[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



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        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.
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    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.
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    \1\ The prepared statement of Mr. Williams appears in the Appendix 
on page 63.
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    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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