[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
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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
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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
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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.]