[Senate Hearing 109-975]
[From the U.S. Government Publishing Office]


                                                        S. Hrg. 109-975
 
     AN ASSESSMENT OF THE IMPROPER PAYMENTS INFORMATION ACT OF 2002 
=======================================================================
                                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

                               __________

                            DECEMBER 5, 2006

                               __________

        Available via http://www.access.gpo.gov/congress/senate

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

                     U.S. GOVERNMENT PRINTING OFFICE

32-355 PDF                 WASHINGTON DC:  2007
---------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing
Office  Internet: bookstore.gpo.gov Phone: toll free (866)512-1800
DC area (202)512-1800  Fax: (202) 512-2250 Mail Stop SSOP, 
Washington, DC 20402-0001























        COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS

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

                   Brandon L. Milhorn, Staff Director
             Michael L. Alexander, Minority Staff Director
                  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             MARK PRYOR, Arkansas

                      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...............................................     4

                               WITNESSES
                       Tuesday, December 5, 2006

Hon. David M. Walker, Comptroller General, U.S. Government 
  Accountability Office..........................................     6
Hon. Clay Johnson, III, Deputy Director for Management, Office of 
  Management and Budget..........................................     9

                     Alphabetical List of Witnesses

Johnson, Hon. Clay, III:
    Testimony....................................................     9
    Prepared statement...........................................    59
Walker, Hon. David M.:
    Testimony....................................................     6
    Prepared statement...........................................    27

                                APPENDIX

Chart submitted for the Record from Senator Coburn...............    62


     AN ASSESSMENT OF THE IMPROPER PAYMENTS INFORMATION ACT OF 2002

                              ----------                              


                       TUESDAY, DECEMBER 5, 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 10:33 a.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 CHAIRMAN COBURN

    Chairman Coburn. The Subcommittee on Federal Financial 
Management, Government Information, and International Security 
of the Committee on Homeland Security and Governmental Affairs 
will come to order.
    I first want to thank our two guests for being here. They 
are two people this Subcommittee has found very diligent in 
their work with us and we appreciate their service to the 
country.
    I have a written statement that I will introduce for the 
record and will be available.
    In thinking about this hearing and the importance of it, I 
thought about constituents back home and I thought about if I 
was a postal worker or a teacher or a doctor or a retiree that 
was still having an amount of income, that was still paying 
taxes, and if you were to ask them how it could be that on 60 
percent of the Federal Government, $38 billion a year at a 
minimum is improperly paid out, what would they think about 
that?
    I know in my heart what they would think about that. What 
in the world is going on? Thirty-eight billion dollars? and 
that is highly inaccurate, I believe, as to the full extent, 
especially from what this Subcommittee's work has done the last 
2 years. and that is talking about improper payments only. That 
is not talking about fraud, waste, or abuse.
    So when you start considering that and the financial plight 
that we have in front of us, improper payments and the 
correction of it--the reason we want to know what the improper 
payments are is not to know what the improper payments are, it 
is how do we make managerial changes so that we don't have 
that? What we are not measuring, we can't manage.
    A full $850 billion of the Federal Government's spending in 
2005, and OMB should know the request for that on this came 
from this Subcommittee, it wasn't generated by GAO. It was our 
request that it be 2005 data and not 2006 because 2006 wasn't 
completed by the time we asked for that data. The fact that 
there is another $800 billion that nobody is even looking at in 
terms of improper payments, either because we don't think it is 
there or we don't have the resources with which of the 
managerial techniques in place to measure, comes back.
    If you just extrapolate, at a minimum, we have $55 billion 
to $60 billion a year in improper payments. If you are the guy 
or the gal that is working out in Oklahoma or Delaware and 
paying taxes every year and are thinking that 2.5 percent of 
everything that you pay is improperly paid out, and then 
knowing that there is another $150 to $200 billion of fraud, 
abuse, or duplication, which brings you to about 2.5 percent of 
everything that you pay in is what I consider waste, you have a 
hard time not getting a little bit angry when you go to send 
that check in on April 15.
    As both of you know, we have had several hearings on the 
tax gap in this country, and motivation to be a great citizen 
in this country and pay your fair share, part of it is that you 
feel like you are getting some good value for what you are 
paying.
    First of all, I want to applaud OMB because I think they 
have done a phenomenal job from hitting the ground in 2001 with 
the mess that they had and the Improper Payments Act and 
implementing that and doing the job that they have done. So 
this hearing isn't to be critical in any way of the job that 
they have done. I think it has been a phenomenal job, but I 
think we need to do better. I believe that we need to measure 
it all. Once we measure it all, I believe that we can then put 
into place both managerially but also legislatively some of the 
things that might need to be put in place to lessen that burden 
and to build the confidence in the American public eye.
    I am concerned there is a crisis of confidence in our 
country in both the institutions of government in the Executive 
Branch, but also in the institutions of government in the 
Congressional and Legislative Branch. I think to fix that 
requires cultural changes within the Congress and management 
changes within the Administration.
    I also believe that this next Congress ought to work on 
some new rules, and the rules ought to be something similar to 
the following: We are not going to authorize new bills that 
duplicate programs that are existing without either eliminating 
the programs that are existing or cleaning up the programs that 
are existing; we are not going to authorize new bills with such 
sums as necessary. If we think something ought to be 
authorized, we ought to know what it is going to cost and we 
ought to do the hard work of doing that; and the third thing is 
we shouldn't authorize anything until great and thorough 
oversight has occurred on every aspect of the program that we 
are thinking about legislating on.
    Those are the duties that we have. Those have not been 
accomplished by what I consider to be lazy Congresses over the 
last 10n to 12 years. I believe that ought to be the start of 
the 110th Congress, that we make a commitment across the aisle.
    I know my Co-Chairman, Senator Carper, has been a great 
ally on this Subcommittee in terms of how we have looked, and 
what we have looked at, and what we have done with what we have 
looked at and has been instrumental in one of the key pieces of 
legislation that we passed, which was the Transparency Act of 
2006. But I believe with those things in mind and really 
measuring what we are doing and giving the Administration the 
authority to make the changes they need to make--we have had 
hearings on the PART analysis, etc.--that we can do great 
things for the American people and we can also reestablish 
confidence that what we are doing makes common sense, makes 
managerial sense, and is efficient.
    Those are all important things because as General Walker 
has been relating to the Congress, and now, thank goodness, 
relating throughout the country in his trips throughout the 
country, the impending fiscal disaster that faces this country, 
and it has to start with us. It can't just start by saying 
there is a problem. We have to start doing the hard work to 
reach the goals and the solutions for those problems. General 
Walker, I would thank you for your efforts in building up the 
grassroots support and the knowledge of the American citizen 
for what the problems are that face us.
    To Mr. Johnson, I would say thank you for your hard and 
diligent work to accomplish cleaning up some of this.
    [The prepared statement of Chairman Coburn follows:]
                 PREPARED STATEMENT OF CHAIRMAN COBURN
    Improper payments isn't a glamorous topic. Accounting systems and 
standards set by Congress and finessed by the Administration don't make 
headlines. But this country is in a crisis. We are at war. We have a 
deficit in the hundreds of billions and a debt limit at $9 trillion. 
We've got a generation of Americans about to retire and rely on 
bankrupt Federal entitlement programs. The President is asking for $150 
billion in ``emergency''--that is, over-budget--war spending. No amount 
of waste is ever acceptable but our efforts to track down every penny 
need to be all the more aggressive in our current fiscal climate. Does 
it take resources to make our improper payments policy more 
comprehensive? Sure. But every employee we devote to ending payment 
errors more than pays for his own salary in the billions that are being 
lost every year.
    There has been some controversy about today's topic. We're not here 
to examine individual agency performance or to quibble about the 
validity of certain program reporting estimates, as we have done in our 
previous hearings. And let me be clear--we're not here to complain 
about or criticize the Office of Management and Budget's performance on 
improper payments. What OMB faced when this President first took office 
was a Katrina-sized accounting problem at every Federal agency. Before 
Congress had even passed the Improper Payments Information Act, this 
President recognized the alarming scope of the problem and set to work 
with a major initiative to reduce payment errors. Congress came in a 
little later and passed the Act.
    The intent of the Act was pretty clear--clean up the whole problem, 
not just the squeakiest wheels. However, when you're facing a Katrina-
sized problem and you have limited staff resources at OMB and the 
agencies, you have to triage. Congress gave OMB some discretion to set 
some rules about where to start. I would argue that some agencies did a 
pretty haphazard job of following those rules, but even among the 
agencies who complied fully--the rules--perhaps understandably--were 
aiming for the low-hanging fruit rather than a comprehensive solution.
    Some have argued that OMB's definition, by not being comprehensive 
enough, violated Congressional intent. Let me speak in OMB's defense. 
They inherited a trainwreck and they made some judgment calls. They 
will argue today that they needed to make serious progress right away 
and focusing on the perfect would have impeded progress on the good. 
They will argue today that they took care of 95 percent of the problem 
with their rules. I think there's some good evidence to suggest that's 
not quite the case, and we can discuss that more today. But I just want 
to personally applaud OMB for their fantastic work on this issue. They 
faced a Katrina-sized fiscal disaster and they rightly fixed highways, 
bridges and hospitals before they got around to clearing tree stumps 
and filling side-street potholes.
    That said, we are now approaching the 5-year mark on the Improper 
Payments Information Act, and I think there's nothing wrong with 
commending this President on the accomplishments to date while still 
asking him step it up a notch. I think our friends in the Gulf coast 
area would agree that while the first efforts in Katrina recovery 
needed to be on the low-hanging fruit, ultimately they want that 
neighborhood debris removed and schools rebuilt. In other words, 5 
years in, it seems reasonable to start looking at how to build on the 
successes and lessons learned of the first 5 years and cobble together 
a more comprehensive approach to the problem of payment errors.
    The first step to reducing payment errors is knowing how many 
errors are being made. I'm concerned that the reporting on these 
errors--just getting a baseline estimate from which to measure later 
progress--is not always optimal. For those unfamiliar with the Improper 
Payments Information Act, it first requires agencies to review all 
programs and activities annually and identify those that may be 
susceptible to significant improper payments. Congress directed OMB to 
prescribe guidance for agencies to annually review all programs and 
activities. What Congress did not do, however, was direct OMB to define 
this susceptibility for agencies. Nonetheless, OMB defined susceptible 
programs as those whose improper payment amounts exceed both 2.5 
percent and $10 million. This leaves out a large number of government 
programs. For example, the Social Security Administration's Old Age and 
Survivors' Insurance represents $493.3 billion in outlays, yet because 
their improper payment rate is only .74 percent, they are not required 
to estimate improper payments and address other improper payment 
reporting requirements in the Act.
    Let me explain why the threshold may not be ideal: Of the 23 
agencies that reported assessing ``all'' programs and activities for 
risk, six limited their risk assessment reviews to only those programs 
that would likely meet OMB's definition. Two of these six agencies 
reported that they did not perform a complete risk assessment because 
the programs would not have exceeded both of OMB's threshold criteria. 
The remaining four agencies did not perform a complete risk assessment 
of programs with annual outlays ranging from $40 million to $200 
million, generally citing the threshold criteria as the reason why 
these medium-sized programs weren't assessed. In this way, OMB's 
definition of susceptibility has ironically prevented some agencies 
from complying with the Act.
    While it's not my intention to criticize OMB's past performance--
their efforts have been unprecedented and rigorous--it's important that 
we learn from the past in order to improve the future. I've found that 
good work always leads to more work. The better someone is at his job, 
the more he realizes there's always more to do. So I hope this hearing 
will provide an opportunity to look at some of the challenges faced so 
far in addressing payment errors, and we can start talking about how to 
overcome those challenges, either with or without legislation.
    To the end, GAO has done outstanding work. It is GAO's job to be 
the thorn in every Administration's side--to commend the good while 
still demanding the perfect. To shine light on what works and to expose 
what doesn't. The job of Congress is not to pick ``sides,'' but to look 
at GAO's findings in light of the substantial success and remaining 
challenges of the Administration and the statute at hand, and to use 
those findings as a tool to improve upon legislation, oversight or 
both. So thank you to both Mr. Johnson and General Walker for being 
here and helping to do that.

    Senator Coburn. With that, I would yield to my friend from 
Delaware.

              OPENING STATEMENT OF SENATOR CARPER

    Senator Carper. Thanks, Mr. Chairman. To our guests, 
welcome back. General Walker and Mr. Johnson, it is always good 
to see you and we thank you for being with us, for testifying 
before our Subcommittee, and for responding to our questions. 
We thank you and the members of your team for your service to 
this country.
    As sort of a personal note, a side note, I was approached 
by somebody in Delaware this last week who told me they had 
heard a general speak, not in Delaware but in a place other 
than Delaware, who was really good on fiscal issues and talking 
about budget, sort of the debacle that we face and the 
impending doom and disaster. He said it was not an uplifting 
speech, but he was talking about the Comptroller General. I 
don't know what State he caught you speaking in, but we know 
you are out across the country and that is a good thing. We 
appreciate that.
    I want to just reemphasize a couple of things the Chairman 
has said and then make one or two points and then we will turn 
it over to both of you.
    I don't know if the number is $38 billion in improper 
payments for 2005, or $40 or $42 billion, but its somewhere 
around $40 billion. It is real money and it is money that we 
are borrowing that we don't need to borrow, we shouldn't be 
borrowing, and we want to further reduce that amount.
    My suspicion is that the number is down a little bit from 
where it was a year or so ago, maybe because of a time delay or 
a paperwork transaction rather than so much that the improper 
payments have been reduced. I think there is a sequencing issue 
that may have caused the apparent reduction by several billion 
dollars.
    But that notwithstanding, if the amount is actually $40 
billion in improper payments in 2005, I don't believe that 
includes Homeland Security at all. I don't believe it includes 
much of the Department of Defense. I don't believe that it 
includes the Department of Justice. I don't believe that it 
includes a number of our entitlement programs, including among 
others Medicaid and TANF, maybe the school lunch program, to 
mention a few. I don't believe that it includes the Community 
Development Block Grant program. So there are a number of 
fairly substantial programs and outlays that are not included 
in the improper payments that we just don't know.
    My hope is that for the balance of this year and going on 
into the next Congress that we will have the opportunity to 
commend those agencies that are doing a good job of finding out 
what their level of improper payments are and reducing those 
and put a spotlight on those agencies. I always think if you 
use positive reinforcement, you are more likely to get the kind 
of behavior you want, so we want to incentivize the agencies by 
commending those that are doing an especially good job.
    We want to put, I believe, a spotlight on those agencies 
that are not doing enough, that can do more, but they are doing 
something. and finally, we want to figure out why we are not--
some of our larger agencies, some of our larger outlay 
programs, aren't even on the radar screen here with respect to 
improper payments. We don't even have an idea what the amount 
of improper payments are in some of these large agencies.
    And finally, as the Chairman has said, I hope that we will 
be turning back to the tax gap issue. I realize this is for 
legislative purposes in the purview of the Finance Committee 
and we are not interested in taking any of their jurisdiction. 
That is not what we are trying to do here. What we are 
interested in doing, though, is making sure that we are working 
on both fronts, improper payments on the spending side and 
revenue collection to make sure that the monies that are owed 
are being collected.
    With that having been said, again, we are delighted that 
both of you are here and we look forward to your testimony and 
to continue to work with both of you. Thank you.
    Chairman Coburn. Thank you, Senator Carper.
    David Walker has been Comptroller General of the United 
States since November 1998. He serves as the Nation's Chief 
Accountability Officer and head of the U.S. Government 
Accountability Office. He has extensive executive-level 
experience in both government and private industry. He is a 
Certified Public Accountant and has a B.S. degree in accounting 
from Jacksonville University. He also holds a Senior Management 
in Government Certificate in Public Policy from the John F. 
Kennedy School of Government at Harvard University, as well as 
honorary degrees in both business and public service.
    Mr. Walker, thank you for appearing today. Thank you for 
your work for our country, your dedication to the facts and 
figures and not to spin. You are now recognized.

TESTIMONY OF HON. DAVID M. WALKER,\1\ COMPTROLLER GENERAL, U.S. 
                GOVERNMENT ACCOUNTABILITY OFFICE

    Mr. Walker. Thank you, Chairman Coburn and Senator Carper. 
It is a pleasure to be back before you, and as I have said 
before and I will say again, this Subcommittee has clearly been 
one of a few that has been actively engaged in oversight for an 
extended period of time, and it does make a difference when you 
engage in that oversight. I thank you for both of your efforts 
and look forward to continuing to work with you.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Walker appears in the Appendix on 
page 27.
---------------------------------------------------------------------------
    It is a pleasure to be before you today to talk about the 
issue of government-wide improper payments. My testimony today 
is based primarily on the report that both of you have referred 
to that was issued in November 2006. As the Chairman noted, the 
request was for us to look at the 2005 improper payments. As 
you know, the annual summary is done by OMB and usually 
released in February of each year.
    But we do have some preliminary information with regard to 
2006 and so since the agencies have now reported their 
financial statements. As you know, the consolidated financial 
statement report will not be published until sometime next 
week--but I wanted to go ahead and give you a sense as to where 
things are for 2006 on a preliminary basis since we now have 
that information available, and I have two boards to help in 
that regard.
    First, I think it is important to note that under OMB's 
leadership, progress has been made in each of the last 3 years 
with regard to implementing the Act. As we can see in 2004, in 
the blue section, 52 percent of Federal spending was covered by 
the reporting requirement under the Act. It went up to 64 
percent in 2005 and a little over two-thirds in 2006. So 
progress is being made each year with regard to the percentage 
of Federal spending where the agencies are reporting.
    On the next board, you can see what the trend has been with 
regard to improper payments for the period fiscal year 1999 to 
2006, and again, the 2006 number is a preliminary number, but 
you can see that for a variety of reasons, you have more people 
reporting as well as improved sophistication of their 
estimation process since the effective date of this Act. We saw 
a significant increase in the reporting of improper payments 
between 2002 and 2004, and now we have seen somewhat of a 
moderation with regard to the total amount of payments.
    But I think it is important to note that the estimated 
incidence rate is 2.3 percent for those reporting, and 
therefore, if we had the same incidence rate for the balance of 
the Federal Government that has yet to be reported, then total 
improper payments would be around $62 billion.
    I also think it is important to keep in mind that improper 
payments don't necessarily mean that the entire amount was 
inappropriate. In fact, you could have an improper payment 
where $8 of the $10 was proper and one of the questions is to 
what extent agencies are reporting that as a $2 improper 
payment or a $10 improper payment. I will come back to that 
later because I think one of the things that would be very 
helpful is to clarify certain terms in the legislation in order 
to maximize the chance that the intent of the legislation, in 
fact, is being achieved.
    As you know from our report, for fiscal years 2004 and 
2005, we concluded that the magnitude of the problem was still 
unknown because we have still got a significant percentage of 
Federal dollars not being estimated. While DHS did not estimate 
in 2005, they estimated in 2006. The two biggest programs that 
did not report in 2006, based upon data that I have, would be 
the Medicaid program and the TANF program. The Medicaid program 
was about $183 billion in fiscal year 2006--I have little doubt 
in my mind that there is more than 2.5 percent improper 
payments in the Medicaid program. The TANF, or Temporary 
Assistance for Needy Families program expenditures were $17.4 
billion in 2006.
    In our report, we found several things. First, that the 
agencies reporting improper payment information was incomplete 
but progress is being made. Second, that the total improper 
payment estimate does not include certain large risk-
susceptible Federal programs, including the two that I noted. 
And third, that OMB's criteria in defining such terms as which 
programs are susceptible to significant risk are such that 
there are a number of programs that will not be required to 
report which may or may not be consistent with your 
expectations for the type of items that would be reported in 
connection with this Act.
    Specifically, it is my understanding that, and obviously I 
look forward to Director Johnson commenting here, OMB's 
criteria basically are that you have to have improper payments 
that for a particular program would exceed $10 million in a 
year and 2.5 percent of the program payments if the 2.5 percent 
of the program payments is greater than $10 million. Well, 2.5 
percent of the Federal budget is $67.5 billion, and 2.5 percent 
of the Medicaid program is $4.5 billion.
    So I think one of the issues is while I think OMB clearly 
has the authority to define these terms under the statute 
because they are not specifically defined in the statute, I 
think one of the issues that needs to be considered is whether 
or not certain terms need to be defined statutorily in order to 
try to help make sure that your intent is being met and to try 
to help ensure consistency both today and, frankly, over the 
longer term. We know that there will be new administrations in 
the future, and while OMB has clearly been committed to 
management issues, that level of commitment can vary from time 
to time with different administrations and with the different 
passage of time.
    Mr. Johnson. Why would they have anything to do with it?
    Mr. Walker. Article I does have something to do with it, 
there is no doubt about that.
    With regard to agencies recovery auditing efforts, which is 
a mechanism that is used once you have the improper payment to 
try to rectify those improper payments, kind of as the horse is 
already out of the barn, you have already identified that, we 
found that the data that is being reported there may not 
represent an accurate view of the actual experience. The 
example I would give there is NASA, where there is a huge 
difference of opinion between what management reported and what 
NASA's Inspector General reported. So that is an area, I think, 
where additional emphasis is necessary.
    We did include a matter for Congressional consideration and 
four recommendations in our report which have been summarized 
and I know you are very familiar with.
    In summary, Mr. Chairman, progress has been made. More 
remains to be done--sounds like a typical GAO report. But in 
this particular case, I do believe that the Congress should 
consider clarifying certain definitions, and I will be happy to 
get into that in the question and answer portion, in order to 
maximize the chance that the intent of Congress is being 
achieved, in order to help assure consistency today, and in 
order to help ensure consistency across administrations.
    Thank you, Mr. Chairman.
    Chairman Coburn. Thank you, General Walker.
    Clay Johnson, III, is Deputy Director for Management at the 
Office of Management and Budget. In this capacity, he provides 
government-wide leadership to Executive Branch agencies to 
improve agency and program performance. Prior to this, he was 
Assistant to the President for Presidential personnel. He was 
responsible for the organization that identifies and recruits 
approximately 4,000 senior officials, middle management 
personnel, and part-time board and commission members.
    He has a wealth of public and private sector management, 
including Chief of Staff to Governor George W. Bush, Chief 
Operating Officer and Acting Director for the Dallas Museum of 
Art, President of Horchow mail order, and then President of 
Neiman Marcus mail order after Neiman Marcus was purchased by 
the Horchow Company. Mr. Johnson received his undergraduate 
degree from Yale University and a Master's degree from MIT's 
Sloan School of Management.
    Welcome, Mr. Johnson, again before our Subcommittee and 
thank you for your service. You are recognized.

  TESTIMONY OF HON. CLAY JOHNSON, III,\1\ DEPUTY DIRECTOR FOR 
        MANAGEMENT, U.S. OFFICE OF MANAGEMENT AND BUDGET

    Mr. Johnson. Thank you, Chairman Coburn and Senator Carper. 
Thanks for having me. As General Walker said, I congratulate 
you all on your attention to this and the priority you place on 
it. I feel like I am amongst friends here today.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Johnson appears in the Appendix 
on page 59.
---------------------------------------------------------------------------
    I want to make the point that Federal agencies are working 
to eliminate virtually all improper payments. There is a lot of 
talk about what we are reporting and what we are not reporting. 
General Walker in the report talks about it is probably 
impossible to eliminate improper payments. Our goal is to 
eliminate improper payments virtually and we think this is 
doable. It is a 10 year, plus or minus, kind of a time frame 
thing to do, but that is the mindset. That is the mindset, not 
to reduce but to eliminate improper payments.
    We have come a long way. Federal agencies have come a long 
way in the last 3 years. Eighty-five percent of what we 
consider to be all programs with high-risk outlays, or $1.3 
trillion, have error measurements and agencies are working on 
those programs to eliminate all forms of payment impropriety. 
The remaining 15 percent of what we consider to be high-risk, 
there is risk of an improper payment, $200 billion, that will 
be measured by 2008.
    Separately, there are about half of the contract payments 
have been looked at from the standpoint of recovery audits. One 
of the things we have got to talk about here is get 
clarification and probably a tighter definition of what needs 
to be done with regard to contract payments. Right now, there 
is a recovery audit approach to it and that is one of the 
primary reasons why there is a difference between what 
contracting offices find versus the IGs, because they don't 
limit themselves to recovery audits.
    It has always been clear, I would hope, what programs were 
to be measured and in what sequence. The next time you want to 
know what is currently being audited and what is not, just call 
us. You don't need to call GAO. It should come as no surprise 
that Medicaid has not been audited up until now. That has 
always been our intention. Our intention has been to focus on 
big problems and also programs that could be measured. It is 
going to be extremely difficult to measure Medicaid, extremely 
difficult to measure TANF. We are going to do it. It will be 
totally measured by the end of 2008. But it has always been our 
intent that would be a year four, year five program. So this is 
not new news.
    The reason for the 2.5 percent and the $10 million--the 
program called for $10 million as the hurdle to focus on 
significant risk of improper payments. Our attempt has been to 
focus agencies on just that, significant risk of improper 
payments. That is why there is the dual criteria, 2.5 percent 
and $10 million.
    Incidentally, if there is ever any interest on your part or 
General Walker's part, GAO's part, to add a program to this 
because you have reason to believe that there is a high risk of 
improper payments, we can add that to the list.
    There has been no attempt--I don't think it was implied, 
but I wanted to clarify, there is no attempt to produce an 
overly optimistic view of the improper payment situation. They 
are $40-plus billion. Whether it is 40 versus 60 versus 100, 
$40 billion is of huge national consequence. Even though it is 
a small percentage, we need to be placing a high priority on 
its elimination and I believe we are doing so.
    We generally don't believe that the Improper Payments Act 
needs major modification. We need to better understand about 
primarily the contract payments, we believe. But it was 
designed originally to be a risk assessment, approaching a risk 
assessment standpoint. If you want everything measured, that 
can be the law, but that is not a risk assessment. That is 
assuming that you want everything measured and the key is are 
there resources and monies and so forth to make that happen. So 
as we talk about this new legislation we are going to talk 
about, let us make sure that we have got the resources to be 
able to follow through on it.
    Most importantly, though, we think, it is critical that 
Congress work with GAO and with OMB and Federal agencies to 
create enabling legislation which would allow us to better 
recover improper payments or eliminate improper payments. There 
are issues with agencies' access to other agencies' databases 
that have significant impact on an agency's ability to prevent 
or to recover improper payments.
    There are eligibility rules in some programs that are too 
complex and so complex that they create improper payments or 
the risk of improper payments, and that can be clarified. There 
are also statutory constraints on State-administered programs 
that limit our ability to go in and work with States to deal 
with the issue of improper payments. That needs to be looked 
at, as well.
    And then, as with everything, these kinds of efforts 
require monies and we need to make sure that our appropriator 
friends understand this takes money and that we would identify 
that we have got the necessary funds to take care of business 
here.
    So this is a high priority. We have made great progress. 
There is work still to do. But we are making significant 
progress at eliminating improper payments and I believe that it 
is a very strong story and I believe it is closer to 10 years 
than 5 years or 20 years we can see these being at virtually 
zero. If not, then we have not done our job. Thank you, sir.
    Chairman Coburn. Thank you. Let us go over a couple of 
things. I recall from some of our previous hearings, there are 
some estimates as high as $15 billion worth of Medicaid fraud 
in New York City. I also recall from some of our early hearings 
where we have programs that are administered through the 
States, like food stamps, where we have seen pretty big 
progress in terms of cutting that down.
    The question that I would ask, and I think, Mr. Johnson, 
you are right. The American public, what they want is to 
eliminate improper payments, and I think General Walker is 
right that we need to make sure we are talking apples and 
apples. If there are truly gross improper payments or net 
improper payments, we need to know what that number is. If you 
are going to tell us what you need us to change in terms of 
legislative parameters, or funding to be able to do something 
about that, we need to know what the real number is. So I think 
that is one area where we need clarification within the law.
    I think the other area that we have is your reporting of 85 
percent of the high-risk outlay is still just $1.3 trillion of 
a $2.8 trillion budget. So the question is, in my mind, as we 
look at all these areas that you all do not consider high-risk 
but yet this Subcommittee has had hearings on that show that 
they are significant, there has got to be something--and it may 
be the priority in which you are placing it. We know about 
Medicaid. Mr. Johnson, Charlie Johnson, has testified about the 
plans on that and we understand the difficulty with that and 
that is advancing.
    But nevertheless for the American taxpayer to say we are 
not looking at $800 billion worth of programs--for example, the 
CDBG block grant, HUD says there is no problem. I don't believe 
that. I believe there is a big problem with fraud and 
mispayments in CDBG block grants. and for us to just say, no 
problem, we are not looking at it----
    The other thing that concerns me, and this is OMB and it is 
probably my lack of understanding rather than a true criticism, 
is that if somebody is not high-risk or they get a waiver for a 
couple of years, there seems to be an unending waiver. Well, I 
believe everybody ought to have to report improper payments. 
They ought to have to go through the analysis to do that. And I 
don't believe it ought to be OMB's job to do that. It ought to 
be the agency's job and it ought to be using agency resources 
to do that. The reason that is important is because if they 
know they are going to have to measure it, then they are going 
to make some judgment in terms of management decisions on how 
to minimize it.
    So I guess I would go to the first question to Mr. Walker. 
Why is it important that the Improper Payments Information Act 
define what is considered susceptible to significant improper 
payments? Why is it important that we revise----
    Mr. Walker. I think it is important in order to make sure 
that we have a vast majority of the Federal Government's 
programs and activities on the radar screen. It is also 
important that we make sure that the intent of the Congress is 
being met. For example, as I mentioned before, OMB has the 
authority to define significant risk and they have exercised 
that authority. They have done two things. One, they have used 
the $10 million number, which is in the statute. Second, they 
have said in defining significant risk, it exceeds $10 million 
and 2.5 percent of the expenditures for that program.
    Well, as I mentioned, 2.5 percent can be a very big number 
and therefore my view is that has to be looked at to determine, 
if you want something other than the $10 million, what is a 
reasonable percentage. I would respectfully suggest that 2.5 
percent is too high. That is about $67 billion. So that is an 
issue, because otherwise, we could have a significant amount of 
improper payments going on that would never have to be 
reported.
    Chairman Coburn. You were Comptroller General when this 
bill became law. In your recollection, and my staff is looking 
at the history of this, do you believe that there was an intent 
to give the kind of discretionary level to OMB at this 2.5 
percent when you look at the House testimony.
    Mr. Walker. Stated differently, I believe that in the 
absence of clarity in the statute and/or the related 
legislative history, that OMB had the ability to exercise some 
discretion here and I don't believe that they have abused their 
discretion. I do, however, believe that how they have used 
their discretion may or may not be consistent with what the 
Congress intended.
    What is more important is not to focus on what has happened 
in the past because a lot of people are working very hard to 
try to make progress here and we are making progress. I think 
the important thing now is to say, where might there need to be 
clarifications from this point going forward rather than 
focusing on whether or not things have been done in the past.
    And in that regard, I would suggest, Mr. Chairman, several 
areas. First, clarification of the definition of program and 
activities.
    Second, a clarification of the definition of significant 
risk, which deals with this 2.5 percent issue.
    Third, a clarification of how do you handle an improper 
payment in the circumstance that I articulated where the 
payment may be $10 of which you know that $8 is proper, and $2 
is improper. How are we counting that to make sure we have 
apples and apples?
    And fourth, there is a whole category of payments now that, 
as I understand it under the statute, aren't on the radar 
screen. They may be different but we somehow need to get them 
on the radar screen, and that is the handling of due process 
payments. In other words, where you have a situation where 
there is a payment that has been made for Social Security or 
otherwise and you believe it is improper but there are certain 
due process requirements that the individual is entitled to, my 
understanding is those aren't being captured and they don't 
have to be captured under current law. They are off the radar 
screen. Now, maybe we want to count those as a different 
category, but I think it is something that we need to focus on.
    And then last, I would agree with Mr. Johnson that it is 
not just trying to prevent improper payments. To the extent 
that they happen, we want to make sure that we can go after 
them. But to help both in preventing and to go after them, I 
think there are certain legislative changes that may be 
necessary to facilitate more data matching and more data mining 
that cannot occur right now.
    I would respectfully suggest while privacy issues are a 
matter of concern. When you are talking about taxpayer dollars, 
we ought to be able to pursue reasonable data matching and data 
mining in order to make sure that only eligible individuals are 
receiving the benefit of these taxpayer dollars.
    Chairman Coburn. Mr. Johnson, any response to that?
    Mr. Johnson. I am going to clarify the $2.5 trillion and 
the thought there is a potential area of risk of 2.5 percent 
times $2.5 trillion is $60-some-odd billion. Three-hundred-and-
fifty billion dollars of our $2.5 trillion in outlays, there is 
virtually no risk of improper payments. It is payroll----
    Senator Carper. Say that amount again, please.
    Mr. Johnson. Three-hundred-and-fifty billion dollars----
    Senator Carper. Out of how much?
    Mr. Walker. Two-point-seven trillion.
    Senator Carper. OK.
    Mr. Johnson. That is payroll----
    Chairman Coburn. Let me just stop you there. I sent a 
letter out yesterday, and I don't know if you were a 
cosignatory on it, on absent Federal employees. No agency is 
measuring people--not people taking leave, people that are just 
absent. Several of the agencies that we talked to on 
background, this is a big problem. So for you to tell me that 
payroll has no risk, I don't believe that is true because we 
have significant risk. We have a lot of Federal employees that 
aren't working that are getting paid that are not using leave. 
They are just absent.
    It is not a lot, but the point is we want to manage and 
that comes back to my whole point. This is not to say that OMB 
hasn't done a fantastic job----
    Mr. Johnson. No, you all can stop saying nice things about 
OMB and apologizing. Nobody is taking any offense here, OK.
    Chairman Coburn. OK.
    Mr. Johnson. Let us just talk about our business here.
    Chairman Coburn. The point is for OMB to take the position 
that there is no risk with payroll, I don't believe that. I 
believe there is risk with payroll. Now, the question is what 
is the risk? Well, if we never look at it, we are never going 
to know. So at least we ought to look at it a couple of times 
and say, what does it look like, rather than saying we are not 
going to look at it because we don't think there is any risk 
there. and I will assure the taxpayers of this country there is 
more than $10 million in improper payments to Federal payroll 
every year.
    Now, that is a small percentage, I agree, but we don't 
really know what that number is. So I guess my point is I 
believe we ought to run it all by trying to do the best job we 
can and measuring performance indicators, looking at metrics to 
help us know where we are weak and where we are strong, and I 
know you believe that and you have built your career on that.
    The question is, where is the risk and reward, and that is 
really what you said.
    Mr. Johnson. Right.
    Chairman Coburn. Where do we start spending more dollars 
versus getting fewer dollars back?
    Mr. Johnson. Right. Let me comment----
    Chairman Coburn. Go ahead.
    Mr. Johnson. There is no such thing as no risk. There is a 
risk with everything. You have to pay extra to look at 1 
percent error rates versus 2 percent error rates versus 10 
percent error rates. If we want to go looking for errors in a 
$130 or $140 or $150 billion payroll and benefit account, we 
can do that, and there is almost certainly $10 million in 
there.
    Chairman Coburn. Yes.
    Mr. Johnson. Should that be a priority? I would suggest 
not. The reason we focused on 2.5 percent and $10 billion----
    Chairman Coburn. That is where----
    Mr. Johnson [continuing]. Is to focus on the priority. Let 
us get that under control first and then go to the lower level 
opportunities.
    Chairman Coburn. Right.
    Mr. Johnson. I would suggest that payment on the Federal 
debt, if there is such a thing as being really close to low-
risk, that is it. That is included in $2.7 trillion.
    Chairman Coburn. That is $200 billion.
    Mr. Walker. Two-hundred-and-twenty-four billion, roughly.
    Mr. Johnson. There is $250 billion in low-volume, what we 
consider to be low-risk programs that will be looked at. We 
agree totally with you that every program should have to assess 
their programs to have some substantial basis for saying that 
they don't reach the $10 million and 2.5 percent hurdle. They 
should not be able to say that just whimsically.
    But going in and looking at this and where are the big 
pockets of opportunity for improper payments, our approach has 
been to apply a $10 million, 2.5 percent hurdle to it and that 
has focused us to place resources where the opportunity to do 
the best for the taxpayer is the greatest. Once we get that 
under control, I would suggest then it is appropriate to go 
where the return on our time and expenditure of taxpayer 
resources, the return on that investment is likely to be less, 
but nevertheless, it is likely to be positive.
    But let us focus on the high-return opportunities first. 
Let us get those $40, $50, $60 billion numbers down to 
acceptable numbers, virtual zero, before we start getting all 
consternated, to use the new word here, over what the error 
rate is with payroll. I think that should be a really low 
priority. We will be glad to do it if that is what the will of 
the Congress is. But I would suggest to you that is a real low 
priority.
    We should be going to great lengths to determining what the 
legislative fixes are that allow agencies to get at databases 
that they can't now get access to that allow us to reduce 
improper payments that we already know exist, but we can't do a 
very good job of preventing them or recovering them.
    So it is just a question of how we want to prioritize our 
time, and the focus is on eliminating priorities, eliminating 
improper payments, and doing so quickly, doing so with some 
sense of priority, and I would suggest that is the priority 
versus having a full accounting of what all improper payments 
are.
    I had the luxury in this regard, or the benefit of being 
the Market Research Manager at Frito Lay for a year back in the 
mid-1970s. The primary thing I did was cut out market research. 
We were doing so much research that was nice to know. It was 
nice to know what people felt about this or people felt about 
that. But the question was, if you knew this information, would 
you do anything any differently, and the answer in so many 
cases was no. I wouldn't do anything different right now, but 
maybe in a year or two I would do something.
    That is what a lot of this reporting can end up being. We 
need to make sure we don't get into the ``nice to know'' 
reporting business. We are in the elimination of improper 
payment business. That is the way we need to think about it. 
and we need to be thinking about eliminating the biggest chunks 
of the most egregious improper payments first before we start 
getting into the programs where the error rates, both 
percentage and absolute dollars, are very small.
    Chairman Coburn. I guess my response to that is I would 
agree with it. What we would like to know is what are your 
plans? In other words, when you get there, what are the plans 
to go looking at, because we haven't seen them. We have no 
knowledge that is going to happen after the fact because of the 
guidance that you have put out there.
    So one of my concerns is that if you look at the 2.5 
percent or $10 million and you take, for example, SSA's Old Age 
and Survivors' Insurance of $4.93 billion, they get over $10 
million, but they are a low percent. But the point is, there is 
still a lot of money there.
    Mr. Johnson. Right.
    Chairman Coburn. How do we move, once this Administration, 
both with its PART analysis, its management systems that it has 
put in, and its improper payment look, how do we move to the 
next step of having good management tools that say that this is 
automatic? To run this department effectively, we have to know 
we are paying the bills right.
    Mr. Johnson. Yes.
    Chairman Coburn. How does that become a part of every 
agency, whether they have $10,000, $100,000, or $100 million a 
year in improper payments? I guess that is why I have some 
concern. I don't see that in the planning and it certainly 
wasn't in the statute.
    Mr. Johnson. We need to----
    Chairman Coburn. When the statute first came out, it was $1 
million, period. Of course, that was changed to $10 million. I 
mean, when it was the original bill in the House, it was $1 
million. It was changed to $10 million. and I guess that is 
where we are getting. We are looking at what has been done and 
what we know is going to be done. The question is, where do we 
go?
    Mr. Johnson. Yes. And we know where $40 billion is, and 
when we get through in the next 2 years looking at Medicaid and 
these other programs, TANF and so forth, we will know where $50 
or $55 or $60 billion is. I would suggest our priorities should 
be, both Congressional and Executive Branch and GAO, is getting 
that $50 and $60 billion to zero, and that is a higher priority 
than going and finding out what improper payments are in 
payroll and in $250 million that we would deem are not likely 
to meet the $10 million and 2.5 percent hurdle. We will get at 
that, but I would suggest that would be a low priority for us.
    Chairman Coburn. General Walker.
    Mr. Walker. You have to set priorities because ultimately 
you have limited human, financial, and technological resources. 
There is no doubt about that. But I think there is a difference 
between having something on the radar screen and setting 
priorities as to how you are going to go about attacking the 
problems. They are two different things, in my opinion.
    Second, there is no question in my mind that there is 
significant susceptibility to improper payments in payroll, 
especially with regard to DOD. I mean, we have issued reports 
showing huge improper payments within DOD for its payroll. But 
more importantly, I think we also need to put things into 
context here, and that is we need to get things on the radar 
screen. We need to set priorities about how you go about it. 
You want to try to get it as close to zero as you can, although 
I don't think it will ever be zero.
    We also have to keep in mind that there are a whole new 
category of payments that nobody is reporting here that is a 
lot of money, too, that we are all aware of in this room, and I 
will give you an example and it is something we have issued a 
report on. The Defense Department spent billions of dollars in 
incentive and award fees, paying incentive and award fees to 
contractors that were late, over-budget, and under-performing.
    Chairman Coburn. Six billion dollars.
    Mr. Walker. Yes, billions of dollars. I would bet a lot of 
money that there is not a dime of that that is shown as an 
improper payment. Now, I am not saying it should be, but I am 
saying it is a problem and we have to go after it.
    Mr. Johnson. In that regard, we pay out hundreds of 
millions of dollars, if not billions of dollars, in salary 
increases to employees that have not earned it, and we employ 
people that don't perform satisfactorily. We don't call that an 
improper payment, either, but that is another committee. That 
is another set of issues. So we have to be careful about having 
this thing expanded to include every moving thing in the 
Federal Government where the value is not----
    Chairman Coburn. That is not our goal with this hearing. 
The goal of this Subcommittee is to find out where we are not 
spending money wisely. Most of that is not the Administration's 
problem. Most of that is a Congressional problem.
    Mr. Johnson. We will do whatever the legislation wants us 
to do, I am just saying, but think about really what is the 
value of it? Social Security, if there are improper payments 
and the court says we have to continue to make them until it 
has been proven, do we measure that? We don't do that now. We 
can, we just never have because it is nice to know information. 
There is nothing we can do about it. Once they have, once all 
the appeals have been exhausted and Social Security begins to 
collect the information, we collect that like within a 98 
percent rate. It is not a problem collecting it. But to know 
that it is out there is nice to know.
    Chairman Coburn. I will turn it over to Senator Carper, 
knowing what is out there can sometimes change what you do so 
that it never gets out there in the first place. I agree that 
there are statutory requirements on Social Security payments, 
but maybe things could change inside Social Security so that 
there are fewer of those going out there, so that there are 
fewer having to go back and get it. The deal is not about going 
and getting the money. The deal is about not paying the money 
in the first place.
    Mr. Johnson. Right.
    Chairman Coburn. Again, those are judgment calls. I am not 
critical of it. The purpose of this hearing is where are we 
going on improper payments? Do we need to tweak it somewhat so 
we get a better benefit? There is no undermining of what we 
have seen being done. It is to raise the awareness of the 
American people that we do have $60 billion at a minimum of 
improper payments. But we don't know what percentage of that is 
true payments to people that don't deserve it versus a portion 
of that.
    Mr. Johnson. Yes.
    Chairman Coburn. So defining what that is, I think is 
important, not just for the American people, but also for a 
management tool.
    Mr. Johnson. We know where more than, I would suggest, 75 
percent of all improper payments are now. Let us go get those 
down to zero at the same time that we are finding out and 
detailing and specifying exactly what that remaining 25 percent 
or whatever it is is. But let us not get so focused on 
reporting every dollar that is improperly paid out that we lose 
sight of the importance of having legislation we need to access 
the databases, et al that we need to get what we know to be 
improper to zero.
    Chairman Coburn. OK. Senator Carper.
    Mr. Walker. Can I, real quickly, Mr. Chairman?
    Chairman Coburn. Sure.
    Mr. Walker. This is important. We need to make sure that we 
are focusing on implementing preventative controls to try to 
make sure that we don't have an improper payment to begin with. 
To talk about what the two of you just talked about, the Social 
Security due process, we might recover 98 percent--I don't know 
if that is accurate or not--we might recover a very high 
percentage of what ultimately goes through the adjudicatory 
process, but we spend a lot of money on the adjudicatory 
process and it takes a lot of time. So there is a cost.
    So it is not just a matter of how much we ultimately 
recover, it is what can we do to prevent this to begin with and 
how can we minimize the amount of costs that we are having to 
spend in dealing with those types of issues, and it is 
considerable.
    Senator Carper. I am reminded, Mr. Chairman, of something 
my father used to say to my sister and me over and over and 
over again when we were kids growing up in Dan Pool and 
Roanoke, Virginia. He would observe our behavior, and whether 
we were doing our homework or working around the house or in 
the yard or whatever, and it wouldn't meet his standards and he 
would say, ``Just use some common sense. Just use some common 
sense.'' and what I have often tried to do is apply what I call 
a common sense rule or approach to just about everything I have 
ever done, in the Navy, in government, in State Government when 
I was Governor of Delaware and certainly here today.
    We have talked about some statutory changes that might be 
appropriate to make in the improper payments law, but let me 
just ask you to put on your common sense caps, and have a 
conversation together, sort of both of you can talk not at the 
same time, but just have a conversation with us. If we are 
going to use some common sense to make some changes to this law 
next year, what would we be doing? And I would be interested in 
hearing especially, I think it would be helpful to us to know 
where you agree on those changes that should be made.
    I don't care who goes first, second, third, fourth, but 
just----
    Mr. Walker. Why don't I start?
    Senator Carper. Take off, if you would.
    Mr. Walker. I totally agree that you have to set priorities 
and you have to consider cost-benefit. I totally agree with 
that. That is a common sense approach.
    I would respectfully suggest that in defining significant 
risk, the $10 million may be too low in certain circumstances, 
but 2.5 percent of total payments from a program is too high, 
is way too high. In the case of Medicaid, that is over $4.5 
billion.
    So, therefore, I think you need to consider lowering that 
2.5 percent to a much lower percentage, e.g., half-a-percent. 
Still for Medicaid, that is over $1 billion, but it makes a 
difference because it gets you on the radar screen. Then you 
can decide how you are going to allocate your resources on what 
are you going to go after to try to be able to recover.
    Senator Carper. Mr. Johnson, do you want to comment on that 
point, please?
    Mr. Johnson. Well, I think--what was the one that you 
referred to, Medicare?
    Mr. Walker. Medicaid.
    Mr. Johnson. Medicaid. That error rate is greater than 2.5 
percent.
    Mr. Walker. I agree.
    Mr. Johnson. So that one is going to be in there. It is 
going to be a huge number and it is going to be very difficult 
to collect and it will be collected. It will be eliminated, 
virtually. It is going to be very hard to do. So this 2.5 
percent and $10 million does not prevent us from tackling 
Medicaid.
    If there is a program that 2.5 percent and $10 million 
causes us to not pay attention to, let us know what it is. We 
would be glad to include it.
    Mr. Walker. But here is the problem with that, Mr. Johnson. 
We are talking informally and we know each other well. We work 
together constructively.
    Mr. Johnson. We have the same agent. [Laughter.]
    Mr. Walker. We have found that when you speak for free, you 
can get a lot of bookings.
    Mr. Johnson. Yes. [Laughter.]
    Mr. Walker. And two-for-one, two times zero is zero.
    But in any event, the other issue is, I trust what you are 
saying, but frankly, you are only going to be in your job 
another 2 years. Part of the issue here is how can we assure 
consistency, not just within an administration but between 
administrations?
    So I take you at your word where you say, ``if there is one 
that is a problem, let us put it on there.'' I don't know who 
your successor is going to be and I don't know what their 
attitude is going to be about management issues to begin with. 
So that is why I would respectfully suggest that while I trust 
what you are telling me, it is probably not in the 
institutional interest of the Congress or in the broader 
taxpayers' interest to take that approach.
    Mr. Johnson. You are talking about codifying what the rules 
are----
    Mr. Walker. Right.
    Mr. Johnson [continuing]. But, in fact, the discussion here 
is what should the rules be. Should it be $10 billion and 2.5 
percent? I am saying all the programs that everybody knows we 
should be looking at or anybody has been suggesting that we 
look at get covered by 2.5 percent and $10 million.
    There is $250 billion in programs that we think don't meet 
that in our general way of looking at it and our intention is 
to, and we need to be clear about what our plans are, I am 
hearing from this, that we need to scrub that to see are there 
any programs that besides our omniscience and understanding of 
these programs, in fact, have large numbers of improper 
payments that we need to include in this. But I have not heard 
anybody identify a program yet that they know has high improper 
payments that is not covered by the $10 billion and 2.5 
percent.
    Mr. Walker. Payroll. I would----
    Mr. Johnson. Military payroll is considered high-risk, and, 
I was mistaken, is in----
    Mr. Walker. It is in there?
    Mr. Johnson [continuing]. The $1.5 trillion that we are 
looking at. The civilian payroll----
    Mr. Walker. Well, here is what I would suggest. If it 
doesn't make a difference between the half-a-percent and the 
2.5 percent, which I don't know that is true or not, but if it 
doesn't make a difference, then why shouldn't you lower it?
    Mr. Johnson. It is a hugely different approach to try to 
find error rates down to one-half percent. The sample sizes, 
the time it takes to do it, the level of precision you have to 
go to is dramatically different at those levels. You are 
talking about being able to demonstrate that you can measure 
error rate at 2.5 percent before you try to get it down to 
measure it down to half of 1 percent. You are talking about 
taking programs that we have never measured error rate and all 
of a sudden now trying to figure out what we have, it is a real 
challenge to measure it with a 2.5 percent accuracy level and 
that is dramatically orders of magnitude more difficult than to 
measure it with precision down to one-half of one percent.
    So walk before you run. If we then decide we get that $50, 
$60 billion down to near zero, then let us take it down to a 
much lower level, or at a minimum, let us talk to the 
statisticians and confirm what the costs are and the difficulty 
is and the value of going down to 1 percent or 1.5 or half of 1 
percent versus the benefit.
    I know we have got all that agencies and we and you can say 
grace over with the current criteria.
    Senator Carper. Say that again. We have got what?
    Mr. Johnson. We have all the improper payments identified, 
or will have them all identified by 2008, that we can say grace 
over and do an effective job of eliminating using the criteria 
we have now. When we get that to zero, then it would make 
sense, our level of monitoring, our level of sampling, our 
ability to access the databases and so forth will be such that 
we will have the ability to get the error rate down from 2.5 
percent to something lower than that. Right now, we have a 10-
year challenge ahead of us to get it down to 2.5 percent.
    Senator Carper. All right. I appreciate this discussion. I 
think it has been illuminating. But my question is sort of 
using a common sense test or application, what changes do we 
need to make next year in the current law with respect to 
improper payments?
    Mr. Johnson. I was talking with my brain trust on the way 
down here and asking them that very question.
    Senator Carper. It is an impressive group.
    Mr. Johnson. Well, it is a large group because this is a 
complex issue.
    Senator Carper. I think you told me coming in that the more 
complex the issue----
    Mr. Johnson. The more complex----
    Senator Carper [continuing]. The bigger the posse.
    Mr. Johnson [continuing]. The bigger the posse, right. But 
it is a huge issue. I remember visiting with the President a 
couple of years ago and he asked me what I was involved in and 
working on. I talked about this and that and one was improper 
payments. I said, guess what our level of improper payments 
are, and he had no earthly idea. I said, well, we have only 
measured, I don't know, two-thirds of all the programs that are 
at risk of making improper payments and we think it is $45 
billion. He was dumfounded, as you all are and as the American 
people would be if they knew. It is a huge opportunity for us 
to really do good work here.
    But the things that are not as clear as we would like them 
to be and as you all would like them to be are what we should 
be doing with regard to contract payments and what we should be 
doing with regard to things like tax refund errors. Those are 
improper payments. But how do we want to be treating those? So 
there is some clarification of categories of payments that I 
think need to be dealt with that will make it clear to all, and 
with IRS and Treasury and OMB and the relevant agencies as to 
what kinds of things we should be looking at here.
    And there should be a time to focus on those things where 
we can go do some good work. There is action to be taken to 
eliminate them. Contrarily, when talking about Social Security, 
it is nice to know. We can't do anything about it. We might be 
able to prevent it, but that is not what I have understood the 
opportunity is.
    To me, that is what the biggest opportunity is on this, 
plus changing the laws that prevent us from getting at data 
that would allow us to prevent a lot of these improper 
payments. And I don't know if that would fall under this Act, 
amendments to this Act, or that would fall under legislation 
that dealt with education matters or labor matters or defense 
matters or whatever.
    Senator Carper. Mr. Walker.
    Mr. Walker. Several things. One, I think you need to 
consider cost-benefit in defining risk, and I do think that you 
need to consider what the cost would be if you modified the 2.5 
percent, but I think that needs to be focused on because that 
determines what is on the radar screen.
    Two, I think that there are categories of payments that you 
need to clarify how they should be handled. Mr. Johnson talked 
about a couple. Another one that I talked about was the due 
process payments. I am not saying what the answer is. I am just 
saying you need to focus on it and decide whether or not you 
think they ought to be included or not included and to try to 
help assure that there is consistency.
    Senator Carper. Can you give an example? You mentioned due 
process earlier, I think with respect to, what was it, Social 
Security payments?
    Mr. Walker. Yes, disability payments. It is any kind of 
payment where by law there--even though you know it is 
improper, there is a due process right that the person has by 
law, and it is very common for entitlement benefits and things 
of that nature.
    Right now, my understanding is they are not on the radar 
screen, and I think there are two angles to that. One angle is 
the one that Mr. Johnson talked about. How much do we recover 
after you go through all the due process? But the second angle 
is, well, how much money are we spending on due process that 
otherwise we might not have to spend if we had the preventative 
controls in place that kept us from having the problem to begin 
with, and I think that is a cost-benefit issue, too. I think we 
have got to talk about that.
    My only point is he mentioned a couple. I mentioned a third 
where I think we need to decide how they ought to be treated 
and we ought to consider cost-benefit.
    The third angle is, and I am not sure if this has to be 
legislative, maybe it could be done administratively, but if 
you are going to do legislation anyway you may want to think 
about how do we want to count the improper payments? On the 
example that I gave you, if the payment that was made was $10 
and it was not a duplicative payment, all right, but the only 
amount in question is a portion of that, do you want to count 
the whole thing or do you want to count a piece of it?
    I think this is very important and I am not sure that it 
relates directly to this Act but I think it is necessary in 
order to deal with the intent of this Act, and that is there 
are certain barriers that prevent the government from employing 
data matching and data mining techniques in order to, A, 
prevent improper payments to begin with, and B, to recover on 
improper payments after they occur. And I think when you are 
talking about taxpayer money, I think that we need to look at 
where additional flexibility could be provided there. That is 
different than when you are talking about the use of data and 
data matching where you are not talking about taxpayer money. I 
mean, they are not taxpayer resources.
    And then last, and this is clearly beyond the scope of this 
legislation but I think it is clearly valid based upon one of 
the things that Mr. Johnson said, I think the eligibility 
requirements for some Federal programs are just so complex that 
ultimately down the road, and this is separate and distinct 
from this legislation. We need to relook at a lot of existing 
Federal spending programs and tax policies because they are 
just so complicated it is almost impossible to effectively 
comply and minimize errors.
    Senator Carper. And if we were to do so, General Walker, 
following up on your last comment, if we were to do so, and 
clearly that is beyond the scope of this--well, you just said 
it is beyond the scope of this law, but if we were to do so, 
what are the implications, if you will, or the benefits from 
taking those steps? I think I know the answer, but go ahead and 
say it.
    Mr. Walker. We would save billions of dollars and we would 
improve the credibility of and the confidence in government in 
a variety of ways, among other things.
    Senator Carper. And who would have the responsibility for 
doing that? At the Congressional level, it would be program by 
program, committee by committee, and within the Executive 
Branch, department by department?
    Mr. Walker. I think with regard to eligibility 
requirements, many of those may be statutory and that is going 
to be the Congress' responsibility and I would say it would be 
the committee with jurisdiction over the particular programs 
involved.
    As you know, Senator Carper, and Senator Coburn does, too, 
we issued a document in February 2005 called ``21st Century 
Challenges: Reexamining the Base of the Federal Government.'' 
That just gives 200 examples of things that need to be looked 
at and reengineered. The eligibility requirements of certain 
programs. I am sure we have some examples in that document, but 
they need to be done by the appropriate authorizing committees 
and those that have responsibility for the respective programs.
    Mr. Johnson. Two ideas kind of along the lines of the 
question you are asking, Senator Carper, is I will bet you the 
access to different databases or the statutory changes, it is 
enabling legislation-specific and it has to come out of that 
authorizing committee. But when you--and I am not the most 
knowledgeable person about how Congress works, but my 
impression is when you approach an authorizing committee about 
wanting to change some enabling legislation, they think, well, 
I don't want to do this because this has served us well for 10 
years and I don't want to change it.
    But if they understand that this is a common problem 
amongst several authorizing committees, six, eight, ten 
authorizing committees and there are access to database 
opportunities for all these committees, maybe one of the things 
this Subcommittee can do is help us bring all these different 
authorizing committees together and look at it as a group so 
that we are making the argument to all the relevant authorizing 
committees with you all's endorsement so we get them all to 
understand this is a government-wide opportunity for us to 
better spend the taxpayers' money and to better account for the 
taxpayers' money, and then they can go off and make the 
necessary changes, but they understand they are part of a 
government-wide effort as opposed to being singled out. So that 
isn't just changing the law, but it is a way that you would 
operate and interact with other committees.
    And then I don't know if this impacts the law, but one of 
the things that I didn't understand at the beginning when I 
started working in improper payments was if the improper 
payments are $45 billion and we take it to zero, that does not 
mean that we reduce our outlays to zero, our improper outlays 
to zero, because a lot of these improper payments are payments 
that are at risk of being improper. We don't have the necessary 
paperwork to say this is a proper payment, so we put it as it 
is improper. We did not get the required paperwork. When we 
tighten our processes and, in fact, get the required paperwork, 
we confirm in many cases that, in fact, it was proper.
    This happened this past year when the Medicare error rate 
went down seven-point-something billion dollars. Payments 
remained the same, but we had confirming paperwork. We started 
getting confirming paperwork from physicians that we did not 
have before. So we now know that these payments are proper, but 
without that paperwork, there was a risk that they were 
improper.
    If we want to distinguish between those and have a 
reporting on the difference, distinguish between, in our 
reporting, about what impacted outlays or recoveries and what 
took us from a risk of overpayment or underpayment to an 
assurance of propriety, that would be important, because right 
now there is a suggestion, because I wasn't clear about this 
for the first year, that we are not saying that we are paying 
out $41.6 billion improperly. There is some of that, but there 
is some of it where there is the risk of that that we will 
subsequently find out was proper.
    Senator Carper. And that is the point that I think General 
Walker has been making, about if you have a $10 payment and $8 
of it is appropriate, is it really a $10 improper payment?
    Mr. Johnson. Right.
    Mr. Walker. That is correct. I mean, it may be a lack of 
documentation and it could have been a proper payment, and I 
think that is an issue----
    Mr. Johnson. Right.
    Mr. Walker [continuing]. That we need to understand. Should 
we somehow recognize that and report it differently?
    Let me give you an example that you all can relate to, 
earmarks. Congressional earmarks clearly have proliferated. 
Clearly, there is a major problem. Clearly, something needs to 
be done. But even if you eliminated every dollar of 
Congressional earmarks, you are not necessarily going to save a 
dollar of taxpayer money because it is saying how you are going 
to spend the money, not how much money you have to spend. On 
the other hand, it could significantly increase public 
confidence and trust in their government and credibility if 
something was done about earmarks. There is an analogy here.
    The last thing is let me give you two examples, I believe, 
of programs, one on the spending side, one on the tax side, 
where there are very complicated eligibility requirements. 
Disability----
    Senator Carper. Under Social Security?
    Mr. Walker [continuing]. Under Social Security would be a 
spending side. On the tax side, the Earned Income Tax Credit, 
mind-bogglingly complex. And so while that is beyond the scope 
of this Subcommittee, one of the great things about the Senate 
Homeland Security and Governmental Affairs Committee is that 
you are concerned with all of government with regard to how 
government is organized and managed. And a lot of the things we 
are talking about here are systemic problems that cross many 
organizational boundaries in the Legislative Branch as well as 
the Executive Branch. Somebody has to have a more strategic and 
cross-cutting approach and I think this Subcommittee is well 
positioned to try to do that in partnership with the other 
committees with jurisdiction over particular programs and 
policies.
    Senator Carper. OK. I think I have almost used up my time, 
Mr. Chairman. What do you think? Let me just stop there and 
just say at this point thanks very much for those responses.
    It would be of value to me, and I suspect to the Chairman, 
but certainly to me as we look to the next Congress, if we were 
to ask you to put in writing some of what you have just said in 
response to my original question, common sense changes to the 
current law on improper payments.
    Chairman Coburn. I would think in addition to that the 
specifics of the cross-availability of data, specifically what 
data needs to be cross-referenced to be able to protect against 
fraud. I think that is a legitimate role for the Federal 
Government, to make sure that public money isn't fraudulently 
scammed, and the easy way to look at that is where is the money 
coming from, where is it going, and who is claiming disability 
and yet has filed an income tax report that doesn't have that? 
The two aren't looked at together. I don't think there is 
anything wrong with doing that in a very limited perspective 
that will save us a ton of money.
    The final point I would make, and I know Mr. Johnson agrees 
with this but it is detail and it goes all the way down, I 
agree that the very expensive small percentage changes are not 
something we should go after now. But I don't agree that 
management systems shouldn't have individual managers saying, 
we ought to look at this because it is good management inside 
our own agency. So if that happens in terms of improper 
payments, what happens is they never have to report it, they 
just fix it. And that is what ought to be our goal.
    The reason we have an Improper Payments Information Act is 
because we didn't know. The purpose behind the Act ultimately 
is to be more efficient and more accurate with what we do. So I 
would just encourage that something come out from OMB all the 
way down to the ones that even have no risk saying maybe you 
ought to take a look at this once and see. It still sticks in 
my mind when HUD says there is absolutely no risk with CDBG 
block grants and so therefore they don't look at it, that is a 
signal to the rest of the people getting CDBG block grants, we 
can take advantage of this. They are not looking at it.
    So I think management systems need to be the same 
throughout every level of government and every area. Good 
management is good management and that requires checks and 
balances and tools to assess that what we did this year needs 
to be changed in this way to be more efficient with why we do 
it next year. And I know you all are trying to do that. I know 
to get your hands around this behemoth is difficult and I think 
we are making good progress. I just think we need to make more 
and we need to make it faster, and part of that is because what 
is impending coming down the road for us.
    You are going to be thankful you are not in OMB in 10 years 
when the real problems start hitting the fan. And I am thankful 
again, I will say it to General Walker, the American people 
need to know what is going on because Congress certainly hasn't 
been honest with the American people about the impending nature 
of the financial difficulties we face and I am very thankful 
that he is out there. I have been preaching this since I have 
been in the Senate, what is going to happen.
    We need to do the best job we can now to get things under 
control because we are going to have to make a lot of cuts 10 
years from now and we need to have the financial tools to know 
which ones are good and which ones aren't, which ones are 
efficient and which aren't, because we need to be able to have 
the Congress say, we are going to have to make hard decisions. 
Which ones go? Which ones stay? And if we don't have good 
management tools, we are not going to be able to do that.
    I want to thank each of you. I would reiterate, I would 
love to have from you in writing the cross-agency data mining 
you think minimally is necessary to accomplish your goals, the 
recommended changes that you would like to see in the statute, 
and if none. And also what is happening on these other areas, 
where are you going and why, so that we can look at that.
    With that, are there any other comments?
    Thank you for your attendance. The Subcommittee is 
adjourned.
    [Whereupon, at 11:46 a.m., the Subcommittee was adjourned.]


                            A P P E N D I X

                              ----------                              

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

                                 
