    [Senate Hearing 109-774]
    [From the U.S. Government Publishing Office]

                                                            S. Hrg. 109-774

        REPORTING IMPROPER PAYMENTS: A REPORT CARD ON AGENCIES' PROGRESS

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

                                    HEARING

                                   before the

                    FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT
                         INFORMATION, AND INTERNATIONAL
                             SECURITY SUBCOMMITTEE

                                     of the

                                  COMMITTEE ON
                             HOMELAND SECURITY AND
                              GOVERNMENTAL AFFAIRS
                              UNITED STATES SENATE

                           ONE HUNDRED NINTH CONGRESS

                                 SECOND SESSION

                                   __________

                                 MARCH 9, 2006

                                   __________

           Printed for the use of the Committee on Homeland Security
                            and Governmental Affairs

                        U.S. GOVERNMENT PRINTING OFFICE

    27-749 PDF                  WASHINGTON : 2007
    ------------------------------------------------------------------
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    Washington, DC 20402-0001

            COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS

                       SUSAN M. COLLINS, Maine, Chairman
    TED STEVENS, Alaska                  JOSEPH I. LIEBERMAN, Connecticut
    GEORGE V. VOINOVICH, Ohio            CARL LEVIN, Michigan
    NORM COLEMAN, Minnesota              DANIEL K. AKAKA, Hawaii
    TOM COBURN, Oklahoma                 THOMAS R. CARPER, Delaware
    LINCOLN D. CHAFEE, Rhode Island      MARK DAYTON, Minnesota
    ROBERT F. BENNETT, Utah              FRANK LAUTENBERG, New Jersey
    PETE V. DOMENICI, New Mexico         MARK PRYOR, Arkansas
    JOHN W. WARNER, Virginia

               Michael D. Bopp, Staff Director and Chief Counsel
       Joyce A. Rechtschaffen, Minority Staff Director and Chief Counsel
                      Trina Driessnack Tyrer, Chief Clerk

    FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT INFORMATION, AND INTERNATIONAL
                             SECURITY SUBCOMMITTEE

                         TOM COBURN, Oklahoma, Chairman
    TED STEVENS, Alaska                  THOMAS CARPER, Delaware
    GEORGE V. VOINOVICH, Ohio            CARL LEVIN, Michigan
    LINCOLN D. CHAFEE, Rhode Island      DANIEL K. AKAKA, Hawaii
    ROBERT F. BENNETT, Utah              MARK DAYTON, Minnesota
    PETE V. DOMENICI, New Mexico         FRANK LAUTENBERG, New Jersey
    JOHN W. WARNER, Virginia

                          Katy French, Staff Director
                     Sheila Murphy, Minority Staff Director
                John Kilvington, Minority Deputy Staff Director
                           Liz Scranton, Chief Clerk

                                C O N T E N T S

                                     ------
    Opening statements:
                                                                       Page
        Senator Coburn...............................................     1
        Senator Carper...............................................     6

                                   WITNESSES
                            Thursday, March 9, 2006

    Hon. Linda M. Combs, Controller, Office of Management and Budget.     8
    McCoy Williams, Director, Financial Management and Assurance
      Team, U.S. Government Accountability Office....................    10
    Hon. Mark Everson, Commissioner, Internal Revenue Service........    21
    Hon. James B. Lockhart III, Deputy Commissioner, Social Security
      Administration.................................................    23
    Hon. Samuel T. Mok, Chief Financial Officer, U.S. Department of
      Labor..........................................................    33
    Hon. Charles Johnson, Assistant Secretary for Budget, Technology
      and Finance, U.S. Department of Health and Human Services......    34

                         Alphabetical List of Witnesses

    Combs, Hon. Linda M.:
        Testimony....................................................     8
        Prepared statement...........................................    58
    Everson, Hon. Mark:
        Testimony....................................................    21
        Prepared statement...........................................    90
    Johnson, Hon. Charles:
        Testimony....................................................    34
        Prepared statement...........................................   119
    Lockhart, Hon. James. B., III:
        Testimony....................................................    23
        Prepared statement...........................................    99
    Mok, Hon. Samuel T.:
        Testimony....................................................    33
        Prepared statement...........................................   110
    Williams, McCoy:
        Testimony....................................................    10
        Prepared statement...........................................    63

                                    APPENDIX

    Charts submitted for the Record from Senator Coburn..............    47
    Copy of the ``FY 2007 Budget Proposal'' submitted for the Record
      by Mr. Lockhart................................................    52
    Questions and responses for the Record from:
        Ms. Combs....................................................   133
        Mr. Williams.................................................   148

        REPORTING IMPROPER PAYMENTS: A REPORT CARD ON AGENCIES' PROGRESS

                                  ----------

                            THURSDAY, MARCH 9, 2006

                                           U.S. Senate,
                Subcommittee on Federal Financial Management,
            Government Information, and International Security,
                                of the Committee on Homeland Security
                                              and Governmental Affairs,
                                                        Washington, DC.
        The Subcommittee met, pursuant to notice, at 2:33 p.m., in
    room SD-342, Dirksen Senate Office Building, Hon. Tom Coburn,
    Chairman of the Subcommittee, presiding.
        Present: Senators Coburn and Carper.

                  OPENING STATEMENT OF SENATOR COBURN

        Senator Coburn. The Subcommittee on Federal Financial
    Management will come to order.
        Let me first thank each of our panelists for being here.
    This is not an exciting subject for most people, but it is,
    nonetheless, a very important subject when it comes to the
    process and the unsustainable course we find ourselves on over
    the next few years.
        I appreciate the frankness with which many of our panelists
    have dealt with our Subcommittee and the general cooperative
    nature. And I want to thank you in advance for that.
        This will probably be a fairly long hearing because of the
    nature and extent of the questions and the importance of it. We
    are here again, this is our third hearing on improper payments
    in just over 8 months. A lot of people find the subject dry and
    overly technical. Some people think payment errors are simply
    too arcane to interest taxpayers. When you look at the total
    amount of money, it is far from a small amount of money.
        This Subcommittee is dedicated to continue having hearings
    on the subject, first of all, because if the American people
    were aware of some of these numbers, they would vote us all out
    of office and probably fire most in the executive agencies when
    they see the scope of the problem.
        Let me give you an example of what I mean. The Federal
    Government pays out a lot of money to individuals,
    organizations, businesses, States, and local government.
    Between this year and last year, $83 billion of those payments
    were wrong. The vast majority of them, greater than 95 percent,
    were overpayments.
        That means that $83 billion didn't go to accomplish the
    goals that the government set out. And it meant that $83
    billion could have been used to help somebody. It could have
    been used to offset the tremendous deficit that we are facing.
    This amount translates into over $300 for every man, woman, and
    child in America.
        If we eliminated improper payments, we could do a lot of
    things with that money that would make a significant difference
    in this country. The $83 billion would fund everything we are
    going to need, four times fold, for Hurricane Katrina this
    year. It would pay completely for this year's war effort in
    Iraq, rather than charging it to our children.
        There are several problems I want to outline in my opening
    statement, and then we will get into details after we have
    heard our panelists. The first problem is that the $83 billion
    is an underestimation. It is much greater than that. That is
    only what we know about based on agency reporting.
        At our first hearing, we heard that $45 billion improper
    payments represented only 23 of the 35 Federal agencies that
    were required to report improper payment information, and those
    reports only showed the agencies that performed a risk
    assessment of programs and activities, just the first step in
    complying with the improper payments law.
        Eight months later, that number is not changed, and the $37
    billion in improper payments for last year represents again
    only 23 agencies. It is not easy to bring the agencies into
    compliance, and I know that Linda Combs and the CFO Council are
    working hard to do that. But I think they would agree with me
    that it is still not good enough. The law does not exempt any
    agency from reporting.
        Here we have a poster that shows the worst offenders. The
    Department of Health and Human Services, the Department of
    Agriculture, and Department of Housing and Urban Development
    have a combined total of seven programs that are not reporting
    on these programs whose total outlays last year equaled $228
    billion.
        There are two major programs and activities at the
    Department of Agriculture that have failed to report--School
    Programs and WIC. At HHS, four major programs are not reporting
    improper payments--Medicaid, TANF, Child Care, and Development
    Fund, the State SCHIP Program.
        At HUD, the Community Development Block Grant Program has
    failed to report. We will be inviting representatives from both
    USDA and HUD back to testify before this Subcommittee on their
    failure to comply with the law.
        Major programs from these three agencies with combined
    budgets of over $200 billion are not yet reporting their
    payment errors. So we can't even estimate how much is in error
    each year.
        Some of the lowest payment error rates we have seen are
    around 3 percent. And if we pretended that these agencies had
    about 3 percent, we would be still looking at another $7
    billion in improper payments. And I suspect it is much higher.
        One of the worst examples is the Medicaid Program, or
    health safety net for the poor. Outlays for this program were
    almost $200 billion last year. In 2004, the program told us
    they would be reporting their payment errors by this year. But
    last summer, we heard that they wouldn't be able to do it until
    2008. That wasn't acceptable news then, and it is not
    acceptable news now.
        Second problem. Reporting agencies report unacceptable
    rates. Not all programs are out of compliance with the law.
    Some are reporting, and the reports are deplorable.
        The worst example by far is the earned income tax credit
    with a payment error rate of 28 percent. That is $1 in every $4
    that goes to that program is improper, most of which are
    improper overpayments. That means at least a quarter of the
    payments paid out by the program are wrong, and they are
    increasing in error, not decreasing.
        Not all the news is bad. Food Stamp rate is going down,
    though it is still staying high. The Department of Labor's
    Unemployment Insurance Program and other agencies have
    implemented great public policies that help bring the payment
    error rate down.
        And I would note, and we will be talking about this later,
    the Department of Labor has to work through State programs to
    do that. And what we have heard in this Subcommittee is many
    agencies say we can't get the information because we have to
    work through State programs. But the Department of Labor has
    shown that you can do that and that you can, in fact, know what
    the improper payment rate is, and you can bring it down.
        Transparency is the means. It is not the end. This
    Subcommittee is not going to rest until every program of every
    agency is in compliance with the improper payments law. I think
    most people know that I mean what I say and I say what I mean.
    And so, we will be back here multiple times until we get to
    that point.
        The law doesn't tell us what to do when reporting reveals
    bad news. Transparency is the first and foundational principle
    of accountability, but it is only the beginning, not the end.
    You still need performance programs, and programs can be
    compliance with the law, but still have astronomical payment
    error rates. It is important that the American people have
    confidence to know what is going on, how the money is being
    spent.
        The solution. Can you imagine the accounts payable
    department of Wal-Mart or Microsoft reporting an error rate of
    28 percent or even 3 percent? What would happen to the people
    in the position of responsibility if 3 percent of the payments
    were overpayments for everything that Wal-Mart bought or
    Microsoft bought? The people responsible for that would not be
    there.
        So it is not that we don't have people trying. It is not
    that there aren't hurdles in terms of the bureaucracy to get
    there. But it is something that we have to solve for our
    children and our grandchildren.
        Congressional responsibility. We have some as well.
    Accountability in the Federal Government requires political
    will on the part of our elected officials. I say,
    unfortunately, because our system of checks and balances
    intended by our Framers is broken, only Congress has the power
    to pull the plug on programs that are fleecing the taxpayers.
        Instead of providing a check on wasteful spending, Congress
    prefers writing a blank check to the Executive Branch, no
    matter the waste, fraud, or abuse of that money. No matter or
    not, whether they are complying with the law. When we have
    offered amendments to cut the funding of programs with
    unacceptably high payment error rates, those amendments have
    failed.
        Congress should be in the business of protecting the
    taxpayer from being forced to subsidize broken systems. It also
    should be in the business of protecting the future. Financial
    systems that aren't working, that aren't measuring results, or
    are measuring results that are unacceptable without appropriate
    action is an unacceptable thing for Congress to be accepting.
        The Department of Defense has over 4,000 financial
    reporting systems that don't even talk to each other. Like the
    board of directors of a corporation is supposed to look out for
    all its shareholders, the American people rely on Congress to
    look out for their investments by scrutinizing the government's
    performance on these and other problems. America needs to
    require Congress to take that responsibility seriously.
        In the meantime, this Subcommittee will not give up. We
    will keep trying to make the case to our colleagues until these
    amendments start passing or agencies find a way to get the
    results the taxpayers deserve.
        I want to again thank our witnesses for coming today. Each
    one of them faces a monumental task. This is not an easy
    problem to solve. Cleaning up financial systems has had a great
    start under President Bush and his management team. I am very
    appreciative for that. I applaud their efforts, and I hope that
    this hearing will help efforts back at the agencies that are
    affected.
        [The prepared statement of Senator Coburn follows:]
                      PREPARED STATEMENT OF SENATOR COBURN
        Well, here we are again. This is our third hearing on Improper
    Payments in just over 8 months. A lot of people find this subject dry
    or overly technical. Some people think payment errors are simply too
    arcane to interest the taxpayers.
        But this Subcommittee is going to keep having hearings on the
    subject, because I think if the American people heard some of these
    numbers, they would vote us all out of office, and they'd be right to
    do so. Let me give you an example of what I mean. The Federal
    Government pays out a lot of money to individuals, organizations,
    businesses, States, and local governments. Between this year and last
    year, $83 billion of those payments were wrong. Most of those errors
    were overpayments rather than underpayments. That means we just threw
    away the better part of $83 billion.
        That translates into almost $300 for every man, woman, and child in
    America. We could buy every American an iPod! Remember that $300 tax
    refund check the President's tax cuts sent out a couple years ago? If
    we eliminated improper payments, we'd be able to do it all over again
    without the hassle of a nasty floor debate. More seriously, we could
    use that $83 billion to pay for this year's war effort in Iraq, or fund
    this year's Katrina reconstruction efforts four times over.
        But the $83 billion is an underestimation. that's only what we know
    about, based on agency reporting. At our first hearing, we heard that
    $45 billion in improper payments represented only 23 of the 35 Federal
    agencies required to report improper payment information--and those
    reports only showed that agencies had performed a risk assessment of
    programs and activities--the first step in complying with the law.
    Eight months later, that number has not changed, and the $37 billion in
    improper payments for last year represents again, only 23 agencies.
    Now, I know that it is not easy to bring these agencies into compliance
    and I know that Linda Combs and the CFO council are working hard on
    this. But I think they would agree with me that it's still not good
    enough. The law does not exempt any agency from reporting.
        The Department of Health and Human Services, the Department of
    Agriculture and the Department of Housing and Urban Development have a
    combined total of seven programs that are not yet reporting for
    programs whose total outlays equal about $228 billion. There are two
    major programs and activities at the Department of Agriculture that
    have failed to report: School Programs, and Women, Infants, and
    Children (WIC). At HHS, four major programs are not reporting improper
    payments information: Medicaid, Temporary Assistance for Needy Families
    (TANF), Child Care and Development fund, and the State Children's
    Insurance Program. At HUD, the Community Development Block Grant
    program has also failed to report. I will be inviting representatives
    from both USDA and HUD back to testify before this Subcommittee on
    their failure to comply with the law. Major programs from these three
    agencies with combined budgets of over $200 billion are not yet
    reporting their payment errors, so we cannot even estimate how much
    they are wasting each year.
        Some of the lowest payment error rates we've seen are around 3
    percent. Let's pretend that these non-reporting programs have error
    rates at that so-called low rate--we would still be looking at almost
    $7 billion in wrong payments from these non-reporters. And I suspect
    that it's actually much higher, because, appallingly, very few programs
    who do report are reporting a rate as low as 3 percent.
        One of the worst examples is the Medicaid program, our healthcare
    safety net for the poor. Outlays for this program were almost $200
    billion last year. In 2004, the program told us they'd be reporting
    their payment errors by this year. But last summer, we heard that they
    wouldn't really be able to do it until 2008. That wasn't acceptable
    news, and I hope I'll hear some better news today.
        Not all programs are out of compliance with the law. Some are
    reporting, and the reports are deplorable. The worst example by far is
    the Earned Income Tax Credit program, with a payment error rate of 28
    percent. That means that at least a quarter of payments paid out by
    this program are wrong. Social Security Administration programs also
    have unacceptable rates, which have actually been increasing.
        Not all the news is bad. The Food Stamps rate is going down, tough
    it is still stunningly high. Department of Labor's Unemployment
    Insurance program and other agencies have implemented some good
    policies to help bring the payment error rate down.
        This Subcommittee will not rest until every program of every agency
    is in compliance with the Improper Payments law. But the law only
    requires reporting. The law doesn't tell us what to do when the
    reporting reveals bad news. Transparency is the first and foundational
    principle of accountability, but it's only the beginning, not the end.
    You still need performance. Programs can be in compliance with the law
    but still have astronomical payment error rates.
        I think I know why. Can you imagine the Accounts Payable Department
    at Microsoft or Wal-Mart reporting an error rate of 28 percent, or even
    3 percent? In the private sector, there are consequences for poor
    performance. In the Federal Government, the natural consequence of
    either failing to report payment errors or reporting an unacceptable
    error rate should be that you lose your funding. Why should taxpayers
    support a program that wastes a third, a tenth, or even 3 percent of
    their investment? Taxpayers should not have to tolerate programs that
    have outrageous waste just because those programs are founded on good
    intentions, or because the financial officers in those agencies are
    working long hours and trying hard to fix the problem. There should
    come a time when it's no longer acceptable to fund a program that's
    wasting a significant fraction of its budget.
        Unfortunately, accountability in the Federal Government, unlike in
    the private sector, requires political will on the part of elected
    officials. I say ``unfortunately'' because our system of checks and
    balances intended by the Framers is broken. Only Congress has the power
    to pull the plug on programs that are fleecing the taxpayers. Instead
    of providing a ``check'' on wasteful Washington spending, Congress
    prefers writing a ``blank check'' to the Executive Branch, no matter
    the waste, fraud, or abuse of that money.
        When we have offered amendments to cut the funding of programs with
    unacceptably high payment error rates, those amendments have failed.
    Congress should be in the business of protecting the taxpayer from
    being forced to subsidize broken systems. Homeland Security's contract
    to get its financial reporting systems in order was such a failure,
    they recently just cut their losses on that contract and have proposed
    to start over next year. Department of Defense has over four thousand
    financial reporting systems that don't talk to each other. Like the
    Board of Directors of a corporation is supposed to look out for all its
    shareholders, the American people rely on Congress to look out for
    their investment by scrutinizing the government's performance on these
    and other problems. Americans need Congress to take that responsibility
    seriously.
        In the meantime, we will not give up. This Subcommittee will keep
    harping on these themes. We will keep trying to make the case to our
    colleagues until these amendments start passing or the agencies find a
    way to get the results the taxpayers deserve.
        I want to thank our witnesses for coming today. Each one of them
    faces a monumental task. Cleaning up financial systems in the Federal
    Government is not for the faint of heart. I applaud their efforts and I
    hope that this hearing will help those efforts back at the agencies.

        Senator Coburn. I would like to recognize my Ranking Member
    and good friend, Senator Carper.

                  OPENING STATEMENT OF SENATOR CARPER

        Senator Carper. Thanks, Mr. Chairman. How are you today?
        Senator Coburn. I am better.
        Senator Carper. Good.
        To our witnesses--Mr. Williams, Hon. Linda Combs--nice to
    see you both. Thanks for joining us, and we look forward to
    your testimony and that of the other panels who follow.
        I am going to probably repeat a little bit of what the
    Chairman has said, and I would ask you just to bear with me. I
    have a statement. I am going to ask you to enter it for the
    record.
        Senator Coburn. Without objection.
        Senator Carper. And I will just summarize it if I can. We
    have a budget deficit that David Walker was telling us the
    other day that he said set aside cash-basis accounting. He said
    think of accrual accounting. And he said this is not a $300
    billion deficit. This is really about a $600 billion or $700
    billion deficit.
        And that makes what we are talking about here today and
    what some of you are trying to do even all the more worthwhile.
    If there are $50 billion worth of improper payments, if we can
    only somehow reduce that by half, that is a huge improvement.
        If there are $350 billion in tax revenues that are going
    uncollected out there, if we could only get a third of that,
    that is a third of the deficit right there, and it is money
    that we have to go after rather than increase our debt.
        And as I think the Chairman has already talked about, back
    in 2002, when the Improper Payments Information Act was
    adopted--were you in the House then?
        Senator Coburn. No.
        Senator Carper. I was here in the Senate, got to vote for
    it. But I don't think many of our colleagues had much of a
    sense of what it could mean.
        And I think the Administration has shown a real commitment
    to making it work. We have had great support from GAO--and with
    the appointment and confirmation of Ms. Combs to be our, I will
    call her CFO, if you will, at OMB. That is a lot of
    alliteration. That is a lot of acronyms there. But with her
    confirmation, I am encouraged that we are going to make good
    progress.
        I was tempted, I forgot to bring this magazine because it
    was a great magazine. What is it called?
        Ms. Combs. Government Executive.
        Senator Carper. Government Executive. Your picture is on
    the cover of it. I wanted so badly to hold it up and just to be
    able to brag on you a little bit, on the work that you are
    doing.
        But OMB has now made the elimination, I believe, of
    improper payments a top management priority, and the leadership
    of Linda Combs is going to be critical if we are going to
    actually make the progress we need to make.
        There is some evidence now that all of the attention paid
    to improper payments in recent years is starting to pay off. We
    are encouraged by that. I am told that reported improper
    payments among Federal agencies were about $37 billion in 2005.
    That is down by about 17 percent from fiscal year 2004, when I
    think the estimate was about $45 billion. So we are heading in
    the right direction.
        And as we learned at a hearing we had last summer that some
    of us were present at, the official improper payments estimates
    we will hear discussed today are probably just the tip of the
    iceberg. And the estimates for some programs that we know are
    at risk for improper payments, one of them is Medicaid, are not
    included in this $37 billion tally.
        In addition, GAO will testify today, I believe, that some
    agencies are not doing as rigorous a job as they ought to be
    doing in assessing the programs that they administer to
    determine whether or not they are at risk for waste. Still
    others, GAO has found, have not even conducted the necessary
    assessments for all of their programs. Those are obviously
    things we are concerned about.
        And I say in closing, I understand that OMB-issued guidance
    that the agencies use to conduct their work under the Improper
    Payments Information Act may perhaps unintentionally leave
    significant amounts of waste that is unreported. We would like
    to find out if that is the case.
        Agencies apparently must only report on and develop
    remediation plans for improper payments that both exceed $10
    million and make up at least 2.5 percent of program outlays. So
    it has to be at least $10.5 million and make up at least 2.5
    percent of program outlays. And our concern is that might leave
    a fair amount of money on the table. So I think there may be a
    good reason why the guidance was written as it was, and perhaps
    we can talk about that and find out if that is the case.
        So, again, it is an important hearing. I am just pleased
    that we didn't have one hearing and kind of let this one go,
    but to continue to be diligent and to do the oversight that
    this Subcommittee is becoming known for, and under the
    leadership of our Chairman. And I am just pleased to be his
    compadre.
        Thank you.
        [The prepared statement of Senator Carper follows:]
                      PREPARED STATEMENT OF SENATOR CARPER
        Thank you, Mr. Chairman, for continuing this Subcommittee's focus
    on the problem of improper payments.
        As you know, our country is currently in the midst of some very
    trying fiscal times. The size of the Federal budget deficit and the
    burden our growing national debt force Congress every day to make
    difficult decisions about what to do with scarce resources. This
    situation makes our work on this Subcommittee even more important.
        Every dollar wasted because of lax financial management--whether
    due to error or fraud--is a dollar that can't be used to fund worthy
    programs or to lessen the debt burden on future generations.
        As you know, Mr. Chairman, our predecessors on this Subcommittee
    worked back in 2002 to enact the Improper Payments Information Act--
    legislation that, for the first time, required all agencies to
    determine which programs are at significant risk for waste, estimate
    the amount those programs are spending improperly each year, and then
    come up with a plant to do something about it.
        In addition, OMB has now made the elimination of improper payments
    a top management priority and, under the leadership of Linda Combs and
    others, has been working hard to help agencies comply with the Improper
    Payments Information Act.
        There's some evidence now that all of the attention paid to
    improper payments in recent years is starting to pay off. Reported
    improper payments among Federal agencies were about $37 billion in
    fiscal year 2005. This is down 17 percent from the fiscal year 2004
    estimate of about $45 billion.
        As we learned at a hearing last summer, however, the official
    improper payments estimates we hear about are only the tip of the
    iceberg. Estimates for some programs we know are at risk for improper
    payments, like Medicaid, are not included in the $37 billion tally.
        In addition, GAO will testify today that some agencies are not
    doing as rigorous a job as they should be in assessing the programs
    they administer to determine whether or not they're at risk for waste.
    Still others, GAO has found, have not even conducted the necessary
    assessments for all of their programs. Finally, I understand that the
    OMB-issued guidance that agencies use to conduct their work under the
    Improper Payments Information Act may, perhaps unintentionally, leave
    significant amounts of waste unreported.
        Agencies must only report on and develop remediation plans for
    improper payments that both exceed $10 million and make up at least 2.5
    percent of program outlays. In a large program, Mr. Chairman, this
    could mean that improper payments that you, me or any casual observer
    would deem significant are largely being ignored.
        There may be a good reason why the guidance was written this way
    but I don't know of any private company that would ignore such large
    payment errors. We should see to it that the Federal Government no
    longer does either.
        Thank you again, Mr. Chairman, for your commitment to this issue. I
    look forward to hearing some more today about the progress that is or
    isn't being made and to seeing what we might need to do in Congress to
    make sure we have a better picture of the problem and are giving
    agencies all of the tools they need to address it.

        Senator Coburn. Thank you very much, Senator Carper.
        Our first panel is Linda Combs, Controller, Office of
    Management and Budget. She served in that position since June
    2005. Prior to her time as controller, she served as Assistant
    Secretary for Budget and Programs, and CFO at the Department of
    Transportation.
        She also has a history of serving as the chief financial
    officer at the Environmental Protection Agency and served in
    various oversight roles in executive-level management positions
    at the Department of Education, Veterans Affairs, and Treasury.
    That makes her extremely well qualified in terms of her
    knowledge of all of these other agencies, and we are very
    pleased that she is in the position that she is in.
        Also on the first panel is McCoy Williams, Director,
    Financial Management and Assurance Team in the Government
    Accountability Office. He has worked with this Subcommittee
    quite well. We are very appreciative of his help and direction.
        He has worked in the financial management and audit issue
    area since 1980 and is responsible for GAO's financial
    management work at the Department of Defense, Homeland
    Security, Veterans Affairs, State, NASA, and USAID. He also
    covers government-wide improper payments work in financial
    management systems.
        Welcome to you both. Your complete statement will be made a
    part of the record, and Ms. Combs, you are recognized.

    TESTIMONY OF THE HON. LINDA M. COMBS,\1\ CONTROLLER, OFFICE OF
                         MANAGEMENT AND BUDGET

        Ms. Combs. Thank you very much, Senator Coburn, Senator
    Carper, and Members of the Subcommittee.
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Ms. Combs appears in the Appendix on
    page 58.
    ---------------------------------------------------------------------------
        And I must say, Senator Carper, I, too, thought of bringing
    that magazine today. And I thought I would sit it up right
    here, and you could have the magazine instead of me.
    [Laughter.]
        Thank you so much for letting us be here today. I am
    pleased to be here. It is a very important topic, and I am
    pleased to discuss the Administration's efforts to improve
    accuracy and integrity in our Federal payments.
        There is no more important topic that we can be discussing
    today than the American taxpayer's money. The effectiveness and
    the efficient stewardship of taxpayer dollars is extremely
    important to all of us, and I can't tell you how much I
    appreciate the collaborative spirit and the continuing
    partnership and cooperation. We get an awfully lot out of these
    hearings ourselves because we need to also know what our
    partners think are important, and we want to respond and be
    aggressive in responding to not only what we believe is
    important, but what you believe is important as well.
        The President has made the elimination of improper payments
    one of his highest priorities. During fiscal year 2005, the
    Federal Government made substantial progress in meeting the
    President's goal to eliminate improper payments. And most
    significantly, the government-wide improper payment total
    reported in 2004 did, indeed, decrease from $45.1 billion to
    $37.3 billion. And that was a reduction in $7.8 billion, or 17
    percent.
        We have some wonderful news to share in some of these
    programs. Medicare reported improper payments decreased by more
    than $9 billion, or 44 percent. USDA reported an error rate of
    less than 6 percent in the Food Stamp Program, and that is the
    lowest error rate in that program's history.
        The Department of Labor, as you mentioned earlier, has
    reduced improper UI payments--unemployment insurance payments--
    by approximately $600 million in fiscal year 2005. And this
    represents a greater than 15 percent decrease in the level of
    improper payments for this program since last year's reporting.
        The Department of Housing and Urban Development has reduced
    improper payments in their program by more than $1.8 billion
    since 2000.
        There are a couple of programs, as we will talk about, I am
    sure, today, who have reported some increases. But the
    government-wide improper payment total is trending
    significantly downward.
        Our CFOs and our program officers in various departments
    are working very hard to continue to leverage new technologies,
    to generate more cost-efficient methods for measuring and
    eliminating improper payments, and doing many other things that
    probably don't show up on any of our reports.
        But another critical accomplishment in 2005 was that
    Federal agencies reported error measurements on an additional
    17 programs. And as you mentioned earlier, that is what we need
    to do. We need to continue to get the right measurement rates.
        We have an error measurement in place for approximately 85
    percent of all the payments that were deemed risk susceptible
    by Federal agencies. And although we are proud of that record,
    we are not satisfied with it.
        Also of note, in direct response to suggestions made by
    this Subcommittee in some of our previous hearings, agency
    reporting on improper payment to vendors is now included in our
    government-wide reporting as well. And that is not an
    insignificant number either. But providing a more complete
    picture on government-wide improper payments is what we both
    seek in the transparency here.
        But specifically, Federal agencies reviewed $365 billion in
    vendor payments in 2005, and they identified $557 million in
    improper payments, of which $467 million, or 84 percent of
    that, has been recovered.
        Because 95 percent of the reported improper payment total
    continues to reside within the seven programs that we talked
    about in our first hearing, we continue to focus on these
    agencies. But we certainly want to be open to pursue aggressive
    strategies in any other programs that are deemed worthy by this
    Subcommittee or by GAO. And we have embarked upon a lot of
    case-by-case work with different programs and different
    agencies.
        We also have within the President's 2007 budget an
    aggressive legislative agenda that will help us in the arena of
    improper payments as well. But with the tools that we have with
    IPIA and our Administration's management initiatives, the
    Federal Government today is in a stronger position to build on
    dynamic reduction in improper payments that we have achieved
    this year and to ensure that an error measurement is provided
    for all higher risk programs.
        With the goal of ensuring that each taxpayer dollar is
    spent wisely, efficiently, and for the purpose for which it was
    originally intended, we remain committed to eliminating Federal
    improper payments. We look forward to continuing to work with
    the Congress and with this Subcommittee to see that objective
    is, indeed, accomplished.
        Thank you.
        Senator Coburn. Thank you, Ms. Combs. Mr. Williams.

    TESTIMONY OF McCOY WILLIAMS,\1\ DIRECTOR, FINANCIAL MANAGEMENT
       AND ASSURANCE TEAM, U.S. GOVERNMENT ACCOUNTABILITY OFFICE

        Mr. Williams. Thank you, Senator Coburn and Senator Carper.
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Mr. Williams appears in the Appendix
    on page 63.
    ---------------------------------------------------------------------------
        I am pleased to be here today to discuss the government-
    wide problem of improper payments in Federal programs and
    activities. Our work over the past several years has shown that
    improper payments are a long-standing, widespread, and
    significant problem in the Federal Government.
        The extent of the problem initially had been underestimated
    because only a limited number of agencies reported their annual
    payment accuracy rates and estimated improper payment amounts
    prior to the passage of the Improper Payment Information Act of
    2002. Our work has also shown that primary causes of improper
    payments are a lack of internal controls or a breakdown in
    existing controls.
        Mr. Chairman, fiscal year 2005 marked the second year that
    Federal agencies government-wide were required to report
    improper payment information in their performance and
    accountability reports. The act has increased visibility over
    improper payments to a higher, more appropriate level of
    importance.
        It requires executive agency heads, based on guidance from
    OMB, to identify programs and activities susceptible to
    significant improper payments, estimate amounts improperly
    paid, and report on the amounts of improper payments and their
    actions to reduce them. Further, in fiscal year 2005, OMB began
    to separately track the elimination of improper payments under
    the President's Management Agenda.
        Mr. Chairman, the Federal Government has made progress
    under the leadership of OMB in identifying programs susceptible
    to the risk of improper payments. At the same time, significant
    challenges remain to effectively achieve the goals of the act.
        For example, while progress has been made, the full
    magnitude of the problem remains unknown because some agencies
    have not yet prepared estimates of improper payments for all of
    their programs. We note in my written statement that seven
    major agency programs with outlays totaling about $228 billion
    have not reported improper payment estimates, even though these
    agencies had been required to report this information since
    2002 with their fiscal year 2003 budget submissions under
    previous OMB Circular A-11 requirements.
        Further, agency auditors have identified major management
    challenges related to agencies' improper payment estimating
    methodologies and significant internal control weaknesses for
    programs susceptible to significant improper payments. Mr.
    Chairman, we recognize that measuring improper payments and
    designing and implementing actions to reduce them are not
    simple tasks and will not be easily accomplished. The ultimate
    success of the government-wide effort to reduce improper
    payments depends on the level of importance each agency, the
    Administration, and the Congress place on the efforts to
    implement the act.
        In closing, I want to thank you and the Members of this
    Subcommittee for your continued interest in this problem and
    providing important leadership to ensure that this problem is
    properly addressed. I look forward to working with this
    Subcommittee as well as Federal agencies and the Administration
    in the future to address this problem.
        This concludes my statement. I would be pleased to answer
    any questions that you or Senator Carper may have. Thank you.
        Senator Coburn. Thank you, Mr. Williams.
        Well, let me just start, and we will try to get through
    these. Several of the questions we have, we will try to put in
    written form for you, Ms. Combs. I have way too many questions,
    but I still want the answers, and so I won't delay all of our
    other witnesses with all of the questions.
        According to the testimony we have received from HHS and
    our confirmation is there really wasn't a reduction in Medicare
    improper payments. There was a change in methodology, which
    actually said they measured it wrong last year. Is that
    correct?
        Ms. Combs. I think what happened last year and, of course,
    our good friend and CFO, Charles Johnson, is here----
        Senator Coburn. Right.
        Ms. Combs [continuing]. As a witness today, and he can
    certainly substantiate this. But I look on what happened as a
    good news story because I think what they did is they actually
    corrected some audit findings that they had the year before. In
    other words, they were counting payments as improper because
    they could not find an audit trail.
        Senator Coburn. Right. It is good news in that their
    methodology is much improved, and the actual payment error is
    probably lower than what they thought it was.
        Ms. Combs. That is exactly how I view it.
        Senator Coburn. So that is good news. But it does say that
    we really haven't reduced the payments, and that is the point I
    want to make.
        As we go through these questions, I want you to know I
    appreciate everybody out there that is working. For the first
    time, our government is going to have some financial
    accountability, and I don't mean to belittle that at all as we
    try to go through this hearing.
        And I have confidence in those that are testifying today,
    in their leadership potential and what they are going to do.
    But I think it still behooves us to outline where the problems
    are.
        I heard you say, Ms. Combs, 85 percent of the susceptible
    agencies are the higher risk programs. And then I heard Mr.
    Williams talk about the necessity of and the law government-
    wide. And I have some real problems with where we are on that
    because you can make it look good if you don't look at all of
    it.
        And the question I would have to you is that if you were
    running anything other than this, you would have the same
    financial controls in business or any other, in State
    governments, they have the same financial controls at every
    level. In other words, there should not be anybody exempted,
    even though the act and the arbitrary definition that OMB put
    out of 2.5 percent or $10 million.
        To most people in this country, if you wasted, overpaid
    $9.99 million, that is more than they will ever see in their
    entire lifetime. And so, to me, I read the law, and it says
    everybody is required to report. What is your understanding of
    that?
        Ms. Combs. That is my understanding as well. And what I
    don't want to leave the impression of is that we are certainly
    not giving anyone a pass.
        What we have, and it is in my written testimony, and there
    is a chart attached. And it shows specifically that there is
    one piece of that pie, and it is practically this piece of the
    pie you have up on your chart. But one of the things I want to
    make very clear is just because we have 15 percent still yet to
    go doesn't mean we are not looking at those.
        It also does mean that 15 percent is the hardest part to
    get because what we are saying is we can't yet get the error
    rate for that. And there are many reasons for that. I can
    certainly explain and embellish that in some of the answers we
    give to you.
        Senator Coburn. Well, let me ask you just a little more
    specifically. If the Department of Labor can get a payment
    error rate on unemployment insurance that runs through the
    States, and yet HHS can't get one on Medicaid that runs through
    the States? Tell me why the difference is so great.
        Ms. Combs. Well, I am glad you have CFO Sam Mok here today
    because this success story is, indeed, a good one for, I think,
    a legislative model. And I think you will hear him talk about
    some of the things they did as far back as 1987 to actually set
    their program up, set it in place, so that it can actually
    operate in the way that it is operating today.
        And I think it is a model. I think it is a great
    opportunity for us to look at that and do the collaboration and
    look at the transparency that we both seek in order to do that.
    I think they have been at this for quite a while. They used
    some mechanisms in setting this up that serve them well today,
    and I think that having that single entity in the State helps
    them an awfully lot because they are in control of this.
        Some of these programs that are causing the most difficulty
    right now in your thinking and in mine, they don't have a way
    to go out and collect some of this information. They are
    prohibited, in essence, from collecting some of that. So I
    think you will hear some of that from some of our colleagues
    today as well.
        Senator Coburn. Are you suggesting that there could be
    legislative changes that would alleviate the collection of
    data?
        Ms. Combs. I am suggesting that there probably are some
    things we need to look at together----
        Senator Coburn. OK.
        Ms. Combs [continuing]. With these programs and with our
    State colleagues as well. And I have used every available
    opportunity or some available opportunities--probably not every
    one. When we would have some of our State treasurers in town,
    for example, to ask them, Are there things that we can do
    together that would get at some of these things?
        And I think if we could figure out a way to not be
    legislatively prohibited from doing those things and pair those
    other collegial working relationships together, we probably
    could make a very good start at this.
        Senator Coburn. So what you are really telling me is the
    Department of Labor has some better practices that work?
        Ms. Combs. They do.
        Senator Coburn. So why can't those be replicated at the
    other agencies?
        Ms. Combs. I think they could be replicated if the
    legislation in the other agencies will let them do the same
    things that the Department of Labor has been doing for several
    years now.
        Senator Coburn. Well, it would seem to me that the
    Administration would mandate that they do it, not let them do
    it. Is there a problem with motivation?
        Ms. Combs. No, sir. I don't think it is the motivation.
        Senator Coburn. Will you make a commitment to this
    Subcommittee that you will give us the list of the legislative
    changes you think need to be made so that the other agencies
    can have the flexibility to be able to measure improper
    payments?
        Ms. Combs. We would love to work with you on that. And then
    there are some in our President's budget for 2007.
        Senator Coburn. All right. Senator Carper.
        Senator Carper. Just to follow up on that last point, if I
    could?
        If we are serious about reducing improper payments, it was
    helpful to have passed the 2002 legislation. If we are serious
    in reducing improper payments, it is helpful to have an
    administration that is serious not just at OMB, but throughout
    the agencies, where particularly those that are making a lot of
    payments are serious about doing something about it.
        If we are serious about reducing improper payments, I think
    it is helpful probably for us to have oversight hearings to put
    a spotlight on those that are doing a good job to reduce
    improper payments and, frankly, to put a spotlight on those
    that aren't doing as much as they can and ought to.
        What further can we do to be helpful? You bring in sort of
    a different perspective than we do to this problem. What
    further can we do on this Subcommittee, on our full Committee,
    in the Legislative Branch that would add to the efforts that
    are already under way?
        Ms. Combs. Thank you for asking, Senator Carper. There are
    six legislative proposals in the President's 2007 budget that
    directly have a direct bearing on our ability to further the
    improper payments initiative forward. And the projected savings
    are in the billions of dollars for each and every one of these.
        The unemployment insurance, even the one that has such a
    good record, we have a recommendation there, where we can make
    that even better. The child tax credit. The computational
    complexity of that program, and I think you will probably hear
    that from Mr. Everson when he comes to testify before you. The
    rules and the complexity of that is part of the legislative
    proposal.
        But any of these legislative proposals will make a step in
    the right direction. And while they may look like, ``Oh, well,
    we could do a lot more than this,'' every step is a good step
    if it is in the right direction. So I would encourage you to
    support the Food Stamps portion of that and the ones that are
    in the President's budget.
        Senator Carper. Good. Thanks.
        Ms. Combs. Thank you.
        Senator Carper. Let me ask Mr. Williams a question next, if
    I could?
        Mr. Williams. Yes.
        Senator Carper. And I think there was some discussion at
    our last hearing about requiring some of our agencies to obtain
    regular independent audits of their internal controls as part
    of the effort to beef up the process and the procedures that we
    are using to try to reduce improper payments.
        I understand that since that hearing, a panel convened by
    OMB determined that internal control audits would not be
    beneficial. And I don't know if you were aware of this, but if
    you are or you are not, I would ask you if maybe you can share,
    either today or for the record, your views on that
    determination, the fact that the internal control audits are
    deemed not to be very beneficial.
        And on the question of whether or not OMB or even Congress
    should require internal control audits at least for certain
    select agencies that have really big improper payment problems?
        Mr. Williams. Yes, Senator Carper. If you look a little bit
    closer at the legislation that required the particular report,
    there was a provision that requires GAO to take a look at the
    report that is issued by PCIE and the CFO Council and to give
    our assessment of the report.
        We are currently in the process of performing that
    assessment as we hold this hearing today. Several things about
    the overall issue of internal control reporting. As a policy,
    we have basically concluded that there are several factors that
    you need to look at.
        First of all, if you look at this area of improper
    payments, as I stated in my opening statement, a breakdown in
    the internal controls or lack of internal controls is a primary
    cause for some of the improper payment issues or the problem
    that we are dealing with today. What we have determined is, is
    that you need to look at the scenario in which you are
    currently working with as far as the agency is concerned.
        If the agency has a mature internal control environment,
    then we have come to the conclusion that it would be a good
    idea to get an opinion on internal controls. And the way we
    look at that is by getting that opinion on the internal
    controls, what you have is an independent set of eyes that is
    validating what management has asserted.
        We also have come to the conclusion that if you have an
    operation that have several material internal control
    weaknesses, there are compliance issues, and going into that
    audit, you basically know that there is a lot of work that
    needs to be done, then we don't think it would be an efficient
    use of resources to get an opinion on the internal controls.
    That those resources could probably be better used for the
    purpose of working with management to try to correct the
    problems that have caused auditors in the past to identify
    material control weaknesses, reportable conditions, and
    noncompliance issues.
        So we have tried to break it down into various components
    with the ultimate goal of somewhere down the road, if you can
    address these internal control weaknesses, if you can get a
    mature system of internal controls in place across the
    government. We, in general, think that would be a good concept
    because it would be those independent set of eyes looking at
    what management is asserting as far as this internal control
    environment.
        Senator Carper. Thanks.
        Mr. Chairman, I have some more questions. I will submit
    them for the record. Is this our only----
        Senator Coburn. I am going to go one more round.
        Senator Carper. OK. Good enough.
        Senator Coburn. Ms. Combs, would you submit to this
    Subcommittee the programs that report more than $10 million in
    improper payments but are less than 2.5 percent?
        Ms. Combs. Yes, I will be happy to do that.
        Senator Coburn. DOD, SBA, and SSA, all have programs that
    expend billions of dollars annually, but they are not
    considered to be at risk for making ``significant improper
    payments'' because they do not meet OMB's criteria for
    significant. Mr. Williams, which programs did GAO identify as
    expending billions of dollars, but are not considered to be at
    risk for making significant improper payments?
        Mr. Williams. Mr. Chairman, in my written statement, we
    have identified several agencies that actually reported the
    amounts because of the requirement that OMB placed on the
    agencies in the implementation of the act. And there are
    several programs that we have identified that if you go through
    the exercise of looking at the two criteria that were laid out,
    and you could come to the determination that these agencies
    would not have to report based on the criteria.
        There were two or three in the Department of Defense--
    Military Retirement Fund, military health benefits, Education's
    Title 1. Department of Energy, some payment programs.
    Department of Health and Human Services, Head Start, railroad
    retirement, board retirement and survivors benefit, SBA
    investment and Social Security Administration, Old Age
    Survivors Insurance and Disability Insurance Programs.
        So these are some of the programs that, if you look at them
    and there had not been this particular requirement that if you
    were under the old A-11, you would be excluded from reporting
    amounts under the $10 million, 2.5 percent criteria.
        And by the way, Mr. Chairman, that amount, if you take a
    look at the performance and accountability reports for 2005,
    would have resulted in about $4.3 billion not being included.
    In other words, that $38 billion would have been actually $4.3
    billion less.
        Senator Coburn. OK. I am aware that there is some revised
    guidance that OMB has proposed that would allow programs that
    have been at low risk for over a 2-year period to request a
    waiver in having to report improper payments. Is that true?
        Ms. Combs. We have a very aggressive program on improper
    payments, and as I mentioned to you, we are looking and are
    eager to work collaboratively. To the extent that high-risk
    programs are identified, we will put extra scrutiny on those. I
    have no intention of reducing that.
        Senator Coburn. Yes, it is not true then?
        Ms. Combs. Let me just say this. We have been collecting,
    for 3 years now, comments, considerations that people wish to
    have in any kind of revisions, and we are looking at some
    revisions because it is probably about time to think about
    those. But in terms of releasing or making things less, we are
    not in that posture.
        Senator Coburn. Are you comfortable with this definition of
    2.5 percent of $10 million? I have to tell you, I am
    tremendously uncomfortable with that.
        Ms. Combs. Well, in my testimony and in some of our
    discussions, one of the things that we have talked about is we
    can't do everything at one time. And I know you and I agree on
    that. And I think one of the things that I have to keep
    thinking about are those seven programs. I have to keep a rifle
    eye on those seven programs that we identified originally that
    make up 95 percent of this. And if I keep my eye on that, we
    are going to get a lot done.
        And one of the ways to help agencies keep their eye on that
    is to leave that 2.5 percent, $10 million in our assessment. So
    I would like to continue that. But as I have said, if there are
    specific other programs that we find in our assessments, that
    GAO finds, or that you find in whether it is this or some of
    your other efforts that you are working with, that you want us
    to look at on a case-by-case basis that don't meet that
    threshold, we are more than happy to put them in our mix.
        Because through the President's Management Agenda, we
    monitor a lot of these 118 programs, not just the ones you have
    talked about. And there are at least eight of them that I am
    aware of that we have handled on a case-by-case basis in that
    way, and I am happy to have your input and include more of
    those.
        Senator Coburn. Are you aware of the GAO report that came
    out on defense purchasing on performance bonuses?
        Ms. Combs. No, sir. I am not.
        Senator Coburn. It is a very revealing report. As a matter
    of fact, it is very disturbing because, and I think this is
    right, it is between 80 and 90 percent of the performance
    bonuses paid, the contractor did not meet the performance bonus
    requirements. And if that isn't an improper payment, I don't
    know what it is. And yet we have the Pentagon says they don't
    have any improper payments.
        And so, I am going to submit the rest of my questions, and
    I am just going to ask you one more. Community Development
    Block Grant and Medicaid, are you going to commit to get us the
    improper payment on those big programs? I mean, we don't have
    it. And there is a good estimate to say $40 billion in Medicaid
    is improperly paid. Fourteen billion just what looks like in
    New York City.
        And we are sitting here saying that if, in fact, we wait
    until the end of fiscal year 2008 to get the data on Medicaid
    and if my estimate is two times too high, it is still going to
    mean $40 billion got spent that shouldn't have gotten spent.
    And that is a significant amount of money. Why should we have
    to wait until 2008 to get improper payments on Medicaid?
        Ms. Combs. Well, we certainly share your concern about the
    complexity and about the magnitude of what that program will
    entail. But I think to get that comprehensive error rate, it is
    going to require an awfully lot of work, and you have an expert
    witness here to talk to you today about how much work that is
    going to require and what the complexities of that is.
        We are happy to work with you, and if you find some ways
    that you think we can enhance that and improve that from a time
    standpoint, we certainly want to work with you to do that.
        Senator Coburn. One last question, and I will hand it over
    to Senator Carper. The 2005 performance and accountability
    report said that it had no programs susceptible to significant
    improper payments. And I just want to read this for the record.
        Department of Commerce, none. General Services
    Administration, which I know is not the fact based on the
    hearings that we have had here, none. The Department of
    Homeland Security, no improper payments? I can show you a ton
    of improper payments just on what they have done in Louisiana
    and Mississippi.
        The Department of Interior. NASA, we can't even get them to
    answer or even to give us a response. The Nuclear Regulatory
    Commission and the Securities and Exchange Commission. We have
    had a hearing on the SEC, how they spent, I think, something
    like $27 million more than they should have on a building, and
    yet that doesn't come up under improper payments.
        So how confident are you of these agencies' assertion that
    they have no improper payments?
        Ms. Combs. It may not come up under the improper payment
    initiative, but it certainly comes up under the recovery audit
    initiative.
        Senator Coburn. Right. So does that not mean that maybe
    this definition of ``significant'' needs to be changed?
        Ms. Combs. Well, I am happy to look at any of those
    programs that you would like me specifically to look at and
    report back to this Subcommittee. I am happy to work in any way
    we can to address your specific concerns on that.
        I do know that most of the Departments that you have
    mentioned in your question there, they certainly have plenty of
    contracts. And that is why the recovery audit is so important
    for them.
        Senator Coburn. Right. Thank you.
        Mr. Williams, any comment on that, and then I will turn it
    over.
        Mr. Williams. I would just add the point that we took a
    close look at this particular statement also as we were
    reviewing the performance and accountability reports. And I
    guess the question that came to my attention, having
    responsibility for the Department of Homeland Security, also
    for NASA, and looking at some of the control weaknesses,
    Homeland Security I believe had 10 material internal control
    weaknesses. There were two reportable conditions, and I think
    there were seven issues of noncompliance. And that was one of
    the agencies in which, I think, the auditors of the financial
    statement questioned the quality of the assessment that the
    agency performed.
        So I think you have raised a question that needs to be
    debated and discussed a little bit further as we go along in
    trying to address this issue.
        Senator Coburn. Thank you. Without objection, I have about
    14 other pages of questions that I would like to enter for the
    record.
        Senator Carper. I think you should ask them all, Senator.
    [Laughter.]
        Senator Coburn. No, I don't think so. I want supper
    tonight, and I know everybody else does, too. So I will submit
    those for the record, and if both Mr. Williams and Ms. Combs
    would respond to those, I would very much appreciate it.
        Senator Carper. I have a couple of questions I would like
    to offer for the record and ask you to respond in writing, if
    you would?
        Mr. Williams. OK.
        Senator Carper. I just want to come back and revisit--I
    apologize for being so slow on the uptake on this. But do I
    understand that there is roughly seven or so programs or
    agencies that are responsible for about 95 percent of the
    improper payments that are being reported? Could you just
    mention those briefly, please?
        Ms. Combs. Yes. Medicare, EITC, unemployment insurance,
    SSI, OASDI, HUD rental assistance, Food Stamps, and then there
    is a small portion of others that make up the 100 percent. But
    those I just mentioned make up 95 percent.
        Senator Carper. And just in relative terms, of those seven
    or so, which is the largest?
        Ms. Combs. Medicare.
        Senator Carper. Or did you sort of list them in order of
    their magnitude?
        Ms. Combs. Somewhat.
        Senator Carper. All right. Which of the seven is heading in
    the right direction most quickly?
        Ms. Combs. Most quickly, well, we have a head start here
    with unemployment insurance, I think. While they make up about
    9 percent of that, they certainly have a great model, as we
    have talked about earlier today. And the others, I think, would
    be Medicare and the HUD rental assistance and Food Stamps that
    I mentioned in my testimony.
        Senator Carper. So, again, you said unemployment insurance
    (UI), Medicare, HUD rental assistance, and Food Stamps?
        Ms. Combs. Food Stamps, right.
        Senator Carper. Are generally the better performers?
        Ms. Combs. They have had some very good successes.
        Senator Carper. And of the others that you have not
    mentioned--EITC and SSI, OASDI--can you just characterize how
    we are doing in those three? Or how the agencies responsible
    for them are doing?
        Ms. Combs. Well, I think all of them are responding well.
    The question is how hard is it to get success? And I think you
    have the representatives, I believe, are here from each one of
    those other programs to talk with you today.
        Senator Carper. OK. We will let them speak for themselves.
        The major programs that are not included here, that are not
    reporting improper payments, and I have heard Medicaid
    mentioned a time or two. What are some of the other larger
    programs for which improper payments are not being reported?
        Ms. Combs. Well, the error rates that have not yet been
    accumulated or assessed for those were on primarily the first
    chart that was up here.
        Senator Carper. Which, fortunately, you can see, but we
    cannot.
        Ms. Combs. Oh, you can't see it--the Department of
    Agriculture's School Programs.
        Senator Carper. School lunch and breakfast programs?
        Ms. Combs. School Programs.
        Senator Carper. OK.
        Ms. Combs. The Health and Human Services Children's
    Insurance Program. Department of Agriculture, Women, Infant,
    and Children. Health and Human Services, Medicaid. Health and
    Human Services, Child Care and Development Fund. Health and
    Human Services, Temporary Assistance for Needy Families. And
    Department of Housing and Urban Development, Community
    Development Block Grants are the major programs that we
    understand have not yet reported their improper payment
    estimates.
        Senator Carper. Of those that you have mentioned, and the
    Chairman was good enough to give me a listing here, it says at
    the bottom of the page that total outlay is about $227 billion
    in a year. So, from reading this, what we should understand is
    that while roughly seven agencies are responsible for 95
    percent of the known improper payments, there is a bunch of
    pretty big programs for which we just don't know?
        Ms. Combs. That is correct.
        Senator Carper. And could you just give us a sense--and you
    have probably done this before, and I am going to ask you to do
    it again--when do you think some of these big programs are
    going to be in a position to report improper payments?
        Ms. Combs. Some of them are going to report in 2007, and
    some of them are going to report in 2008.
        Senator Carper. Do you think we will have them all by 2008?
    Are you saying everybody will be in by then?
        Ms. Combs. Probably not all of them, unless you hear
    something different than we have been hearing.
        Senator Carper. OK. Who do you think might still not be
    able to report by the end of 2008?
        Ms. Combs. Probably Medicaid. Which one? TANF and child
    care, it looks like. The Temporary Assistance for Needy
    Families and Child Care Development Fund. We yet do not have an
    estimate of when they might be able to report.
        Senator Carper. OK. Do we have somebody coming before us
    today from HHS? We do, don't we?
        Ms. Combs. Yes.
        Senator Carper. Maybe we can talk about that a little bit
    further.
        Ms. Combs. I am sure he is my very good friend now.
    [Laughter.]
        Senator Carper. He or she, you never know.
        All right. Well, Ms. Combs, thanks so much for being with
    us today. And Mr. Williams, good to see you.
        Ms. Combs. Thank you.
        Mr. Williams. Thank you.
        Senator Carper. Thank you very much for your help. We look
    forward to continuing to work with you.
        Mr. Williams. Thanks.
        Senator Coburn. Thank you all very much.
        Ms. Combs. Thank you.
        Senator Coburn. And you will be receiving a list of
    questions for both of you. And timeliness in that response, if
    you could have that back to us in a couple of weeks, we would
    appreciate it very much.
        Thank you.
        Our next panel is Mark Everson, Commissioner of the
    Internal Revenue Service. Prior to his time at the IRS, he was
    Deputy Director for Management for the Office of Management and
    Budget, where he provided government-wide leadership to
    Executive Branch agencies to strengthen Federal management and
    improve program performance.
        With him today is the James Lockhart, Deputy Commissioner
    of the Social Security Administration. He is the agency's Chief
    Operating Officer and a member of the Executive Committee of
    the President's Management Council.
        Mr. Lockhart served as Executive Director for the Pension
    Benefit Guaranty Corporation under the previous Administration
    and has served in various private sector positions.
        Welcome, each of you. Mr. Everson, you will be recognized
    first. Your complete statement will be made part of the record.

     TESTIMONY OF THE HON. MARK EVERSON,\1\ COMMISSIONER, INTERNAL
                            REVENUE SERVICE

        Mr. Everson. Thank you, Mr. Chairman. Nice to see you
    again, Senator Carper.
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Mr. Everson appears in the Appendix
    on page 90.
    ---------------------------------------------------------------------------
        I am pleased to be with you again to talk about our
    performance under the Improper Payments Information Act. Before
    I turn to that, though, I would like to give you a brief update
    on the subject that we talked about last October, the tax gap.
        You will recall at that time that we had not yet finalized
    our estimate. I think you may have seen in recent weeks we have
    now done that, and the estimate came in at that top end of the
    range, basically, of what we had for 2001--$345 billion for the
    gross tax gap. But that is $290 billion after the late payments
    and our enforcement activities. I point this out because we are
    already using the----
        Senator Carper. Would you say that last part again, if you
    will? That is what after?
        Mr. Everson. The number $345 billion is the estimate of the
    gross noncompliance. But because the tax gap is defined as what
    is paid on a timely basis, is it timely or not? So if you get a
    late payment that comes in, you say to us you owe $10,000, but
    you only sent us $3,000, there is a $7,000 underpayment gap
    there.
        So if it comes in late or we do something from the
    enforcement activities, we consider that a recovery. That is
    the $55 billion. So that brings the $345 billion down
    ultimately to $290, but over time.
        We are already using this research to change our audit
    selection model. So that is good news. That will make us more
    effective, and it will also drive down the no-change rate,
    where we audit somebody but really don't find anything.
        As the President's proposed fiscal year 2007 budget does,
    it continues to rebuild our enforcement efforts as well through
    more enforcement activities. I am thankful for this
    Subcommittee, and the full Committee, for the support it has
    provided over the last several years to securing or for
    securing adequate funding for the IRS.
        And I would like to also note that in the 2007 request,
    there are additional legislative proposals for incremental
    reporting. This is, indeed, a set of what could be viewed as
    modest proposals, but they are very significant because this is
    really the first time since 1986 that any administration has
    made new proposals on reporting. We think that will have a big
    impact.
        There are two that are particularly of interest to this
    Subcommittee. I will be testifying next week in terms of
    government contracting. One is about due process, collection
    procedures for employment taxes, and the other is about
    additional reporting for payments made by governmental
    entities, Federal, State, and local.
        So those are all very important developments, and I hope
    the Subcommittee will support us on those.
        Senator Coburn. We will. And at Senator Carper's request
    and my agreement, we are going to have another hearing on that.
        Mr. Everson. Great.
        Senator Coburn. You have just not been noticed on it, but
    we will give you plenty of time.
        Mr. Everson. OK. I have a busy hearing schedule, and I
    somehow thought I would hear back from you on this.
        Senator Coburn. You will.
        Mr. Everson. Let me turn to the EITC for just a minute or
    two. The EITC is one of the Nation's most successful anti-
    poverty programs. It lifts millions out of poverty each year.
    In fiscal year 2005, 22 million taxpayers received $40 billion
    through the EITC.
        It is a refundable Federal tax credit that offsets income
    tax owed. If the credit exceeds the amount of taxes owed, a
    lump sum payment is provided to those who qualify. At the IRS,
    our philosophy concerning the EITC is clear. Everyone who
    qualifies for the credit should receive it, but only those who
    qualify.
        Senator Carper. Can I interrupt for just a second? Mr.
    Chairman, the chart has just been replaced. I don't know if
    this is a chart we are supposed to be able to see or not.
        Mr. Everson. I am happy to have it face your way instead of
    mine. [Laughter.]
        Senator Carper. Oh, yes. Let me just say to our staff that
    you can actually put the chart in a place so that they can see
    it and we can, too. And I would ask you that, maybe just pull
    it toward you? There you go. That is great. Thank you.
        Mr. Everson. In 2005, the IRS spent approximately $165
    million on EITC activities. These funds supported an EITC
    compliance program, which conducted over 500,000 audits and
    prevented $2 billion in EITC refunds from being paid in error.
    We estimate that EITC enforcement efforts have directly
    protected an estimated $6.5 billion from 2002 through 2005.
        Nevertheless, this chart points out erroneous payments
    under the program remain too high. Our latest estimates are
    that even after our efforts, $9.5 to $11.5 billion, or 23 to 28
    percent--and since we are interested in accuracy, I would ask
    that maybe we have 23 to 28 percent instead of just the high
    end--is paid out erroneously each year.
        As we continue our efforts to improve the EITC program and
    reduce erroneous claims, let me make the following
    observations. EITC administrative expenditures are a tiny
    fraction of program benefits. Current administration costs are
    less than 0.5 percent of the benefits delivered. These costs
    are quite low compared to other benefit programs in which
    administrative costs can run as high as 20 percent.
        Let me depart for just a second. Food Stamps. The Food
    Stamps Program budget is $3 billion to deliver $30 billion in
    benefits. If we were to take that ratio for the EITC, we would
    add $4 billion to the IRS budget. Our whole budget right now to
    run a $2.2 trillion system is only $10.6 billion. So we would
    be talking about a very real departure in how we do business.
        I would also point out that the current improper payment
    estimating technologies are not precise enough for us to
    capture annual estimates of good reliability, which is really
    what the act would want us to do. Going forward, we propose to
    simplify EITC eligibility requirements, and we will continue to
    refine our efforts to better enforce the law.
        In summary, I would just like to make three points. We have
    a balanced approach to administering the EITC. Again, we want
    those who qualify to get it. This program enjoys the highest
    participation rate for any of these big benefit programs,
    something like 80 percent. That is a good thing for our
    country. But again, we want to make sure that we aren't paying
    out more than we should.
        We also plan to grow the use of community-based volunteer
    organizations to help people prepare their returns here. We
    have seen that as an effective way of getting people to claim
    the credit without having to take these predatory RALs, these
    refund anticipation loans. I am sure if Senator Akaka were here
    today, he would be grilling me about RALs. That is one of his
    most pointed remarks whenever I see him.
        And the final thing I would say is that adopting the
    President's budget request would be helpful. There are several
    constructive points in here. They won't make a huge difference
    in this, but they will help simplify the credit, and we think
    they are good ideas.
        Thank you.
        Senator Coburn. Mr. Lockhart.

        TESTIMONY OF THE HON. JAMES B. LOCKHART III,\1\ DEPUTY
              COMMISSIONER, SOCIAL SECURITY ADMINISTRATION

        Mr. Lockhart. Senator Coburn and Senator Carper, thank you
    for inviting me here today to discuss the efforts the Social
    Security Administration (SSA) is undertaking to strengthen and
    maintain the integrity of the Old-Age, Survivors and Disability
    Insurance (OASDI) Program and the second program we administer,
    the Supplemental Security Income Program, referred to as SSI.
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Mr. Lockhart appears in the Appendix
    on page 99.
    ---------------------------------------------------------------------------
        In 2005, Social Security paid $520 billion in benefits to
    over 48 million retirees, survivors, disabled persons, and
    their dependents. SSI is a needs-based program, and it paid $38
    billion to over 7 million disabled and aged individuals.
        The importance we put on improper payments can be noted
    that one of our nine strategic objectives is to detect and
    prevent fraudulent and improper payments and improve debt
    management. As you can see with the charts I attached to the
    testimony, our combined error rate for the two programs have
    been about 1 percent, which is well below the OMB's threshold
    guidance of implementing the improper payments act of 2.5
    percent. But I hasten to add both of these programs are
    included--both SSI and Social Security--despite Social Security
    being well below the 2.5 percent limit.
        In measuring payment accuracy, Social Security considers as
    proper those payments it is required to make under statute or
    court order. Both OMB and GAO have affirmed this to be a
    correct methodology. However, I think it is very important to
    emphasize that we pursue the recovery of all overpayments, not
    just those considered to be improper. I would like to add also,
    our collection effort is very successful. Over time, we collect
    over two thirds of the overpayments.
        In 2004, Social Security's improper overpayment rate was a
    very low 0.5 percent on overpayments and 0.2 percent on
    underpayments. Despite these low percentages, we are committed
    to taking the steps to further reduce these levels. That is
    very important in a program the size of Social Security, where
    each 0.5 percent increase in payment accuracy equals $2.6
    billion of error prevented.
        SSI is a much more complicated program than Social Security
    in that we must know income, living arrangements, in-kind
    support, and resources. In 2004, our SSI error rates were 6.4
    percent for overpayments and 1.3 percent for underpayments.
        We build accuracy controls into every payment decision we
    make at Social Security. In addition, we have two major
    processes to prevent and detect improper payments. They are
    continuing disability reviews (CDRs) and redeterminations of
    eligibility for SSI. About $8 program dollars are saved for
    every $1 administrative dollar spent on these reviews. As an
    example, in 2004, redeterminations enabled us to collect or
    prevent $2.4 billion in overpayments and $1.3 billion in
    underpayments.
        We have developed plans and performance goals to support
    the President's Management Agenda initiative of eliminating
    improper payments, and we report our progress every quarter to
    OMB. We also developed a specific SSI corrective action plan in
    June 2002 to help get SSI off GAO's high risk list. Even though
    GAO did remove us from the high risk list in 2003, the plan is
    updated regularly, and I meet monthly with the accountable
    executives.
        We are making great strides in preventing improper payments
    by obtaining beneficiary information from independent sources
    sooner and by using technology more effectively. For example,
    we have data matches with a number of Federal and State
    agencies, and we have developed jointly with the States the
    Electronic Death Registry (EDR).
        We are testing an automated telephone process for SSI
    recipients to report monthly wages. We have a very successful
    pilot in the New York region to gather information
    electronically about unreported bank accounts and work directly
    from financial institutions.
        The President's 2007 budget request includes two
    legislative proposals for Social Security. One would simplify
    the administration of our workers' compensation offset
    provisions and the other would establish a mandatory system for
    collecting data on pension income from noncovered State and
    local employment. These two proposals will prevent $2.8 billion
    improper payments over the next 10 years. We are also working a
    plan to simplify SSI, focusing on the very complex in-kind
    support and maintenance rules.
        Last, in the President's budget, there is a request to
    increase funding to do additional continuing disability reviews
    through a discretionary cap adjustment of $201 million, which
    would save over $2 billion in program costs.
        Finally, I would like to confirm we are very committed to
    continue to work with Congress and OMB to eliminate improper
    payments. I would be happy to answer any questions you have.
        Senator Coburn. Any comments, Mr. Williams?
        Mr. Williams. No, sir. Not at this time.
        Senator Coburn. First of all, I know that both of you are
    dedicated in what we are trying to accomplish here, and I want
    to thank you for your efforts.
        Mr. Lockhart, did I hear you say, did I understand that of
    the overpayments that you all make, two thirds are re-
    collected?
        Mr. Lockhart. That is correct.
        Senator Coburn. OK. So your net overpayment is a third of
    what you are actually reporting in terms of the improper
    overpayments?
        Mr. Lockhart. That is correct.
        Senator Coburn. All right. Thank you.
        So, for example, on SSI, yours would be 2.1 percent
    overpayment net, after collection. In other words, you go back
    and get it back?
        Mr. Lockhart. Right. We go back and get it back. Some we
    can do almost automatically because they are still receiving
    benefits. In SSI, we can take 10 percent out a month. In
    disability, we can take the whole check.
        Others, we have all sorts of debt collection activity. But
    over a 5- to 10-year period, we do collect over two thirds.
        Senator Coburn. On the EITC program, Commissioner, is there
    a number that brings that down, that 23 to 28 percent?
        Mr. Everson. The numbers I cited, the $2 billion, are
    before that. And EITC, again, the distinction between it and
    almost anything else is there is no front-end eligibility
    verification as there is with all of these other programs. What
    Congress did allow the agency to do was to take a look, and
    then what we will do is we will hold the refund if we have a
    suspicion.
        If we are going to do an audit, and these audits that I
    mentioned--I think of the $2 billion, something like $1.3
    billion was the amount that was held. There is the other piece
    of what we call ``math errors,'' where there are certain
    problems facially on the return, where we hold another $300 or
    $400 million.
        And then there is the last piece that gets you up to $2
    billion, another $300 million. That happens later basically
    through an audit or document matching. And then what happens is
    you don't participate, you don't get the money the next year.
    You are not eligible to file again, or it is offset in a
    subsequent period, or maybe in some instances you get it back.
        But by and large, we don't get a lot back. We don't have
    the same ability to get it back as Jim's people do.
        Senator Coburn. So would that mean that you need statutory
    changes to change the front end to improve this eligibility?
        Mr. Everson. Well, the basic choice that the Congress made
    was to embed the largest means-tested benefits program in the
    tax code when they set up the EITC. And so, we are on the honor
    system here, and there is error. There is a high degree of
    error, and there is fraud. I can't tell you with precision what
    the balance is between the two.
        So there are a number of things that can be done here. One
    is clearly simplification, and that applies not just to the
    EITC, but to other credits. There are something like seven
    education credits. When I testify before the tax panel, we
    believe simplification is an important thing to do.
        Senator Coburn. Both for you and for the----
        Mr. Everson. For everybody. That is right. I think as I
    mentioned last October, we believe that complexity obscures
    understanding. That makes it tougher for the person who desires
    to be compliant to comply. It also makes it easier for that
    person who seeks to not comply to be noncompliant.
        But the big change here, if you really wanted to drive this
    down--again, I drew the comparison to Food Stamps--and this
    would be a big change. You would have a front-end eligibility
    requirement, as you do in most of these other programs. Then
    you would have higher program costs, not $165 million, or 0.4
    percent of the benefits paid. And then you would get a much
    cleaner program.
        Now, on the other hand, sir, think about this. We have an
    80 percent participation rate. This program does very good
    things for people, for families, and for communities around the
    country. That would change, no doubt, as well. So it is a
    policy choice.
        Senator Coburn. Well, by your data, 20 percent of those
    people aren't eligible? You have 20 percent of the people who
    aren't eligible taking money from the program----
        Mr. Everson. That is exactly right. The money is being
    spent to a certain degree in the wrong place. The way I think
    about this, if you say it is a $40 billion program, and 20
    percent of the people aren't eligible, maybe it ought to be
    paying out $50 billion. But then you would have to reduce it by
    the quarter that you are talking about. You would have to spend
    $35 or $38 billion that way.
        Senator Coburn. Have you all done an analysis to look at?
    The goal is, is we have EITC, and we know who we want to get
    that.
        Mr. Everson. Yes.
        Senator Coburn. Have you done an analysis on what the cost
    would be for program management to get that range down to where
    you don't have such--and I believe this is correct. Correct me
    if I am wrong. This isn't error. Most of it is fraud.
        Mr. Everson. No, I don't agree with that, sir.
        Senator Coburn. You don't.
        Mr. Everson. I do not.
        Senator Coburn. Is most of it error and not fraud?
        Mr. Everson. I don't think we know for sure, but I think
    the people who have looked at this most broad, the academics,
    have sort of said probably, maybe there is about a third that
    is clear error. Maybe at the other end, maybe there is about a
    third that has got some intentional distortion of the
    eligibility. And then there are lots of questions in between,
    if you will.
        Senator Coburn. How much do we pay out every year in EITC
    dollars?
        Mr. Everson. Forty billion dollars. Let me explain that, if
    you will. The first $5 billion of that is a reduction of income
    tax that individuals would otherwise pay.
        Senator Coburn. Right. But it is still paid?
        Mr. Everson. That is right. And then the next $35 billion
    is actually cash out.
        Senator Coburn. So it is $40 billion. So let us go between
    23 and 28 percent, let us set it on 25 percent. That is $10
    billion.
        Mr. Everson. Yes, sir.
        Senator Coburn. And a third of that is fraud. So that is $3
    billion a year. The question I would have to you is what do we
    have to spend to find that $3 billion? Where is the break-even
    line for you as an agency, and what can we do to help you to
    where we get to that point?
        Mr. Everson. Well, this gets back into the overall tax gap
    question. We spend about 5 percent of our personnel resources
    on the EITC, and that is roughly proportional with the tax gap,
    the component of the tax gap.
        On the other hand, though, if you look at the number of
    audits--I mentioned 500,000. That is a huge proportion of the
    1.2 million audits we did last year. This is the single-highest
    audit rate for individuals because of this history.
        If the Congress threw an extra billion dollars at me, sir,
    in all good conscience, I would not spend it in this area. I
    might put some small piece of it there, but I would be working
    on corporations, high-income individuals, and the small
    businesses area, where if I could just digress for one second?
        Floyd, if we could have the chart on the reporting because
    I think it is pertinent? The bar chart on what kind of
    reporting we have?
        It gets back to where we were talking about last--no the
    other chart, right. It gets back to the President's proposals.
    Look out to the left here. We talked about wages. If the
    noncompliance rate for salary and wages where we have reported.
    We know how much you make as a senator. Even if you don't tell
    us, the Senate tells us. The noncompliance rate there is 1
    percent.
        If you go all the way out here to where there is little or
    no information reported, and this is individuals operating
    small businesses, the noncompliance rate is 1 in 2. This, if
    you will, is squarely in the middle.
        So, obviously, to run a rational program, what we want to
    do is attack all of these areas, but we will be devoting more
    audit resources here, and also we want to get a little more
    reporting.
        The last thing I will say on this is--I am making a
    commercial here for U.S. senators, not on this particular EITC
    subject--is these proposals, they just treat--we want to get
    credit cards as an example--credit card issuers to give us
    information on receipts that they get for businesses. This is
    no different than 150 million employees already get some
    reporting on their wages. That is what we are trying to do.
        Senator Coburn. Senator Carper.
        Senator Carper. I think the Chairman asked a part of a
    question on the EITC that I was going to ask. But I don't know
    that he asked this part while I was out of the room. Let me
    just ask it, Commissioner Everson.
        Are the errors per EITC recipient usually fairly large, or
    are they usually fairly small? And can you maybe quantify them?
        Mr. Everson. I am not sure I understand what you mean. If
    we look at the credit here, just to familiarize you. Do you
    have this chart, Floyd?
        These are relatively small amounts of money. This shows the
    credit. It maxes out at $4,400 if you were a family and you
    have two children. And then it actually declines as your income
    goes up, and it is in the mid 30s now.
        So on any individual return, it is a relatively small
    amount of money compared to what we do on the corporations that
    is at stake. But again, there are 22 million taxpayers that are
    claiming this.
        I think the other element of your question, though, is we
    see, where we do see the fraud, you may have read about. There
    was a lot of discussion a couple of months ago about the refund
    fraud program that we have. We do see rings of people who
    generate false returns, and they somehow find it right at this
    sweet spot, if you will, where the credit maximizes.
        They send us a return that shows the income to be $15,000,
    the person working, and then claiming the $4,400 credit. So
    that is in there, too.
        Senator Carper. OK. I am going to ask you the same question
    I asked the earlier panel that Mr. Williams was on, and that is
    I think you have spoken to this already, each of you. What can
    we do to be of direct assistance, particularly to you, Mr.
    Everson, to try to ratchet down the EITC overpayments? And to
    our panel is it deputy administrator?
        Mr. Lockhart. Commissioner.
        Senator Carper. To our deputy commissioner, particularly
    for the programs that you spoke to, SSI and others. But what
    specifically? I know you mentioned there are two legislative
    initiatives. But just go back and revisit those for us.
        Mr. Everson. The first point is this Subcommittee has been
    great in terms of supporting the President on making sure there
    is adequate funding. I think the oversight of this Subcommittee
    has been second to none in the tax areas outside of finance
    because your colleagues on the Permanent Subcommittee on
    Investigations are constantly looking at our issues.
        Your own inquiries on the tax gap, I am very appreciative
    of that. The more we can educate members to understand what is
    at stake here, and then take solutions like the incremental
    reporting, which will be terribly important, that is
    principally what you can do.
        If you really want to get after this problem, this 25
    percent problem, you do need to think of this question--the
    construction of the program. Do you want to have a front-end
    eligibility verification as opposed to just a back-end?
        But again, I caution you, this program has a great
    participation rate and lifts millions out of poverty. We need
    to have an important national discussion on that if we really
    want to move it down to 5 percent or something.
        Senator Carper. All right. Mr. Lockhart.
        Mr. Lockhart. Well, certainly, first of all, thank you for
    having a hearing, and this is my first opportunity to talk to
    you. But I really appreciate you----
        Senator Carper. What was your job in the Clinton
    Administration?
        Mr. Lockhart. It was President Bush ``41'' Administrative.
    I ran the Pension Benefit Guaranty Corporation.
        Senator Carper. Would you like to have that job again?
        Mr. Lockhart. It was pretty bad then.
        Senator Carper. It is a lot worse now. That could be a
    whole other hearing, Mr. Chairman.
        Mr. Lockhart. So I really appreciate you having this
    hearing and your offer. Certainly, there are two proposals in
    the President's budget. One on simplifying the workers'
    compensation offset. If you get disability benefit, in some
    States, your disability benefit is lowered if you are getting
    workers' compensation. So we have a proposal to simplify that.
    That is a very messy workload.
        We also have one to get pension reporting of people that
    are getting pensions that can be offset against Social
    Security, and that is for State and local workers.
        We are also in the process of putting one together to help
    simplify the very complicated SSI program. In SSI, the reason
    for the high error rate is basically the complexity of the
    program. And one of the complexities and really intrusiveness
    of the program is that we have to know monthly what your income
    is, what your rent is, who is paying for your food, clothing,
    and all of these sort of things, and we need to try to simplify
    that.
        And then, last, we have a tremendous payback from what we
    call our stewardship work.
        Senator Carper. What does that mean?
        Mr. Lockhart. The work to ferret out improper payments. We
    find in our redetermination process, which, again, is looking
    at SSI and looking at all those complexities, we get a payback
    of close to $9 for every dollar we spend. And then from
    continuing disability reviews, which are basically look to see
    that the person is still disabled, we get a payback of almost
    10 to 1.
        So those are tremendous paybacks that we can give. But
    unfortunately, one is in the administrative bucket of expenses,
    and the other is the program bucket. And it is over a longer
    period of time, and it is hard to get them funded in a proper
    way.
        Senator Carper. All right. Mr. Lockhart, I think you
    mentioned something about working with States, and I think I
    heard you say electronic death registry. Did you say that?
        Mr. Lockhart. Yes, I did.
        Senator Carper. I think I understand, but tell us how it
    works.
        Mr. Lockhart. Well, we have been working over the last few
    years to have States electronically report all death records,
    and at the same time, we verify the Social Security number so
    we know it is a good death report, if you will.
        And we now have it up and running in 10 States and the
    District of Columbia. We funded another 10 States and New York
    City, and we are looking this year to award contracts to as
    many States as funding allows. It will be going to the
    Department of HHS as part of legislation that was passed a
    couple of years ago.
        But this will not only be good for Social Security, but for
    any benefit-paying program to know if people are dead and no
    longer deserve benefits. And we are going to make it available
    to everybody.
        Senator Carper. When you say ``we are going to make it
    available to everybody,'' do you mean for other programs where
    it would be helpful to have that kind of information?
        Mr. Lockhart. Yes, other government programs.
        Senator Carper. That is good to hear.
        Are we going to have another round here, Mr. Chairman?
        Senator Coburn. I hadn't planned on it.
        Senator Carper. Could I ask one more question of
    Commissioner Everson, please?
        Senator Coburn. Sure.
        Senator Carper. Commissioner Everson, I want to go back to
    something that I heard you say. Like I think most of us here,
    we believe the EITC is a real good program, and it is one of
    those things that Republicans like Ronald Reagan and Democrats
    like Bill Clinton and myself and others think, all of us,
    basically this is a good thing.
        And we all want to figure out how we can reduce the
    overpayments, and you mentioned how it really sounds like
    fraud, these rings that are created to go out and bilk
    taxpayers out of refunds. You mentioned the cost of
    administering the program----
        Mr. Everson. Yes, sir.
        Senator Carper [continuing]. On a percentage basis, which
    is actually very small. I think you said maybe 0.5 percent?
        Mr. Everson. Yes, sir. As part of our budget, we spend
    about $165 million a year on this out of a total of $10.6
    billion that, as you know, is our whole budget. So it is small,
    and that contrasts with the figure I saw. I looked at the
    President's budget--$3 billion for Food Stamps against $30
    billion of expenditure.
        So you could, no doubt, spend more, a lot more on this and
    do better on the error rate. You are still left with the fact
    that it is at the back end, which is not the most effective way
    to deal with this.
        But again, you have to balance this out with your first
    point, with which I agree, that this program is very important,
    and it does have a high participation rate. So there is a
    dampening effect on this that you see, the degree to which you
    do more.
        Senator Carper. Did you say the participation rate, Mr.
    Commissioner, is 80 percent?
        Mr. Everson. About 80 percent is what we estimate, plus or
    minus a few points. Yes, sir.
        Senator Carper. That is pretty high. Is that counting the
    people who are not eligible who are still participating? Is
    that in that number or not?
        Mr. Everson. No, it is not, sir. But we think that is 80
    percent of the eligible people are participating.
        Senator Carper. And I would just ask you to answer--you
    don't have to answer it here--but for the record. You have
    spoken to it, the point about whether or not if we are not
    encouraging you to dramatically raise your administration
    costs.
        But the question that is in the back of my mind here, maybe
    the front of my mind, is if you were to spend a bit more money
    for administration, how would that help us to address the
    improper payments, the overpayments? And if you can see if
    there is some kind correlation? I am sure you have looked at
    that.
        Mr. Everson. Yes.
        Senator Carper. Or folks, before you have looked at that.
    And just for the record, if you could just share some of that
    with us?
        Mr. Everson. Yes, sir. Certainly.
        Senator Carper. Good. Thanks so much.
        Thanks, Mr. Chairman.
        Senator Coburn. The point of diminishing returns, I think,
    is what he is looking for.
        I just want to have one other question. This idea between
    avoidable and unavoidable overpayments, I think I understand
    it. Would you try to explain it to me because I have a little
    concern that we start using this language, we are liable to see
    other departments start describing ``avoidable'' and
    ``unavoidable'' payments. So would you clarify that for me, Mr.
    Lockhart?
        Mr. Lockhart. I would be happy to. We look at overpayments
    in two categories--first, improper, and the other category is
    required by statute or law. And those are the ones that are
    unavoidable.
        A simple example is due process. When someone's benefit is
    reduced or eliminated, they have 60 days to appeal. And if they
    appeal, we don't cut their benefits until that appeal is
    decided.
        Senator Coburn. But the problem I have with that is that
    reported as an improper payment is not an improper payment. It
    is not an improper payment because you are following the law.
        Mr. Lockhart. Right.
        Senator Coburn. It is like continuing SSI for somebody or
    somebody's Social Security after they die, but you don't have
    the notice that they are dead.
        Mr. Lockhart. Right.
        Senator Coburn. You can't stop it because they might be
    dead. You can only stop it when you know they are dead. And so,
    the point is that is not an improper payment.
        Mr. Lockhart. Right. But it is an overpayment, and we go
    out and collect it when we find out about it.
        Senator Coburn. Yes. But that is not an improper payment
    because you are actually following the law. Mr. Williams, do
    you have any comments on that?
        Mr. Williams. I would agree with that. We talked about this
    with our attorneys. And as you correctly stated, if the statute
    requires you to continue to make the payment as you go through
    the due process, by definition of the improper payments act,
    that is not an improper payment.
        At the point that a decision is reached, a ruling is made
    on it, and it is determined that person is required to pay that
    money back, it becomes a receivable. But at no point in time
    should that be classified as an improper payment.
        What we at GAO further believe is that because you have
    this particular scenario, we believe that it is a good practice
    to continue to track these types of activities because for
    informational purposes, it is good information to provide to
    the Congress and decisionmakers in case there is a need for
    some type of change in legislation, etc..
        Senator Carper. Before we finish, could I ask one more
    questions before we finish?
        Senator Coburn. Yes. Let me finish this point.
        Each of you have made note of recommendations in the
    President's budget. Would you be so kind as to send those
    specifically to me for your Department so we can look at them
    as things will move faster if we can get everything back
    together before the Subcommittee.\1\ And you will have a
    multitude of questions coming from us that, if you would,
    please answer, we would appreciate, on a timely basis.
    ---------------------------------------------------------------------------
        \1\ Copy of the ``FY 2007 Budget Proposal'' submitted for the
    Record by Mr. Lockhart appears in the Appendix on page 52.
    ---------------------------------------------------------------------------
        Mr. Everson. Yes.
        Mr. Lockhart. Be happy to.
        Senator Coburn. Senator Carper.
        Senator Carper. Just one more for Commissioner Everson. Mr.
    Commissioner, you mentioned in your testimony, somewhere I
    think you mentioned the word ``certification?'' That you are
    using or testing to determine how effective certification is in
    reducing improper payments in the EITC.
        Mr. Everson. Yes, sir.
        Senator Carper. Could you just give us a little more in
    terms of detail about what those tests involve and how
    effective they have been, if you have had a chance to make that
    determination? And what kinds of unintended consequences you
    have discovered?
        Mr. Everson. Well, sir, we have been testing over the last
    2 years or so in the tens of thousands to try and provide some
    form of an up-front verification of eligibility. And if I were
    to characterize the results so far, I would say that the
    results do drive down the improper payments, but it appears
    they also dampen participation. So there is this tradeoff that
    I mentioned before.
        Senator Carper. And have you reached some conclusion as to
    whether the costs or the unintended consequences is greater?
        Mr. Everson. I haven't reached a conclusion yet. We have a
    little ways to go on this. But I think we will be left, again,
    with what I would consider this fundamental policy choice of
    right now we let people claim this on a tax return, and with a
    minimum of hassle, if you will, if you really want to change
    this, do you go to what is a more traditional benefits program
    model?
        Senator Carper. OK. Thanks so much.
        Senator Coburn. I would like to make a note. Don't we want
    the ineligible not to be getting the money?
        Mr. Everson. I absolutely agree with that, sir.
        Senator Coburn. Thank you all very much.
        Our next panel is Assistant Secretary Charlie Johnson from
    HHS. Mr. Johnson serves as Assistant Secretary for Budget and
    Technology and Finance at the Department of Health and Human
    Services.
        Prior to his service at HHS, Assistant Secretary Johnson
    was appointed to Chief Financial Officer at the Environmental
    Protection Agency. He has spent 31 years in the public
    accounting profession and served on numerous boards and
    committees related to accounting and management.
        We also have Samuel Mok, CFO at the Department of Labor.
    Mr. Mok was confirmed by the Senate in January 2002 to be the
    Chief Financial Officer at the Department of Labor. Prior to
    his time at the Department of Labor, he served as Chief
    Financial Officer and Controller of the Treasury Department,
    where he was responsible for implementing many management
    programs to enhance financial reporting and control.
        Mr. Mok has extensive private sector accounting and
    auditing experience and also served in active duty as a
    lieutenant in the U.S. Army.
        I want to recognize each of you and recognize that Mr.
    Johnson has been here before. We thank him for returning. Your
    full statements will be made a part of the record.
        Mr. Mok, you are recognized for 5 minutes.

        TESTIMONY OF THE HON. SAMUEL T. MOK,\1\ CHIEF FINANCIAL
                   OFFICER, U.S. DEPARTMENT OF LABOR

        Mr. Mok. Thank you, Senator Coburn and Ranking Member
    Carper.
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Mr. Mok appears in the Appendix on
    page 110.
    ---------------------------------------------------------------------------
        I appreciate the opportunity to testify before this
    Subcommittee today to discuss the Department of Labor's
    compliance with the Improper Payment Information Act of 2002.
        In fiscal year 2005, the Department had three programs
    classify at high risk for improper payments. The Unemployment
    Insurance Benefits Program had nearly $3 billion in improper
    payment, with an estimated overpayment rate of 9.5 percent. The
    Federal Employees Compensation Act, otherwise known as FECA,
    benefits had $3 billion in improper payments, with an estimated
    error rate of 0.1 percent. And the Workforce Investment Act,
    otherwise known as WIA, grant programs had $8 billion in
    improper payment, with an estimated error rate of 0.2 percent.
        I am pleased to report that the Department met its improper
    payment reduction and recovery targets for each of these
    programs in fiscal year 2005. Improper payment fell
    approximately about $600 million, a 15 percent decrease over
    the previous years.
        While statistical sampling allows estimation of improper
    payments for most of the Department's programs, WIA grants pose
    unique challenges. Grants to States, cities, counties, private,
    nonprofits, and other organizations fall under the single audit
    act. We found that it is more efficient and effective to rely
    on the findings of a single audit to monitor grant recipient
    funding.
        By analyzing all of the available single audit reports for
    WIA grants, we are able to develop a proxy for improper
    payments to estimate the improper payment rate. Our program
    with the highest dollar outlay and the highest rate of improper
    payments is the UI program. This Federal-State partnership is
    based on Federal law, but it is administered by State employees
    under State law.
        In the UI program, the sooner the State finds an improper
    payment, the sooner the State can cut off the benefits and
    start collecting the overpayment. In 2004, the Department
    entered into an agreement with the Social Security
    Administration that essentially allows State UI agencies to
    cross-match UI claim information against Social Security
    records. This helped prevent payments to persons working under
    stolen Social Security numbers and helped to determine the
    correct benefit amounts for individuals receiving pensions.
        The Department funds States to use data in a State
    directory of new hires to detect and prevent improper payments
    to beneficiaries who continue to collect despite having
    returned to work. State directory cross-matching has saved at
    least, in our estimate, $150 million in the last 2 calendar
    years. The reason is States have gained access to the National
    Directory of New Hires to tap employment information from a
    wider variety of employers, including Federal agencies and
    multi-State employers who report all the new hires to a single
    State. Such cross-matching is an effective way to reduce
    improper payments.
        The President's fiscal year 2007 budget includes
    legislative proposal and funding request to better help States
    deter, detect, and collect UI overpayments. These include
    allowing States to use a percentage of all recoverable payment
    for benefit payment control activities and requiring States to
    impose at least a 15 percent penalty on fraud overpayments and
    allowing States to permit collection agencies to retain a
    percentage of fraud overpayment recovered.
        Further, requiring employers to report start work date to
    the State directory of new hires. And last, but not least,
    authorizing the U.S. Department of Treasury to intercept
    Federal income tax refund to recover overpayment of UI
    benefits. We believe that these legislative proposals would
    reduce overpayment and increase overpayment recoveries and
    delinquent tax collections by an estimate of $5.4 billion over
    the next 10 years.
        The President's fiscal year 2007 budget requests $10
    million to prevent and detect fraudulent UI claims filed using
    personal information stolen from unsuspecting workers, an
    effort to combat identity theft. And $30 million to help States
    better assess claimants' eligibility and provide re-employment
    assistance.
        In closing, I would emphasize that the Department of Labor
    recognizes the important stewardship challenges of ensuring the
    funds go to their intended purposes, and eliminating improper
    payment is a task that we must continue to pursue with great
    diligence.
        Thank you, and I will be glad to take any questions you may
    have, Mr. Chairman.
        Senator Coburn. Thank you. Mr. Johnson, welcome back.

     TESTIMONY OF THE HON. CHARLES JOHNSON,\1\ ASSISTANT SECRETARY
    FOR BUDGET, TECHNOLOGY, AND FINANCE, U.S. DEPARTMENT OF HEALTH
                           AND HUMAN SERVICES

        Mr. Johnson. Well, thank you.
    ---------------------------------------------------------------------------
        \1\ The prepared statement of Mr. Johnson appears in the Appendix
    on page 119.
    ---------------------------------------------------------------------------
        Senator Coburn. I think you kind of got slammed before you
    got up here.
        Mr. Johnson. I was going to say I heard a lot of nice
    things said about the Department of Labor, and I heard a lot of
    things said about the Health and Human Services. It is sort of
    like ``beauty and the beast,'' and I am not the beauty.
        But let me report to you on where we are because I do think
    we have had some successes, and certainly we have some
    challenges. I think all seven of our programs have been
    mentioned. Let me just briefly go through each one, if I may?
        In Medicare, in fiscal 2005, we reported a Medicare fee-
    for-service error rate of 5.2 percent. And that rate is, of
    course, significantly lower than the 10.1 percent that we
    reported in the previous year. And I think you correctly
    pointed out that the significant drop in the rate is primarily
    attributable to our measures taken to ensure that necessary
    documentation is in place. That I consider to be the low-
    hanging fruit. I think there is no question about that.
        I would like to speak about Medicaid and SCHIP together. We
    have looked at a lot of options to measure Medicaid and SCHIP.
    We have concluded that the best way to measure this is the same
    way we measure our Medicare program. Medicaid and SCHIP are
    just 50 different Medicare programs conducted by 50 different
    States.
        And so, we have engaged contractors this year that are
    going to develop a national Medicaid error rate. And these
    reviews will be much the same as they are in Medicare. By the
    end of 2008, all 50 States will have been surveyed. We are
    going to start with 17. After the first 17, we will have a
    pretty good idea of what that error rate is going to be.
        Under Head Start legislation, grantees are required to be
    monitored at least once every 3 years. We reported a Head Start
    payment error rate reduction from 3.9 in 2004 to 1.6 in 2005.
    This is primarily achieved by reinforcing the requirement that
    90 percent of the served populations come from low-income
    family. That was, again, maybe you can call it low-hanging
    fruit, but it had to happen.
        On the Foster Care Program, we developed a methodology for
    estimating a national payment error rate centered around
    eligibility reviews, and those are required by regulation.
    That, too, dropped from 10.33 percent to 8.6 percent. So we
    have had drops in the first three programs I have mentioned,
    and that is the success part.
        Let me tell you about TANF. We have had many pilots which
    are successful, and yet we have not identified an efficient and
    effective approach for determining an estimate of improper
    payments in the TANF program. By design, States are given great
    flexibility in the administration of this program. There were
    also statutory limitations with regard to the information that
    the Department can request of States.
        But in the meantime, we have installed alternative
    procedures to stop improper payments immediately upon
    discovery. The first initiative is our PARIS system. It is the
    Public Assistance Reporting Information System.
        It provides--again, similar to Department of Labor--a
    matching program, matching the capability to identify improper
    payments in Medicaid, TANF, and Food Stamps. Thirty-four
    States, the District of Columbia, and Puerto Rico are using the
    PARIS system and reporting millions of dollars in annual
    savings. That is a self-reporting system.
        Even more promising is the use of our National Directory of
    New Hires, again referred to by the Department of Labor. That
    matches the database with new hires under W4s, quarterly wage
    data, and unemployment compensation, finding great success with
    that.
        We had a pilot in the District of Columbia in which 33
    percent of the individuals reviewed were identified as being
    employed. Over 81 percent of those identified were verified as
    actually being employed. The vast majority of those recipients
    were not known to be employed by the TANF agency. So, again,
    these matching programs really do work, and we have 30 States,
    the District of Columbia, and Puerto Rico now on that program.
        Senator Coburn. You said 81 percent. Is that what you said?
        Mr. Johnson. Eight-one percent of----
        Senator Coburn. Were employed?
        Mr. Johnson. First, we found a third of the people that we
    looked at went on this list as hitting a match. And when we hit
    the match, then in subsequent verification of whether or not
    they really were employed, 81 percent were, indeed, employed.
        Senator Coburn. So 24 percent of the people?
        Mr. Johnson. That is right.
        Senator Coburn. OK. It is kind of like EITC, isn't it?
        Mr. Johnson. Yes. And so, we are sold on this as a program.
    The problem with this is it doesn't get us to, by definition,
    the national error rate that is required by the act.
        In the child care program, as with TANF, the child care
    program legislation gives the States great flexibility in the
    design and administration of the program. With child care, we
    have initiated an improper payment pilot in which 18 States
    participated. Based upon these pilots, we believe we now have a
    methodology to evaluate participant eligibility, which is the
    highest risk area, and we think we are on our way with at least
    a plan.
        So, in conclusion, we have valid improper payment systems
    and are reducing error rates in three of the seven programs--
    that is, Medicare, Head Start, and foster care. In Medicaid and
    SCHIP, we have developed and are implementing a plan similar to
    the Medicare model, which we believe will be equally
    successful.
        In the two programs we have not yet developed a
    methodology, that is the TANF and the child care program. In
    TANF, as I mentioned, we have implemented data match systems,
    which allow us to reduce improper payments, and in child care,
    we are engaged in a pilot that we think has some real promise
    to lead us to methodology that will comply with the act.
        I would like to leave you with one very interesting
    statistic, though. And I think the American taxpayer is well
    served by the money spent at HHS to combat both improper
    payments and particularly health care fraud and abuse. Since
    1997, we have spent $5.7 billion on our Medicare program
    integrity work, $5.7 billion, but have recovered approximately
    $82 billion, a 14 to 1 cost-benefit ratio. So we do have some
    good news to report to you, Senator Coburn.
        Thank you again for the opportunity to talk about the
    Department's improper payments, and I will also be pleased to
    answer any of your questions.
        Senator Coburn. Thank you. I just want to address a little
    business. I don't think OMB likes you. [Laughter.]
        Well, the reason I say that is our last hearing, your
    testimony didn't come in on time. And this hearing, we got it
    last night. And we had a little discussion about that, and
    either they are gunning for you or they are not getting it soon
    enough.
        And I would also say that Mr. Mok's testimony didn't come
    in until yesterday as well. And I don't know if that is an OMB
    problem, or it is a problem with it getting there. But I can't
    do the job if I don't have your information in time to study
    it.
        I mean, my staff can study it. They can stay up all night.
    But I can't stay up all night and then be sharp and ask you the
    questions that the American taxpayers want. So I just ask for
    your indulgence, 48 hours sooner than you did this time try to
    get it. This hearing has been on for quite a while, and I would
    just appreciate that help.
        Mr. Johnson. You have my apology, and from our end, we will
    do better.
        Mr. Mok. Same here.
        Senator Coburn. I am pleased to hear progress. I am still
    confused how we can be making better progress in one program
    that is State run, and we can't in other areas. And the
    unemployment insurance is still way too high in terms of
    improper payments, and most of that is overpayments. It is not
    underpayments.
        And tell me how, even though I know both of you are
    dedicated to making these things happen, what can you learn--
    for Mr. Mok. And actually, the question really is, is did this
    really start in 1987, or did you all really start good
    management 5 years ago or 4 years ago?
        Ms. Combs really alluded to the fact that you all were
    improving and had a lower error rate because it started a long
    time ago. Not to question her word, but is that what happened?
    Is that why you are where you are today and improving, or is it
    because management things and management principles were
    applied, and audit trails were followed, and programs were put
    in place to actually lower this?
        Mr. Mok. I think Ms. Combs is right and what you said
    earlier is right, too. I think there are many factors. We have
    put together a program, which today is known as the Benefit
    Accuracy Measurement Program, since 1987.
        So in the 1970s, we had been requiring the States to report
    statistics to us. In 1987, we have this program that we measure
    and assess. So we have a history of collecting data and trying
    to collect some of these overpayments. But I will also say that
    since President Bush came into office, with the PMA and other
    initiatives, there is a culture to get this overpayment
    recovered and also eliminate overpayment to the best of our
    ability.
        At the Department of Labor, I am also very fortunate
    because under the leadership of Secretary Elaine L. Chao, she
    is a Harvard MBA. She understands finance. She also inherited
    the United Way after its fiasco, financial crisis. So she
    understands very well that if you don't pay attention to
    financial management, horrible things can happen.
        So my office receives incredible support from her and my
    contemporaries to effect a good program to live up to President
    Bush's promises to reduce improper payments, and we have an
    excellent working relationship with the States and also
    excellent working relationship with other assistant
    secretaries, primarily because of the culture fostered by
    Secretary Chao to go after these problems.
        So it is really a foundation that I have been fortunate to
    inherit, and we are able to leverage that. And also the
    stability of the management team helps. Because the Labor
    Department, again under Secretary Chao, has probably one of the
    most stable management teams.
        I am currently the longest-serving CFO in the history of
    the U.S. Department of Labor. So I learn from my mistakes, and
    so we are able to do some good things there.
        Senator Coburn. That is great. Well, what you are saying is
    leadership really matters?
        Mr. Mok. Yes, sir.
        Senator Coburn. And what the President has instituted is
    really going to matter, and the key is, is it carried down? Mr.
    Johnson.
        Mr. Johnson. Let me discuss TANF because that has been
    maybe our most difficult to penetrate and get a national error
    rate.
        I was formerly chief of staff to now Secretary Leavitt when
    he was governor of the State of Utah. And of course, the TANF
    program had a couple of provisions. You were able, by design,
    to use that money in a manner that would best fit your State.
    And it was sort of a hands off from the Federal Government and
    hands on by the State.
        I can tell you that in our State, and I suggest probably in
    every State, that they are also working hard to reject and
    eliminate improper payments. We have a data survey out to them
    asking them, ``What are you doing in your individual State?''
    We will compile those. They will be on a Web site as a best
    practices.
        We are trying to get at this in another way. And yes, I
    guess we could as a public policy decide, look, the flexibility
    that we have given the States on design of the program and on
    the amount of data that we can request from them, we could
    legislate that and, of course, get all the cooperation that we
    needed through legislation.
        We are trying to work at it in a different method, and
    maybe we are wrong. Maybe we need to revisit that. But we would
    be happy to work with you on that issue.
        Senator Coburn. Are you having trouble getting cooperation
    from the States?
        Mr. Johnson. Well, they are cooperative in telling us what
    they are doing. But if you ask them to spend some money--and
    all of these things take money--and to get a statistically
    valid rate, then, yes. There is some resistance.
        Senator Coburn. So let us go back. Your oral testimony was,
    I believe, with TANF in one area, where you are running a
    demonstration project, hooking up----
        Mr. Johnson. We are doing the matches, yes.
        Senator Coburn. You are doing the matches?
        Mr. Johnson. Yes.
        Senator Coburn. And of the 30 percent that you looked at
    that was not accurate, 81 percent of that actually were
    employed?
        Mr. Johnson. And that is in the District of Columbia.
        Senator Coburn. That is here in Washington, DC?
        Mr. Johnson. Yes. So I don't say that is representative.
        Senator Coburn. Well, I am not going to generalize that,
    but I am just saying here is one where it looks like you have
    24 percent improper overpayment on TANF?
        Mr. Johnson. Right.
        Senator Coburn. And what is the total payments for TANF for
    a year in this country?
        Mr. Johnson. I think $17 billion, if someone can help me?
        Senator Coburn. $17 billion. So let us say that it is not
    24 percent. Let us say it is 8 percent. It is a billion dollars
    a year.
        Mr. Johnson. Right.
        Senator Coburn. Tremendous amounts of money. Well, what I
    would like, Mr. Johnson, is for you to give to this
    Subcommittee any suggestions that you might like to see that
    would tend to incentivize the States to be much more
    cooperative in terms of improper payment because if the States
    really won't be cooperative with you and yet you are being
    hammered by us, then it is up to us to give you the tools to
    get the information.
        Mr. Johnson. Yes. And I do think that they are incented
    when we give them these data matching programs. They are
    incented to use those because that is to their benefit. But
    that doesn't translate to a national error rate calculation. We
    can give you the results of all of that, and I think you get
    the same benefit. But if you want exact compliance with the act
    and a statistically valid error rate, that is a different
    issue, and we are trying to do both.
        Senator Coburn. How about for Medicaid? You got an FMAT
    match on administrative cost. What do they get, $8 or $9 for
    every dollar they spend?
        Mr. Johnson. Not that high, but----
        Senator Coburn. OK, $6 or $7 for every dollar they spend on
    administrative costs from the Federal Government. The point is
    you would think that they would gold mine that to get you the
    data.
        Mr. Johnson. Now on Medicaid, it is true these contracts,
    they are cooperating. They are paying part of the contractual
    price, yes.
        Senator Coburn. So the real problem is not a problem on
    SCHIP and Medicaid?
        Mr. Johnson. No, that is not the problem.
        Senator Coburn. The problem is on TANF, children's care?
        Mr. Johnson. Yes. And again, we think we may have that
    solved. But TANF is going to remain our most difficult program
    to get a statistical measurement.
        Senator Coburn. And there is a good guess that there might
    be a billion, at least a billion dollars a year there? Well, if
    you take a third of what is happening in DC.
        Mr. Johnson. Sure. Right.
        Senator Coburn. And you say Washington, DC is three times
    worse than the rest of the country, on average, you get a
    billion dollars. And if it is only two times worse, you get a
    billion and a half.
        Mr. Johnson. And I think that is why we are getting these.
    As we put out these matching programs, we are getting reports
    back from the State--again, State reporting----
        Senator Coburn. Right.
        Mr. Johnson. That they are saying, yes, it is millions of
    dollars that they are saving individually. We can compile all
    of that.
        Senator Coburn. Do all of the States have this now?
        Mr. Johnson. They have access to it.
        Senator Coburn. How many of them are not using it?
        Mr. Johnson. Well, 34 States are. So 16----
        Senator Coburn. Sixteen are not.
        Mr. Johnson. If my math is right.
        Senator Coburn. Your math is usually right. It is not what
    we want to see all the time, but it is usually right.
        Senator Carper.
        Senator Carper. Thanks so much, gentlemen. Good to see you.
    And Mr. Williams, nice to see you again.
        Mr. Williams. Thank you.
        Senator Carper. You just got yourself a permanent seat
    there, don't you?
        Mr. Williams, let me just start off with you. Any
    observations you would like to share, sort of reflecting on the
    testimony and responses of our other two witnesses?
        Mr. Williams. Yes, not only the other two on this panel,
    but on the previous panel. I think that one of the things that
    I did in preparing for this hearing was to realize that I am
    looking at agencies across the government, and I am not an
    expert in all of these agencies. So I talked to some of our
    experts and made sure I got as much information about these
    various programs.
        And the feedback that I got from our experts is consistent
    with some of the things that I have heard today as far as what
    the Congress can do to help out, and that relates to
    simplification of some of the processes. That really could be
    of benefit.
        Senator Carper. Could you give us maybe an example of that?
        Mr. Williams. I think when we were talking about the earned
    income credit. In talking to our experts, one of the things
    that they pointed out to me was that while the tax code is
    complicated, their thinking was the section that related to the
    earned income credit was probably one of the more complicated
    sections of the code.
        And to take that a step further, a lot of people that
    qualify for it might not have the most education and is aware
    of how to go about filling it out. So that is something that
    you might want to take into consideration when you are looking
    at simplification of a process. That is one thing that they
    pointed out to us.
        They also pointed, and I have testified to this over the
    years, and that is when you are looking at these various
    programs, you definitely want to take into consideration cost-
    benefit factors. And I think there was a lot of discussion
    about that today. And I would concur with those statements that
    the way I like to put it, why would you spend a dollar and one
    cent to get back a dollar. So I would concur with those
    statements.
        Most recently, there was a statement that was made about
    are we better off in some programs than others because we have
    been working at this longer? I could take HHS as an example. If
    you look at the reporting that is going on under Medicare, this
    process started back in 1996, when the IG began taking a
    sample.
        And as recently as last year, you can see that they are
    still making refinements to it and that we have had the
    discussion today that the number dropped down because of better
    reporting of the documentation that is coming in from the
    medical providers.
        So I think you would have to conclude that it does take
    time in some of these programs. That might be one of the
    reasons why some of these programs are showing not reporting
    instead of having an amount.
        So I think with time, and I think we all would agree that
    people are working hard at trying to address this issue, and
    there are various things that are going on. Because as I read
    through their various performance and accountability reports, I
    saw numerous examples of various matching concepts that have
    been put into place and things along this line that should help
    reduce some of the improper payments that is occurring in the
    Federal Government today.
        But in conclusion, I also want to point out that $38
    billion is still $38 billion, and we still don't know today
    exactly what that number is in total based on the reporting
    that I have seen up through fiscal year 2005. Thank you.
        Senator Carper. Good. Thanks. You mentioned people are
    working hard. Are there any folks out there that aren't working
    hard enough that you know of?
        Mr. Williams. None that I know of. [Laughter.]
        Senator Carper. All right. I was out on a phone call here
    for a minute, and I missed a part of the testimony of two of
    our witnesses. I was trying to watch it on TV in the anteroom
    here and do my phone call as well and probably didn't do a good
    job with either of them.
        But I came in and I think I heard the Chairman talking
    about these programs where the Feds partner with the States and
    maybe the States administer the programs and where I think
    Medicaid might have been an example of one of those programs
    where we still haven't been able to get our arms around the
    improper payments problem.
        I think I heard some discussion about incentivizing the
    States to cooperate more. It reminded me a little bit of a
    conversation we had in another hearing where I think we dealt
    with real property management, and we were looking at, I think,
    the Veterans Administration, where they are actually doing a
    much better job than some of our other agencies in handling
    their property management because they have an incentive to do
    so.
        Let us come back to the issue and programs that either of
    you partner with the States, in other words, on UI or Medicaid.
    And just talk to us about, let us say you are a governor or a
    State legislator, what incentives are we providing the States
    to partner with us in reducing the improper payments? Why
    should the States want to help us on this, aside from being the
    right thing to do?
        Mr. Johnson. Yes, and as a former governor, you know that
    States do want to do the right thing, and they do have a vested
    interest.
        Senator Carper. I know in Delaware and Oklahoma they sure
    felt that way. I can't speak for some of those other States.
        Mr. Johnson. The issue then is whether or not the
    incentives just to do the right thing is all that it takes. And
    with respect to Medicaid, we think now that the States have
    entered into a contract, joint contract--they are paying their
    part, we are paying our part--and we do think we have a
    solution there.
        We have just introduced these matching programs just
    recently. But our success factor then in getting States to sign
    up has been rather astounding. So they can see the benefit of
    using these matching programs to find errors because if you
    take TANF or the child care, the benefit comes right back to
    them, right back to the State.
        But again, those work and those are dollar savers. It just
    doesn't get us to the technical statistically valid national
    error rate. And so, I look at it from a cost benefit, I think
    we are doing a lot of the right things. And getting to this,
    the technical, we are eliminating errors, and we are
    eliminating fraud and abuse, but we are missing somewhat
    getting this technical requirement down.
        And I know we have to obey the law, and we intend to. But
    in the meantime, we are trying to save dollars.
        Senator Carper. For a State, their incentive on TANF, the
    large States don't have enough money in their Temporary
    Assistance for Needy Families. They have a waiting list for
    child care.
        Mr. Johnson. Yes.
        Senator Carper. So what they need to do is to stretch the
    dollars. And so, the incentive for them is if we can ferret out
    an improper payment, then there is more money in their
    allocation to use for the needs that need to be met. That is a
    pretty good incentive.
        Mr. Johnson. That is a very good incentive. Where it breaks
    down is if you say, ``I would like you to spend some of your
    administrative dollars to do some statistical sampling that
    will give us a national error rate.''
        They are saying, ``I like the matching program. I like
    that. I can see direct benefit of that.'' It gets a little more
    distant when you start asking them to get some statistical
    sampling so it will help the Federal Government get a national
    error rate. And so, I understand that.
        Senator Carper. All right. One more question, if I could,
    Mr. Williams, to ask you to talk about the controls, I guess I
    would say controls against waste along the Gulf Coast with
    respect to the recovery, and your confidence or lack of
    confidence that FEMA can set up a system to prevent waste
    during a disaster? Anything you could offer us on that?
        Mr. Williams. Well, one of the things that I would like to
    point out, first of all, is that if you look at the event from
    a timing standpoint, if you are looking at the 2005 reports
    that the agencies have put out, the events took place very
    close toward the end of the fiscal year.
        So from an improper payment standpoint, if there are
    several major impacts in the improper payments area, it will
    probably show up more in the 2006 financial reports than the
    2005 because you only had about a month, month and a half.
        We have always had concerns about internal controls, and
    when you look at audit reports in which an agency had 10
    material internal control weaknesses, they had two reportable
    conditions, and they had seven noncompliance with laws and
    regulations. And one of those noncompliance issues related to
    not being compliant with the improper payments act.
        So that raises an antenna right there, and I would suggest
    that in an environment like that, you would want to have every
    resource possible working in your favor to put internal
    controls in place so that you can prevent improper payments
    from occurring, as well as having procedures in place to detect
    improper payments.
        I like to look at it from the standpoint of putting
    procedures in place to prevent the horse from getting out of
    the barn, but once the horse gets out of the barn, you need to
    have something, and those are my detectable controls. So you
    would want to see as much of those in place as possible when
    you have an area that has that number of material weaknesses,
    noncompliance, reportable conditions.
        It would be an area in which not only would you want to
    look close at it, but you would want to make sure that you have
    good oversight, good communications, and I think that was the
    thinking of the Congress when it passed the Department of
    Homeland Security Financial Accountability Act, was the
    Congress was trying to get involved in this process to make
    sure that there was a structure in place that would highlight
    some of these issues, would put strong management in place at
    the organization.
        I think the statute had some specific requirements as far
    as the chief financial officer at the agency. That they would
    be confirmed by the Senate, that they would have certain
    experience, extensive experience in accounting, budgeting,
    financial systems. And I think that was the thinking along that
    line, and I would encourage anything that the Congress can do
    in going forward to assist the agency in any way possible to
    make sure that these procedures are put in place because there
    is a susceptibility to risk, based on the reporting that we
    have seen from the auditors at the agency over the years.
        Senator Carper. All right. Good. Thanks so much.
        And Mr. Chairman, thanks for being so generous with the
    time.
        Mr. Williams. Could I add one more point? Without going
    into any details, I would just like to make the both of you
    aware of the fact that I currently have an assignment under way
    in which I am basically looking at what things are going on in
    this area with the States, what needs to be done from a State
    perspective in order to try to address the issue of improper
    payments, given the fact that the States play such a large role
    in this particular issue with grants in the neighborhood of
    $400 billion a year.
        And we are in the latter stage of gathering that
    information, but I just wanted to make you aware that we are
    looking at that, and we are looking at issues such as what can
    the Federal Government do? What can OMB do? And things along
    this line to address any communications issues, things that
    could be done to improve the link between the Federal
    Government and the States in some of these programs that we are
    talking about today.
        Senator Carper. I don't think we would be interested, do
    you?
        Senator Coburn. I have a couple of other questions. One is,
    we started a brand-new program this year. It is called Medicare
    Part D.
        Mr. Johnson. That is correct.
        Senator Coburn. What aspects of Medicare Part D had in it
    so that we will know what the improper payment rate is? Is
    there a program in it?
        Mr. Johnson. Well, I think the Medicare Integrity Program
    encompasses Part D. Part D, of course, will be a little bit
    different from the standpoint that we are now going through
    other insurance companies or, therefore, other providers. And
    so, it will have a little less risk on that side because
    someone else is setting premium rates.
        Senator Coburn. I understand that. But here is my question.
        Mr. Johnson. Yes.
        Senator Coburn. With a brand-new program, knowing we have
    an improper payments law, was there a component of that program
    that said, here is this new multi-, multi-, multi-, multi-,
    multi-billion program, was part of the design of that program
    in its implementation a way to audit and report improper
    payments?
        Mr. Johnson. I have been given a note that says starting
    next week, we are having discussions on that issue. But as of
    now, we don't have anything in place.
        Senator Coburn. OK, but you would agree----
        Mr. Johnson. Oh, absolutely.
        Senator Coburn [continuing]. That one of the things that
    should have been in that rather than after the fact, design it
    with the fact as a part of the program. And so, this is part of
    the management agenda the President has to get ahead of. I
    mean, if we have something new, then you have to meet the
    requirements.
        The other point that I would make is the improper payments
    act may be hard, but it is the law. And I will tell you
    personally I am not going to rest until every agency is
    reporting on it accurately. And then if it cannot happen, then
    the President and the Administration has an obligation through
    OMB to come back to us and say this has to be changed, and here
    is why because it is not achievable.
        But to say it isn't going to happen, and we can't get it
    done because it is hard to get done isn't an acceptable
    response. I know it is difficult, and I don't doubt dedication.
    I want to make sure you all understand that.
        My communication to you is, I think, we have wonderfully
    dedicated people, but I think we have to be thinking down the
    road, and what the President is attempting to do through this
    difficult process of changing bureaucracy, I think we are
    seeing some good signs that we are seeing change. But one of
    the reasons we are having this hearing is the pressure is going
    to stay on, OK?
        GAO reported that Department of Labor did not follow the
    required format for recovery auditing included in OMB's
    guidelines. Are you aware of that, Mr. Mok?
        Mr. Mok. Yes, I am aware of that if you are talking about
    the recovery audit, where the auditor is allowed to keep
    certain percentage recovered. According to our internal
    analysis and study, we do not see the cost effectiveness of
    doing that because if you look at some of the programs that we
    can apply it to, the amount is not there.
        Senator Coburn. Right. You also reported that no improper
    payments were noted from recovery auditing activities for 2005.
    Is that correct?
        Mr. Mok. That is correct.
        Senator Coburn. And that recovery audit effort was,
    therefore, unnecessary?
        Mr. Mok. We do not see the need at this time. However, we
    are continuously looking at that, monitoring that.
        Senator Coburn. Yes. What do you find on that, Mr.
    Williams?
        Mr. Williams. That is consistent with your statement. You
    have made an accurate statement. What I would point out in this
    area is that if that is the conclusion now, that you need to
    continue to monitor the process because things change as you go
    down the road.
        Mr. Mok. And that is our intent.
        Senator Coburn. Well, let me once again thank each of you.
    I am sorry for the late hour. I apologize for it. I thank you
    for your dedication and your service. We will be back here in
    about 6 months, doing this again, I will assure you.
        You will have some additional questions. I would also ask
    that you give us recommendations from your agencies that you
    would like to see changed. I think Senator Carper and I have a
    good handle on improper payments, and we can work both sides of
    the aisle to try to get some of this stuff to happen.
        You will be sent some additional questions, and we would
    like a prompt reply on that, if we could.
        Thank you very much, and the hearing is adjourned.
        Mr. Mok. Thank you very much.
        Mr. Johnson. Thank you.
        [Whereupon, at 4:52 p.m., the Subcommittee was adjourned.]
                                A P P E N D I X

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