of 
simplification and enforcement.
    Mr. Shays. But the bottom line is nearly $10 billion is 
being paid out erroneously to people who do not qualify, and it 
seems to me this committee and other committees need to pay 
attention to that.
    Let me just ask you about food stamps, another important 
program. It is a program that is supposed to help those with 
the least income. According to reports that we have from your 
department, we have a 9 percent error rate; in other words, 
$1.4 billion is paid erroneously. Now, in this case one billion 
represents an overpayment and $400 million an underpayment. And 
in either case, that is wrong, correct?
    Mr. Walker. That is correct. I mean we want people that are 
eligible to get the benefits. But the ones that aren't 
shouldn't.
    Mr. Shays. And so what should we be doing here? How can we 
make sure that we don't have waste, fraud and abuse in the food 
stamp program?
    Mr. Walker. I would like Dr. Posner to come up for a second 
if it is OK. He is one of our experts with regards to the 
details here. Is that alright, Mr. Chairman?
    Chairman Nussle. Yes. Please identify yourself for the 
record.
    Mr. Posner. I am Paul Posner, managing director for our 
work on budget and intergovernmental programs.
    Basically there are a number of things that have been done 
over the years to address this. One is----
    Mr. Shays. There is a red light on, and so I know other 
members have very little time, so real quick.
    Mr. Posner. OK. One is to give more incentives to the 
States to do a better job in pursuing this kind of thing. The 
other is electronic benefits transfers to reduce trafficking in 
food stamps, which will really improve oversight of a real 
abuse in the system. But the incentives to the States are 
really important.
    Mr. Shays. OK. Thank you. I am sorry for the need for the 
short answer. Thank you.
    Chairman Nussle. Thank you.
    Mr. Scott.
    Mr. Scott. Thank you, Mr. Chairman. Can I get the other 
one? This chart shows how we have been budgeting. The chairman 
is very reluctant to talk about how we got to where we are, but 
I think it is instructive because you see all the red ink being 
run up during the Reagan and Bush administrations. The green 
part is what happened in----
    Chairman Nussle. Will the gentleman yield just briefly?
    Mr. Scott. I yield.
    Chairman Nussle. All I am suggesting--all I was suggesting 
is that there are probably two sides to the story. That is all 
I was suggesting. I know I have a side. I know you have a side. 
I just thought it was maybe not necessary to go into that today 
is all I was suggesting.
    Mr. Scott. Reclaiming my time.
    Chairman Nussle. Please.
    Mr. Scott. I understand why you don't want to go into it. I 
just want to say that as a Member on this side, we voted for 
the green and we voted against the red. So when we start 
talking about which was the Democratic plan and these 
amendments, some of these amendments are dealing with the mess 
that has been created, the best good faith effort. But if you 
want to know what the Democratic plan is, look at the green.
    Now, the next chart is what this mess puts us in. That 
green sloping line is what General Walker referred to as we 
were going to pay off the national debt. That was what the 
projection was when this new administration came in. The red is 
the interest on the national debt we are going to pay. The 
blue, just to put things into perspective, is the defense 
budget.
    Now, General Walker, you have pretty well disparaged the 
idea that we are going to grow ourselves out of this mess and 
said these are tough choices. Is the fact that one-half of the 
2001 tax cut--if it had been that same amount of money had been 
allocated to the Social Security problem--that we could have 
solved the Social Security problem with that amount of money?
    Mr. Walker. Candidly, based upon GAO's long range budget 
simulations which we do twice a year, if we can enhance 
economic growth that will help. The gap is too great in the 
long term to grow our way out of the problem. Therefore, tough 
choices are going to have to be made with regards to tax 
policy, including tax incentives, spending policy, and 
regulatory policy. You are not going to avoid that, and quite 
frankly,we need to get on with it.
    Mr. Scott. Thank you.
    EITC, how much would it cost to fix the problem?
    Mr. Walker. How much would it cost to fix it? I think you 
are making a good point here, Mr. Scott. In some cases in order 
to fix the problem you have to spend a little bit of money, you 
have to spend to save. And there could be a net savings once 
you do that. This also ties to one of the things I think we 
need to be thinking about in the budget process which is how to 
look at discounted present value as well as annual cash flow 
since sometimes the latter can cause us to do some unusual 
things.
    Mr. Scott. About how much would it cost to fix the problem?
    Mr. Walker. I apologize. I do not have that number readily 
available, and I don't know that we do either but I will check 
and see.
    [The information referred to follows:]

Mr. Walker's Response to Mr. Scott's Question on How Much It Will Cost 
                             to ``Fix'' EIC

    How much will it cost to ``fix'' the Earned Income Credit (EIC) 
compliance problem?
    The estimated cost of fixing the EIC compliance problem continues 
to evolve and an overall estimate remains unknown. IRS has received a 
dedicated appropriation for many years that is intended to help it 
reduce the level of EIC overpayments while maintaining the program's 
fairly high participation rate. These appropriations totaled about $875 
million between 1998 and 2003. However, the most recent IRS compliance 
study found that EIC overpayments for tax year 1999 totaled between 
about 27 to 32 percent of dollars paid out, or between $8.5 and $9.9 
billion. For fiscal year 2004, IRS has asked for a total of $251 
million, including about $151 million for the activities supported by 
the long-standing special appropriations plus $100 million for a new 
EIC initiative intended to address the major sources of noncompliance 
errors in claiming qualifying children, income misreporting, and filing 
status errors. A joint Department of the Treasury/IRS task force 
estimated that the cost of the dedicated EIC appropriation for years 
between 1998 and 2003 represented about 0.5 percent of the total EIC 
tax credits paid to taxpayers each year. When considering the new 
initiative for fiscal year 2004, we estimate this will increase to 0.8 
percent.
    Whether the continued special appropriations and the additional 
funding for the new initiative will be sufficient to result in 
significant reductions to the EIC's compliance problems remains to be 
seen because IRS is only in the planning or testing phases of the new 
initiative. Expansion of the new initiative will depend on results of 
testing over the next year, but data will not be available for some 
time. We are preparing a report on the portion of the new EIC 
initiative dealing with errors in claiming qualifying children. The 
report is due in late July.
    In addition, it should be noted that Congress has enacted three 
pieces of legislation since 1999, which could potentially improve 
compliance rates. However, the effect on EIC compliance has been 
estimated for only one of the statutory changes-a change that required 
the custodial parent with the highest income to claim a qualifying 
child. This study, prepared by Treasury, indicated that the new rule 
would have eliminated about $1.4 billion of the tax year 1999 EIC 
overclaims.

    Mr. Scott. The gentlelady from Wisconsin mentioned some 
Judiciary Committee programs. In education, we have got student 
loans, school lunches and rehabilitation. In education, where 
do we save money on those programs or are any of those 
programs? Or on your high risk list?
    Mr. Walker. We have specifics laid out in the testimony, 
and there are specific recommendations that we have made in the 
past that we think you should consider in order to be able to 
save money.
    Mr. Scott. What about veterans' benefits? The gentleman, my 
colleague from Virginia, mentioned the problem that if you cut 
veterans benefits, you may be disqualifying people that are in 
fact eligible. How do you save money with veterans benefits?
    Mr. Walker. Well, veterans benefits frankly are like most 
other entitlement programs. You want to make sure the people 
who are truly entitled to benefits receive them but that those 
who aren't, don't. There is more that has to be done, for 
example make sure we are not paying dead people.
    Mr. Scott. Can we do that by cutting administrative 
expenses?
    Mr. Walker. It is more complex than just how much money 
there is. It is how the money is used.
    Mr. Scott. What is so complicated about sanctioning those 
who abuse credit cards? I mean, has anybody ever gone to jail 
for trying to charge a personal cruise on a government credit 
card and passing the expense off to the government?
    Mr. Walker. To my knowledge, no. But the IG and us are 
following up on what DOD is doing.
    Mr. Scott. So how is that any different? I mean why is this 
complicated? Why is it any different than just vouchering the 
cruise to the Federal Government? Just going to Office Depot 
and buying a computer and charging, taking it home and charging 
it off to the government? I mean that is theft. What is so 
complicated about that?
    Mr. Walker. Well, I think the point you are making with 
which I would agree is that when we find clear examples of 
abuse and illegal activity, we need to take specific actions. 
There must be penalties that are paid to dissuade those who 
would try to take advantage of this system from doing so.
    Mr. Scott. Thank you, Mr. Chairman.
    Chairman Nussle. I thank the gentleman.
    Mr. Garrett.
    Mr. Garrett. Thank you. Just a couple of questions. One of 
your points seems to be that if you want to save money, you 
want to go after the big programs first. And Medicare, you are 
talking about $12 billion, and that comes out in my little 
computations around 5 percent of the program, roughly. We are 
looking now depending on the bill before us at a prescription 
program of either $400 billion, $600 billion or now maybe $1 
trillion. If all things hold true on the average of setting up 
new programs going forward, if the 5 percent figure holds true, 
are we looking at around a $20 billion possibility for waste, 
fraud and abuse in this new program we are about to pass in one 
form or another?
    Mr. Walker. There is little question in my mind that 
preventing fraud, waste and abuse will be a challenge in any 
prescription drug program. There is also no question in my mind 
that one of the things Congress has to do is have more concrete 
debate on the long term discounted present value--the long-term 
cost of any new legislation that is considering on either the 
spending or the revenue side. Today you do not have that. We 
have a big hole. Congress debates 10-year numbers but our 
biggest problem does not start until after the baby boomers 
retire.
    Mr. Garrett. Can you provide us this committee or myself 
with what the real figure is, I guess, going forward under our 
proposal as far as what the real costs will be when we hit that 
date?
    Mr. Walker. That is CBO's job. One of the things we have 
recommended is that when you anticipate big, long-term numbers, 
especially when the cost starts going up after the 10-year 
period, then separate calculations be done of the long-term 
fiscal exposure. I don't know whether or not CBO has done that 
or not, but I think that would be important.
    Mr. Garrett. I mean, I saw one figure in the paper and I 
don't know where they got it, not from CBO, about $3.8 
trillion. I am going forward on that, so----
    Mr. Walker. Well, I think we have to recognize that we 
already have a $5.8 [trillion]-$5.9 trillion gap on Part A of 
Medicare alone. That doesn't count Part B and that obviously 
doesn't count prescription drugs.
    Mr. Garrett. Right. And so this is just adding to that. One 
of the questions that my constituents had, and I am a new guy 
here so I have a hard time answering this, is when we say, 
well, we are not responsible for some of this because now we 
are--almost over half is on the mandatory side and we have no 
control over that. And they of course say, well, you are in 
Congress, I thought you had control over everything. My 
understanding, correct me if I am wrong, there is a number of 
programs which are in that category, which come under the 
authorized programs, right, that have been authorized in the 
past but have not been reauthorized. And yet we continue to pay 
on those programs. Is that how it works?
    Mr. Walker. I am looking to my budget people real quick. 
This is Dr. Susan Irving, who is in our budget area. I want to 
make sure we get you a correct answer and right answer.
    Ms. Irving. Mr. Chairman. I am Susan Irving, Director of 
Federal Budget Analysis.
    The issue of unauthorized programs that still continue to 
receive funding is largely in the discretionary area of the 
budget. Every year CRS and CBO put out a list of unauthorized 
but appropriated programs. And in the past it has been held 
that the act of appropriation means the Congress implicitly 
authorizes the activity. For most of the mandatories, it is 
kind of a direct spending. That is the spending flows directly 
from the authorizing legislation. Social Security is the 
obvious example. The amount of money that goes out is a 
function of the eligibility rules and the payment benefit 
calculations. You do have control. You can change those, but 
not on an annual basis through the appropriations process.
    Mr. Walker. And that is the point. Congress ultimately has 
the authority to act on what is mandatory as well as 
discretionary programs. It just hasn't always.
    Mr. Garrett. Right. So on the authorized ones, which are 
within the discretionary category, the courts are saying that 
we are basically authorizing them all over again just by the 
fact that they appropriate the dollars. But we have the 
authority actually--right now NASA and a few other ones people 
say have not been reauthorized, but we just continue to do it. 
And I see that NASA is one of the programs in here that you 
highlight. Not that I am picking on NASA. But I saw that in 
here as I thumbed through.
    So these are things that we have the ability to control 
through the authorization process and also through the 
mandatory process but we opt not to do it is the record.
    Mr. Walker. Congress has not done it. The area on the list 
is NASA contract management.
    Mr. Garrett. Right. Thanks a lots.
    Chairman Nussle. And just for the gentleman's information, 
the CBO does have that information and per Mr. Spratt's request 
we will be holding a hearing on the long-term implications of a 
number of these programs. That will be one of the next hearings 
that the Budget Committee holds.
    Mr. Davis.
    Mr. Davis. Thank you, Mr. Chairman. Since we are about to 
have votes, Mr. Walker, I will try to be brief and I have to 
ask you about something that my friend from Connecticut, the 
vice chair, was asking you about earlier. He asked you about 
what I think if you listen to the administration, one would 
believe is an epidemic of irresponsibility among poor people in 
this country. If you listen to the administration or the 
inference of my friend from Connecticut's question, one would 
think that there is this huge problem with people who are 
getting foods stamps or who are getting school lunches or who 
are getting the earned income tax credit engaging in fraudulent 
behavior. I have no doubt that there is some level of 
fraudulent behavior that goes on with those groups. But what 
very much concerns me is that frankly I don't see the same 
level of attention and scrutiny being directed to folks who are 
engaged in corporate avoidance, for example. I had a chance to 
look at your high risk series book last night and it is an 
interesting piece of work. I am sure you will correct me if I 
am wrong, but as I looked through it I don't see a single 
reference to a corporate avoidance tax gain. Did I miss one or 
is there one in here?
    Mr. Walker. No, we don't have that on here. Frankly----
    Mr. Davis. Let me ask you another question since we are 
running low on time. You have heard of something called sale 
in, lease out. You have heard of that?
    Mr. Walker. I am not an expert on it. I have heard about 
it.
    Mr. Davis. OK, and you have heard it is a kind of corporate 
tax avoidance game and you haven't taken an effort to become an 
expert on that either, have you?
    Mr. Walker. Not to this point in time.
    Mr. Davis. And it is not referenced in your high risk 
series book, is it?
    Mr. Walker. That is correct. It is not.
    Mr. Davis. You have also heard that occasionally there is a 
problem of some consulting firms marketing tax shelters that 
deal with inflated patent valuations. You have heard that is a 
problem that exists?
    Mr. Walker. Yes.
    Mr. Davis. Is there a reference to that in your high risk 
series?
    Mr. Walker. We are doing work on tax.
    Mr. Davis. Is there any reference to that in your high risk 
series book?
    Mr. Walker. It is not, but in fairness our high risk series 
started out more narrowly focused, and as time goes on it is 
broadening and may well--those types of items may well come out 
in the future ones.
    Mr. Davis. OK. Can you tell me if there is a single 
corporate tax avoidance scheme reference in your high risk 
series book?
    Mr. Walker. By the way, we do have one item on the high 
risk list that these----
    Mr. Davis. Is that in your high risk series book?
    Mr. Walker. Yes. Collection of unpaid taxes.
    Mr. Davis. Is there a reference to ``corporate'' unpaid 
taxes in your high wrist series book?
    Mr. Walker. It is just ``unpaid taxes,'' period. It doesn't 
make any difference what type.
    Mr. Davis. OK. And I will represent to you that I have read 
that section. There is no reference for--the word ``corporate'' 
is not contained in it. Do you disagree with that?
    Mr. Walker. I haven't read it lately so----
    Mr. Davis. Do you get the point I am making?
    Mr. Walker. Oh, I understand your point.
    Mr. Davis. OK.
    Mr. Walker. I only need to hear it once.
    Mr. Davis. And since I have got a little bit of time left I 
do want to leave you with this observation, Mr. Walker. One 
thing that I do think enormously frustrates a lot of people in 
this country, and regardless of what party we come from, a lot 
of our constituents are people who are frankly not making a lot 
of money. They are people who are earning between 10 and 
$25,000 a year and we recognize that, yes, some of those people 
are engaged in fraudulent conduct. But I think it must be 
enormously frustrating and disheartening to them when they hear 
the administration focusing only on their irresponsibility 
whereas some of the wealthiest people in this country are doing 
things that could potentially cost us a lot of money and, 
frankly, we don't have the kind of laser focus on them.
    Mr. Neal. Mr. Davis, would you yield for a second?
    Mr. Davis. No. I don't have a lot of time left, so I 
apologize.
    Mr. Neal. It would be helpful to your argument.
    Mr. Davis. Well, let me finish my point. We have got a 
little bit of time left. The point that I want to make to you, 
Mr. Walker, is this is what frustrates a lot of people, in my 
opinion, before I yield to my friend from Massachusetts, that 
when the Republican administration wants to find a way to save 
money they tend too look in very particular places.
    I would be happy to yield to my friend from Massachusetts.
    Mr. Neal. Thank you, Mr. Davis. Let me just ask you this 
quick question, Mr. Walker. Do you believe that Tyco is a 
Bermuda based company?
    Mr. Walker. In form but not in substance. And let me say 
this. I think it is important to respond. No. 1, I think if you 
look at a number of my speeches and a number of GAO's work, you 
will find that we have been very much on the case in trying to 
highlight that more attention needs to be paid to the tax side; 
to preferences and incentives, and some of these abuses. We 
have also said that more needs to be done with regard to IRS 
enforcement. It is one thing to provide service and that means 
enforcement on all aspects of the tax code. And I think you 
will also see that I have said a number of times and GAO has 
products noting a number of concerns with regard to not only 
tax abuse but also failures in corporate governance and 
accountability under the current systems.
    Mr. Davis. Briefly reclaiming my time since I have a little 
bit left, the concern though, Mr. Walker, is you and your 
agency draft the high risk series book. Even when you chose to 
talk about tax avoidance the word ``corporate'' doesn't even 
surface on the pages that you all drafted. That is the omission 
that concerns some of us, that the fixation is on one end of 
society and not the other one.
    Thank you, Mr. Chairman.
    Mr. Walker. Well, I will go back and look at that to make 
sure. But the fact of the matter is if it isn't expressly noted 
who the individuals are, that is inappropriate because it is 
across the board, and let me make clear to you, it is across 
the board.
    Mr. Davis. I agree.
    Chairman Nussle. We have time for one more inquiry, and 
then we are going to have to recess for votes. Mr. Diaz-Balart.
    Mr. Diaz-Balart. Thank you, Mr. Chairman. You know, one of 
the things that comes to mind is that with all these problems, 
if this is no accountability to those that are, you know, 
signing off or making the decisions, then nothing is ever going 
to happen. And Mr. Schrock asked the question what happens to 
those people that make those bad decisions that create the 
fraud or that sign off on the fraud, and I believe that your 
answer was really not much, right?
    Mr. Walker. We are following up to see what actions were 
taken. We are willing to make sure that there is appropriate 
accountability because the only way you are going to dissuade 
further abuse is if you have swift and effective 
accountability.
    Mr. Diaz-Balart. Because, Mr. Chairman, as you know, with 
your direction and your assistance after speaking with you, and 
with your blessing, many of us, the Republican freshmen, we 
created a working group to combat waste, fraud and abuse, and 
some of the things that we have been able to find in a very 
short time span is really scary. Such numbers--the numbers are 
amazing. Even Medicare, $13.3 billion, or housing subsidy 
programs, $3.3 billion, or supplemental security income, $2.6 
billion or unemployment insurance or disability insurance. And 
these are funds that are being frankly misused or wasted by the 
Federal Government and therefore are not going to those that 
really do need the assistance, which is why those programs were 
set up in the first place. So we have created this working 
group. And not only--so I want to kind of use this opportunity, 
Mr. Chairman, to kind of throw in a plug. We are going to use 
this working group not only to highlight some of these 
horrendous misuse of taxpayers' money, not only is it robbing 
the taxpayer, it is also not going to those that truly need it. 
But also hopefully come up with some ideas that we can help 
this committee and others to try to show some possible 
solutions. I think one of those has to be accountability, and 
until we have some serious accountability to those that are 
making the decision, until jobs are on the line, I don't think 
that anything is ever going to change.
    Mr. Chairman, so I want to thank you for this opportunity 
and I know we have very little time because we have to go vote. 
But thank you.
    Mr. Walker. I would respectfully suggest that Congress is 
part of the accountability mechanism as well. What kind of 
oversight you exercise and what do you do with regard to 
appropriations?
    Mr. Diaz-Balart. Absolutely.
    Chairman Nussle. Congress has oversight responsibility that 
it has not been utilizing. It needs to. One of the ways that it 
does that is through the General Accounting Office, as an arm--
nonpartisan arm--of the United States Congress. Mr. Davis has 
brought up a couple of items that I have no doubt, knowing that 
you, Mr. Walker, and others with GAO, when you get ideas you 
are all over it like a big dog on a piece of steak. So I have 
no doubt that you will do that in this instance as well. You do 
not work for the administration. I think you have demonstrated 
that independence in many ways both from Congress as well as 
from the administration, and we appreciate it.
    This is a start. We could go on all day, I know, for a 
number of reasons, but this is a good start. We appreciate the 
time you have spent with us today. We know that your time is 
limited. You are going to have to leave by noon and our votes 
will not be completed by that time. So at this point in time we 
will dismiss you and begin with the second panel when we 
reconvene the hearing.
    Mr. Walker. Thank you, Mr. Chairman. I need to go start 
chewing on the steak.
    Chairman Nussle. Go do it. Thank you. And with that we will 
recess subject to the call of the Chair following the third 
vote on the floor. [Recess.]
    Call the committee back to order. This is the hearing on 
waste, fraud and abuse in Federal mandatory programs. We will 
resume now with the second panel, Robert S. McIntyre, who is 
the Director of Citizens for Tax Justice. We welcome you, Mr. 
McIntyre, to the committee. Your entire testimony will be made 
part of the record, and we are pleased to hear your testimony 
and have you summarize that testimony at this point. Welcome.

 STATEMENT OF ROBERT S. MC INTYRE, DIRECTOR, CITIZENS FOR TAX 
                            JUSTICE

    Mr. McIntyre. This is my first visit to the Budget 
Committee, despite working on tax issues for the last quarter 
of century or so. So I appreciate the opportunity. Our group, 
Citizens for Tax Justice, advocates for government fiscal 
policies based on two rather simple principles: One, that the 
government ought to raise enough money to pay for the programs 
that it enacts and, secondly, that it ought to do so in a fair 
and progressive way. Until recently, these weren't particularly 
controversial propositions.
    Over the years, we have worked with members of both parties 
in the Congress and the White House to try to achieve these 
goals and often with some success. These days, however, the 
idea of raising enough money to fund the government and raising 
it fairly puts us somewhat in disagreement, I think, with the 
current management in the Congress and the White House.
    This year, fiscal year 2003, the latest estimates show that 
the on budget deficit will be $570 billion or more. That means 
that $1 out of every $3 that the government spends on 
everything but Social Security will be financed with borrowed 
money. This is the highest level of borrowing to fund on budget 
spending since World War II, nosing out an almost as high 
number in President Reagan's first term, before he and I became 
allies. Faced with this very dire fiscal situation, which shows 
no sign of abating, it is very appropriate that this committee 
is starting to look at ways to stem the flow of red ink. We are 
happy if we can help in that effort.
    The focus here is on mandatory spending, an area which is 
one of the most important ones to look at. I haven't heard 
much, though, except for the earned income tax credit, about 
tax provisions that are part of the mandatory spending system, 
and that is what I wanted to focus on today.
    Every year, the Joint Committee on Taxation and the 
Treasury Department put out lists about the total amounts of 
mandatory tax entitlements. The latest numbers from the Joint 
Tax Committee indicate that we will see $843 billion worth of 
those programs this year, and that will rise to $915 billion by 
fiscal 2007. That is more than the total of all discretionary 
appropriations. These are mandatory programs embedded in the 
tax code, and I must say those numbers are actually low. They 
leave out corporate tax shelters. They understate the tax 
benefits of accelerated depreciation. They assume sunsets will 
happen that probably won't. For a number of reasons the number 
is probably closer to $1 trillion in tax-based mandatory 
spending.
    Of course, lots of these programs are probably things the 
government would do whether it did it through the Internal 
Revenue Service or a regular government agency. But many of 
them aren't, and I want to focus on the ones that almost surely 
aren't, the large business subsidies that are embedded in our 
tax code that are benefiting industries from oil, nuclear, 
ethanol, drug manufacturing, you name it, more than 75 of them 
listed in the Joint Tax Committee list. I have a very strong 
feeling that if any of these were proposed as direct spending 
programs out of the Commerce Department or the Environmental 
Protection Agency or whatever other agency would have 
jurisdiction, that their chances of passing the Congress would 
be something close to zero. So I think they need some more 
scrutiny because they are so similar to regular spending 
programs.
    We have had a concerted attack on these kinds of programs 
under President Reagan, who in the 1986 Tax Reform Act scaled 
way back on these subsidies for the very simple reason that 
they were perceived, correctly, I think, by the administration 
and by the Congress, as wasteful, as violative of our free 
market principles and as economically harmful in the long run.
    But things have changed since then. I know you hear from 
business lobbyists day in and day out about how horribly cruel 
we are to our corporations when it comes to taxes. The fact 
they can say that with a straight face suggests that they have 
had some very serious training, because as is well known if you 
just read the papers, many of our biggest companies are paying 
nothing at all in taxes. Overall, our taxes on corporations are 
now just about the lowest in the world as a share of the 
economy. Only Iceland is slightly lower. How can they be 
complaining about high taxes when they are the lowest in the 
world? I don't know how they get away with that.
    The reason that our corporate taxes have become so low, at 
least in recent years, has nothing to do with tax rates, but to 
an explosion in the mandatory subsidies in the tax code. 
Recently, for instance, the Congress in 2002 and 2003 passed a 
vast expansion in tax breaks for depreciation write-offs, $114 
billion in 2002 and then another $60 billion this year. The 
combination of these changes, almost $180 billion in added 
corporate subsidies, has not received the attention that it 
needs. In fact, if the sunsets are not honored, and certainly 
the lobbyists don't want them to be honored, these programs, 
just the ones adopted in the last 2 years, will cost over $400 
billion over this decade. So that is one area you ought to look 
at.
    I mean, wouldn't it make sense if we want to tax our 
businesses on their profits that we tax them on what they 
actually make, not on some figment of their accountants' 
imagination? Why do we want a system that taxes some companies 
at much higher rates than others just depending on the mix of 
their investments?
    A second area that I think you ought to look at is 
international. Our multinational companies have as their goal 
to pay as little taxes as possible. One way they try to do it 
is to tell the Internal Revenue Service that they made their 
profits offshore. In recent years, the accounting firms have 
come up with ways for companies to take their U.S. profits and 
make them all of a sudden magically appear in Bermuda, 
Barbados, Liechtenstein, or some other place where they are not 
taxed. As a result of that, most people who have looked at it 
think that we are probably losing to these subsidies something 
in the order of $50 [billion] or $60 billion annually just from 
companies avoiding, or I think in many cases evading, their tax 
responsibilities to the United States.
    There are ways to address this issue. They are not on the 
table in the Ways and Means Committee except to expand them, 
but there are steps that could be taken that would save average 
ordinary taxpayers tens of billions of dollars a year. I think 
it is something you ought to look at.
    Finally, as I said before, there are many industry-specific 
subsidies in the code benefiting this industry or that for 
whatever political reason they were put in. I wonder why you 
would be supporting these programs, if you have any belief at 
all that businesses ought to make business decisions and that 
the government shouldn't be running sort of a quasisocialist 
state. Clearly because free market principles and these 
subsidies are so inconsistent with one another.
    So the bottom line is that on-budget revenues this year are 
going to be about 11\1/2\ percent of GDP. That is the lowest 
level since before World War II, and it is almost a quarter 
below the level in fiscal 2000. This drop in revenues explains 
most of the enormous deficits we face. And the vast expansion 
in tax based subsidy programs explains quite a lot of that. Of 
course the income tax rate cuts and so forth explain a lot of 
it, too.
    It seems to us that this committee and the Congress ought 
to look at tax based spending programs the same way you look at 
anything else. There is no real distinction except artificial 
bookkeeping differences. Let me give you an example.
    Suppose the earned income tax credit were not refundable, 
but instead poor families could sell their tax breaks to better 
off families and get the money that way. That would show up as 
a reduction in taxes rather than as spending, but it wouldn't 
be a different program. If you think that is out of the blue, 
remember that corporations day in and day out sell their excess 
tax breaks to companies that can use them. That makes the 
corporate subsidies, whether it is the low income housing 
credit or accelerated depreciation or whatever, in essence 
refundable. And yet, well, they don't get the attention. So it 
seems to us that if this committee is serious, and I hope you 
are, in trying to reduce our government's unsustainable 
borrowing, then curbing unwarranted tax based entitlement 
programs, especially the expensive tax subsidies for 
corporations that fail to serve economic purposes and cost 
hundreds of billions of dollars should be very high on your 
agenda.
    Thank you very much.
    [The prepared statement of Mr. McIntyre follows:]

 Prepared Statement of Robert S. McIntyre, Director, Citizens for Tax 
                                Justice

    Recent projections from the Congressional Budget Office indicate 
that in fiscal 2003, the onbudget Federal deficit is likely to exceed 
$570 billion. That means that $1 out of every $3 that the Federal 
Government spends outside of the self-funded Social Security system 
will be paid for by borrowing. This will be the highest share of on-
budget Federal spending financed by deficits since World War II.
    Faced with this dire fiscal situation, which shows no sign of 
abating in the future, it is entirely appropriate that this committee 
is searching for ways to stem the torrent of red ink.
    In seeking to reduce the enormous rise in Federal borrowing, 
however, one important area has been largely off the radar screen of 
the majority party in Congress: the many mandatory Federal programs 
embedded in the tax code and administered by the Internal Revenue 
Service.
    As the Joint Committee on Taxation points out: ``Special income tax 
provisions * * * may be considered to be analogous to direct outlay 
programs, and * * * are similar to those direct spending programs that 
are available as entitlements to those who meet the statutory criteria 
established for the programs.'' (Joint Committee on Taxation, Estimates 
of Federal Tax Expenditures for Fiscal Years 2003-07, Dec. 19, 2002)
    The Joint Committee on Taxation's most recent compilation of these 
tax code-based spending programs, issued last December, found a total 
of $843 billion in such programs in this fiscal year alone, rising to 
$915 billion by fiscal 2007. That's more than the total amount of 
discretionary appropriations.
    It should be noted that even these enormous figures for tax-based 
spending are substantially understated. They do not include the 
recently enacted increases in tax-based spending in the 2003 tax bill. 
They assume that various sunsets on old and new tax-based spending 
programs will be honored. They use a statistical trick to greatly 
understate the tax code's largest official corporate tax subsidy, 
accelerated depreciation. And they do not include the huge and growing 
cost of the burgeoning abusive corporate tax shelters that Congress and 
the Bush administration have so far chosen to encourage or at least 
tolerate.
    To be sure, some tax-based spending programs serve important needs 
that would doubtless incur significant Federal costs if they were run 
by government agencies other than the IRS. In my testimony today, I 
want to focus on what I see as the most objectionable and fastest 
growing area of wasteful tax-based spending programs, those that are 
designed to subsidize various corporate activities. There are more than 
75 of these ``mandatory'' corporate subsidy programs, benefiting 
activities such as oil drilling, insurance, nuclear power, commercial 
real estate, equipment purchases, drug manufacturing, ethanol 
production and so on.
    In President Reagan's second term, he strongly criticized corporate 
tax subsidies as wasteful, inconsistent with free market principles and 
harmful to economic growth. At Reagan's instigation, the subsidies were 
sharply cut back in 1986. But in recent years, corporate tax subsidies 
have made a striking comeback, and are now costing ordinary taxpayers 
close to $200 billion annually. They should be prime targets for 
reexamination in the effort to bring the budget back into balance.
  our low, low corporate taxes and high, high corporate tax subsidies
    Contrary to the constant whining that members of Congress hear from 
corporate lobbyists, corporate income taxes in the United States have 
fallen so much over the past few decades that they now are virtually 
the lowest among the world's developed countries. Here are a few 
salient facts, taken from the Organisation for Economic Cooperation and 
Development's October 2002 comparison of taxes among its member 
countries:
     In 1965, U.S. Federal, State and local corporate income 
taxes were 4.1
    percent of our gross domestic product, compared to 2.4 percent of 
GDP in the other OECD countries.
     But by 2000, U.S. corporate income taxes had dropped to 
2.5 percent of GDP, while corporate income taxes in the other OECD 
countries had risen to 3.4 percent of GDP. That placed us 22nd among 
the 29 reporting OECD countries.
     In 2002, the last year for which full Federal, State and 
local figures are available, U.S. corporate taxes plummeted to only 1.5 
percent of our GDP. That's below the most recently reported corporate 
tax levels in any other OECD country except Iceland.
     Looking only at the U.S. Federal tax system, corporate 
income taxes have fallen to only 1.2 percent of the GDP this year and 
last--69 percent below their 3.8 percent share of GDP in the 1960s. 


    This sharp drop in corporate tax payments in the United States in 
recent years has not been caused by a lower statutory corporate tax 
rate, but rather by an explosion in congressionally enacted tax 
subsidies and a wave of corporate tax sheltering activity. As a result, 
most of the profits that corporations report to their shareholders are 
never reported on their tax returns. In fact, it appears that this year 
corporate taxes as a percent of U.S. profits will fall to well under 15 
percent probably only about a third of the statutory corporate rate of 
35 percent.
  recent legislation has vastly expanded tax-based corporate subsidies
    In early 2002, Congress enacted the largest corporate tax reduction 
in a generation, primarily by greatly expanding the amount that 
companies can write off for wear and tear on their equipment. This $114 
billion expansion in business tax subsidies was defended as a supposed 
``stimulus'' to our ailing economy, and was supposed to ``sunset'' in 
the fall of 2004, then to be followed by partially offsetting big 
corporate tax increases in future years. But last month, the 2002 
``depreciation'' tax subsidies were extended and increased (and the 
bill initially passed by the House would have provided an even longer 
extension).
    The combination of the 2002 and 2003 corporate tax changes is 
expected to increase business tax subsidies by a total of $178 billion 
in fiscal 2002-04. For corporations, that will cut income tax payments 
by 25 percent over that period. And if the revised ``sunset'' date is 
waived after the end next year, then the cost of these programs will 
exceed $400 billion over a decade.
    Under current depreciation rules, the profits generated by 
equipment investments often aren't taxed at all. Instead, many 
investments enjoy ``negative'' tax rates, that is, they are more 
profitable after tax than before. A whole industry has risen up to help 
companies with excess tax subsidies to sell the excess to other 
companies, typically through leveraged leasing deals, thereby making 
the tax subsidies essentially ``refundable.''
    On its face, the asserted purpose of the recent corporate 
``stimulus'' bills seems sadly misdirected. For the past few years, our 
economy has faced serious excess capacity: businesses can make more 
products than consumers want to buy. Oddly, Congress and President Bush 
concluded that rather than trying to boost demand, the answer to the 
over-capacity problem was to try to encourage even more over-capacity. 
Not surprisingly, this nonsensical strategy hasn't worked. By the end 
of 2002 the Business Roundtable reported that more than 80 percent of 
its members planned no added investment although they were surely happy 
to take the money for doing what they would have done anyway.
    Yet confronted with the abject failure of the previous effort at 
economic stimulus, Congress 1and the President have not admitted their 
mistake. Instead, they concluded that throwing good money after bad was 
the best policy and included even bigger corporate depreciation 
subsidies in the 2003 tax bill.

    OFFSHORE CORPORATE TAX SHELTERING SCHEMES HAVE PUSHED CORPORATE 
                         SUBSIDIES STILL HIGHER

    The fact that Congress was so eager to extend its obviously failed 
corporate ``stimulus'' program illustrates just how hard it is to 
eliminate tax-based spending programs once they are placed in the tax 
code. But while the justification for the recent corporate ``stimulus'' 
legislation is shaky in the extreme, Congress's tolerance of the wave 
of abusive offshore corporate tax shelters that have emerged in recent 
years is even worse.
    By way of background, the traditional goal of U.S. corporate tax 
policy is to tax companies whether American or foreign-owned on the 
profits that they earn in the United States. We give a full tax credit 
for taxes paid on profits earned abroad, that is, actually earned 
abroad. For their part, corporations try very hard to make their U.S. 
profits appear to be foreign on paper, in order to avoid paying taxes 
to any country. In recent years, major accounting firms have designed 
an array of abusive tax shelters that have hugely expanded such paper 
profit shifting.
    Everyone has heard about the dozens of American companies that have 
chosen to renounce their American citizenship and reincorporate in 
Bermuda or other tax haven countries to avoid paying taxes on their 
U.S. profits. In the face of public outrage, only a few politicians are 
willing to publicly defend this unpatriotic practice.
    But the Bermuda tax avoidance scheme is only the tip of a vast 
iceberg of corporate offshore tax sheltering all designed to shift U.S. 
profits, on paper, outside the United States. Congress and the 
President have failed to act to curb these abuses, which all together 
are costing the Treasury and ordinary taxpayers on the order of $50 
billion or more a year.
    Earlier this year, the Senate version of the 2003 tax cut bill 
proposed to take a few small steps toward curbing the Bermuda loophole, 
``Enron-style abuses,'' and other indefensible corporate tax shelter 
subsidies. But even these modest changes were rejected out of hand by 
the House.
    In fact, the chairman of the Ways and Means Committee has made it 
clear that he favors a vast expansion in subsidies for offshore tax 
sheltering. Last year in H.R. 5095, he proposed $83 billion in 
additional subsidies to encourage offshore tax avoidance, only slightly 
offset by the $14 billion in temporary tax shelters curbs he felt 
forced to propose in response to public outrage over the Bermuda 
loophole.
    Of course, some may argue that there should be no taxes on 
corporate profits, or on any kind of investment income for that matter, 
and that only wages should be taxed. That indeed is the apparent 
opinion of the Bush Treasury Department, along with many antitax groups 
and some members of Congress. But even if one has that goal totally 
mistaken in my view setting up a tax system that encourages avoidance 
and evasion by the unscrupulous at the expense of honest corporate and 
individual taxpayers is indefensible.

                     CURBING CORPORATE ENTITLEMENTS

    The agenda for corporate entitlement reductions is a long one. Let 
me quickly highlight a few areas that ought to be given a very hard 
look:
     Excess depreciation write-offs. Beyond enforcing the 
sunsets on the 2002 and 2003 misdirected ``stimulus'' bills, Congress 
could go considerably further in curbing unwise depreciation tax 
subsidies. If our goal is to tax corporations on what they really earn, 
then tax deductions for depreciation ought to be based on a reasonable 
approximation of actual wear and tear, not used as a hidden subsidy 
that distorts investment behavior and interferes with fair competition. 
In addition, depreciation write-offs on debt-financed investments could 
be disallowed, either completely or at least partially, as the 
corporate alternative minimum tax used to do before it was gutted in 
the 1990s.
     Multinational tax subsidies. There are many steps that 
could be taken to curb our current array of wasteful, if not perverse, 
tax subsidies for multinational corporations. For one thing, we don't 
have to let a mail drop in Bermuda turn an American company into a 
foreign corporation. Instead, Congress could follow the lead of 
countries such as Germany, Japan, and the United Kingdom, and treat any 
ostensibly ``foreign'' corporation whose shares are mostly owned by 
Americans as American. Going beyond the specific Bermuda loophole, we 
could take on offshore corporate tax sheltering generally. One 
important step would be to scrap an antiquated rule that lets U.S. 
companies indefinitely ``defer'' reporting their foreign profits on 
their U.S. tax returns. As noted above, it's not that we want to tax 
actual foreign earnings: We give companies a full tax credit for the 
taxes they pay to foreign governments when and if they report the 
foreign income to the IRS. But deferral opens up the door to other 
scams that companies use to shift their American profits on paper to 
tax-haven countries, and our current anti-abuse rules are too weak. 
Eliminating deferral would stem these abuses and hugely simplify the 
corporate-tax laws to boot. That's exactly what the Kennedy 
administration unsuccessfully proposed back in the early 1960s, and 
what both the House and the Senate passed in the mid-1970s 
unfortunately not at the same time.
    Congress could also consider scrapping our unworkable rules that 
require the IRS to examine billions of fictitious intracompany 
transactions, and instead adopt a combined-reporting system that 
allocates taxable corporate profits among countries based on a 
straightforward formula. Under this approach, a corporate tax would 
apply once and only once, rather than only occasionally as is too often 
the case under current law.
     Industry-specific subsidies. Using the tax code to favor 
particular industries and/or investments that make no economic sense in 
the absence of a subsidy (such as ethanol) is almost always bad policy. 
As part of corporate entitlement reform, Congress should consider 
clearing out the array of narrow interest business subsidies that were 
they not hidden in the tax code, would have stood almost no chance of 
being enacted in the first place.

               CONCLUSION: ELIMINATE THE DOUBLE STANDARD

    This year, on-budget Federal revenues are expected to fall to about 
11\1/2\ percent of GDP, the lowest level since before World War II, and 
about a quarter below the 15.9 percent level in fiscal 2000. This drop 
explains most of the enormous deficits we face this year and in the 
future. Of course, the recently enacted reductions in personal tax 
rates and the phase-out of the estate tax explain much of this decline. 
But the vast expansion in tax-based subsidy programs, particularly the 
hundreds of billions of dollars annually for corporations, looms very 
large as well.
    Despite artificial bookkeeping differences, it seems obvious that 
programs should be evaluated on the same terms whether they are run by 
a regular government agency or by the IRS through the tax code. To do 
otherwise would elevate form over substance, and make responsible 
budgeting difficult or impossible.
    So if this committee is seriously interested in reducing our 
government's unsustainable borrowing binge, then curbing unwarranted 
tax-based entitlement programs, especially the many expensive tax 
subsidies for corporations that fail to serve any worthwhile economic 
or social objective, should be high on the agenda.

    Chairman Nussle. Thank you.
    Mr. Scott.
    Mr. Scott. Thank you, Mr. McIntyre. The previous witness 
pretty well disparaged the idea that we are going to grow our 
way out of this mess. Do you agree with that?
    Mr. McIntyre. The idea that cutting taxes increases 
revenues is a nice thought, but it has been tried before. 
Remember under President Reagan when we were going to pay for 
the defense buildup with the revenues generated by the tax 
cuts? A few trillion dollars in increased debt later, they 
figured out that was a bad policy and we reversed it. In fact, 
we managed to balance the on-budget budget for several years in 
the late 1990s. So repeating that failed strategy seems to me 
to be, you know, foolish.
    Mr. Scott. Could you put the deficit chart up? So you agree 
with his disparaging remarks?
    Mr. McIntyre. I do agree with his disparaging remarks. I 
probably would state them even more strongly.
    Mr. Scott. This is the interest on the national debt that 
we were going to pay--the interest on the national debt in red 
that we were going to pay in the defense budget. If we look at 
that chart and the increasing interest on the national debt and 
the Social Security deficit looming after 2017 and the full, as 
you have suggested, 10-year cost of all the phased in tax cuts 
and the President's statement when he came in office that said 
that Social Security needs reform but not in such a way that 
will adversely affect the benefits for those on retirement or 
those near retirement, opening up the question of what about 
everybody else, how do you reconcile that statement, this 
chart, the Social Security deficit in any way that does not 
include a repeal of Social Security?
    Mr. McIntyre. Well, we have big problems with Social 
Security due to the budget deficits that we are running. As you 
pointed out, it is not too long from now when Social Security 
taxes will not be enough to fund the program and Social 
Security will start to have to ask the government to pay back 
the money that Social Security lent it. And if the government 
has a huge national debt and huge interest payments, it won't 
be able to afford to make those payments back to Social 
Security. That is one very important reason why we should be 
trying to get the budget back into balance and maybe into 
surplus when the economy recovers so we will have the resources 
to pay the Social Security commitments that we have made.
    Mr. Scott. And if we don't do something drastic, is it fair 
to assume that we will not be able to afford Social Security?
    Mr. McIntyre. I suppose they could eliminate the Defense 
Department instead, but something has to give, yeah.
    Mr. Scott. One analysis was that in terms of tough choices, 
the tax cut that the top one percent got in 2001 would be 
enough money; if instead of spent on a tax cut, if it had been 
spent on Social Security, it would have increased the surplus 
in Social Security such that we could have paid Social Security 
for 75 years without reducing benefits. Do you agree with that 
calculation?
    Mr. McIntyre. Well, it is sort of contingent on the sunset 
in 2010. But ignoring the sunset, that is right. By 2010 half 
of the 2001 tax cut will go to the wealthiest people and that 
will continue thereafter. And the size of the tax cut if it is 
extended is about double the Social Security problem. So yes.
    Mr. Scott. Is there any chance we might solve this problem 
by tightening up the abuse of credit cards?
    Mr. McIntyre. No.
    Mr. Scott. Is there any chance that we might solve this 
problem by cutting back on waste in student loans, school 
lunches, veterans benefits or veterans pensions?
    Mr. McIntyre. You could eliminate all those programs and 
you wouldn't solve this problem.
    Mr. Scott. You mentioned tax fairness. Can you make a 
statement how fair the abolition of the estate tax would be 
while this is going on?
    Mr. McIntyre. Well, as you know, the estate tax is mainly 
paid by just a handful of very large estates. Some of them were 
listed in today's Washington Post, the Hallmark Card family and 
the Mars Candy family, the ones who have been pushing hardest 
for repeal of the tax. For 98\1/2\ percent of Americans there 
is no estate tax. So it was one of our most progressive taxes 
and one that was an extraordinarily good deal for the vast 
majority of Americans.
    Mr. Scott. When you talk about the foreign taxes, would you 
cure that by changing the foreign taxes from a credit to a 
deduction?
    Mr. McIntyre. Actually, no. I mean our goal on 
international is to try to tax companies on the money they make 
in the United States. We don't try to tax them on their 
legitimate foreign profits. We do try to stop them from 
artificially shifting profits offshore to avoid taxes on what 
they make here. So the foreign tax credit says, look, if you 
pay tax to France or Germany we are not going to tax you again. 
Fair enough. But if you shift your profits to Bermuda, we are 
not going to honor that, and shouldn't honor that. The chairman 
of the Ways and Means Committee wants to honor it. If we crack 
down on the abuses and say we want to measure your profits 
fairly in the United States and that is what you pay tax on, 
just by getting rid of the offshore tax shelters, I am 
confident could raise $50 billion a year.
    Mr. Scott. Thank you, Mr. Chairman.
    Chairman Nussle. Thank the gentleman.
    Mr. Spratt.
    Mr. Spratt. By your calculation what is the effective 
corporate tax rate today?
    Mr. McIntyre. Well, my calculation in 2002 was that it was 
about 15.4 percent. Since then, Congress has adopted even 
larger corporate tax breaks. So I would think it is less than 
15, probably in the ballpark of 12 or 13 percent right now, 
about a third of the statutory rate.
    Mr. Spratt. How much of that is attributable to the ability 
of American multinational firms to move their earnings or 
allocate their earnings overseas and outside the jurisdiction 
of the United States?
    Mr. McIntyre. Well, if corporations paid taxes on all of 
their U.S. profits at the 35 percent rate, they would be paying 
more than double what they are paying now, something in the 
order of about $280 billion. The recent tax legislation on 
depreciation has cut that by about $50 billion a year. Offshore 
sheltering cuts it by another 50. And then there are other 
items in the tax code that cut it down the rest of the way. So 
of the total drop in the effective rate, well, a little more 
than a sixth is due to offshore shelters.
    Mr. Spratt. Would you explain to us exactly how a company 
declares that Bermuda is its headquarters and is now 
domesticated in another country and most of its earnings accrue 
and are allocated to that country rather than this one?
    Mr. McIntyre. Well, I will tell you why they bother. We 
have rules in the tax code that have been there since the 
Kennedy administration that try with limited success, but some, 
to restrict a company's ability to use tax havens. But those 
rules only apply to American companies. If a company, say Price 
Waterhouse Coopers Consulting, which was planning to do it last 
summer, can reincorporate itself as a foreign corporation, say 
in Bermuda, and then shift part of its operations to 
Liechtenstein and some of it to Barbados on paper, our rules 
that stop them from doing that shift out of the United States 
don't work very well. Bermuda was sort of an elegant way to get 
around the rules that Congress set up to stop these kinds of 
abuses. Unfortunately, in the current Ways and Means Committee, 
the chairman believes that these abuses are good.
    Mr. Spratt. Now in your testimony you indicate that 
Germany, United Kingdom and Japan have all taken steps to clamp 
down on this tax avoidance scheme. Have they redefined what is 
a domestic corporation, what is a foreign corporation?
    Mr. McIntyre. Basically their rule is that if you are owned 
by Germans, you are a German company. We could do the same 
thing here. If you are an American-owned company you are 
American, even if you happen to plant your flag on an atoll in 
the Pacific or in Bermuda.
    Mr. Spratt. You indicate one of the problems is allowing 
firms which haven't actually paid taxes to a foreign entity 
which they can claim as a credit against U.S. income, but also 
they defer--even if they haven't paid the taxes but have 
deferred them, they can treat the deferral as having paid 
foreign taxes on income allocated to some other jurisdiction?
    Mr. McIntyre. Deferral says that the companies doesn't pay 
taxes on their foreign profits, foreign in quotes here, until 
they repatriate them, which is basically never. The problem 
with deferral primarily is that it makes it too easy for 
companies to shift their profits to tax havens. Deferral is not 
an issue if you are paying taxes in Europe to real countries, 
because the foreign tax credit would shelter your profits 
anyway. So when John Kennedy proposed what became the anti-tax 
haven rules, he actually proposed to get rid of deferral 
entirely because it was the clean and elegant solution. 
Unfortunately, the Congress wouldn't go that far.
    Mr. Spratt. Is this definitionally hard to accomplish?
    Mr. McIntyre. No. The European countries have great 
interest in going along with it, by the way, if we took the 
lead. They are concerned that the kind of avoidance we are 
seeing here now is starting to spread to their countries.
    Mr. Spratt. We could have some sort of tax treaty with the 
western European countries who want to combat this tax 
avoidance scheme?
    Mr. McIntyre. There would be a great deal of interest. 
There also might be interest in working out a simple formula 
approach to allocating profits among countries, so that at that 
point the corporations would lose incentive to try to shift it 
around because it is either going to be taxed by France or by 
us.
    Mr. Spratt. When profits earned allegedly abroad are 
brought back to the United States and invested here, are they 
taxed at that point?
    Mr. McIntyre. Almost never. They are virtually always 
sheltered by the foreign tax credit. And in fact there are easy 
ways to bring the money back here and invest it here without 
technically repatriating.
    Mr. Spratt. So repatriation doesn't catch up with the tax 
liability?
    Mr. McIntyre. I think I have read about 4,000-5,000 annual 
reports over the last 20 years and the boilerplate is always 
the same in the tax footnote. Our company has X billion dollars 
of profits on which taxes are deferred because they are 
overseas. We never expect to pay any taxes on them. If we do 
repatriate them they will be sheltered by the foreign tax 
credit. I think they have a rubber stamp for that one.
    Mr. Spratt. Thank you very much for your testimony and the 
efforts you put in coming here today. I appreciate it.
    Chairman Nussle. I ask unanimous consent that all members 
be given 7 days to submit statements and other matter for the 
record. I should have done that at the beginning and I did not. 
Without objection, so ordered.
    There are also others who wish to put in statements in the 
record today and without objection, there are a number of other 
statements that I know needed to be submitted so we will do 
that by unanimous consent as well.
    [The prepared statement of Mr. Barrett follows:]

  Prepared Statement of Hon. J. Gresham Barrett, a Representative in 
               Congress From the State of South Carolina

    Mr. Comptroller General, first I'd like to welcome you here and 
thank you for your testimony today. As a taxpayer before coming to DC 
as a Representative I understood that if Washington, DC received the 
money they would spend it. This idea has been reinforced in my mind 
since arriving in Washington just 6 months ago. The amount of taxpayer 
money that is wasted is inexcusable. The American people have a right 
to know what is happening to their money in DC.
    We can't ask taxpayers, businesses and State and local governments 
to cut back and not do the same on our level. As Comptroller General of 
the GAO, I'm sure you are aware of the magnitude of this problem, but 
I'd like to take a moment to list just a few examples for the American 
people.
    The GAO reported: ``Since 1996, annual audits by the Department of 
Health and Human Services Office of the Inspector General have found 
that Medicare contractors have improperly paid claims worth billions of 
dollars.'' Last year, improper payments in the Medicare Fee-for-Service 
Program totaled $13.3 billion, or 6.3 percent of the program. Let me 
say that again because it's astounding--last year, improper payments in 
the Medicare Fee-for-Service Program totaled $13.3 billion.
    With regard to student financial aid the GAO says: ``Millions of 
dollars in loans and grants have been disbursed to ineligible students 
because of internal control weaknesses. Further, while default rates 
have fallen, the amount of defaulted student loan dollars has remained 
high.''
    I along with several other members of this committee have made a 
commitment to hold government accountable. Sometimes we come up here 
and forget it's not Monopoly money we are talking about--it's the money 
of the hard working American people.
    We are determined to find and eliminate waste, fraud and abuse at 
all levels of the Federal Government--we have asked each committee, as 
well as each Cabinet Secretary and down throughout the agencies, to 
really look at how they are spending the taxpayer's money.
    I know the GAO is often referred to as the watchdog of the Federal 
Government, so I look forward to listening to your testimony today and 
I look forward to any suggestions or recommendations you may have.

    [The prepared statement of Associated Builders and 
Contractors, Inc. follows:]

       Prepared Statement of Associated Builders and Contractors

    Associated Builders and Contractors (ABC) appreciates the 
opportunity to submit the following statement for the official record. 
We thank Chairman Nussle (R-IA) and Ranking Member Spratt (D-SC) for 
addressing the problem of wasteful Federal spending programs. It is our 
hope that today's hearing, entitled ``Waste, Fraud, Abuse in Federal 
Mandatory Programs,'' will shed light on just how inefficient, 
fraudulent and outdated the Davis-Bacon Act has become in today's 
economy.
    ABC is a national trade association representing more than 23,000 
contractors, subcontractors, material suppliers and construction-
related firms in a network of 80 chapters. Our member firms employ 
close to one million craft professions across the country. Our diverse 
membership is bound by a shared commitment to the merit shop philosophy 
of awarding construction contracts to the lowest responsible bidder, 
regardless of labor affiliation, through open and competitive bidding. 
With more the 80 percent of the construction industry made up of merit 
shop contractors, ABC is proud to be their voice.
    ABC has long advocated the repeal of the Davis-Bacon Act as a way 
to reduce government spending and improved efficiency and cost 
effectiveness of Federal contracting. The Davis-Bacon Act is a 
Depression-era relic enacted in 1931. Today, it functions as a system 
rife with waste, fraud and abuse, which translates into significantly 
inflated costs for Federal construction. Because of the law's outdated 
restrictions, Davis-Bacon has been demonstrated to inflate construction 
costs by at least 5 to 15 percent, and up to 38 percent, above what 
projects would have cost in the private sector. The unnecessary costs 
are directly passed on to the customers--the American taxpayer--who are 
forced to fund this wasteful program. According to the Congressional 
Budget Office (CBO), repealing Davis-Bacon would save taxpayers over 
$10 billion dollars over 10 years. These savings would guarantee more 
construction for the dollar for important public projects, such as 
schools, roads, bridges, low-income housing, hospitals, prisons, and 
more.
    The Davis-Bacon wage process has been proven to be inaccurate and 
biased and used a tool to defraud taxpayers. In Oklahoma, extensive 
fraud was uncovered whereby numerous falsified wage forms were 
submitted to the U. S. Department of Labor, citing phony projects and 
workers with grossly inflated wages in order to increase the mandated 
wages for public projects. In 1997, a Department of Labor Inspector 
General's report confirmed that two-thirds of the wage surveys were 
inaccurate. In January 1999, a General Accounting Office (GAO) report 
found errors in 70 percent of the wage forms, frequent undetected 
errors, and that the high proportion of erroneous data ``poses a threat 
to the reliability'' of prevailing wage determinations. One very recent 
illustration of the current wage survey process's inability to 
accurately determine ``prevailing'' wages for a region is a recent wage 
determination for several counties in Pennsylvania which increased the 
Davis-Bacon wage rates for several categories by more than 300 percent. 
Upon further investigation, it turns out the association representing 
the vast majority of contractors in the area did not even receive the 
survey and that several ``luxury'' projects, which were otherwise 
anomalies in the area, significantly distorted the real wage picture. 
As a result of this gross wage distortion, the construction of new 
affordable housing projects and other government-financed projects are 
threatened, along with the jobs of construction workers who would be 
working on these projects.
    Davis-Bacon also raises costs by vastly reducing competition. The 
extensive and overly burdensome paperwork and compliance requirements 
associated with the Act makes it nearly impossible for smaller 
businesses to compete. The Act also requires that companies follow 
outdated union job categories, providing yet another inefficient 
compliance hurdle contractors must abide by. When competition is 
reduced, costs increase significantly.
    Under its current application, Davis-Bacon does not provide for the 
use of ``helpers,'' a commonly used job category in the private sector. 
Former Federal Reserve Board Governor Lawrence Lindsay commented, 
``These restrictions (to not allow helpers) impede inner city 
development in two ways: they drive up the cost of construction and 
they tend to deprive local residents of job opportunities.'' Not only 
does the inflated cost in inner city development prevent the use of the 
local labor, it impacts the general public for whom the projects are 
designed. For example, the increased costs greatly decrease the benefit 
of low-income housing. One study found the Act reduces the number of 
minority workers in the construction industry by 25,000 per year; 
another study showed that in states with little Davis-Bacon laws 
African American employment in construction is less than half that in 
states without the law. With presently no allowance for helpers, a 
business has one of two choices in filling unskilled labor positions. A 
firm can a) hire only skilled labor, thereby having highly qualified 
workers performing menial tasks or b) hiring unskilled labor which 
means that workers with few to no skills will be paid the same wage as 
a ``veteran'' worker. This diminishes moral among higher skilled 
laborers with the knowledge that they are paid the same wage as 
unskilled labor.
    The Davis-Bacon Act, through the waste, fraud, and abuse that is 
inherent in the system, ends up costing the American taxpayer upwards 
of a billion dollars every year. The Federal Government cannot, and 
should not, attempt to determine ``prevailing'' wage rates for 
construction, or for any other sector of the economy. The outdated and 
abused Davis-Bacon law should be repealed so that the free market can 
be allowed to work for public contracts, as it does in private 
construction. If the Federal Government is looking for ways to reduce 
waste, fraud and abuse in Federal spending, it need not look any 
farther than elimination the Davis-Bacon Act.
    ABC appreciates this opportunity to submit comments on such a vital 
issue. We look forward to continuing a constructive dialogue on how to 
increase efficiency and value in Federal Government spending

    .[Letter submitted for the record by the Independent 
Budget:]

Letter Submitted for the Record by AMVETS, Disabled American Veterans, 
      Paralyzed Veterans of America, and Veterans of Foreign Wars

                                    The Independent Budget,
                                                     June 17, 2003.
    Dear Chairman Nussle and Ranking Member Spratt: On behalf of the 
coauthors of The Independent Budget, AMVETS, Disabled American 
Veterans, Paralyzed Veterans of America, and Veterans of Foreign Wars, 
we are writing to express our concern as you proceed to investigate 
proposed additional ``savings'' from veterans' benefits and services 
based on what is assumed to be waste, fraud and abuse within the 
Department of Veterans Affairs (VA).
    We were pleased that the Budget Committee abandoned its proposal to 
cut $28 billion in veterans' mandatory and discretionary spending over 
a 10-year period in the fiscal year 2004 Concurrent Budget Resolution. 
However, we are concerned that this Committee is proceeding to require 
committees such as the Committee on Veterans Affairs to report 
arbitrarily established recommended mandatory spending cuts in the 
amounts of $342 million in fiscal year 2004 and $3.9 billion over 10 
years.
    We are certainly no friends of waste, fraud, or abuse. We believe 
that any waste, fraud, and abuse should be identified as part of an 
ongoing effort by the VA and remedied by the VA and the Committees of 
jurisdiction. Because of the very nature of any such savings, we do not 
believe that they can be identified as a rhetorical goal. We are 
concerned that any such savings, identified in this forum, will not be 
used to improve the provision of benefits and services to veterans. To 
set a target that is arbitrary could very well mean that the mandated 
target might very well not be met, and that real benefits will need to 
be cut to reach such a goal. These would be real cuts affecting real 
people, veterans, their families, and survivors.
    At a time when veterans are waiting months to receive earned health 
care benefits, and years to receive other benefits they have earned, we 
respectively ask this Committee, as well as the VA and the Committees 
of jurisdiction, to work together to provide the VA with the stable 
resources it needs to provide the benefits earned by the men and women 
who have answered our Nation's call to duty and to sacrifice.
            Sincerely,
                                                Rick Jones,
                             National Legislative Director, AMVETS.
                                        Joseph A. Violante,
         National Legislative Director, Disabled American Veterans.
                                         Richard B. Fuller,
      National Legislative Director, Paralyzed Veterans of America.
                                           Dennis Cullinan,
    National Legislative Director, Veterans of Foreign Wars of the 
                                                     United States.

    Chairman Nussle. I will let you deal with Chairman Thomas. 
I think you have misstated his position. He can stick up for 
himself, but just for the record I think there is as with many 
things another side of the story here. We appreciate your brief 
testimony on the subject of the hearing today and we thank you 
for that. And if there isn't any further business to come 
before the committee, we will stand adjourned.
    [Whereupon, at 12:45 p.m., the committee was adjourned.]

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