[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]


 
  FEDERAL FINANCIAL STATEMENTS FOR FISCAL YEAR 2007: FISCAL OUTLOOK, 
                 MANAGEMENT WEAKNESSES AND CONSEQUENCES 

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

                                HEARING

                               before the

                 SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
                     ORGANIZATION, AND PROCUREMENT

                                 of the

                         COMMITTEE ON OVERSIGHT
                         AND GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                              JUNE 5, 2008

                               __________

                           Serial No. 110-96

                               __________

Printed for the use of the Committee on Oversight and Government Reform


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              COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

                 HENRY A. WAXMAN, California, Chairman
EDOLPHUS TOWNS, New York             TOM DAVIS, Virginia
PAUL E. KANJORSKI, Pennsylvania      DAN BURTON, Indiana
CAROLYN B. MALONEY, New York         CHRISTOPHER SHAYS, Connecticut
ELIJAH E. CUMMINGS, Maryland         JOHN M. McHUGH, New York
DENNIS J. KUCINICH, Ohio             JOHN L. MICA, Florida
DANNY K. DAVIS, Illinois             MARK E. SOUDER, Indiana
JOHN F. TIERNEY, Massachusetts       TODD RUSSELL PLATTS, Pennsylvania
WM. LACY CLAY, Missouri              CHRIS CANNON, Utah
DIANE E. WATSON, California          JOHN J. DUNCAN, Jr., Tennessee
STEPHEN F. LYNCH, Massachusetts      MICHAEL R. TURNER, Ohio
BRIAN HIGGINS, New York              DARRELL E. ISSA, California
JOHN A. YARMUTH, Kentucky            KENNY MARCHANT, Texas
BRUCE L. BRALEY, Iowa                LYNN A. WESTMORELAND, Georgia
ELEANOR HOLMES NORTON, District of   PATRICK T. McHENRY, North Carolina
    Columbia                         VIRGINIA FOXX, North Carolina
BETTY McCOLLUM, Minnesota            BRIAN P. BILBRAY, California
JIM COOPER, Tennessee                BILL SALI, Idaho
CHRIS VAN HOLLEN, Maryland           JIM JORDAN, Ohio
PAUL W. HODES, New Hampshire
CHRISTOPHER S. MURPHY, Connecticut
JOHN P. SARBANES, Maryland
PETER WELCH, Vermont
------ ------

                     Phil Schiliro, Chief of Staff
                      Phil Barnett, Staff Director
                       Earley Green, Chief Clerk
               Lawrence Halloran, Minority Staff Director

  Subcommittee on Government Management, Organization, and Procurement

                   EDOLPHUS TOWNS, New York, Chairman
PAUL E. KANJORSKI, Pennsylvania      BRIAN P. BILBRAY, California
CHRISTOPHER S. MURPHY, Connecticut   TODD RUSSELL PLATTS, Pennsylvania,
PETER WELCH, Vermont                 JOHN J. DUNCAN, Jr., Tennessee
CAROLYN B. MALONEY, New York
                    Michael McCarthy, Staff Director


























                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on June 5, 2008.....................................     1
Statement of:
    Dodaro, Gene L., Acting Comptroller of the United States; 
      Daniel Werfel, Deputy Controller, Office of Management and 
      Budget; and J. David Patterson, Principal Deputy Under 
      Secretary of Defense (Comptroller), Department of Defense, 
      accompanied by James Short, Deputy Chief Financial Officer, 
      and David Fisher, Director of the Business Transformation 
      Agency.....................................................     6
        Dodaro, Gene L...........................................     6
        Patterson, J. David......................................    62
        Werfel, Daniel...........................................    53
Letters, statements, etc., submitted for the record by:
    Dodaro, Gene L., Acting Comptroller of the United States; 
      Daniel Werfel, Deputy Controller, Office of Management and 
      Budget, prepared statement of..............................     9
    Patterson, J. David, Principal Deputy Under Secretary of 
      Defense (Comptroller), Department of Defense, prepared 
      statement of...............................................    64
    Towns, Hon. Edolphus, a Representative in Congress from the 
      State of New York, prepared statement of...................     3
    Werfel, Daniel, Deputy Controller, Office of Management and 
      Budget, prepared statement of..............................    55


  FEDERAL FINANCIAL STATEMENTS FOR FISCAL YEAR 2007: FISCAL OUTLOOK, 
                 MANAGEMENT WEAKNESSES AND CONSEQUENCES

                              ----------                              


                         THURSDAY, JUNE 5, 2008

                  House of Representatives,
            Subcommittee on Government Management, 
                     Organization, and Procurement,
              Committee on Oversight and Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2:14 p.m., in 
room 2154, Rayburn House Office Building, Hon. Edolphus Towns 
(chairman of the subcommittee) presiding.
    Present: Representatives Towns, Welch, and Bilbray.
    Staff present: Michael McCarthy, staff director; William 
Jusino, professional staff member; Kwane Drabo, clerk; and Alex 
Cooper, minority professional staff member.
    Mr. Towns. The hearing will come to order.
    Welcome to today's oversight hearing on financial 
management in the Federal Government. Today we will discuss an 
important issue for Congress and for the Oversight Committee. 
As stewards of taxpayer dollars, it is our duty to ensure full 
transparency and accountability over the Federal Government's 
operation and fiscal condition. We must have a full 
understanding of the Federal Government's finances in order to 
fulfill this duty. We must ensure that taxpayer dollars are 
spent as efficiently as possible and that they are protected 
from waste and abuse.
    I am happy to say that there have been some improvements 
since last year. For the first time, GAO was able to give an 
unqualified opinion on the 2007 Statement of Social Insurance, 
which is a big step for the Federal Government. GAO also 
reports some improvement to accounting and financial reporting 
standards, which provide greater transparency. OMB has reported 
that 14 additional programs measured and reported their 
improper payments in fiscal year 2007, which gives us a better 
understanding of this problem. Seven out of the 24 CFO Act 
agencies' auditors reported no material weaknesses and no 
noncompliance issues.
    Having said that, we still have a lot of work ahead of us. 
This marks the 11th year that the GAO was unable to render an 
opinion on the consolidated financial statement. Only 19 of the 
24 CFO Act agencies received clean audit opinions, the same 
number as last year. Thirteen of the agencies did not comply 
with at least one of the three requirements under the Federal 
Financial Management Improvement Act. Some of these agencies 
just aren't performing the basic accounting work that they are 
required by law to do. This situation is unacceptable.
    The weaknesses that prevented GAO from offering its 
opinions relate to measures of financial reporting, things like 
reconciling accounting between agencies, recording agencies' 
assets and costs of operations and estimating loan guarantee 
liabilities. The Department of Defense has longstanding 
problems with these and other financial management issues, and 
I hope that we can hear some solutions today.
    We just can't afford those problems. GAO says that the 
coming years are going to be difficult as the baby boom 
generation starts to retire and collect Social Security and 
Medicare benefits. We have a lot to do to make sure we will 
meet all of our commitments in the coming year. Weak financial 
management is the last thing that we need.
    So today we will hear more about these problems.
    And let me conclude and ask now to give time to Congressman 
Bilbray, the ranking member from California.
    [The prepared statement of Hon. Edolphus Towns follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Mr. Bilbray. Thank you, Mr. Chairman.
    Mr. Chairman, traditionally, the ranking member thanks the 
Chair for holding the hearing. I'm not going to do that today. 
I'm going to instead thank you for the attitude and the 
approach in which you address this issue and the attitude that 
you've taken in holding this hearing. I think that in a time 
when partisan bickering and brinksmanship and political 
advantage seems to be the role of the day, your leadership 
shows on this issue that outcome really does matter. And the 
fact is, this is an issue that I think historically we can look 
back and say the challenge, the improvements and the problems 
transcend partisanship.
    We've had a Republican--I mean, a Republican administration 
executive branch with a Democratic majority in the House. Prior 
to that, we had a Democrat administration with a Republican 
majority in the House. And the progress and the challenges have 
transcended those political lines.
    I just want to say sincerely, I really appreciate your 
approach here, because I think, rather than finding blame, we 
are looking for answers. We're recognizing the challenges. This 
is a foundation that has to be laid if we're going to have a 
viable financial structure for future generations. And I think 
that to be able to address the challenge before us, this 
committee and all of Congress, including the White House with 
the cooperation of Congress, needs to be able to work together 
and leave those partisan lines behind. Because, let's face it, 
our children and our great grandchildren are not going to ask 
if it was a Democrat or Republican that left us out in the 
cold. They're just going to know that America and its leaders 
did it.
    So, Mr. Chairman, I say sincerely, I have looked at the 
panel we have and, most importantly, the way you structured 
this thing, and I think that you have structured it in a way 
that allows all of us to work together for our great 
grandchildren. And so, we'll continue the progress, slow and 
tedious and frustrating as it has been, so that in the long 
run, we make sure that we have an answer that does not serve 
the Democrat or the Republican party but serves the American 
people. And thank you very much for your leadership.
    Mr. Towns. Thank you. Thank you for your words. Thank you 
so much. Now I'll yield time to Congressman Welch.
    Mr. Welch. In the interest of time, I yield back to the 
chairman.
    Mr. Towns. Thank you very much.
    We return now to our panel. It is longstanding committee 
policy that we swear in our witnesses. So please stand and 
raise your hands.
    [Witnesses sworn.]
    Mr. Towns. You may be seated. Let the record reflect that 
they all announced in the affirmative.
    So why don't we start with you, Mr. Dodaro.

STATEMENTS OF GENE L. DODARO, ACTING COMPTROLLER OF THE UNITED 
STATES; DANIEL WERFEL, DEPUTY CONTROLLER, OFFICE OF MANAGEMENT 
  AND BUDGET; AND J. DAVID PATTERSON, PRINCIPAL DEPUTY UNDER 
  SECRETARY OF DEFENSE (COMPTROLLER), DEPARTMENT OF DEFENSE, 
ACCOMPANIED BY JAMES SHORT, DEPUTY CHIEF FINANCIAL OFFICER, AND 
  DAVID FISHER, DIRECTOR OF THE BUSINESS TRANSFORMATION AGENCY

                  STATEMENT OF GENE L. DODARO

    Mr. Dodaro. Good afternoon, Mr. Chairman, Congressman 
Bilbray, Congressman Welch. It is a pleasure to be invited here 
to talk about the results from GAO's audit for the consolidated 
financial statements for fiscal year 2007.
    As you mentioned in your opening statement, like prior 
years, we are unable to provide an opinion on the accrual-based 
financial statements. While there are a lot of reasons for that 
and problems and weaknesses, we have identified there are three 
primary impediments. First, there are serious financial 
management problems at the Department of Defense; second is the 
inability to properly record and eliminate intergovernmental 
transactions between Federal agencies; and, third, there are 
problems with the compilation of the financial statements by 
the Department of Treasury.
    Now, as you mentioned, this year, although we have had a 
similar overall outcome on the accrual-based financial 
statements, there have been some market progress.
    First, we were able to provide an unqualified opinion on 
the Statement of Social Insurance. This is very important, 
shedding some light on the Federal Government's long-term 
fiscal exposures, as this statement displays the fact that the 
net present value of the commitments for Social Security and 
Medicare, for example, are $41 trillion over the next 75-year 
period.
    Second, the administration, working with both OMB and 
Treasury, produced a summary financial statement, which is very 
short and concise, and it puts in understandable terms the 
financial statements of the Federal Government and the long-
term fiscal challenges facing the government going forward. So 
we think that was a tremendous addition this past year as well.
    Now, DOD and Treasury and many of the other Federal 
agencies have plans under way to try to address some of these 
longstanding weaknesses that have been in place, and it is 
very, very important for progress to be sustained. We have a 
transition in administration coming up, and this administration 
needs to continue to work hard on these activities as they have 
been up until that point in time. And they don't have to be 
picked up again by the next administration going forward so we 
can continue to make progress in these areas.
    Now, it is not only important for accountability, but it is 
important to understand the long-term fiscal position of the 
Federal Government. If I could direct your attention to this 
chart that we have over here to highlight a couple of trends 
that the financial statements show.
    This first chart talks about the increase in the total 
Federal debt that the Federal Government owes. As it shows, in 
the last 4 years alone, the total Federal debt has climbed from 
about $6.5 trillion up to $9 trillion at the end of fiscal year 
2007. Now, the debt--the shaded part at the bottom is debt held 
by the public, and that has gone up as well as the white 
portion, which is the intergovernmental holdings. That is 
largely the money that the Federal Government is using from the 
Social Security revenues in excess of expenditures to pay for 
current obligations of the Federal Government.
    Now, the debt--the $9 trillion--right now, the debt ceiling 
is set at about $9.8 trillion. So it is expected that sometime 
next fiscal year, the Federal Government will hit that debt 
ceiling again, and there will have to be additional action 
taken by the Congress. So this is a trend. The financial 
statements are showing some light on this.
    But this situation, as I'm going to show in the next slide, 
where the Federal Government has this excess revenue from 
Social Security, from payroll taxes over expenditures is going 
to dissipate as the baby boom generation retires.
    On this next slide, this looks in the outyears. This 
assumes--it takes the time period from 2008 to 2040 over the 
next 32 years, and it shows several things.
    One, it assumes that we hold revenue, basically assuming 
that the tax cuts will be extended through 2018; and, after 
2018--the solid line represents revenue--we assume revenue 
recedes at 18.3 percent, which is the average of GDP, which is 
about the average over the last 40 years in the Federal 
Government's experience.
    On the bottom, there are four components to the Federal 
spending side. The bottom, the darker shaded area, is interest 
on the national debt. That shows going up the second component 
of the bar is Social Security, the third component is Medicare, 
and then the white portion at the top is all other spending for 
the Federal Government. This includes defense and all other 
discretionary spending.
    What this shows is that by the year 2030, the Federal 
Government, assuming historic revenue collections, would only 
have enough revenues to pay interest on the debt, Social 
Security payments and Medicare payments. It wouldn't have 
enough money left to fund any other activity in the Federal 
Government, and that even becomes more acutely painful in 2040. 
Now, obviously, our country will not let this happen, but it 
shows the magnitude of the fiscal challenge ahead.
    Simply put, the Federal Government is on an unsustainable 
fiscal path and that action is urgently needed to begin to 
address some of these issues, both entitlement spending, the 
base in government and to look at the revenue side of 
government as well going forward.
    So, Mr. Chairman, I commend you and the committee for 
continuing to focus on making improvements in Federal financial 
management. It is urgently important. It is tough work, as was 
mentioned by Congressman Bilbray, going forward every year, but 
it is very important. So I commend this committee for its 
diligence on this, and I'd be happy when we get to the 
question-and-answer period to answer any questions.
    Mr. Towns. Thank you very much.
    [The prepared statement of Mr. Dodaro follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Mr. Towns. Mr. Werfel.

                   STATEMENT OF DANIEL WERFEL

    Mr. Werfel. Thank you. Thank you, Chairman Towns, Ranking 
Member Bilbray, Representative Welch and other members of the 
subcommittee for having this hearing today and inviting me to 
speak.
    When the CFO Act of 1990 was enacted close to 18 years ago, 
Congress established three fundamental objectives for Federal 
financial management. The first objective was transparency, 
making sure that the Federal Government is informing the public 
on the state of the Nation's finances. The second objective was 
internal control, making sure that Federal agencies were 
putting in the right people, process and technology to track 
Federal taxpayer funds and mitigate financial risks. And the 
third objective was decision support, making sure that the 
right financial information at the right time was in the hands 
of agency decisionmakers to guide both operational, 
programmatic and other key decisions of the Federal Government.
    Through improvements in the reliability and timeliness and 
readability of our financial report, we are building a 
foundation for achieving the broader objectives of the CFO Act.
    With respect to reliability, 80 percent of CFO Act agencies 
today have clean audit opinions, and governmentwide we have 
seen 4 consecutive years of declines in material weaknesses, 
with an overall decrease of 35 percent in the last 7 years.
    With respect to the timeliness of our financial report, 
agencies are now reporting audited financial statements 45 days 
after the end of the fiscal year and the governmentwide report 
comes out 30 days after that. Compare that with just not so 
long ago, several years ago, when the timelines for producing 
these reports were more than 3 months more than what I just 
described.
    And with respect to the readability and the transparency of 
our financial reports, through an OMB pilot program conducted 
in 2007, agencies are producing summary documents to help 
readers digest hundreds of pages of detailed information on 
finance and performance.
    Attached to my testimony today--and Mr. Dodaro mentioned it 
as well--is a great example of how we're working to make 
government financial reports more transparent. This report, A 
Citizen's Guide to the 2007 Financial Report to the U.S. 
Government, provides readers with an 8-page version of the 
larger 182-page financial report. It is an easy-to-read 
overview of the U.S. Government's short and long-term financial 
outlook, and it serves as an important reference tool for data 
and findings of that 182-page document I referenced earlier.
    We are very proud of the citizen's report not only because 
it improves the presentation of our financial information. We 
are proud because of the clarity and transparency this report 
gives to the most significant fiscal challenges facing the 
government today and that is, as very astutely described by Mr. 
Dodaro, the impending, unprecedented and enormous fiscal 
imbalance the Federal Government faces due to the rising cost 
of entitlement programs.
    The Federal financial community plays an important role 
with respect to this fiscal crisis.
    First, the Federal financial community is responsible for 
ensuring that the data and analysis are clearly and effectively 
communicated to the public and to the policymakers. We believe 
the Citizen's Guide is an important step in meeting this 
objective.
    And also, as has been mentioned already, our attainment of 
a clean opinion on the Statement of Social Insurance is another 
critical step, because it demonstrates not only that we are 
reporting the information clearly but the information contained 
within this important report is reliable.
    The Federal financial community is responsible for more 
than just reporting on the Nation's fiscal health. It plays a 
critical role in developing and implementing strategies to 
control Federal spending and otherwise ensure that the fiscal 
health of the Federal Government remains sound. In areas such 
as improper payments, billions of dollars in error are being 
eliminated; and real property, billions of dollars in unneeded 
assets, are being removed from our inventory. The Federal 
community is achieving these results by gathering reliable 
financial data, just as the CFO Act originally envisioned, and 
using that data to make smarter decisions about the way 
government funds are spent.
    Despite these results, there is clearly more work to be 
done. While most of our major financial reports are passing 
audit scrutiny, too many of them do not. To address this, we do 
have sound corrective action plans in place for each financial 
management weakness, and these action plans continue to have us 
trending toward better audit results each year. With the 
unprecedented challenge before us on the future fiscal health 
of the government, we need to make sure that our financial 
readers are moving beyond just the fundamentals of audited 
financial statements. We need to make sure our financial 
reports contain the right information that is most relevant to 
the important programmatic and business decisions that agencies 
make, and we also need to make sure that the internal control 
requirements that we impose on Federal agencies are 
sufficiently focused on financial risks, such as improper 
payments and charge card abuses.
    As we approach the 20-year anniversary of the CFO Act, OMB 
looks forward to working with Congress and GAO to evaluate 
financial management requirements as they exist today, to 
address the issues about I have outlined and to ensure that the 
broad and important objectives of the act are met.
    At this time, I'm happy to answer any questions that you 
have.
    Mr. Towns. Thank you very, very, very much.
    [The prepared statement of Mr. Werfel follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Mr. Towns. Mr. Patterson, good to see you again.

                STATEMENT OF J. DAVID PATTERSON

    Mr. Patterson. Good to see you, Mr. Chairman.
    Mr. Chairman, Ranking Member Bilbray and Congressman Welch, 
thank you for this opportunity to appear before you to discuss 
the Department's financial management improvement efforts and 
to respond to your questions. We are always happy to bring to 
the committee an update and to clarify any questions you might 
have on specific issue areas.
    With me today, I'd like to introduce Mr. James Short, 
Deputy Chief Financial Officer, and Mr. David Fisher, Director 
of the Business Transformation Agency, who will be pleased to 
answer questions relating to the--would you please stand, 
please?
    Mr. Towns. Thank you.
    Mr. Patterson. And they will be pleased to answer questions 
that are specific to the topics you identified in your letter 
of invitation.
    Before we address the particular issue areas, however, I 
would like to discuss just a moment two most important aspects 
of DOD financial management, the size and scope of the 
challenge we face, and, second, the progress that the 
Department has been making in meeting that challenge over the 
last 7 years.
    The Department of Defense is not only the largest 
Department in the Federal Government, it is the largest and 
most complex organization in the world, with more than 600,000 
facilities, 6,000 locations, 163 countries around the globe. 
The Department has 5.2 million inventory items, $3.6 trillion 
in assets and liabilities and an operating budget this year 
that exceeds half a trillion dollars.
    To put this in perspective, consider the Department's 
annual base budget is almost 50 percent greater than the annual 
revenues of Wal-Mart, its assets three times the size of Wal-
Mart, IBM and ExxonMobil combined. In fact, the Department of 
Defense, if it were a country, it would rank 17th among the 
world's GDPs.
    In a single year, the Department of Defense processes more 
than 150 million pay transactions, which is approximately 22 
pay transactions every second on a 40-hour workweek--disbursed 
is over $446 billion to payroll recipients, commercial 
vendors--manages $22 billion in foreign military sales and 
maintains about 57 million general ledger accounts.
    But the Department's sheer size and magnitude and 
complexity is not in any way an excuse for not putting every 
available resource and all of our energies into ensuring 
America's hard-earned tax dollars are spent wisely. Quite to 
the contrary. It is, however, an explanation why achieving our 
financial management objectives is not a quick and easy matter.
    The second point is the substantial progress that the 
Department has made over the last 7 years in bringing its 
financial management processes and systems into the 21st 
century and preparing the Department for that clean audit. For 
example, in 2001, only two DOD entities, the Department of 
Finance and Accounting Service and the Military Retirement 
Fund, were auditable. Today, we have five defense entities 
whose combined assets and liabilities comprise 15 percent of 
the Department's total assets and 50 percent of its total 
liabilities. They all have clean audit opinions.
    Again, to give you some perspective, the combined value of 
those five entities is larger than the value of the entire 
Department of Health and Human Services, which is the next 
largest Federal agencies with an unqualified audit opinion.
    By the end of fiscal year 2009, we expect to receive clean 
audit opinions on 37 percent of the Department's total assets 
and 88 percent of its liabilities and that by 2010 48 percent 
of all DOD assets and 89 percent of all of its liabilities will 
be audit ready. In addition, the U.S. Army Corps of Engineers, 
which accounts for $49 billion in DOD assets and liabilities, 
was audited for the first time and is projected to receive a 
clean audit in the next fiscal year.
    So we have some tremendous progress and we have made a 
tremendous amount of progress in these last short few years, 
but improved financial management is also eliminating material 
weaknesses, increasing efficiency and productivity and saving 
the taxpayers literally billions of dollars. For example, 
financial transformation, combined with robust metrics 
programs, has produced a dramatic 80 percent improvement in the 
accuracy and timeliness of information. Electronic invoicing 
has reduced errors and increased efficiencies, raising the 
number of electronic invoices processed per quarter of 64 
percent in 2004 to 82 percent today.
    Since 2001, 84 percent of all manager-identified internal 
control weaknesses have been corrected, dropping from 116 to 
just 19. In addition, increases in the rate of operations and 
elimination of excess capacity and increased productivity at 
DEFAS by 52 percent while lowering costs to the services by 
$317 million has occurred since 2001. Military and civilian pay 
is now more than 99 percent accurate. At Defense Contract and 
Audit Agency, which audits more than 10,000 contractors, 
including some of the world's largest companies, more than 
271,900 audits have taken place since 2001, covering $1.9 
trillion. These audits have saved the taxpayers $17.6 billion.
    Mr. Chairman, these are just a few examples of how the 
Department of Defense has transformed financial management and 
put the Department on a clear path to a clean audit.
    Again, we are happy to be here, and I'm very pleased to 
take your questions, sir.
    Mr. Towns. Thank you very much.
    [The prepared statement of Mr. Patterson follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
    
    Mr. Towns. I know you know that the bells have sounded, and 
that means that we have votes. So what I'm going to do is to 
call for a recess until 3:30, and then we'll come back and 
we'll have some questions for you. Because there are about five 
votes, and I understand it will probably be 3:30 before we will 
be free. I hate to do this, but we have to vote. So we will be 
back at 3:30.
    So the committee is in recess.
    [Recess.]
    Mr. Towns. We'll come to order.
    Again, let me apologize for the delay, but voting is 
important around here.
    Let me begin with you, Mr. Dodaro. Your report emphasizes 
the long-term financial problems that the Federal Government is 
going to have with meeting all of its commitments as the baby 
boomers' generation reaches retirement. The report says we are 
on an imprudent and unsustainable fiscal path and calls for 
leadership to place us on a more prudent path. As you know, 
your predecessor, David Walker, presented a list of proposals 
last year that he said would help us get back on such a path. 
Does GAO continue to support those proposals?
    Mr. Dodaro. First of all, we continue to be very concerned 
about the long-term fiscal path. I think the proposals that Mr. 
Walker had advanced are very important considerations that need 
to be, you know, continued to be debated and discussed. And so, 
you know, basically, we think several things, Mr. Chairman.
    First, there needs to be attention to reforming the 
entitlement programs, in particular in the health care area--
health care is the primary driver of the long-term fiscal 
condition--but also Social Security reform.
    We think there needs to be also, you know, additional looks 
at the budget process that is in place with trying to provide 
more transparency about the long-term implications of various 
proposals and the government's financial condition. We are very 
encouraged by the inclusion in the fiscal report of the long-
term fiscal position. And, as Mr. Werfel pointed out, the 
summary report available to all citizens talks about the 
unsustainable path; and these debates need to be continued. We 
think there is a need for long-term sustainability reporting on 
the Federal Government and additional tools that are available 
to alert policymakers to the long-term implications.
    So, you know, by and large, the ideas that former 
Comptroller General Walker advanced are still relevant and need 
to be continued to be discussed and hopefully addressed as we 
move forward.
    Mr. Towns. What can we do to increase public awareness and 
understanding of this problem?
    Mr. Dodaro. Well, I think the first thing was the summary 
annual report that has been made available this year. I think 
that is very important for the public to understand.
    I know one of the reasons that Mr. Walker resigned as 
Comptroller General was to continue the public awareness and 
education campaign through the new foundation that was created 
that he is heading up as chief executive. We plan at GAO to 
continue to make this a prominent piece of the reports and 
testimonies that we have. We have a Web site, Mr. Chairman, 
that we update these long-term projections on a quarterly 
basis, and it is available to all members of the public. So GAO 
will continue within the sphere of our independent and 
nonpartisan status to keep raising this issue both to the 
attention of the Congress but also, you know, indirectly to the 
public through our reports and testimonies.
    Mr. Towns. Right.
    Mr. Werfel, what do you think could be done?
    Mr. Werfel. I agree a lot with Mr. Dodaro.
    I think, first of all, the efforts of David Walker and the 
various foundations that are driving a fiscal wake-up tour--I 
think, they have been to 40 different cities around the Nation, 
really with a powerful presentation on the fiscal imbalance 
that is upon us, using graphs like what Mr. Dodaro provided, 
and trying in a really digestible, user-friendly way to explain 
what is happening with respect to the growth and entitlement 
costs and how it is going to impact citizens and the children 
and grandchildren of citizens. And the Federal financial 
community more and more is taking seriously the need to get 
this information out there in a digestible way and make sure 
that folks like you on the Hill and the media and others are 
paying very close attention to it.
    I know the President's budget spends many, many pages on 
this issue trying to explain the level of the urgency, and this 
report tries to do it in a little bit more of a simple and 
easy-to-digest framework than is in both the financial report 
and the President's budget. But I think the fiscal wake-up tour 
is an important first step, and I think, from our perspective, 
the more clarity we can provide to the issue--that is the best 
first step question take.
    Mr. Towns. At this time, I yield to the ranking member.
    Mr. Bilbray. I guess, Mr. Chairman, everybody is talking 
about, you know, climate change and the issue of An 
Inconvenient Truth. I guess, from the fiscal point of view, we 
are talking about a terrifying truth, and I wish as much 
attention was given to that. Maybe we need somebody to do a 
movie to scare the hell out of the public with what kind of 
fiscal reality we are giving our grandchildren and our great 
grandchildren.
    Gene, you were talking about the issue of reaching a debt 
limit and having to move it again. Do we have any plan not to 
dig the hole deeper so we don't bottom out? Do we have any plan 
to avoid having to ask Congress not to raise the debt limit?
    Mr. Dodaro. Actually, Congressman, the debt limit 
indication is really a lag indicator. By the time that happens, 
the commitments and the spending have already occurred, and 
that is why we're trying to encourage some, you know, forward 
thinking about the implications going forward. And also, 
Congressman, by the way, there is a movie in the making, and it 
is one of Mr. Walker's projects going forward to try to----
    Mr. Bilbray. Well, I hope I get a footnote for the title. 
OK?
    Mr. Dodaro. OK. But in terms of the debt limit, I mean, 
given the commitments and the spending that is--the decisions 
that are going to be made this year, I think it is pretty much, 
you know, a predictable that next fiscal year it is going to 
happen. So, I mean, all the debt limit does in raising a bit is 
to allow for past commitments that have already been made to be 
issued.
    You know, one of the issues that we have, you know, raised 
is that a lot of spending now, a greater proportion of Federal 
spending, is on mandatory spending, which is governed by law. 
So as long as the eligible populations meet that criteria, the 
money gets spent, and so there is less on a discretionary 
basis. So to the extent to which eligible people receive those 
services--the Federal Government is obligated to pay it.
    Mr. Bilbray. So it is really easy for us to make all these 
commitments, and then take all of the credit for it but then 
bail out and not have to pay the bill?
    Mr. Dodaro. The bills come, and they will have to be--the 
money will have to be raised in order to pay the bills. And 
that will come. I mean----
    Mr. Bilbray. Just as we are talking about the fact that the 
existing politics, economy and cultural experience is going to 
leave a devastated planet to our next generation, we're talking 
about, from a fiscal point of view, even as bleak a program 
from the fiscal point of view down the line. Instead of rising 
water, we're having rising debt to drown our next generations.
    Mr. Dodaro. Yes, and I think, Congressman, what is going to 
happen in these long-range projections it is going to occur 
even sooner. Around the year 2011, the amount of the payroll 
taxes in excess of Social Security benefits is going to begin 
to dwindle. So the amount of money that has been available in 
the past to support current spending for current operations is 
going to dwindle. In 2017, Social Security goes negative. It is 
estimated to go negative--in other words, the benefits will be 
more than----
    Mr. Bilbray. So--when?
    Mr. Dodaro. 2017. Excuse me. 2017. But the pinch will start 
to occur in 2011. 2017 that will occur.
    Now the Medicare Part A program, the hospital portion, if 
this fiscal year is in the negative cash position----
    Mr. Bilbray. 2017 our Social Security polar cap melts.
    Mr. Dodaro. We'll have to start--the government will have 
to start redeeming the Treasury securities that it has placed 
as IOUs in order to sustain the program, which means that there 
will have to be additional borrowings from the public, there 
will have to be additional spending offsets or revenue 
enhancements. Something will have to start occurring.
    Mr. Bilbray. I appreciate that.
    Daniel, let's talk assets. I guess the biggest problem is 
Democrats always, in theory, want to talk about revenue 
enhancers and Republicans all want to talk about fiscal 
constraints and reduced expenditures. But let's say something 
we may be able to find common ground on. That is, the assets 
that the Federal Government owns that may not be managed 
appropriately.
    I was pointing out to the chairman during the vote that one 
of the greatest losses to the Federal family with the savings 
and loan was not the savings and loan but the way the assets 
were liquidated. They were practically given away. Frankly, I 
think that--I'm astonished that the media did not study how 
much the assets were lost.
    Has anybody even proposed that when we leave our, like, 
real estate, that we stop giving it away, we stop deeding it 
over to the local government, we stop deeding it over to the 
States, we stop transferring from one Department to the other, 
but look at the fact that this is an asset that may be able to 
not only generate a sales revenue but then generate more tax 
revenue and more income for the Federal Government in the long 
run? Have we talked at all--be willing to talk about----
    In Florida--I guess it was in California. It is a good 
example. Fair market value of that must have been trillions of 
dollars when you look at it. Has anybody talked about that?
    Mr. Werfel. Actually, Congressman, yes.
    First, I'd like to start by pointing out that the law that 
governs the disposal of Federal real estate is the Real 
Property Services Reform Act of 1949. So, in the year 2008 
we're still operating under a law that was developed in 1949, 
and the results of that are that we have a very slow and 
bureaucratic process.
    You mentioned some of the concerns that we have, is that 
before we can dispose of real estate, we have to have it out 
there in the Federal Register, being looked at by State and 
local government, being looked at for different law enforcement 
interests, interests of the homeless, and that process takes 
more than a year sometimes to get rid of an asset and the 
process itself disincentives agencies from going through the 
disposal.
    Also, what we also pointed out is that once agencies do 
make it through that long process and they sell the asset, the 
proceeds go to Treasury, and the agencies don't get to use 
those proceeds in a way to improve their mission-critical 
assets. And what we have done at OMB is try to approach this 
from a right-sizing perspective where we know that there is not 
a lot of funds and resources available in the budget each year 
to invest in our infrastructure, to improve the condition of 
our mission-critical assets and, at the same time, we also know 
that we have assets that we don't need.
    So what we think what is appropriate is to sell those 
assets that we don't need or get rid of them and to use those 
proceeds to invest in our infrastructure and improve the 
mission-critical assets that we have. And it is for that reason 
that we have a proposal, a proposed pilot program that would 
allow agencies to retain 20 percent of the proceeds of sale, 
but, as importantly, it would allow agencies to take properties 
direct to market.
    Because if we know that we have an asset--and this often is 
the case--let's say we have a 100,000 square foot warehouse and 
it is waterfront and we really don't know that there is any--it 
is not the highest and best use of that asset to be a 
warehouse, and we think the best interest of the taxpayer from 
the Federal perspective is to sell that asset to a developer 
and use that money to help defray the deficit or other funding 
needs.
    I will also point out that the House has introduced a bill 
that would--very recently that has made it through and I think 
is out of markup--that would allow agencies to retain 100 
percent of their proceeds but doesn't provide for any expedited 
disposal. So you still have to go through the 1-year process.
    Mr. Bilbray. Well, I think it is something that this 
committee ought to be looking at.
    Mr. Chairman, we actually in San Diego County right 
downtown had a military headquarters, and they realized that 
the footprint was worth so much that they went out and worked 
with the local government to, basically, redevelop it with--an 
overwhelming majority of it was a revenue-generating visitor 
seating facility with the headquarters still in there. But 
rather than just sitting on the footprint, they're now 
utilizing that.
    And I think that kind of approach is one of the things we 
need to talk about. I think we need to talk about the fact that 
the revenue sources across the board are not going to hold up.
    I think income tax is a hundred years old. My family has 
been in income tax. My wife owns a business. I just think that 
there is going to come a time when this crisis is going to 
force us to look at the fact that there is not a broad enough 
basis income tax to support the structure anymore. We have to 
be brave enough to say the emperor has no clothes. The income 
tax system is 100 years old. We need to look at change in the 
structure, but I would appreciate allowing the time over, Mr. 
Chairman.
    Mr. Towns. Thank you very much, and thank you for your 
comments as well.
    Mr. Patterson, welcome.
    Congress responded to GAO's findings of fraud, waste and 
abuse at DOD by enacting legislation directed at improving the 
management of DOD's Purchase Card Program. In its most recent 
work, GAO notes that DOD has improved its internal controls 
over its purchase card activities. However, GAO still found 
instances of a lack of accountability over fiscal assets and 
improper purchase cards used at the Department of Defense. What 
is being done about that?
    Mr. Patterson. Actually, we are kind of proud of the fact 
that DOD was not singled out as one of the agencies who had 
egregious purchase card violations. But, having said that, our 
Defense Finance and Accounting Service is very, very fastidious 
about how they manage and how they determine whether fraud, 
waste and abuse has taken place. As soon as we find it, we turn 
that over to the Department's IG and their investigative 
service, and we are very, very serious about the oversight that 
we provide for that particular card. And we took it as a wake-
up call, as we do always when the GAO finds areas where 
improvement needs to be done, and our director of Defense 
Finance and Accounting Service has taken that on as a personal 
challenge.
    Mr. Towns. Thank you. Thank you.
    Because though we talked about that before and we are happy 
to see there has been some movement, but still, based on what 
we understand, there is still a long way to go.
    Mr. Patterson. I would say there is improvement to be made 
at the Department, yes, sir.
    Mr. Towns. Mr. Werfel, certain Federal agencies are unable 
to adequately account for and reconcile intergovernmental 
activity and balances. GAO has stated that this failure is one 
of the three major impediments that continue to prevent GAO 
from rendering an opinion on the U.S. Government's consolidated 
financial statements. What is OMB doing to address the 
longstanding problems of Federal agencies not adequately 
accounting for and reconciling intergovernmental activities and 
balance between them? And when can we reasonably expect to see 
some significant progress?
    Mr. Werfel. This is--thank you for this question. This is 
one of the issues that OMB--one of the first steps we took was 
to understand that this is a governmentwide issue. It is not 
specific to a given agency. So what we did was took it to the 
CFO Council. The CFO Council was created by the CFO Act to 
solve governmentwide financial management problems, and we 
asked the CFO Council to make this one of their No. 1 
priorities.
    The CFO Council has convened a team, a committee just 
dedicated to this issue, and they developed a corrective action 
plan that has four components to it that are producing results 
today.
    The first thing we did was we made standard business rules 
and published them so that every agency that approaches a 
transaction with another agency is operating on the same set of 
rules and regulations, because when there are different rules 
and regulations for how you transact with one another, that is 
where some of the problems occur.
    The second thing we did was we created a watch list, a 
high-risk list, if you will, where we identified trading 
partners with imbalances and said, agency Y and agency X you're 
off by $1 billion or $100 million. Please come together, meet 
with OMB and figure out a path toward reconciling this 
imbalance.
    We are in the process of creating a dispute resolution 
committee, a jury of their peers, so to speak, so that agencies 
that have disagreements about whether they recorded the right 
payable or the other agency recorded the right receivable, 
those can be resolved quickly.
    And also and perhaps the largest potential impact is to 
improve the information technology solution by which agencies 
transact with one another. Right now, the system that we have 
is outdated and doesn't have the necessary business rules built 
into it to make sure that agencies aren't transacting with each 
other in a way that inaccuracies are occurring.
    The one result I'd like to point out--and it is also in my 
testimony--is when we started this watch list at the beginning 
of fiscal year 2007, we identified $24 billion in 
intergovernmental imbalances between agencies, and since that 
time we have eliminated more than half of it, so over $12 
billion. We still have a long way to go. I know these are big 
numbers, but that is an important first step in this endeavor.
    Mr. Towns. Right.
    Before I yield back to my ranking member, GAO has called 
for DOD to have a chief management officer to oversee the day-
to-day business, transformation efforts within the Department. 
The National Defense Authorization Act of Fiscal Year 2008 
designated the Deputy Secretary of Defense as the CMO. The act 
also established the position of Deputy CMO and designated that 
a CMO be established within the military department. Mr. 
Dodaro, is this still GAO's position?
    Mr. Dodaro. Mr. Chairman, we still think there needs to be 
a full-time Chief Management Officer at certain organizations. 
DOD is one of them. The Department of Homeland Security is 
another one, and we think that it's a full-time job given the 
magnitude of the business systems and business processes 
challenges over at DOD.
    We're coming up, we as a Nation, as a government, to 
another Presidential transition period of time. This will be on 
its second major Presidential transition since many of these 
management reforms were put into place, so it's very important 
for these initiatives to be sustained and the next 
administration to build on progress that has occurred. We've 
been pleased at how the current administration has built on the 
previous administration.
    And one of the things that will be going to GAO, since it 
is cited as a source under the Presidential Transition Act that 
agencies are encouraged to go to to learn about their new 
responsibilities--one of the roles that we plan to play is try 
to encourage progress that needs to be continued. But these 
problems at DOD and DHS are such that they're not going to be 
solved within a period of the normal span of any one 
individual, and they need full-time attention. So it's still 
our position that you need a full-time Chief Management 
Officer, and that management officer ought to have a tenure 
that spans across administrations to make the progress that's 
needed.
    Mr. Towns. Right. Take the politics out of it.
    Mr. Patterson, what do you think about that? You knew I was 
going to ask you, didn't you?
    Mr. Patterson. I was anticipating it actually. As you know, 
Deputy Secretary England has taken this on as a personal 
responsibility in that he has taken it on as is directed in the 
legislation as the chief management officer for the Department. 
We have an interim process whereby we'll have a process 
improvement officer that goes through all of our processes that 
are looking at each one individually, combining them as 
necessary so that we will have a combined integrated report to 
the Congress.
    The Deputy Secretary, as you know, sits as the co-chair for 
the Defense Business Systems Management Committee in which we 
look at all of the systems that are proposed. We evaluate them, 
and I sit on that committee as well, to determine which ones 
have merit, which will further the goals of the Department to 
have a network or information systems that do, in fact, achieve 
a good financial basis. With the next administration, because 
the deputy chief management officer is to be a PAS, we'll leave 
that to the next administration to fill that position.
    Mr. Towns. Thank you very much, and I yield to the ranking 
member, Congressman Bilbray from California.
    Mr. Bilbray. David, I'll say this, because the chairman and 
I are friends, and I think I can be frank about it. Are you 
guys really comprehending that in 6 months you could be totally 
under siege as a Department?
    Mr. Patterson. Could you repeat that?
    Mr. Bilbray. Are you guys comprehending that in 6 months 
you could be totally under siege from a new administration? Are 
you ready to answer and take on those challenges, first of all, 
from one way is the internal operation, but also the massive 
amounts of reduction of assets? Are you guys even thinking 
about that at this time in the game?
    Mr. Patterson. Absolutely. In fact, when I address my 
colleagues, and when I address the--or have the opportunity to 
talk to groups of colleagues, I remind them that if you think 
that what you experience now in terms of cash-flow is going to 
continue through the next administration, you best be thinking 
again, and you better be starting to think seriously about how 
you're going to pare back your expectations in terms of doing 
your work.
    And so, yes, the answer is we fully understand that the 
level of support that Congress has provided in the past is not 
something that we should depend upon in the future.
    Mr. Bilbray. I think you're going to be under huge 
challenges no matter who gets the White House, no matter who 
controls Congress. I mean, the best-case scenario is not good 
for the Defense Department. And the question I've got when you 
get into this, and I'll say this to everybody--let's flip 
around and try to go in the positive here, what are you doing 
about improper payment recovery at this time?
    Mr. Patterson. Our improper payment statistics show that 
the Improper Payment Act requires that we have no more than $10 
million or 2.5 percent, and our percentage has consistently 
been 0.2 percent. We think that's a good start, but because of 
the magnitude of our budget, we don't think that's the way in 
which we should take on this challenge in perpetuity. And we 
continually attempt and have it as a management action to 
improve that.
    Mr. Bilbray. Anybody have any comments specifically about 
the improper payment recovery strategies?
    Daniel.
    Mr. Werfel. Yes, I would like to.
    Improper payments--implementing effectively the Improper 
Payments Information Act of 2002 is probably one of the most 
largest priorities in financial management from OMB's 
perspective. And looking at where we started in 2004, we really 
didn't have any public reporting, any sense of the extent of 
the problem. And where we are today, we are much better 
equipped to honestly look at the problem, understand it and 
start to derive effective solutions, and we've already started.
    When we first reported in fiscal year 2004, we had $45 
billion in improper payments. For those programs that were 
reported at this time, we've shaved $7.9 billion in improper 
payments off those dollars. The trend has been--and then in 
fiscal year 2005, we reported more programs, and in fiscal year 
2006 more, and in fiscal year 2007 more. And the trend has 
been--is once we get those programs out there and have an error 
rate associated with them and improper payment amount, the 
agencies are demonstrating an ability to drive those error 
rates down in subsequent years.
    The key challenge that we have is getting those 
measurements out. We're at the point now where for all those 
high-risk dollars that we've identified, we're reporting an 
error measurement on 85 percent of them, and our plans are to 
have 100 percent reporting by next year. So we're going to be 
at a point where we have a full vetting, a full picture of this 
problem.
    And what's encouraging is progress so far. If you look at 
the trends each year, once reported, these numbers are going 
down, not up. Now, there are exceptions to that rule, and for 
those exceptions the budget has a suite of different 
legislative proposals out there to try to help us tackle these 
problems and issues for the agencies that are not making the 
type of progress we would like them to make in terms of driving 
their improper payment.
    Mr. Bilbray. Let's talk about sweeteners on this incentive. 
What percentage of recovery back into the Department would you 
recommend? Are we talking 10 percent? What do you think would 
be the best way to encourage them to participate more robustly? 
Is that a subtle enough approach?
    Mr. Werfel. We have not to date considered kind of a 
retention of improper payments as a mechanism or an incentive. 
The approach that we've taken to date--although it's an 
interesting idea that I think is worth further discussion. The 
approach we have taken to date is more of the transparency 
breeds accountability, and accountability breeds result. So the 
fact that these numbers are out there, the fact that for the 
Medicare program in particular--when we first reported Medicare 
under the Improper Payments Information Act, it had $20 billion 
in error, and now that number is down to under $10 billion. So 
the number being out there has motivated the Department to take 
all the necessary steps and to mobilize resources to get the 
problem done.
    With respect to payment incentives, that's something that I 
would like to take back to OMB and consider more before I give 
you a fuller answer.
    Mr. Dodaro. Congressman, I think this attention to improper 
payments is one of the real success stories for the Chief 
Financial Officer Act initiatives. When we first started this 
back in the early 1990's, nobody knew what the improper 
payments were from any of these Federal programs. And as Mr. 
Werfel has talked about, it's focused attention on it going 
forward. The number, however, is, I believe, going to continue 
to go up for a while while more programs come under reporting. 
It went up from $41 billion last year to $55 billion this year, 
in part because this is the first time the Medicaid program has 
reported improper payments, and that was only for a 6-month 
period of time.
    Mr. Bilbray. We really have a culture shock there.
    Mr. Dodaro. I agree with you. But I think what will happen 
is the fiscal pressures are going to put enormous scrutiny and 
transparency over bringing these improper payment numbers down, 
and hopefully can get embedded into the appropriation process 
so that it gets a lot of oversight on the part of the Congress. 
But this reporting is really a good tool, and it's very, very 
necessary going forward.
    Mr. Bilbray. Dan, let me say this, because I come from 20 
years in local government. Given some kind of appearance of 
incentive really has made the difference. I mean, we actually 
have in San Diego, a county of over 3 million, larger than 20 
States of the Union, we also has a program that gives cash 
payments to employees who have come in and saved the county 
funds. We have actually given departments segments.
    The Federal Government right now gives major incentives to 
law enforcement for drug busts. They get to keep assets. It is 
just--I know in a perfect world we don't want to do that, but 
it's human nature. We've built the most prosperous free society 
in the history of the world based on profit incentives--or at 
least some kind of benefit for good behavior--and I would like 
to see some way to be able to tap into that, if nothing else, 
as a gesture of thank you very much for doing your job not just 
well, but efficiently. And so I hope that we take a look at 
that. And go ahead. I'll allow you to respond.
    Mr. Werfel. While you were talking, I realized that 
something that has worked very well that can be built upon is, 
at the same time the Improper Payments Information Act was 
passed, the Recovery Audit Act was passed. And what that is 
about--it is about recovering improper payments made to 
vendors, and that statute in particular sets up a framework 
where agencies can hire contractors who get paid to go and find 
the errors, and they get paid based on how many errors they 
find. And that program has been so successful in recovering 
error across government that Medicare programs started using 
recovering auditing to collect errors from hospitals and other 
areas. And again, because that contractor is out there looking 
for errors that were made to their fellow contractors, but 
they're incentivized because they get more money the more 
errors they find, that has proven to be one of the more 
effective lessons learned. So I think we can look at that and 
see what kind of impact you could have broader on the 
government as a whole in programs like food stamps and public 
housing, some of our big-ticket improper payments.
    Mr. Bilbray. I'm sure the chairman has seen that 
contracting out and using the private sector--maybe we could 
give the in-house operation some incentive to be able to get a 
little more efficient. I appreciate that, and I appreciate it, 
Mr. Chairman.
    Mr. Towns. Thank you very much. Thank you.
    Mr. Bilbray. By the way, the percentage I would be 
interested in. If you thought at any time, would you contact my 
office if you see some kind of place that you think we should 
be shooting for? We're looking on legislation right now, and 
that is an interesting point.
    Mr. Werfel. I will do that. Thank you.
    Mr. Bilbray. Thank you, Mr. Chairman.
    Mr. Towns. Let me just run over a couple other things, and 
then we'll call it a day.
    Mr. Patterson, DOD has acknowledged recently that its 
business system environment is comprised of approximately 3,000 
separate business systems. The Department spends over $15 
billion annually to operate and maintain and modernize these 
business systems and associated information technology. Fifteen 
billion dollars is a lot of money. Even for DOD, that's a lot 
of money. How many modernization efforts has the Defense 
Business System Management Committee evaluated and decided that 
there were not a good investment, how many?
    Mr. Patterson. We have a vetting process that has an 
intermediate review board that looks at all of the systems that 
are proposed. I can't tell you how many that we have rejected, 
but I can tell you that very few come to the Defense Business 
Systems Management Committee.
    And for a more detailed look at the process, with your 
concurrence, I would like Dave Fisher, who actually is the 
Director of the agency that deals with this issue, to answer 
your question more, in a more detailed fashion.
    Mr. Towns. I would be delighted to.
    Would you take a seat at the table, please?
    Mr. Fisher. As Mr. Patterson alluded to, what we have found 
and what was helpful going back to the 2005 NDAA, which stood 
up or required the Department to stand up the DBSMC as well as 
investment review boards across the functional areas within the 
Department, what we found is that, as Mr. Patterson alluded to, 
this vetting process has done some self-editing, if you will, 
of the proposals that would come forward. There were some 
systems that came forward through these investment review 
boards that were turned down or were pushed back for further 
analysis to make sure that they were not causing problems with 
a broader portfolio, either duplicative or overlapping. That 
kind of visibility started to come forward at the Office of the 
Secretary level when these investment review boards came into 
play.
    Well, I think most of the systems that eventually find 
their way to the DBSMC do get approval. Many fewer systems are 
coming forward because of this same vetting process. It's got 
to go through the component initially. So the military 
departments have put in their own process, then it comes 
through the Office of the Secretary of Defense process for 
investment management, then it comes to the DBSMC. And what 
we've seen is, the volume of systems that have come forward to 
the top where final approval is required has gone down, we 
think, because this more rigor now has been put in place.
    Mr. Towns. It is our understanding that some of the 
Department's business-system modernization efforts, such as the 
Army Logistics Modernization Program, the Navy Enterprise 
Resource Planning Initiative and the Defense Integrated 
Military Human Resources System, have not been implemented in 
accordance with their plan, schedule and estimated budget. What 
does DOD--let me put it this way: Why does DOD continually have 
difficulty implementing these business systems on time within 
the budget? I mean, what is the problem?
    Mr. Patterson. Having come from the corporate world, I can 
give you a point of view, and I would like to use the Logistics 
Modernization Program as an example. When I first joined the 
comptroller office, I had a review of the various programs that 
we were looking at. LMP was the first program that popped up in 
one of the meetings. I was told that this program needed an 
additional $320 million. I asked how much had already been 
spent, and I thought it was somewhat excessive. And I said, 
well, tell me how is it working, and they said, oh, well, we 
have a pilot program. I said, really, and how long have you had 
this pilot program? For about 3 years. And again my question: 
How is this working? What kind of a contract is this? It's an 
IDIQ contract, I see. And what's the not-to-exceed? Oh, that's 
$1.2 billion. And I said, so you got an IDIQ contract, $1.2 
billion, you don't have a program, and you want $320 million 
more? No. You'll get $20 million, you'll tell me next year how 
you're going to fix this program, and then we'll go from there.
    Amazingly enough the contractor figured out how they were 
going to fix the program, and LMP is back on track and will 
have a--in fact, is turning out a product as we speak in a way 
that they had envisioned some time ago. What it takes is 
putting discipline and structure into the process and not 
allowing contractors to run the program.
    Mr. Dodaro. Mr. Chairman, I would want to echo the concerns 
that Mr. Patterson is mentioning. We look at systems across 
government. I've spent a lot of time looking at DOD. We've put 
DOD on our high-risk list in several respects, both in 
financial management and the business systems area, as well as 
a weapon systems. I just signed out a report not that long ago 
that talked about the huge cost overruns and managing in the 
weapons system area.
    But with regard to the business systems, part of the 
problem is lack of definitive requirements up front as to 
exactly what you want to achieve, incremental improvements 
where you demonstrate some success before you make large 
investments in the process. So you need a disciplined 
management system going forward, and part of the problem over 
at DOD as well is that you have just large components with 
large investments, and it's difficult for the Office of the 
Secretary to provide the oversight over the components.
    It was mentioned earlier, some of the systems aren't coming 
up for review, but there needs to be an oversight process 
within the Department to make sure the components have 
discipline processes in place as well.
    So those are some of the fundamental reasons. It all starts 
with a good definition of requirements and somebody questioning 
that before the investment is made, particularly long-term 
investments. It needs to be more incremental.
    Mr. Towns. Thank you very much.
    Do you have any further questions?
    Mr. Bilbray. Just one. The fact is when we work with DOD--I 
worked on environmental issues in California, and there was a 
thing called technology-forcing regulation, and basically the 
military works with technology-forcing contracting. It's just 
cutting edge. You're literally contracting for things that 
nobody can do now, but they may be able to do, and you push 
that edge. That's how we ended up with a P-51. When the 
contract was going out, nobody in the system even conceived of 
a fighter that could fly that far and protect our B-17.
    So let's talk about the successes. But inherent in that is 
some real challenges. Let's talk about a program the American 
people love, it looks very successful, the Predator, and the 
way the Predator came on line. Is there anything we learned 
there with the program that looks like it was a huge, huge 
success, which challenges why originally it wasn't accepted, 
why there was so much obstruction? And you don't have to do it 
now, but I really would be interested. That is sort of one, so 
if we see how--where it works, maybe we can use that to learn 
of what the things that don't work and make sure that we don't 
throw the baby out with the bath water, because I think right 
now the system, if it wasn't for, I hate to say, an earmark, we 
would never have the Predator. And I think everybody now agrees 
that thank God we had it.
    But I would like to learn from that mistake of the system 
not initially going forward, but developing it. And I know 
there is still an ongoing issue with the Predator, but I would 
like to know the background on that so we can sort of learn 
from successes and failures on that aspect. It's something high 
enough profile that the public could relate to it, too.
    Mr. Patterson. Sir, we'll get you a detailed paper on the 
history and what we see as the Predator's future, and you're 
exactly right; it was a very successful program. It did not 
start out that way, however. It had considerable resistance, 
and if you'll recall it, the Predator as an ISR platform went 
from an ISR platform to a platform that shot Hellfires in about 
90 days because we had to do it.
    Mr. Bilbray. I'm still suspicious. Mr. Hunter is a very 
close friend of mine, and he pushed that Predator. I was very 
suspicious when the next generation came out and it was called 
the Hunter.
    Thank you very much, Mr. Chairman.
    Mr. Towns. Let me just say quickly, if DOD--Mr. Dodaro, if 
DOD does achieve a clean audit opinion on its financial 
statement, does that automatically justify removing DOD 
financial management from GAO's high-risk list?
    Mr. Dodaro. Not in and of itself, Mr. Chairman, for a 
couple of reasons. One, we would want to make sure that could 
be sustained over a period of time; No. 2, that there's not 
material weaknesses that would basically still be problematic 
that would be solved.
    I mean, that's a first step toward it, and if DOD got to 
that step, we would be very pleased to see that happen. But as 
we've taken on this issue in other departments and agencies, 
the opinion needs to be sustained over a period of time, and 
there needs to be not underlying material weaknesses that still 
make it at risk.
    So the answer would be it would be: a good first step, but 
in and of itself it's not enough.
    Mr. Towns. Mr. Patterson, what do you say to that, other 
than you would take yourself off the list?
    Mr. Patterson. No, sir. Actually, as appealing as that 
suggestion might be, we are working with the GAO. My question 
would be, what are the standards necessary to achieve in order 
to reduce the risk as GAO sees it? We're working with the GAO 
to come to those kinds of conclusions. But I think it's 
important to note that although there is a relationship between 
material weaknesses and clean audits, you can, in fact, have a 
clean audit and still have some material weaknesses that you 
are working on. And so we have really a dual-track approach to 
this, and we're working with the GAO.
    In fact, when we had our audit readiness meeting to look at 
the Marine Corps as the first military department or the first 
service to start down a path of a clean audit, we had OMB, IG 
and the GAO in attendance so that we would have a very clear 
understanding of a way forward. We have adopted an audit 
readiness approach to this, which has replaced the previous way 
of looking at this where we had repetitive audits that were 
very expensive and basically told you what you already knew. 
And now we look at these entities in terms of, are they ready 
for an audit, and we have a clear and structured process to do 
that. And again I say that we're working with the GAO and IG 
and OMB, and it has been a very productive relationship.
    Mr. Towns. Let me thank you for coming, and let me just say 
to you that we're going to stay on this because we really feel 
there's a lot of waste, fraud and abuse. We really feel that, 
and I think that some of it might even have to do with the 
structure that you might have to review at some point in time 
to make some changes in order to be able to get to where we 
need to go.
    So thank you very, very much, but we're here to help. As my 
colleague indicated earlier, we want to assist you. We're just 
not raising these questions just to sort of like create 
problems, but we want to see in terms of what we might be able 
to do on this side to assist you. Because we feel that there's 
a lot of resources there, and for some reason we're having 
problems getting a handle on it.
    Mr. Bilbray. And I think that's fair to say that when we 
say a lot of waste, fraud and abuse, by sheer volume a small 
percentage still is one big hunk, and so as a little operation 
may make some big mistakes and it may not add up. You are so 
large that any small mistake is a huge hit, and so there is a 
lot and always will be the challenge to try to reduce that 
down.
    Thank you very much, Mr. Chairman.
    Mr. Towns. All right. Thank you. The committee is 
adjourned.
    [Whereupon, at 4:37 p.m., the subcommittee was adjourned.]
    [Additional information submitted for the hearing record 
follows:]

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