[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]




 
 U.S. FISCAL OUTLOOK AND THE FISCAL YEAR 2005 GOVERNMENTWIDE FINANCIAL 
                               STATEMENTS

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

                                HEARING

                               before the

                 SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
                      FINANCE, AND ACCOUNTABILITY

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             SECOND SESSION

                               __________

                             MARCH 1, 2006

                               __________

                           Serial No. 109-133

                               __________

       Printed for the use of the Committee on Government Reform


  Available via the World Wide Web: http://www.gpoaccess.gov/congress/
                               index.html
                      http://www.house.gov/reform


                                 ______

                    U.S. GOVERNMENT PRINTING OFFICE
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                     COMMITTEE ON GOVERNMENT REFORM

                     TOM DAVIS, Virginia, Chairman
CHRISTOPHER SHAYS, Connecticut       HENRY A. WAXMAN, California
DAN BURTON, Indiana                  TOM LANTOS, California
ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
JOHN L. MICA, Florida                PAUL E. KANJORSKI, Pennsylvania
GIL GUTKNECHT, Minnesota             CAROLYN B. MALONEY, New York
MARK E. SOUDER, Indiana              ELIJAH E. CUMMINGS, Maryland
STEVEN C. LaTOURETTE, Ohio           DENNIS J. KUCINICH, Ohio
TODD RUSSELL PLATTS, Pennsylvania    DANNY K. DAVIS, Illinois
CHRIS CANNON, Utah                   WM. LACY CLAY, Missouri
JOHN J. DUNCAN, Jr., Tennessee       DIANE E. WATSON, California
CANDICE S. MILLER, Michigan          STEPHEN F. LYNCH, Massachusetts
MICHAEL R. TURNER, Ohio              CHRIS VAN HOLLEN, Maryland
DARRELL E. ISSA, California          LINDA T. SANCHEZ, California
JON C. PORTER, Nevada                C.A. DUTCH RUPPERSBERGER, Maryland
KENNY MARCHANT, Texas                BRIAN HIGGINS, New York
LYNN A. WESTMORELAND, Georgia        ELEANOR HOLMES NORTON, District of 
PATRICK T. McHENRY, North Carolina       Columbia
CHARLES W. DENT, Pennsylvania                    ------
VIRGINIA FOXX, North Carolina        BERNARD SANDERS, Vermont 
JEAN SCHMIDT, Ohio                       (Independent)
------ ------

                      David Marin, Staff Director
                      Rob Borden, Parliamentarian
                       Teresa Austin, Chief Clerk
          Phil Barnett, Minority Chief of Staff/Chief Counsel

   Subcommittee on Government Management, Finance, and Accountability

              TODD RUSSELL PLATTS, Pennsylvania, Chairman
VIRGINIA FOXX, North Carolina        EDOLPHUS TOWNS, New York
TOM DAVIS, Virginia                  MAJOR R. OWENS, New York
GIL GUTKNECHT, Minnesota             PAUL E. KANJORSKI, Pennsylvania
MARK E. SOUDER, Indiana              CAROLYN B. MALONEY, New York
JOHN J. DUNCAN, Jr., Tennessee

                               Ex Officio
                      HENRY A. WAXMAN, California

                     Mike Hettinger, Staff Director
               Tabetha Mueller, Professional Staff Member
                          Erin Phillips, Clerk
            Adam Bordes, Minority Professional Staff Member


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on March 1, 2006....................................     1
Statement of:
    Walker, David M., Comptroller General of the United States, 
      U.S. Government Accountability Office; and Donald V. 
      Hammond, Fiscal Assistant Secretary, U.S. Department of the 
      Treasury...................................................    18
        Hammond, Donald V........................................    62
        Walker, David M..........................................    18
Letters, statements, etc., submitted for the record by:
    Hammond, Donald V., Fiscal Assistant Secretary, U.S. 
      Department of the Treasury, prepared statement of..........    65
    Platts, Hon. Todd Russell, a Representative in Congress from 
      the State of Pennsylvania, prepared statement of...........     3
    Towns, Hon. Edolphus, a Representative in Congress from the 
      State of New York, prepared statement of...................    15
    Walker, David M., Comptroller General of the United States, 
      U.S. Government Accountability Office, prepared statement 
      of.........................................................    21


 U.S. FISCAL OUTLOOK AND THE FISCAL YEAR 2005 GOVERNMENTWIDE FINANCIAL 
                               STATEMENTS

                              ----------                              


                        WEDNESDAY, MARCH 1, 2006

                  House of Representatives,
Subcommittee on Government Management, Finance, and 
                                    Accountability,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2 p.m., in 
room 2247, Rayburn House Office Building, Hon. Todd Russell 
Platts (chairman of the subcommittee) presiding.
    Present: Representatives Platts and Towns.
    Staff present: Mike Hettinger, staff director; Dan Daly, 
counsel; Tabetha Mueller, professional staff member; Erin 
Phillips, clerk; Adam Bordes, minority professional staff 
member; and Jean Gosa, minority assistant clerk.
    Mr. Platts. This hearing of the Government Reform 
Subcommittee on Government Management, Finance, and 
Accountability will come to order. Our ranking member, Mr. 
Towns, will be joining us shortly.
    Because of upcoming floor votes, Comptroller General's 
schedule, other committee meetings going on for the ranking 
member and myself, we are going to try to push through as 
quickly as possible to get into the substance and allow 
everyone to meet their other obligations as well. But we 
appreciate your being here.
    The 2005 Financial Report of the U.S. Government and 
accompanying audit, completed by the Government Accountability 
Office, was released on December 15th. This marks the 9th year 
that the Department of Treasury has published the report in its 
current form, and again, this year the report shows fundamental 
weaknesses in the Departments of Defense and Homeland Security, 
problems with financial systems, and an inability to reconcile 
exchanges between agencies.
    Today, in addition to focusing on these continuing 
weaknesses, we hope to explore how the information in the 2005 
financial report could be used to inform the annual budget 
debate and spending decisions made by Congress and the 
President. One of the concerns that led to the passage of the 
CFO Act, was that reporting at the time did not accurately 
disclose the current and probable future cost of operating and 
investment decisions. The authors of the CFO Act and the 
Government Management Reform Act, envisioned the financial 
report as a tool for analyzing long-term obligations and 
spending revenue trends. I would like to see us move more in 
that direction in the years to come.
    Perhaps the most important benefit of the audit process is 
learning how to correct systematic weaknesses. We have seen 
improvement since the initiation of the Governmentwide audit in 
1997. However, we won't benefit from the full value of this 
report until we can be assured that the reporting information 
is accurate and GAO can issue a clean opinion. The Government 
Reform Committee has a responsibility to support sound 
financial management through proper oversight, and this hearing 
is an important part of that ongoing effort.
    Our witnesses here today will provide the subcommittee with 
insight on the audit findings of the consolidated financial 
statements, and discuss how the numbers in this report affect 
our fiscal future. We certainly are honored to again have with 
us the Hon. David Walker, Comptroller General of the United 
States; and Donald Hammond, Fiscal Assistant Secretary at the 
Department of Treasury.
    We appreciate your written testimonies and look forward to 
testimonies here in person today.
    I now yield to our ranking member, the gentleman from New 
York, Mr. Towns, for the purposes of an opening statement.
    [The prepared statement of Hon. Todd Russell Platts 
follows:]

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    Mr. Towns. Thank you very much, Mr. Chairman. What I would 
like to do is to put my opening statement in the record and to 
move directly to hear from the witnesses.
    Mr. Platts. So ordered, and your ears were ringing when I 
said we are going to keep moving this along, because of your 
schedule, and our witnesses' schedules as well.
    Mr. Towns. Thank you very much.
    [The prepared statement of Hon. Edolphus Towns follows:]

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    Mr. Platts. If we could swear in our witnesses, and then we 
will proceed right to your testimony.
    [Witnesses sworn.]
    Mr. Platts. The clerk will note that the witnesses both 
affirmed the oath.
    Comptroller General Walker, we will go right to your 
testimony.

   STATEMENTS OF DAVID M. WALKER, COMPTROLLER GENERAL OF THE 
   UNITED STATES, U.S. GOVERNMENT ACCOUNTABILITY OFFICE; AND 
DONALD V. HAMMOND, FISCAL ASSISTANT SECRETARY, U.S. DEPARTMENT 
                        OF THE TREASURY

                  STATEMENT OF DAVID M. WALKER

    Mr. Walker. Chairman Platts, Ranking Member Towns, thank 
you very much for the opportunity to be back before you on the 
status of financial management in the Federal Government. Let 
me, for the record, and as noted in my statement, commend this 
subcommittee for the fact that you have consistently been 
committed to this subject matter. I think it is a critically 
important subject matter. Since you have already entered my 
entire statement into the record, I will use a few of these 
visuals to make a few key points, and then we can move on to 
Mr. Hammond, and then on to Q&A.
    The first visual notes the results of the fiscal year 2005 
financial statement audits for various departments and 
agencies, and you will note several things from this chart. 
First, a significant majority of the agencies received an 
unqualified opinion on their financial statements. However, an 
overwhelming majority of agencies had one or more material 
control weaknesses and/or noncompliance with certain applicable 
laws and regulations. And last, seven agencies had to restate 
their fiscal year 2004 financial statements as part of the 
issuance of their fiscal year 2005 financial statements.
    Let me be clear, Mr. Chairman and Mr. Towns, that when 
someone has to restate their prior financial statements, it 
means they did not deserve a clean opinion on their prior year 
financial statements. There are some that don't seem to 
understand that, and we are looking to possibly modify the 
Yellow Book requirements to make that point clear, when new 
reports are issued.
    I think the other thing that has happened over the last few 
years is that there has been a tremendous acceleration in the 
timing of the work that has been done and the issuance of these 
annual reports. We have a situation now where agencies are 
reporting by November 15th, and the consolidated financial 
statements and related audit report are coming out by December 
15th. I think that is a huge accomplishment, and everybody 
involved should be complimented for that.
    Next is to show you a few numbers. Let me note that in the 
interest of space, I have dropped zeroes, but these numbers are 
in billions of dollars, and therefore, one would have to add 
nine zeros behind these numbers in order to really get a sense 
for what is going on here.
    What I would like to do is to point your attention to the 
second to the last line that says the unified deficit. This is 
the number that consistently gets a lot of media attention, as 
well as emphasis in the legislative branch and the executive 
branch. It represents the largely cash-based results of 
operations for the fiscal year. You will see that in fiscal 
year 2005 it was negative $319 billion, a deficit of $319 
billion. That is down from $413 billion. But let me say for the 
record, that is misleading. While it is technically accurate, 
it is misleading, because on an accrual basis, as you will note 
in the financial statements of the U.S. Government which uses 
an accrual basis and which virtually every private sector 
company does, our net operating costs or annual based deficit 
went up $144 billion from fiscal year 2004 to fiscal year 2005. 
Specifically, it went up from $616 billion to $760 billion, at 
a time where we had one of the strongest economic growth rates 
of any industrialized nation. We haven't been in a recession 
since November 2001, and the costs associated with Iraq, 
Afghanistan, incremental Homeland Security costs was only about 
$100 billion of that number.
    We are deep in a hole, and it is going to get worse if we 
don't start doing something about it.
    In the last 5 years alone, we have gone from over $20 
trillion--now there are 12 zeros behind a trillion, it is just 
unbelievable--from about $20 trillion in liabilities and 
unfunded commitments to over $46 trillion in 5 years! $46 
trillion, in terms that we might be able to better relate to, 
is $156,000 for every man, woman and child in the United 
States, $375,000 for every full-time worker, and $411,000 for 
each household in America. You compare that to the average wage 
and average net worth. It is over 90 percent of the entire net 
worth of every American in the United States, including Bill 
Gates and Warren Buffett. And the number is going up every 
second of every day continuing deficits, because of compounding 
interest costs and known demographic trends.
    We need more visibility on this. This slide was prepared 
using information in the consolidated financial statements of 
the U.S. Government, but you would have a hard time pulling 
together all of this to show exactly where we are, and that is 
part of our problem. We have numbers in MD&A, management 
discussion analysis. We have numbers on the face of the 
financial statements. We have got numbers in the footnotes. But 
we are not pulling these things together enough. I know that 
Don Hammond, the Secretary of the Treasury, the Director of 
OMB, myself, and others are working to try to see if we can 
improve existing financial reporting to convey this information 
more clearly and concisely.
    By the way, a significant part of this increase is related 
to the Medicare Prescription Drug Bill, the cost of which is 
almost double Social Security's unfunded obligation.
    Next, please. I won't spend a whole lot of time on these. 
This is based upon CBO's assumptions for what the fiscal future 
looks like out to 2040. Unfortunately, these are based on 
certain unrealistic assumptions the CBO is required to make by 
law: No. 1, no new laws will be passed; No. 2, discretionary 
spending will grow by the rate of inflation for the next 10 
years; No. 3, AMT, alternative minimum tax won't be fixed; and 
No. 4, that all tax cuts will expire in their entirety, that 
none will be extended in whole or in part. Even on that basis, 
we have a long-range imbalance because if the bar is above the 
line, that is a deficit.
    Next one. This is an alternative scenario. Discretionary 
spending grows by the rate of the economy--it has been growing 
faster--and all tax cuts are made permanent. The future is 
probably somewhat in between those two, but both of them say 
that we are on an imprudent and unsustainable fiscal path, and 
we need to get serious soon, because nothing less than the 
future of the republic is at stake.
    With that, let me just say that in my statement, I include 
a summary of the areas where there continue to be challenges to 
rendering a clean opinion. They are threefold: No. 1, the 
Department of Defense; No. 2, intragovernmental transactions, 
transactions between Government agencies; and No. 3, the actual 
preparation of the consolidated financial statements.
    I also note in my statement a number of areas where we 
think additional progress is necessary with regard to financial 
reporting and related matters.
    Finally, I also note in my statement, areas where the most 
prominent material control deficiencies and weaknesses still 
exist.
    I thank you again, Mr. Chairman, and Mr. Towns, for your 
interest in this matter. It is critically important, and more 
of your colleagues need to be involved here because the stakes 
are very high.
    [The prepared statement of Mr. Walker follows:]

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    Mr. Platts. Thank you, Comptroller General Walker, and 
again, appreciate your frank testimony. One of the most 
important roles in Washington is yours, in trying to get the 
truthful and honest assessment of the financial state of our 
Nation today and in the future. Your charts do a good job, and 
we will get into it further with questions of bringing it all 
together. As you said, that is one of the challenges because 
there are numbers all over. And, truly, as a parent of a 6-
year-old and 9-year-old, to think they will be in their mid 
forties in 2040, and you look at those numbers, and a third of 
our expenditure is just going to be interest. What is left for 
truly critical programs of the Federal Government? It is a 
scary picture.
    Mr. Walker. Mr. Chairman, you are doing it the right way, 
because this is about a lot more than numbers. It is about 
values, it is also about the future of the country, our 
children and our grandchildren. You are looking at it the right 
way, what burdens are your children going to have to bear under 
the path that we're on? What kind of tax levels? What kind of 
other burdens? What kind of choices are they going to have if 
we don't start making some changes?
    Thank you.
    Mr. Platts. I have a good friend in the State house, he 
would look at that and say what you are setting our Nation up 
for is inter-generational divide, between those on Social 
Security and Medicare, families and children, and if we don't 
make some changes now there is no ability to accommodate the 
needs and interest of all of those different groups. So, again, 
your frank assessment is much appreciated, and hopefully, well-
shared publicly. We certainly are doing our best to allow your 
data to be known.
    Mr. Hammond.

                 STATEMENT OF DONALD V. HAMMOND

    Mr. Hammond. Thank you, Mr. Chairman, Ranking Member Towns. 
I appreciate the opportunity to be here today to talk about the 
financial report of the Government for fiscal year 2005. And 
echoing the Comptroller General's comments, the committee's 
sustained attention over the years to these matters has really 
led to significant progress and improvements. We greatly 
appreciate that.
    I would ask that you include the full text of my statement 
in the record.
    Mr. Platts. Without objection, so ordered.
    Mr. Hammond. With my time I would like to just briefly 
touch on a few high points from that written statement, 
briefly, the results themselves from fiscal year 2005, the 
actions we are taking to resolve the auditors' finding and 
recommendations, our plans to make the report more useful, and 
what I think are the important next steps in the future of 
Federal financial reporting.
    I am pleased that this year, for the second time, we were 
able to issue the report on December 15th. Even as important, 
every one of the CFO Act agencies, all 24 of them, issued their 
reports by November 15th. So timeliness, acceleration in 
particular, has become not only a priority but it has become a 
reality. These much more timely submissions are evidence that 
both Treasury and the agencies have improved their processes, 
systems and data. Yet, as you have already heard, evidenced by 
the GAO's audit report, more needs to be done.
    The financial report stated that the Government's fiscal 
year 2005 net operating cost was $760 billion. You have seen 
the comparable numbers. The Comptroller General has a chart, as 
you have seen this afternoon, that displays 2004, evidencing 
the increase in the net operating costs, while at the same time 
the budget deficit declined year over year. I think this 
highlights the importance of financial reporting. It highlights 
the need to look at things in different ways, and use the 
different methods of accounting. They complement each other, 
and it is an important aspect that we need to pay attention to, 
reinforcing the value of this hearing.
    In addition to reporting the financial results of the past 
year, the financial report provides information on our long-
term financial commitments and obligations for programs such as 
Social Security and Medicare. This information is presented in 
the report, in the Statement of Social Insurance, which will be 
a primary statement subject to audit in fiscal year 2006, this 
coming year.
    My written statement includes a summary of these important 
calculations. Due to longstanding material weaknesses, GAO was 
unable to express an opinion on the statements, and I recognize 
that until our statements can withstand audit scrutiny, we will 
not benefit from the report's full value in informing the 
Congress and the public of the Government's fiscal position.
    We are in agreement with GAO on these principal material 
weaknesses. Across Government we have been addressing these 
challenges and we are making progress. The Department of 
Defense is making headway in improving its systems to correct 
its financial reporting problems, however, this will be a long 
time consuming effort. In addition to Defense, Homeland 
Security and NASA also have significant financial issues, 
particularly as they relate to property, plant and equipment.
    Another significant material weakness is the out-of-balance 
condition that results from intergovernmental transactions when 
two agencies record and report differently on a transaction 
between themselves. We are addressing this critical issue on 
many fronts, including the active involvement of the CFO 
Council and agency auditors. I believe that this full array of 
actions and attention will lead to an improved recording of 
these transactions and help correct imbalances.
    Regarding GAO's findings and recommendations on the 
preparation of the report, we continue to take steps to address 
these. We have developed detailed, multi-year corrective action 
plans and are addressing the material weaknesses. Treasury 
continues to meet with GAO regularly to discuss the findings 
and recommendations in detail, and this past year we initiated 
a process to formally communicate the recommendations that we 
believe are closed, and will continue this ongoing dialog with 
GAO. This is the second year that we have used the GFR system 
to prepare the report, and it has provided us with the 
opportunity to allow the agencies to take ownership and 
responsibility for the data provided into the report. This has 
proved to be a very effective and useful element of the 
compilation process, and one that I think will bring dividends 
for years to come.
    I should note that each agency was able to meet and report 
its information into the system this year on time, meeting all 
the applicable deadlines, which was in and of itself quite an 
accomplishment. With regard to what is actually disclosed in 
the report, I testified last year that the Federal Accounting 
Standards Advisory Board undertook a project to provide 
explicit consideration of disclosures tailored to the financial 
report. They have issued an exposure draft, and we expect that 
if the exposure draft becomes a standard, it will resolve many 
of the remaining disclosure-related findings.
    We have now reached an appropriate point to ask whether our 
financial reports are useful, and whether they serve as an 
informative report to the citizens. Clearly, if we want to 
publish Government financial information that is used more 
broadly, not just by the dedicated reader, we need to do some 
things differently. The first question we need to ask is who is 
our audience? That answered, we need to think seriously about 
what we have in the report that is of value to them. We must 
then act to provide them with a better product in order to meet 
those needs.
    I welcome this challenge, and I am frankly committed to 
doing exactly that. For example, we recently reached outside 
Treasury for suggestions and ideas for improving the 
Governmentwide report, seeking advice from a wide range of 
interested parties. Those discussions were both productive and 
very informative.
    I am also committed to working with OMB and the Chief 
Financial Officers' Council on developing the Government's 
financial management strategy for the near future. The 
improvements in financial systems and business processes that 
many agencies have made has led to better underlying financial 
data. We're looking for improved efficiency in the future. To 
better focus on these objectives, the CFO Council has recently 
changed its committee structure. As part of this effort, I will 
co-chair a transformation team that will be devoted to Treasury 
reporting issues, both budgetary and financial.
    I believe that this effort will lead to both near-term 
efficiencies, and set the stage for changes over the longer 
term. Agencies are also putting in place improved internal 
controls, which are essential for improving data reliability 
and fostering improved reporting and accountability. The 
improved systems and processes and better internal controls 
should help reduce restatements and lay the groundwork for 
further improvements and efficiencies. These enhanced processes 
can in fact serve as the basis of opportunity for more frequent 
financial reporting, development of cost accounting data useful 
to program managers and decisionmakers and other advanced 
financial management practices.
    In conclusion, I want to thank you again for your sustained 
interest. I am very proud to have been part of the significant 
progress that has been made over the last few years in 
Government financial reporting, but as you have heard, we still 
have a long way to go.
    Thank you again, and I am happy to answer any questions the 
committee may have.
    [The prepared statement of Mr. Hammond follows:]

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    Mr. Platts. Thank you, Mr. Secretary, we appreciate your 
testimony and the work of you and your staff day in and day out 
throughout the year.
    Jumping to questions, Mr. Walker, you touched on it with 
your opening statement, just the way things are reported, it 
takes some effort under the current model to bring it all 
together. I know you have shared in the past some specifics. If 
you want to get into some details of how to rework the model to 
give a more honest assessment to the American public, so that 
it is easier to understand as opposed to having to bring 
everything together, but it is just laid out from the get-go. 
If you want to expand on that, that will be great.
    Mr. Walker. Well, first let me say I am disappointed to 
have to say that very, very few individuals read the annual 
financial report of the U.S. Government. I give many speeches 
inside and outside the beltway during a given year, and one of 
the things that I have done recently is to ask for a show of 
hands as to how many individuals have read the financial 
statements of the U.S. Government. It is well less than 1 
percent of all of the audiences that I have addressed, and some 
of those audiences were comprised exclusively of financial 
professionals. So that is very disappointing.
    Frankly, I think one of the problems is, in today's world, 
where we have information overload, we need to make this much 
more user friendly, and there are three projects in particular 
that the principals of the Joint Financial Improvement Program 
are working on right now that are relevant to your question, 
Mr. Chairman. The first is, I believe very strongly that we 
need to publish a summary annual report that is both useful and 
used. When I was a trustee of the Social Security and Medicare 
Trust Funds from 1990 to 1995, myself and my other public 
trustee, endeavored to do this on our own. We started something 
back then that has stood the test of time, and now all the 
trustees are involved. It is a plain English, bigger print, 
charts and graphs, bottom-line oriented document that is widely 
distributed and read.
    I think we need to do the same thing in connection with the 
consolidated financial statements, and the Treasury Department 
has the lead on trying to come together with a proposal for 
consideration in that regard. That does not take any changes in 
law if people do it voluntarily. On the other hand, if we can't 
make progress, it is something that may be worth considering as 
part of your review of financial management in the Federal 
Government.
    Second, if we look at the numbers, even on a cash basis, a 
lot of what is going on in Government deals with earmarked 
revenues, revenues for things like payroll taxes for Social 
Security and Medicare. Those are spoken for. They are supposed 
to be dedicated solely for the purpose of meeting the 
obligations under those programs.
    Now, in reality what happens, we take in the money and we 
spend the money. The trust fund is not really a trust fund. It 
is a subaccount of the general ledger. We replace the loss with 
a bond that is backed by the full faith and credit of the U.S. 
Government, guaranteed as to principal interest, but, one tha 
is not really marketable does not have any economic 
significance at all. It has legal, political, moral 
significance. When you think about how we are presenting in the 
financial statements the difference between what is going on in 
the operating accounts of the Government, or the on-budget, 
versus what is going on with regard to these earmarked revenues 
or so-called trust fund accounts, you will see that the cash-
based budget deficit was about $175 billion bigger last year 
because we spend every dime of the Social Security surplus on 
other operating expenses. That is not new. We have been doing 
it for years.
    That issue is being looked at by OMB. Namely, to take a 
look at how we might present this information in a clearer 
manner.
    A third has to do with what I call a burden statement. It 
is the numbers that I showed you before, where if you end up 
taking the liability numbers off the financial statements, 
certain numbers off the Statement of Social Insurance, and 
others from different places, you can pull together something 
that is more meaningful, to get a sense for where we stand and 
where we are headed. We need to have something that shows where 
we are on our total burdens--that means liabilities and 
unfunded commitments--how we are trending, and we need to 
translate those numbers into per capita numbers, percentage of 
GDP, and use various other benchmarks where people can get a 
better sense of our position.
    The other thing we need to do is what you touched on, Mr. 
Chairman. We need to talk about the inter-generational 
applications of the path that we are on. We need to be able to 
demonstrate that if you are 6-years-old and we continue to go 
on the path that we are, then what kind of tax burdens are you 
likely to have to bear when you are 40-years-old. This type of 
information would be much more meaningful to users of financial 
statements down the road.
    I have other examples on pages 5 and 6 of my statement. The 
only other one that I will mention right now is this country 
forgoes $700 to $800 billion a year in revenue due to 
deductions, exclusions, exemptions and credits under the 
Internal Revenue Code. You will not find this number in the 
financial statements of the U.S. Government. You also won't 
find it in the budget or appropriations process of the U.S. 
Government. We need to have more transparency over these tax 
expenditures, because, in effect, what is happening, is they 
represent back-door spending. If you can't achieve something 
through a direct spending program, there is an incentive for 
people to create a tax incentive to get it off the books, 
outside the budget process, but it really does have an impact 
on the bottom line. It may or may not work because we don't 
know whether a lot of tax preferences were working or not, and 
we don't know if a lot of our spending programs are either. 
Those would be a few examples, Mr. Chairman.
    Mr. Platts. And those examples, as they relate to the 
general public understanding the fiscal realities, and also to 
Congress and the executive branch having information that we 
actually rely on when we act, and the example here would be, as 
one who has supported the Medicare Part D, when I see that 
bottom number of $8.77 trillion in the next 30 years to come, 
our liability that we have now incurred for benefits that we 
are going to pay out in the decades to come, that puts it in a 
different perspective.
    Mr. Walker. That is an important point. Other than the 
financial reporting, I would respectfully suggest that the 
budget process and the legislative process needs to be revised. 
For example, when the Congress is considering a new entitlement 
benefit or a new spending program, or a new tax preference, or 
extending an existing tax benefit, I think the Congress needs 
to not just know what the 1-year, 5-year and 10-year cash-flow 
cost is. For the big ticket items, for the ones that are really 
big and typically get more expensive beyond the 10-year 
horizon, I think Congress needs to know what the discounted 
present value cost of that is. That is what the $8.7 trillion 
Medicare Part D number is. That is how much money you would 
have to have today invested at treasury rates to close the hole 
that has been created--not the donut hole--to be able to 
deliver on the Government's for the next 75 years. None of you 
had that number, and I would respectfully suggest that if you 
did, the outcome might have been different. The irony about the 
Medicare Prescription Drug Benefit is, we were in the hole $15 
to $20 trillion for Medicare before that bill. The bill added 
$8 to $9 trillion more, which is almost double Social Security.
    Mr. Platts. Two other specifics in this type of reform, and 
then I want to get to Mr. Towns.
    On the entitlement, is it something that we should look at 
the way we actually fund entitlements? Now it is an automatic, 
next year 7.6 percent more or whatever, and so unless we take 
action to change it, it just happens. Should it be the same as 
discretionary so every year we are forced to look at the 
realities of these numbers, rather than just being on autopilot 
unless we do something proactive?
    Mr. Walker. Mr. Chairman, we issued a report within the 
last several months, which I will make sure that both of you 
have the benefit of, that talked about what can be done to gain 
better visibility over and control of mandatory spending 
programs. If you look at the current budget, over 60 percent of 
the budget is on autopilot, and it is going up every year. We 
need some reconsideration triggers based upon the percentage of 
budget, the percentage of GDP, or various other factors so that 
Congress is forced to reconsider these programs at least 
periodically, because if we don't do that, then the Government 
is not going to be able to do much more than pay interest on 
the debt and maybe a few other mandatory programs in the out-
years.
    The other thing we need to do is we need to recognize that 
we don't just need to do this with regard to direct spending 
programs, we also need to reconsider some of these tax 
expenditures that are off the radar screen because they involve 
a lot of money too.
    Mr. Platts. One other specific--and I am not familiar with 
your latest report that you reference, and would be glad to get 
that and take a look at it. And it is more specific on the 
discretionary side. I am a believer, having come out of the 
State house, you balance budgets, and one of the ways you 
ensure that is a line item veto. Is that something that has 
been in your discussions that you have looked at on the 
discretionary side?
    Mr. Walker. The difficulty, Mr. Chairman, as you know, with 
the line item veto is that would involve a significant give-up 
of constitutional power from the legislative branch to the 
executive branch. There are pros and cons to it, but I know who 
my client is. My client is the legislative branch. I do think 
there are things that can and should be done that we have not 
even done yet. Hopefully, we could pursue some of those 
actions, and that might end up helping. If those are 
inadequate, then you can look at more dramatic actions that 
could end up involving a more fundamental redistribution of 
power under our current constitutional scheme.
    Mr. Platts. As a member of the legislative branch, but, 
obviously, not an appropriator on the legislative branch, I 
think that we look at our States as laboratories of democracy 
and what works out there, and I think it is all but three or 
four States have balanced budget and line item requirement. I 
sought an action at the State level in Pennsylvania and thought 
it helped bounce back executive and legislative responsibility. 
So if it is to be done, it certainly is a constitutional issue.
    Mr. Walker. Can I mention one thing, Mr. Chairman, on that? 
As you properly pointed out, the States are a laboratory for 
experimentation, and we need to learn what works for them and 
what doesn't. One example is, I believe 49 of 50 States--and I 
will double check it for the record--but I believe 49 out of 50 
States have a balanced budget requirement.
    Mr. Platts. I believe that is correct.
    Mr. Walker. However, it depends upon how you define a 
balanced budget. There is one very large State on the West 
Coast, which I won't mention, that defines a balanced budget as 
balancing cash-flows. If it turns out that expenditures are 
higher than revenues, then they just go out and borrow the 
difference and that is deemed to be a balanced budget. I would 
respectfully suggest that is not a balanced budget. That is 
balancing cash-flows.
    Mr. Platts. That is more this approach of you are not 
accounting for what your future liabilities are, I mean, as far 
as----
    Mr. Walker. It is similar to what we are doing, which 
ultimately will catch up to you.
    Mr. Platts. Rather than us learning from what is working 
out there, they are learning what is not working here in their 
approach.
    Mr. Walker. Unfortunately, the Federal Government is not 
leading by example in this regard.
    Mr. Platts. Exactly.
    Mr. Towns.
    Mr. Towns. Thank you very much, Mr. Chairman.
    Let me begin with you, Mr. Hammond. The weaknesses in tax 
collection activities and system efficiencies have been notable 
in practically every year on the consolidated statement. Can 
you update us on efforts to improve the internal controls of 
the Treasury to ensure efficient operation in the area of 
collection activities?
    Let me just be quite clear, that I understand that if you 
get more employees, that every time you spend $1, that you are 
able to collect an additional $4. And I also would like to add 
I understand that you did not request additional staff in your 
last budget. So could you respond to those three things?
    Mr. Hammond. I will give you a very high-level, kind of 
departmental-wide perspective, but I would respectfully suggest 
that I am not the right person at Treasury to be speaking to 
those specific questions. The Assistant Secretary for 
Management and Chief Financial Officer for the Department, or 
the Commissioner of the Internal Revenue Service, would 
probably have, would certainly have more specific responses. We 
are looking at an environment where enforcement at the IRS is 
indeed a high priority, and I know that the Commissioner has 
reallocated resources within the Service to highlight the 
importance, capitalizing on the efficiencies that he has 
generated internally in the organization through electronic 
filing, for example, and being able to redirect those resources 
toward enforcement activity because they do in fact realize the 
substantial payoff related to additional enforcement work, so 
long as it is done consistent with the standards that were laid 
out a few years ago respecting taxpayer rights.
    Mr. Towns. Right. Can you update us on the development and 
efforts under way in recovering improper payments referred to 
you for collection? Is there any hindrance in your way to 
effectively recoup these funds? Is there anything that the 
Congress should do in order to make it easier for you to be 
able to recoup this money?
    Mr. Hammond. We actually do have a couple debt collection 
proposals, legislative proposals that are in the President's 
budget this year, having to do with somewhat technical aspects, 
the ability to offset different payment streams, the ability 
the collect debts on behalf of States where a debtor may cross 
State lines, and I would refer you to those in the budget. We 
can get you more specific information on those legislative 
proposals.
    In general, the debt collection program is running 
extraordinarily well. Last year we collected over $3.2 billion 
in delinquent debt, some of that Federal, some of that State 
child support, some of that State income tax debt. There are a 
couple aspects of that program where we continue to enhance 
things, the most significant of which is making sure that all 
vendor payments are included in the process. That is really 
much more of an issue of fairness, frankly, than of large 
dollars. Vendor payments are not a significant payment steam, 
but nonetheless--and there are complexities bringing them into 
the collection process. But it is something that is a high 
priority for us, and we have made a lot of progress in the last 
year or so addressing.
    Mr. Towns. Mr. Walker, what do you suggest either we should 
do in order to deal with the public, because those numbers you 
gave us, I mean, they are very alarming, you know. I want you 
to know that--and I am not an emotional person, but you brought 
tears to my eyes. [Laughter.]
    What should we do here? Tell it from a legislative 
standpoint. I mean, there must be something here. I mean 
something is missing.
    Mr. Walker. Well, Mr. Towns, first, there are several 
suggestions in my testimony, and I am happy to provide 
additional ones for the record. There are two issues.
    One issue is, what needs to be done in order to be able to 
obtain better control over our fiscal future? The first thing 
that I would say is we need to learn the first rule of holes, 
and that is, when you are in a hole, stop digging. We haven't 
learned the first rule of holes.
    In that regard, it means that we need to be more truthful 
and transparent about where we are and where we are headed. As 
the chairman mentioned before, we need to consider what the 
long-term affordability and sustainability of certain 
legislative proposals are before they are enacted into law. I 
would respectfully suggest that we need to have reasonable 
spending caps, and pay-as-you-go rules on both sides of the 
ledger, both the spending side and the tax side. I understand 
that is controversial, but when you are trying to control the 
bottom line, you shouldn't exempt one half of the ledger. 
Afterall, some tax cuts stimulate the economy, all tax cuts do. 
In addition, very, very few, if any, tax cuts pay for 
themselves. I have not found an economist who can show me one 
that did yet.
    So we have to do that. We also have to be able to look at 
mandatory spending. How are we going to get control over 
mandatory spending? It is not just entitlement programs. It is 
also other areas. One of the biggest differences between the 
cash-based budget deficit and the accrual-based budget deficit 
is pensions and health care for civilian and military employees 
and veterans. There is a lot that has happened in recent years. 
The costs are going up dramatically, and we are not going to 
have to pay them until the future years, but we can see what is 
coming right now.
    I would be happy to provide some more specifics for you, if 
you want, for the record, but I have testified on numerous 
occasions on some of the things that I think that the Congress 
should respectfully consider either through legislation and/or 
through modifying your own rules. After all, Congress creates 
its own rules, its own points of order, what goes into the 
budget resolution each year and things of that nature.
    Mr. Towns. I am just thinking that when we look at Medicare 
Pard D, now, should we modify it? Is there anything that we 
need to do here, Congress itself, because based on your 
numbers, it is a mess.
    Mr. Walker. I would respectfully suggest, Mr. Towns, that 
Medicare Pard D is a poster case for two things. No. 1, only 
considering the short-term cost, not considering the long-term 
affordability and sustainability of new commitments; and 
second, the fact that I think most reasonable people would say 
that certain portions of the Medicare population need help with 
prescription drugs, and that any modern health care system for 
seniors would involve some assistance for prescription drugs in 
appropriate circumstances. At the same point in time, what was 
done was we just layered on top of Part A and Part B, which by 
the way, is based largely on Blue Cross/Blue Shield 1965, which 
has not been modified and reformed in a dramatic way since 
1965, already had an unfunded commitment of $15 to $20 
trillion, and what we did was we added another $8 to $9 on top 
of that without really reforming the program. And one of the 
things that is going to have to happen is I think that 
Congress--and I have said this publicly--should reconsider 
Medicare Part D as to the scope, as to the timing, and as to 
who benefits, because I think you are going to have an 
extremely difficult time delivering on this promise over time.
    Mr. Towns. Thank you very much. Mr. Chairman, I yield back.
    Mr. Platts. Thank you, Mr. Towns.
    Secretary Hammond, you mention in your testimony, and it is 
in both of the written prepared notes, the fact that this year 
will be the first time we audited the Medicare and Social 
Security Trust Funds. Can you go into some detail of what we 
should expect from that audit and how it will likely impact the 
financial report for 2006?
    Mr. Hammond. I think the short-term answer is we don't 
expect a fundamental change in the report. The schedule itself 
will stay the same. Its placement will move, I think, maybe a 
page or so. So the real question is, what will the scope of the 
audit reveal or what will it indicate?
    The Social Security program was audited on these types of 
estimates a number of years ago, and received, I think--by 
PriceWaterhouseCoopers at the time--and received a very 
favorable report. I am not aware of whether or not HHS and the 
Medicare program had been exposed to the same level of 
scrutiny. So the result may be that we get some additional 
information about some of the preparation and the assumptions 
processes going forward, but I don't expect any startling 
results.
    Mr. Platts. Mr. Walker, any insights?
    Mr. Walker. You are correct in saying this is the first 
year in which the numbers that are in the Statement of Social 
Insurance will be subject to independent audit, and 
PriceWaterhouseCoopers is the independent audit firm that is 
responsible for auditing both Social Security, as well as CMS, 
and therefore, they will be on the front line of these 
responsibilities we will also have to get comfortable with 
these numbers because we are the auditors for the consolidated 
financial statements.
    They will look at the appropriateness of the methodology 
and the reasonableness of the assumptions. We will have to wait 
until they are done but I would be surprised if there are any 
more big findings here although they may wish to point out in 
their report the fact that there is a considerable degree of 
uncertainty with regard to some of these numbers. In part, 
because when you are dealing with health care, only God knows 
what future health care costs are going to be, and God is not 
telling us. So there is a much greater degree of uncertainty 
with regard to health care costs than there is on Social 
Security, because with Social Security, you have a defined 
dollar benefit.
    Under Medicare, the way that it stands right now, is that 
you have a defined level of coverage. Therefore, you need to 
determine what is it going to cost to provide that level of 
coverage to the applicable population? That is a much more 
complex process.
    Mr. Platts. And that, in some degree, relates to, as we are 
trying to get that transparency and honest discussions of the 
coming debts, what we are going to have in the future, when we 
talk about Medicare Part A, B and D. The assumptions, if Part D 
works as intended, people get their prescription drugs, that 
perhaps there is a savings in Part A because there are less 
serious illnesses and hospitalizations. There is no assumption 
of that at this point in the outlooks?
    Mr. Walker. The actuaries for Medicare, it is my 
understanding, considered that when they came up with these 
numbers, they did not believe that there would be any material 
savings in Part A. The laws of economics haven't proved to be 
too valid in connection with health care, because the way that 
our health care system is, everybody wants unlimited health 
care and access to the newest procedures and technologies, 
especially if somebody else is willing to pay for it. 
Ultimately what we are going to have to do, and we have some 
work on this too, Mr. Chairman, we are going to have to engage 
in a much more fundamental discussion about health care and the 
appropriate division of responsibilities between Government, 
employers and individuals for health care. Right now, the 
biggest driver to a long-range imbalance is health care. The 
second is demographics, but health care is really the biggest 
driver to a long-range imbalance, and it is not just an issue 
to the Federal Government. As you know, having been in the 
State legislature. Medicaid is the fastest-growing cost in 
State government. It is also the No. 1 competitiveness 
challenge to the private sector in the United States right now.
    Mr. Platts. You look at the private sector competing in a 
world economy, and the expectations of employees from decades 
of having it provided either at no cost, minimal cost and 
ability to compete now, where every dollar counts as far as 
staying in business, you are right, it is not just a Federal 
and State government challenge, it is a national challenge, 
public and private.
    Let's turn maybe to some of the specifics of the report, 
and how it presents to the various departments, and this being 
my 4th year as chairman, and over the 4-years we have had 11 
different departments, agencies, that got unqualified opinions. 
One of the issues specifically I wanted to touch on, was 
referenced in one of the charts, the number of restatements 
that have been occurring, 5 in 2003, 11 in 2004, 7 again this 
year. You know, we are down from 11 to 7, but still, almost a 
third of the CFO departments and agencies are restating, which 
means that when we look at the ones that are restating, it 
looks 4 maybe out of 7, had supposed unqualified opinions last 
year--my eyes need to be checked here. So it's not a good sign.
    And the fact that we have seven restatements again this 
year, does that mean that we are not moving forward as well as 
we would like to believe in getting more focus on financial 
accountability and financial disclosure, or should I read 
something different from those seven?
    Mr. Hammond. Let me offer a perspective on that. I actually 
think that the volume of restatements that we have seen in the 
last couple of years is a good thing, while recognizing that it 
is a bad accounting outcome. The reason that is a good thing is 
that it has, I think, injected even more discipline and 
seriousness into the process. What has happened is, as agencies 
have improved their systems, gotten more experienced in the 
financial statement preparation process, so too have their 
auditors. I don't think, when we started the financial 
reporting on an audited statement basis, that, frankly, the 
level of audits that agencies received at the Federal level was 
comparable to what you would see in the private sector. And I 
think that as the agencies have gotten better, the auditors 
have gotten better, and the sophistication of the process 
itself is becoming more intense, and it is finding things that 
perhaps should have been found a long time ago.
    I, frankly, think that is a healthy sign of a process taken 
very seriously by both parties.
    Mr. Platts. Why are we not finding them the first time 
around? Because that's how I look at the restatements, that we 
are 7 times this year, 11 times last, we are finding it, but 
after the fact in a sense, and going back in----
    Mr. Hammond. That is right. I am not sure there is a 
complete pattern that, you know, you are seeing the same kinds 
of restatements in all circumstances, the reasons for the 
restatements vary. I do think that there is a question of audit 
funding, in some circumstances, and experienced audit staff. 
That makes it a little bit harder to go forward. Now that most 
agencies--in fact, I think almost all, maybe all but 1--of the 
24 CFO Act agencies now have independent public accounting 
firms doing the audits. That helps. Sarbanes-Oxley influences 
and the emphasis on internal controls has certainly helped 
surface things that may have been just one level below.
    It is a bad outcome on an annual basis, but I think it is a 
healthy sign for what we hope to get out of it going forward.
    Mr. Platts. Mr. Walker.
    Mr. Walker. It is my understanding, Mr. Chairman, that a 
couple of common denominators from the misstatements that we 
have had in the last couple of years are that some of the 
agencies have been implementing new financial management 
systems, and they have had difficulty in that implementation 
process. Second, within the last couple of years we have had 
the new statement of budgetary resources, where you reconcile 
the cash-based budget deficit and the accrual-based budget 
deficit. Some agencies, and their auditors, had difficulties 
with it. That is not something you see in the private sector.
    I would say it is obviously to everybody's benefit that to 
the extent that there is a misstatement, that it be identified, 
hopefully as soon as possible. I think it is good that auditors 
recognize their professional responsibilities to note that and 
to restate those numbers. I do, however, believe that this is a 
high percentage, higher than should be acceptable, and that 
when an agency has to restate its financial statements, it 
should not be green on financial management under the 
President's management agenda because it means you didn't 
deserve a clean opinion if you received a clean opinion in the 
prior year.
    Mr. Platts. Is that something that the administration is 
looking at or willing to look at?
    Mr. Hammond. I would have to ask my colleagues at OMB as 
to--I know they look at the criteria for the scoring on the 
President's score card periodically. It is certainly a question 
I will take back to them.
    I would also note though that this is a trend that--and 
while the numbers and the percentages certainly are not the 
same--but it is a trend for increased restatements. It is 
something we are seeing in the private sector as well. So I 
think there is a level of seriousness going to the audit 
process that is, frankly, new in many respects.
    Mr. Walker. If it can, Mr. Chairman, it is true that the 
number of restatements going in the private sector have gone up 
post Sarbanes-Oxley, in large part because of the 
accountability failures that have occurred in the private 
sector and the relative risk associated thereof, as well as the 
additional oversight and scrutiny that is being imposed by the 
Public Company Accounting Oversight Board, among other things.
    However, the percentage of financial statements that have 
to be restated in the public is way, way, way higher than it 
has ever been, and much higher than it is ever likely ever to 
be in the private sector. I mean this would not be anything 
near an acceptable outcome in the private sector.
    Mr. Platts. If we had a third of the private sector, it 
would be front-page news and there would be a lot of concern 
out there.
    Mr. Walker. Well, in fact, I am going to send you, Mr. 
Chairman, an opinion piece that recently was published, about 
the audit report of the consolidated financial statements of 
the U.S. Government, noting that if the audit report had been 
on any major corporation in the United States, it would have 
been on the front page of every major paper, and yet, it didn't 
even make most papers, much less on the front page. That is a 
problem.
    Mr. Platts. That goes to really one of the challenges as 
Chair of this committee for 4 years, is how to get an 
appreciation, beyond a small circle, of the importance of the 
issues discussed in this committee and through your efforts at 
GAO within the administration. What we are talking about here 
ultimately impacts everything else going on out there in the 
sense of the financial realities of our Federal Government. I 
guess we need to have a major league baseball player sitting 
next to you, when giving your testimony, give his opinion.
    Mr. Hammond. That would be great.
    Mr. Walker. I played on a national championship high school 
football team, but that is not good enough.
    Mr. Platts. We didn't have that in your bio to get the 
national media attention. [Laughter.]
    It is getting that appreciation and focus beyond just a 
small group, because otherwise it is hard to overcome the 
historic practices here.
    There was a mention--I think, Mr. Hammond, I think you 
mentioned Sarbanes-Oxley. You may have both mentioned it. How 
does that impact your read on it just from a human resource--I 
guess it is two part. When I look at those restatements, is 
there a human resource aspect here of just staffing within the 
departments or agencies? And also the expedited deadlines, does 
that impact, that there is a rush to get done, and maybe to 
miss something because of that, and if so, is that still less 
important that we are getting more timely information?
    Mr. Hammond. I think it is less a resource issue and more 
related to a business process issue.
    Mr. Platts. Internal controls and----
    Mr. Hammond. And legacy systems. The Comptroller General 
mentioned, for example, systems conversion efforts. Bringing in 
new financial systems is a good thing. It is also really hard 
to do when you are not just upgrading from a good version to 
the next version of a good system, but in fact, taking a 
collection of legacy systems, trying to put them together in an 
environment, and frankly, the Federal Government never had to 
do accrual-based reporting before these recent initiatives.
    These systems were never designed to capture a lot of this 
information, and there are practices that are unique to the 
Federal Government, for example, property in the hands of 
contractors, which if not properly tracked and accounted for 
during the year with good internal controls, is an absolute 
reporting nightmare at the end of the year. I think some of 
what you are seeing is symptomatic of that type of change that 
is just going on at the agency level.
    Mr. Platts. Maybe no one better exemplified that than at 
DOD, as we try to get a handle on their financial management 
systems, the thousands of different systems. And I will 
probably misstate the names here, but in the most recent 
example, their new pay system, the Forward Compatible Pay 
system where I think we spent $52 million at DOD, and scrapping 
it and starting over, in essence. I mean that type of trying to 
modernize, but needing it to be done responsibly, and thinking 
through everything up front before we keep spending this money 
with no results. That really leads into, DOD, clearly is the 
600-pound gorilla, that unless we fix it, we are never going to 
get to an unqualified opinion. Your assessment, both of you, on 
how you view DOD's progress or lack thereof, as specific or 
general as you like.
    Mr. Walker. First let me make a comment with regard to the 
general issue that you talked about, and that is, financial 
management systems improvement efforts. There are many examples 
of hundreds of millions of dollars being wasted on failed 
financial management systems improvement efforts. A recent one, 
the Navy, several followup projects dealing with an ERP 
project, $1 billion down the drain. One of the fundamental 
problems that we have is who is being held accountable? The 
answer is, all too frequently the answer is no one.
    Mr. Platts. If I could stop you there. On that example, are 
you aware of any person demoted, fired, funds recouped?
    Mr. Walker. We have not done a study of that, but I asked 
the question coming up here, as to whether or not some of the 
same people who are responsible for the failed system are 
responsible for the new system, and the answer was yes.
    My point is--and, frankly, that is a shared responsibility, 
Mr. Chairman. It is not just a responsibility of the executive 
branch, it is a responsibility of the legislative branch.
    Mr. Platts. Our oversight.
    Mr. Walker. We can't continue to have these deja-vu all 
over again problems, as Yogi Berra used to say. There have to 
be consequences to these types of failures.
    But with regard to DOD, I hope that by the end of my 15-
year term, which is October 2013, which mean that it would have 
to be the 2012 financial statements, I hope that by then the 
Department of Defense has an opinion on its financials, even if 
it is qualified, such that we might be in a position to be able 
to render some type of an opinion other than a disclaimer on 
the consolidated financial statements.
    I know there are a lot of people who are working hard to 
try to deal with this. I know they are now trying to take an 
approach of looking at various line items across the 
Department, horizontally, and looking at various units within 
the Department--vertically, to try to make progress one step at 
a time. They have abandoned their prior plan of having an 
opinion on DOD by 2007, which was totally unrealistic. You need 
to have goals and milestones, there is no doubt about that. It 
is fine to make them aggressive, but they have to be 
attainable, because if they are not, they are not credible and 
nobody will pay any attention to them.
    I still have not seen a consolidated plan yet that says 
that the game plan is that over X number of years, we are going 
to be able to get to the point where we think we can have some 
opinion that these line items in year X and these entities by 
year Y, accumulating toward some department-wide outcome. I 
have not seen that yet, and I don't know that it exists. 
According to my staff, they don't have one yet. As you know, 
you have to have a plan or you are going nowhere fast.
    Mr. Platts. Mr. Hammond, comment on DOD, your perspective?
    Mr. Hammond. Just let me add that we have found that the 
financial management community at DOD to be some of the most 
engaged and supportive people across Government, as far as 
meeting the needs that we have and pulling together 
consolidated financial reports. So I think the current 
situation that they find themselves in is not reflective of the 
commitment to trying to do this, but I do think that they have 
a task that is quite challenging.
    Mr. Platts. My read is there have been a lot of dedicated 
people trying over there, but it is kind of just a machine just 
kind of eventually chews them up and spits them out because it 
is so overwhelming. The Secretary has made the commitment to 
focus on this, and now with the Deputy Secretary taking the 
lead on the business transformation and trying to raise the 
priority of it, but in my 4 years, I am hard pressed to say I 
can see true progress being made. Effort, yes. Progress I think 
is something else.
    Mr. Walker. One of the things that we recommended, among 
many, last year about this time was that the Congress seriously 
consider requiring that the Department of Defense have a Level 
2 Deputy Secretary for Management, in order to separate the 
policy and military transformation in fighting the global war 
on terrorism role from the business transformation process. 
After all, the Department of Defense was created in 1947 and 
yet it still has 8 or 25 high-risk areas on its own. It shares 
6 others, so that it represents 14 of 25. One of the biggest 
problems that DOD has is that it lacks a person who is 
responsible and accountable, with the requisite level of 
experience, at the right level, who is there long enough in 
order to get these things done, who can deal directly with the 
unders, who can deal directly with the service secretaries, who 
can cross the silos, and who has direct access to the Secretary 
on a day-to-day basis as necessary to get this job done.
    A year ago we recommended that. I think the world of Deputy 
Secretary England. He is an extremely capable professional, and 
I think that he could do either one of these jobs and do them 
well. However, I question whether any human being on the planet 
can do both of them. Secretary England said a year ago to give 
him a year, and see how it goes with one person trying to do 
both jobs. I am anxious to hear what he thinks now because our 
view stands. Namely, that despite how capable and how high a 
regard we have of him, this is something that has to be 
addressed, because by definition, Gordon England only has a 
recess appointment, and even if he ends up getting a full 
appointment, this administration doesn't even have 3 years 
left. You are not going to get anywhere close to fully 
addressing some of these issues in 3 years. It is going to take 
many more.
    Mr. Platts. I think that is one of the benefits of the 
proposal, that fixed term, whether it is 7 years or, to know, 
as with your position, that there is going to be continuity, 
and truly focus on seeing it through, as opposed to this kind 
of revolving door of--again, whoever is there is making the 
effort, but the ability to make progress in this Department is 
just overwhelming.
    Mr. Walker. It makes a difference not only for the person 
who has the job, it makes a difference for the people who are 
working with the person who has the job. For example, take 
Commissioner Everson of the IRS, who is a friend of mine, and 
who was the former Deputy Director of OMB for Management. One 
of the things that he has said publicly about the commissioner 
job of IRS, which is what he has now, is not only is it a No. 1 
job rather than a No. 2 job, but it is a term appointment. 
Therefore, he has more certainty as to how long he is going to 
be there no matter what happens politically, and the people who 
are working with him and for him have a higher degree of 
certainty that he is going to be there, and that makes a big 
difference.
    Mr. Platts. I apologize. With the vote that is going on 
now, but I also know, especially Comptroller General Walker, I 
know you need to go as well, I don't want to recess and have 
you wait. So is there anything that you want to make sure we 
have part of the record that we did not touch on, that you want 
to highlight before we wrap things up?
    Mr. Hammond. No. I think just one point I would like to 
make, which is going forward, one of the things that we are 
going to need to do in order to raise the infrastructure that 
supports all of this and gets us to more useful reporting or 
more practical information, is to find ways to better integrate 
the budgetary and the financial reporting information streams. 
Today budgetary reporting is important, and everybody does it 
well, everybody does it right. There are significant penalties 
if you mess it up. Financial reporting has always been kind of 
a weaker cousin to budgetary reporting, and by bringing those 
together into the same systems, into the same business 
processes, into the same management chains in some cases, I 
think gives us an incredible opportunity to drive some of the 
changes that we want to do from a reporting standpoint.
    Mr. Platts. That is somewhat reflected just in committee 
assignments, those who flock to be on the Financial Reporting 
Oversight Subcommittee versus, perhaps, the Budget Committee, 
or especially Appropriations, where they are giving the money 
out, you know, it is that challenge that we have in the sense 
of raising the level of understanding on the importance of 
these issues, and that both of you seek to do every day. It is 
something that we need to chip away at as an elected official, 
and as father of T.J. and Kelsey, I look at those graphs on 
what the decades to come will bring, and it is really 
staggering in the challenge that we are putting on future 
generations, what they are going to have to deal with.
    Comptroller General Walker, did you have anything you want 
to add?
    Mr. Walker. The only thing I would say, Mr. Chairman, is 
thank you again for holding this hearing. I would love to have 
the opportunity at some point in time, if you want, to sit down 
and talk about some of these issues, and what is the best way 
forward.
    Mr. Platts. And one that we have talked about and how to 
try to approach, and we know that it is not well received 
within the administration, but the CMO issue at DOD and getting 
our CFO, you know, the Chief Management Officer over there, how 
to go after DOD, because we need to keep chipping away at all 
the departments and agencies, but that one is just so huge that 
unless we jump start it somehow, we are just going to keep 
spinning our wheels I think long term.
    Mr. Walker. I know you are also interested in possibly 
relooking at the financial management legislation, and I would 
be happy to sit down and talk to you about issues of mutual 
interest at some point.
    Mr. Platts. We would welcome your insights.
    If there is any additional information, we will keep the 
hearing record open for 2 weeks if you want to submit. Our 
appreciation to you and your staffs for your preparation and 
appearance here today.
    This hearing stands adjourned.
    [Whereupon, at 3:13 p.m., the subcommittee was adjourned.]

                                 
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