[Senate Hearing 110-724]
[From the U.S. Government Publishing Office]



                                                        S. Hrg. 110-724
 
        IN THE RED: ADDRESSING THE NATION'S FINANCIAL CHALLENGES

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

                                HEARING

                               before the

                FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT
                   INFORMATION, FEDERAL SERVICES, AND
                  INTERNATIONAL SECURITY SUBCOMMITTEE

                                 of the

                              COMMITTEE ON
                         HOMELAND SECURITY AND
                          GOVERNMENTAL AFFAIRS
                          UNITED STATES SENATE


                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                               __________

                             JUNE 26, 2008

                               __________

       Available via http://www.gpoaccess.gov/congress/index.html

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

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        COMMITTEE ON HOMELAND SECURITY AND GOVERNMENTAL AFFAIRS

               JOSEPH I. LIEBERMAN, Connecticut, Chairman
CARL LEVIN, Michigan                 SUSAN M. COLLINS, Maine
DANIEL K. AKAKA, Hawaii              TED STEVENS, Alaska
THOMAS R. CARPER, Delaware           GEORGE V. VOINOVICH, Ohio
MARK L. PRYOR, Arkansas              NORM COLEMAN, Minnesota
MARY L. LANDRIEU, Louisiana          TOM COBURN, Oklahoma
BARACK OBAMA, Illinois               PETE V. DOMENICI, New Mexico
CLAIRE McCASKILL, Missouri           JOHN WARNER, Virginia
JON TESTER, Montana                  JOHN E. SUNUNU, New Hampshire

                  Michael L. Alexander, Staff Director
     Brandon L. Milhorn, Minority Staff Director and Chief Counsel
                  Trina Driessnack Tyrer, Chief Clerk


FEDERAL FINANCIAL MANAGEMENT, GOVERNMENT INFORMATION, FEDERAL SERVICES, 
                AND INTERNATIONAL SECURITY SUBCOMMITTEE

                  THOMAS R. CARPER, Delaware, Chairman
CARL LEVIN, Michigan                 TOM COBURN, Oklahoma
DANIEL K. AKAKA, Hawaii              TED STEVENS, Alaska
BARACK OBAMA, Illinois               GEORGE V. VOINOVICH, Ohio
CLAIRE McCASKILL, Missouri           PETE V. DOMENICI, New Mexico
JON TESTER, Montana                  JOHN E. SUNUNU, New Hampshire

                    John Kilvington, Staff Director
                  Katy French, Minority Staff Director
                       Monisha Smith, Chief Clerk


                            C O N T E N T S

                                 ------                                
Opening statements:
                                                                   Page
    Senator Carper...............................................     1
    Senator Coburn...............................................     5
    Senator Voinovich............................................     6

                               WITNESSES
                        Thursday, June 12, 2008

Gene Dodaro, Acting Comptroller General, U.S. Government 
  Accountability Office..........................................     9
Daniel I. Werfel, Acting Controller, Office of Management and 
  Budget.........................................................    11
Kenneth E. Carfine, Fiscal Assistant Secretary, U.S. Department 
  of Treasury....................................................    12
David M. Walker, President and Chief Executive Officer, Peter G. 
  Peterson Foundation............................................    30
Robert L. Bixby, Executive Director, The Concord Coalition.......    31
James Horney, Director, Federal Fiscal Policy, Center on Budget 
  and Policy Priorities..........................................    33
Maurice P. McTigue, Vice President of the Mercatus Center, and 
  Director, Government Accountability Project, George Mason 
  University.....................................................    35

                     Alphabetical List of Witnesses

Bixby, Robert L.:
    Testimony....................................................    31
    Prepared statement...........................................   124
Carfine, Kenneth E.:
    Testimony....................................................    12
    Prepared statement...........................................   108
Dodaro, Gene:
    Testimony....................................................     9
    Prepared statement...........................................    49
Horney, James:
    Testimony....................................................    33
    Prepared statement...........................................   148
McTigue, Maurice P.:
    Testimony....................................................    35
    Prepared statement...........................................   157
Walker, David M.:
    Testimony....................................................    30
    Prepared statement...........................................   114
Werfel, Daniel I.:
    Testimony....................................................    11
    Prepared statement...........................................    92

                                APPENDIX

Charts submitted by Senator Carper...............................    45
Report entitled ``The Federal Government's Financial Health, A 
  Citizen's Guide to the 2007 Financial Report of the United 
  States Government,'' submitted by Mr. Werfel...................    98
Questions and Responses for the Record from:
    Mr. Dodaro...................................................   162
    Mr. Horney...................................................   183
    Mr. McTigue..................................................   189


        IN THE RED: ADDRESSING THE NATION'S FINANCIAL CHALLENGES

                              ----------                              


                        THURSDAY, JUNE 26, 2008

                                 U.S. Senate,      
        Subcommittee on Federal Financial Management,      
               Government Information, Federal Service,    
                              and International Security,  
                          of the Committee on Homeland Security    
                                        and Governmental Affairs,  
                                                    Washington, DC.
    The Subcommittee met, pursuant to notice, at 2:32 p.m., in 
room SD-342, Dirksen Senate Office Building, Hon. Thomas R. 
Carper, Chairman of the Subcommittee, presiding.
    Present: Senators Carper, Coburn, and Voinovich.

              OPENING STATEMENT OF SENATOR CARPER

    Senator Carper. The Subcommittee will come to order, and on 
behalf of Dr. Coburn and myself, welcome to each of you. We are 
going to be joined by several of our colleagues as the 
afternoon goes on, and I suspect we will have some votes, 
although we do not know just when. And so we will take them as 
they come.
    I asked our staff to put up the chart,\1\ which indicates, 
if you will, a budget that combines the trust funds with our 
operating budget. We have, at least for 2007, some idea of how 
monies were being allocated, and I just want to draw our 
attention to the red part of the chart, which is part of Health 
and Human Services. It is mostly Medicare and Medicaid. It is 
about $556 billion last year, 2007, and there is a little pink 
area there that is right alongside of the red, which indicates 
that is the rest of HHS outside of Medicare and Medicaid. And 
then the blue right below the red, the blue there is Social 
Security Administration, a little over $600 billion. Again, 
that is 2007.
---------------------------------------------------------------------------
    \1\ The charts referred to submitted by Senator Carper appears in 
the Appendix on page 45.
---------------------------------------------------------------------------
    My staff was going over a couple of charts with me earlier 
this morning, and they said this is what it is in 2007. If we 
come back and visit this chart again about the middle of this 
century, in about 45 years or so, the red and the blue will 
crowd out everything else. That is just about what we will be 
able to do if we stay on the path that we are on. And I think 
we are realizing that is unacceptable, and part of the 
challenge for us, not just for Dr. Coburn and myself, but for 
our colleagues, for the House of Representatives, the 
Administration, whoever our Presidents are going to be in the 
years to come, it is up to us to make sure that--when we gather 
here, I will be long gone from the Senate in 45 years, although 
Dr. Coburn may still be around. He will still be delivering 
babies, wherever he is.
    Senator Coburn. That is right.
    Senator Carper. But we can be blue States and red States, 
but we cannot afford to have a pie chart that is just blue and 
just red.
    We have been joined by Senator Voinovich. Glad to have you 
here.
    For the past 11 years, the Treasury Department has been 
required to prepare a financial statement for the Federal 
Government, as you know, and have it audited by the GAO. Every 
year, the information contained in this statement and the 
process used to prepare the statement has been so unreliable 
that GAO's audit team has essentially been unable to do its 
job. As such, GAO has been forced each year to issue a so-
called disclaimer of opinion on the government's finances, 
which is really a nice way of saying that they will not attach 
their good name to the Treasury's work.
    Fiscal year 2007 was, for the most part, little different 
from past years. However, let me just hasten to add, 
improvements have been made, and we look forward to hearing 
about some of those from this panel, and maybe from others as 
well. However, the major impediment to the Treasury Department 
receiving a clean opinion on our consolidated financial 
statements are largely the same as they have been for the past 
decade or more.
    First, there are the longstanding financial management 
problems at the Department of Defense that we all know about. 
In part because of the significant amount of money that goes in 
and out of that Department, the government as a whole, our 
government as a whole, cannot get a clean opinion until they 
are also improving their financial statements as well.
    Second, there is our inability, at a governmentwide level, 
to keep track of the money that individual agencies transfer to 
and from each other.
    And, third, there is Treasury's inability to reliably sum 
up all the financial statements from across the government into 
a single set of consolidated financial statements.
    In addition to these problems that we have known about and 
have been grappling with for some time, GAO has highlighted a 
handful of other financial-related internal control problems 
that we have yet to fully get our arms around. They are the 
inability of OMB and the agencies to determine the extent to 
which improper payments occur throughout government. Then there 
is our inability to manage and effectively execute tax 
collection activities so that we are collecting taxes from all 
of those who owe them. And then there is the problem that a 
number of agencies are unable to deal with their information 
security weaknesses.
    I will note here that these three issues--improper 
payments, information security weaknesses, and the tax gap--are 
issues that this Subcommittee, Dr. Coburn and I and our 
colleagues, our staffs, have focused on a good deal, and we are 
going to focus on them some more. Based on our work, we share a 
deep concern for the potential growing risk that those three 
areas present to us.
    I would like to point out, I think it is Article I, Section 
9 of our Constitution reads, ``A regular statement and account 
of the receipts and expenditures of all public money shall be 
published from time to time.'' It was probably easier to do 
when that was written than it is today. So when we ask for a 
clean financial statement from the Federal Government, we are 
not really asking for anything more than what was required of 
us some 217 years ago.
    Yet, to this date, the average taxpayer or even a well-
trained accountant, for that matter, cannot vouch for the 
accuracy of the Treasury's annual statements or gain any 
assurance from them that our tax dollars are well spent.
    This situation would be maybe laughable if it were not so 
serious. Imagine what would happen if a major business' books 
were in this sort of shape. In fact, it is not so difficult to 
recall the corporate accounting scandals of just a few years 
ago. Businesses folded. People were fired. People went to jail. 
And while the Federal Government's repeated failings in the 
basics of financial management have not received the media 
attention that the failings of some private sector companies 
have received, I, for one, think the state of our Nation's 
finances should be seen as nothing less than a scandal.
    I am not suggesting that anyone here get fired or go to 
jail, but we do need to take definitive action to provide the 
kind of quality financial management and transparency that the 
American people expect and I believe they deserve.
    The Congress, and especially our next President, whoever 
that may be, need to play an important leadership role in this 
regard. Sometimes I think we sort of self-flagellate ourselves 
here in the Congress and say that it is all of our 
responsibilities. Any government entity that I have ever been a 
part of or had a chance to observe, whether it was the State 
level or whether it was the city level or county level, if you 
have a chief executive and a level of government where you have 
a legislative body of some kind, if you do not have strong 
leadership on fiscal issues from the chief executive, it is my 
experience it is not in the nature of a legislative body to 
provide that, absent the leadership from the top. And that is 
just an observation I would provide. So I do not just say this 
is the Congress' job. This is a shared responsibility, and the 
President has a large responsibility, too.
    But among the problems highlighted by GAO's audit report is 
the fiscally unsustainable long-term path this Nation faces, 
and I am grateful to the GAO for taking on this important 
issue.
    Now I am supposed to look to another chart to my right. Is 
that right? Is there another chart for me to look at? All 
right. I asked them to make sure to cue me about these 
charts.\1\
---------------------------------------------------------------------------
    \1\ The chart referred to appears in the Appendix on page 46.
---------------------------------------------------------------------------
    Major fiscal exposures or liabilities. Some of this print 
might be a little small, so I will just kind of walk us through 
it, if I could. We have some more explicit liabilities, 
including publicly held debt and military and civilian pensions 
and retiree health at the top. And if you come across to the 
right on our chart, we are looking at 2000, and there is a 
column there below the word ``2000.'' We will look at 
commitments and contingencies and some implicit exposures. Then 
come over to the right a bit more from the 2000 column, we have 
the 2007 column, and then at the far right, the percentage 
increase from 2007 over 2000. But the explicit liabilities are 
up by about 57 percent from roughly $7 trillion to $11 
trillion. The commitments and the contingencies and things like 
Pension Benefit Guaranty Corporation and undelivered orders, 
that sort of thing, they are up by--they are small. They are 
only about--only about a trillion dollars, but up about almost 
100 percent from 7 years ago.
    The implicit--this is where the real money is, and this is 
the implicit exposures. We see for future Social Security 
benefits in 2000, we are looking at about $3.8 trillion, in 
2007 up to $6.8 trillion. Not quite double, but close. Future 
Medicare Part A benefits, up in 2000 from $2.7 trillion, and by 
2007 up to $12.3 trillion. That is an increase of, I think, 
about four-fold. Future Medicare Part B benefits, exposure in 
2000 was roughly $6.5 trillion; more than doubled to $13.4 
trillion in 2007. And the Medicare Part D prescription drug 
benefit, we did not have that in 2000, and starting in 2007 we 
are looking at an implicit exposure of about $8.4 trillion. And 
that is a program that is actually coming in under budget, at 
least so far, and we are still looking at that magnitude.
    If you look at the totals, looking all the way down the 
column from 2000, we are looking at a total exposure or 
liability of a little over $20, $20.4 trillion. Moving over to 
the 2007 column and coming down to the bottom, exposure or 
liability, if you will, almost $53 trillion in 2007. And that 
is an increase of 158 percent. That is an increase in 7 years. 
We cannot afford another 7 years like that. God knows we cannot 
afford another 47 years like that, and part of our 
responsibility and hopefully part of this hearing is to help 
ensure that we do not continue down the road that is laid out 
there.
    Let me conclude here, if I may, to observe that--one thing 
our next President has got to do, together with us, is to find 
a way to overhaul our entitlement programs so that they are not 
as much of a burden as our next generation. We are getting 
killed on health care costs, and Medicare and Medicaid 
especially. The Social Security Trust Fund I think is fixable. 
Medicare and Medicaid are a far bigger challenge. And I hope 
one of the things that we will accomplish before I leave here, 
I say this to my colleagues, Senators Voinovich and Coburn, one 
of the things I hope that we accomplish in the time that I am 
here in the Senate is to fix Social Security for the next 
several generations or more, and that would be a wonderful 
accomplishment. That is a lot easier, though, than Medicare and 
Medicaid, as we know.
    But having said that, when Senator Voinovich and I were in 
our old jobs, we were able to cut taxes, balance budgets, make 
investments as were needed. Those were better economic times. 
But when things we thought were worthwhile, we paid for them. 
We actually paid for them. And that is a philosophy that we 
need to re-embrace here in our Nation's capital.
    I will close by mentioning PAYGO rules. Not everybody likes 
the PAYGO rules. I always like to quote the guy who used to be 
the Chancellor of the Exchequer, and he used to say, ``When you 
find yourself in a hole, stop digging.'' That is the theory of 
holes. And I just think if things are worth having, we ought to 
pay for them. If they are not worth having, we ought not to pay 
for them. And the guy who really, I think, raises that as much 
as anybody I know is the fellow here to my right--and to my 
left, both of them. So in a sense, I am speaking to the choir 
on this stuff.
    All right. That is what I wanted to say, and we look 
forward to hearing from all of you, and before we do that, I am 
going to ask Dr. Coburn to weigh in, and then Senator 
Voinovich, and then we will turn it over to our witnesses. 
Thank you all.

              OPENING STATEMENT OF SENATOR COBURN

    Senator Coburn. Well, first of all, I thank Chairman Carper 
for having this hearing. Probably not many people are going to 
tune into C-SPAN on this hearing, and that is our biggest 
problem in the country, is people do not realize the 
significant difficulty we have in front of us.
    I would point out on Senator Carper's chart--leave it up 
there for a second--that 60 percent of the increase in that is 
pure demographics. It is the aging of the population on 
programs we have already promised. Fifteen percent, as one 
person adamantly opposed to Medicare Part D, is because we 
added a new entitlement and did not figure out any way to pay 
for it. And so the other 35 percent of the increase in debt 
comes because Congress passed bills--not by themselves, with 
the President, but they passed the bills to increase that 
spending. So as we talk about these issues today, the 
responsibility lies both here and the Executive Branch. We hear 
a lot about the Executive Branch, but the Executive Branch 
cannot spend one penny that the Congress does not pass the 
money for. So it is a dual responsibility, and when there is a 
dual responsibility, then there is dual shared culpability in 
terms of association with that.
    The pattern that most people do not understand is Medicare 
is not going to sink. Medicaid is not going to sink us. 
Interest is going to sink us. Interest is the thing that is 
going to sink us. You see the green in this chart as we go from 
1970 to 2080, you see as a proportion of the budget, in 2080 65 
percent of the budget is interest. And, that is common, basic 
math, we know. Albert Einstein said the most powerful force on 
Earth is not the atom. He said it is compound interest. And it 
can be a tool to help you, but it can be a tool that will 
greatly harm you. And what we are seeing manifested out is the 
irresponsibility of both Executive Branch and Congress, not 
just one but both, in terms of what we have got on the horizon.
    There are a lot of reasons for that. Most of them are 
parochial, short-term thinking by Congress instead of long-
term, hard-choice decisionmaking by Congress. But if we do not 
change that trend line, then what we will have done is abandon 
the heritage of this country for everybody else that follows 
us.
    Put the other one up. Not that one, the next one.\1\
---------------------------------------------------------------------------
    \1\ The chart referred to appears in the Appendix on page 45.
---------------------------------------------------------------------------
    Here we look at the percentage of the GDP that is held by 
the public, but interesting to note, 50 percent of that money 
that is held out there is not held by Americans. It is held by 
non-Americans. So as we look at the oil crisis that is in front 
of us today, what we should duly note is because we have been 
fiscally irresponsible, 23 percent of the increase in the cost 
of oil is because of the devaluation of the dollar that is 
based directly on the fact that we are seen as irresponsible 
and possibly not capable of repaying our debt.
    Now, it is not unfixable. It is fixable. Even with the 
demographic shifts that nobody here is responsible for other 
than me and you and our kids, even with the demographic shifts, 
we can fix it. And this is just one plan. It is put out by Paul 
Ryan, the Ranking Member on the Budget in the House. And if you 
look at his plan, it is not perfect, it is not everything I 
would do, but it is the first comprehensive plan that has been 
forwarded to fix this. So there is the debt, and you can see it 
will peak, but most of the time it is peaking is because we are 
having a demographic shift, not because we are acting 
irresponsibly.
    Put the next chart up, please.\1\
---------------------------------------------------------------------------
    \1\ The chart referred to appears in the Appendix on page 48.
---------------------------------------------------------------------------
    And then government spending as a percentage of GDP, as you 
see what our current policy is, if we continue to do nothing--
and I would tell you in the last 7 years, we have done nothing. 
What our current policy is we are going to go to 80 percent of 
GDP by 2078. That is absolutely unsustainable. We all know 
that. We will not recognize the country that we are in if we 
are in that shape.
    So we have to have a plan, and you can see as a percentage 
of spending of GDP, if you just take Congressman Ryan, which, 
granted, is all going to be controversial, but at least 
somebody is out there with a comprehensive plan that addresses 
all these issues, you can see we can actually perform below the 
historical average of the last 50 years in terms of a 
percentage of GDP.
    So the purpose of this hearing is to hear from you, one, on 
the magnitude of the problem and, two, some of the potential 
ways in which we can keep from ducking the hard choices. And 
that would be my hope, is that you really talk hard and 
straight with us about where we have failed, about what we need 
to do, and about the timeliness of what we do, because time, 
based on the most powerful ??? for on Earth, compound interest 
debt, is killing us.
    Thank you, Mr. Chairman.
    Senator Carper. Thank you, Dr. Coburn. Senator Voinovich.

             OPENING STATEMENT OF SENATOR VOINOVICH

    Senator Voinovich. Thank you very much, both of you, for 
holding this hearing.
    I look forward to hearing the witnesses today. I think we 
need to be reminded of the fiscal realities in which we find 
ourselves. We are operating in the red. The Federal 
Government's checkbook is not balanced. We cannot continue to 
live in the United States of Denial. Here we are, in denial. 
And I am glad to see that a couple of my friends--and all of 
you are my friends, but particularly two people that I have 
worked with for the last several years: David Walker and Bob 
Bixby are here today, and you are still at it, and you have not 
quit. That is wonderful.
    In March 2007, they came out to Cincinnati on their Fiscal 
Wake-Up Tour, which was a huge success, and I do not think 
anyone has worked harder to make the public aware of the 
situation that both my colleagues have been talking about than 
the two of you.
    The country needs to know the truth of the sad state of our 
finances. We are truly operating in the red. As of 2007, the 
national debt stood at almost $9 trillion. As of today, the 
national debt is $9.4 trillion, with each American owing more 
than $31,000. And the deficit for 2008 will be added to that 
number, including, on average, $273 billion a year in interest 
payments on this debt over the next decade.
    But too many in Washington pretend this debt does not even 
exist, and perhaps even more concerning is that 51 percent of 
the privately owned national debt is being held by foreign 
creditors, as Senator Coburn has said, mostly central banks. 
That is up 37 percent just from 6 years ago. Foreign creditors 
provided more than 70 percent of the funds the United States 
has borrowed since 2001. Who are these foreign creditors? 
According to the Treasury Department, China, Japan, and the 
oil-exporting countries known as OPEC.
    If these foreign investors were to lose confidence and pull 
out of the U.S. treasuries, ``Katy, bar the door.'' Just talk 
to Alan Greenspan about that. Borrowing hundreds of billions of 
dollars from China and OPEC puts not only our future economy 
but also our national security at risk. It is critical that we 
ensure that countries that control our debt do not control our 
future. And with the baby-boomer generation coming into 
retirement, the costs of Social Security and Medicare start to 
soar. Our national debt is projected to explode if we do not do 
something now to change the path we are headed down.
    The Federal Government's accumulated long-term financial 
obligations grew by $2.5 trillion last year, a result of the 
increase in the cost of Medicare and Social Security benefits 
as more baby-boomers retire. Taxpayers are on the hook for a 
record $57 trillion in Federal liabilities to cover the 
lifetime benefits of everyone eligible for Medicare, Social 
Security, and other government programs. That is nearly 
$500,000 per household.
    I know too well the situation the Federal Government finds 
itself in, and I look forward to hearing the solutions you lay 
out for us today and continuing this conversation to raise the 
public's awareness of the looming crisis. We are in it now. It 
is going to get worse. And I am extremely interested in hearing 
your thoughts on two pieces of legislation that have been 
proposed to address the entitlement and tax reform problem: 
Securing America's Future Economy, or SAFE Act, and the 
Bipartisan Task Force for Fiscal Responsibility Act. Both bills 
create a bipartisan commission to look at our Nation's tax and 
entitlement systems and recommend reforms to put us back on a 
fiscally sustainable course and ensure the solvency of 
entitlement programs for future generations.
    But it is time to act, and it would be wonderful if through 
this hearing and other hearings we could get the Presidential 
candidates to start talking about the national debt. When was 
the last time we heard the President of the United States talk 
about the national debt? When is the last time we really talked 
about it in Congress? And thank God you are doing this, and a 
couple of other committees. Maybe we can make some progress.
    You know what would be nice? If we could get Senator Obama 
and Senator McCain to sign on to one of these bills and say, 
``If I get elected''--or ``When I get elected, then I will 
appoint my Secretary of the Treasury, I will appoint my OMB 
Director to this, and we are going to get started. We are going 
to do something about this.''
    Thank you.
    Senator Carper. Thank you. Senator Voinovich, and thank you 
for the passion that you bring to this. My hope is that the 
next President will just bring at least a small measure of that 
passion to these issues.
    Let me take a moment just to introduce our three witnesses 
for this panel, and then we will recognize you to speak.
    Our first witness today is Gene Dodaro, the Acting 
Comptroller General of the United States. Mr. Dodaro took over 
in March of this year after the resignation of former 
Comptroller General David Walker, who is here today, and who we 
will be hearing from, I think, on our next panel. Previously, 
Mr. Dodaro spent--was it 9 years as Chief Operating Officer----
    Mr. Dodaro. Yes.
    Senator Carper [continuing]. For the Government 
Accountability Office, the No. 2 spot at GAO, as I recall.
    Our next witness is Danny Werfel, the Acting Controller in 
the Office of Management and Budget. Mr. Werfel previously 
served in a host of positions at OMB, including the Chief of 
Financial Integrity in the Analysis Branch. Also, I think you 
worked as a trial attorney in the Department of Justice's Civil 
Rights Division. Is that correct?
    Mr. Werfel. That is correct.
    Senator Carper. And our third and final witness on this 
panel is Kenneth Carfine, Fiscal Assistant Secretary for the 
U.S. Department of Treasury, a job that you have held since 
your appointment in March 2007, a little more than a year ago. 
Mr. Carfine previously served as Deputy Assistant Secretary for 
Fiscal Operations and Policy, a position to which he was 
appointed in April 2003, and I am sure that was not his first 
job. He has done a lot of other things, and we will not go into 
all of those.
    We are delighted that you are all here. We look forward to 
hearing your testimony. Your entire statements will be made 
part of the record, and just feel free to summarize. I would 
ask you to stay fairly close to 5 minutes. If you go over a 
little bit, we will not bang down the gavel. But try to stay 
fairly close to that if you would. Thank you.
    Mr. Dodaro, welcome.

 TESTIMONY OF GENE DODARO,\1\ ACTING COMPTROLLER GENERAL, U.S. 
                GOVERNMENT ACCOUNTABILITY OFFICE

    Mr. Dodaro. Thank you, Mr. Chairman. Good afternoon to you 
and Senator Voinovich. I appreciate the opportunity to be here 
today to discuss the results of GAO's audit of the consolidated 
financial statements for fiscal year 2007. As you noted in your 
opening statement, like prior years, we were unable to give an 
opinion on the accrual basis financial statements for a wide 
range of reasons which are documented in our report. The main 
three you also pointed out in your opening statement, which are 
the serious financial management problems at DOD, the inability 
to reconcile intragovernmental transactions among departments 
and agencies, and an ineffective process in compiling the 
financial statements by the Department of Treasury.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Dodaro appears in the Appendix on 
page 49.
---------------------------------------------------------------------------
    I would note, though, that there were three positive 
developments in this past year. First, we were able to give an 
opinion, an unqualified opinion, on the 2007 Statement of 
Social Insurance. Now, this statement is a very important 
statement as it discusses the difference between the scheduled 
expenditures for Medicare and Social Security programs compared 
to projected revenues. And it shows a $41 trillion gap of where 
there is fiscal exposure for the Federal Government similar to 
the exposure chart that you mentioned before. So that was a 
positive development because it provides greater reliability to 
that information and helps to put the spotlight on the 
government's long-term financial condition.
    Second, Treasury and OMB published a summary Citizen's 
Guide this past year at the urging of former Comptroller 
General Walker, and in concert with the Joint Financial 
Management Improvement Program Principals.\1\ That was a 
positive development. It is a very brief guide, but it 
highlights the long-term fiscal challenges facing the Federal 
Government.
---------------------------------------------------------------------------
    \1\ The report entitled ``The Federal Government's Financial 
Health, A Citizen's Guide to the 2007 Financial Report of the United 
States Government,'' appears in the Appendix on page 98.
---------------------------------------------------------------------------
    Finally, if I could direct your attention to this past 
year, of the 24 agencies that are covered by the CFO Act, 19 of 
those agencies were able to get unqualified opinions. When the 
legislative requirement first came into place for fiscal year 
1996, only 6 of the 24 agencies were able to get unqualified 
opinions. Although the Federal Government was late to the game 
with a requirement for audited financial statements, much later 
than the State and local governments, as well as the private 
sector, progress has been made. This needs to be sustained in 
the next Administration. The five agencies that did not receive 
unqualified opinions this past year are some large departments 
like DOD, Department of Homeland Security, NASA, Agriculture, 
and the State Department.
    And the next chart shows the magnitude and the pervasive 
nature of DOD throughout the government's finances, with about 
20 percent of net costs, 20 percent of liabilities, and almost 
half of the assets of the Federal Government.DOD needs to make 
major strides as it is the major critical path to an opinion on 
the consolidated financial statements of the Federal 
Government.
    Now, in addition to being a good accountability tool, the 
financial statements are also beginning to shed more light on 
the long-range financial challenges of the Federal Government. 
This next chart shows the steadily increasing debt of the 
Federal Government from 2003 to 2007. This debt is growing both 
in debt held by the public as well as the debt the government 
owes itself regarding the later, the government borrowed about 
$200 billion in Social Security excess of revenues over 
projected benefits paid to help finance the rest of the Federal 
Government's costs. When such borrowings occur, they basically 
generate IOUs to the Social Security trust funds. So the total 
debt is going up. The debt ceiling has had to be raised three 
times in the last 4 years, and it is expected that the debt 
ceiling will have to be raised again, either the later part of 
this year or next year. So that issue will be confronting the 
Congress soon.
    Now, our simulations are similar to the ones that you, and 
Dr. Coburn showed, where the total debt just skyrockets in the 
out-years based on the simulations. The next chart shows what 
some of the impact would be on this. Basically, if in the out-
years revenue as a percent of gross domestic product is held at 
about 18.3 percent, which is about what it has been on average 
the last 40 years, by the year 2030 we will only have enough 
funds to pay interest on the debt, Medicare, and Social 
Security. We will not have any revenues left to pay for any 
part of the Federal Government that is remaining.
    Obviously, this is not going to happen, but it shows the 
magnitude of the challenge confronting the Federal Government 
and the size and scope of the problem going forward. Simply 
put, the Federal Government is on an unsustainable path. It is 
a matter of the utmost importance to the country, and it really 
needs to be dealt with.
    I commend you for holding this hearing and for maintaining 
the attention to these important issues, both from an 
accountability standpoint and from a government fiscal policy 
standpoint.
    Thank you very much.
    Senator Carper. Thank you very much, and thank you again to 
you and the folks that you now lead. Thank you for your 
stewardship and for being there to help us be better fiscal 
stewards than would otherwise be the case.
    Mr. Werfel, we are delighted that you are here. Please feel 
free to proceed.

TESTIMONY OF DANIEL I. WERFEL,\1\ ACTING CONTROLLER, OFFICE OF 
                     MANAGEMENT AND BUDGET

    Mr. Werfel. Thank you, Chairman Carper, Ranking Member 
Coburn, and Senator Voinovich, for having this hearing today. 
We have heard so far today a lot about the rising cost of 
entitlement programs and the expected impact, the enormous 
impact it is going to have on the Federal Government and our 
fiscal health in the coming decades. What I would like to focus 
on--and we will certainly like to discuss those issues as well, 
but for the purpose of my oral statement, I would like to talk 
about the fact that this impending fiscal crisis really brings 
into sharp focus the need to meet our financial management 
goals because of the critical role that the financial 
management community plays in not only reporting on our fiscal 
situation but on controlling costs and making sure that we are 
operating an efficient and effective government.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Werfel appears in the Appendix on 
page 92.
---------------------------------------------------------------------------
    When the CFO Act of 1990 was passed close to 18 years ago, 
Congress established three fundamental objectives for Federal 
financial management: Transparency, informing the public on the 
nature of our Nation's finances; internal controls was the 
second objective, making sure that we are putting in the right 
people, process, and technology to track funds and mitigate 
financial risks; and, third, decision support, making sure we 
have the right financial information at the right time to 
inform agency decisionmaking.
    Significant results are being achieved with respect to the 
reliability, timeliness, and readability of agency financial 
reports today. With respect to reliability, as Mr. Dodaro 
pointed out, 80 percent of CFO Act agencies achieved a clean 
audit opinion today. With respect to timeliness, all agencies 
are now reporting those audited financial statements with 45 
days after the end of the fiscal year, and Treasury and OMB 
issues the governmentwide report only 30 days after that. And 
with respect to readability of our reports, through an OMB 
pilot program agencies are not producing summary documents to 
help readers digest hundreds of pages of detailed financial and 
performance information.
    Attached to my testimony today is a great example of how we 
are working to make government financial reports more readable 
and transparent, ``The Federal Government's Financial Health, A 
Citizen's Guide to the 2007 Financial Report of the United 
States Government'' provides readers an eight-page, easy-to-
read version of the larger, 182-page Financial Report.\1\ The 
Treasury Department and OMB are very proud of the report, and I 
think GAO is as well, not only because it improves the 
presentation----
---------------------------------------------------------------------------
    \1\ The report entitled ``The Federal Government's Financial 
Health, A Citizen's Guide to the 2007 Financial Report of the United 
States Government,'' appears in the Appendix on page 98.
---------------------------------------------------------------------------
    Senator Carper. Let me just interrupt. Whose idea was that?
    Mr. Werfel. Whose idea? Well, it was Mr. Walker's----
    Senator Carper. David Walker.
    Mr. Werfel. Yes.
    Senator Carper. Thank you very much.
    Mr. Werfel. Do not ever say I do not give credit where 
credit is due.
    We are proud of this report not only because it presents 
our financial information more effectively, but we are proud 
because of the clarity and transparency we are giving to the 
most significant fiscal challenge facing the government today, 
the one that we have talked about so far.
    The Federal financial community plays an important role in 
fiscal sustainability issues. We are responsible for ensuring 
that the data and the analysis are clearly and effectively 
communicated, and the Citizen's Guide represents an important 
first step in this area. Also, as Mr. Dodaro mentioned, the 
clean opinion on our Statement of Social Insurance is another 
important step.
    The Federal financial community is responsible for more 
than just reporting on the Nation's fiscal health. We play 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. In real property, billions of dollars in unneeded 
assets are being removed from our inventory.
    Despite these results, more work needs to be done. While 
most of our major financial reports are passing audit scrutiny, 
too many of them are not. And to address this, we have sound 
corrective action plans in place to address financial 
management weaknesses, and these action plans are already 
leading to results. Trends are showing better audit results 
each year.
    With the unprecedented challenge before us, we need to make 
sure that our Federal financial leaders are moving beyond the 
fundamentals of just audited financial statements. Do our 
financial reports contain the right information most relevant 
to important programmatic and business decisions that agencies 
are making?
    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 today to address these 
questions. We must ensure that the CFO Act and other relevant 
laws are best positioning the Federal CFO to help the 
government through the financial challenges that lay ahead.
    At this time I am happy to answer any questions that you 
have. Thank you.
    Senator Carper. And I am sure we will have some. Thank you 
very much for that statement.
    Mr. Carfine, you are the third witness, and we look forward 
to hearing what you have to say.

TESTIMONY OF KENNETH E. CARFINE,\1\ FISCAL ASSISTANT SECRETARY, 
                  U.S. DEPARTMENT OF TREASURY

    Mr. Carfine. Mr. Chairman and Members of the Subcommittee, 
thank you for inviting me to this hearing to discuss the 
Financial Report of the U.S. Government for Fiscal Year 2007. 
Your interest in improving Federal financial management and, in 
particular, fiscal sustainability is greatly appreciated.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Carfine appears in the Appendix 
on page 108.
---------------------------------------------------------------------------
    The Financial Report reflects Treasury's longstanding 
responsibility to provide the Congress and the public with 
timely and reliable information on the costs of the 
government's operations, the sources used to fund them, and the 
implications of the government's financial commitments. The 
Financial Report provides the net operating costs for fiscal 
year 2007, the net position of the government at the close of 
the fiscal year, and other critical information concerning the 
financial performance of the Federal Government.
    The report also contains a Statement of Social Insurance, 
which shows the present value costs of the government's 
exposures of its social insurance programs, primarily Social 
Security and Medicare. The Statement of Social Insurance became 
the first and, to date, the only component of all the 
governmentwide financial statements to earn an unqualified 
audit opinion from GAO.
    As you know, the retirement of the baby-boom generation 
will have a profound impact on the finances of Social Security 
and Medicare. There are currently 3.3 covered workers per 
Social Security beneficiary. That number will fall to 2.1 in 
2034. Medicare faces the same demographic challenges as Social 
Security, but additionally must cope with the rapid expected 
growth in health care costs. While Social Security expenditures 
are expected to grow considerably over the next 75 years, 
Medicare obligations are expected to dwarf those of Social 
Security. The 75-year present value of projected Medicare 
expenditures, less tax and premium revenue, is $34 trillion, 
while the 75-year present value of projected Social Security 
expenditures, less tax revenue, is $4.7 trillion.
    The Financial Report shows that the Federal Government 
current policies are unlikely to be sustainable. Total 
expenditures, including interest, are expected to grow to 50 
percent of GDP by 2070 and 60 percent by 2080. If revenues in 
the future continue at the historic average level of 18 percent 
of GDP, they will barely cover one-third of total government 
expenditures and would not be sufficient to cover the net 
interest on the government debt.
    The consequences of the projected growing gap between 
revenues and expenditures would be a rapidly increasing debt-
to-GDP ratio. By 2030, the need to fund government deficits 
will drive the debt-to-GDP ratio to 68 percent, far surpassing 
the non-wartime peak of 49 percent in 1993. By 2040, this ratio 
is projected to reach 128 percent, well above the World War II 
peak of 109 percent. Thereafter, the ratio of debt held by the 
public to GDP rises sharply to 300 percent by 2060, and 
doubling against to 600 percent by 2080.
    It is important to note that these are merely projections 
based on a number of assumptions that can change and alter the 
outlook. Yet the projections provide an important signal about 
the difficulties that the government faces in attempting to 
sustain current policies. Avoiding the consequences of this 
fiscal path will require actions to bring program expenditures 
in line with available resources. How soon those actions are 
taken will greatly influence their ultimate impact on the 
Nation.
    For fiscal year 2007, GAO was unable to express an opinion 
on the other financial statements in the Financial Report due 
to longstanding material weaknesses. I recognize that until our 
statements can withstand audit scrutiny, we will not benefit 
from the report's full value in informing the Congress and the 
public about the government's fiscal position and condition. We 
are working with OMB and the other Federal agencies to address 
these issues and are making significant progress.
    A common critique of the financial report of the U.S. 
Government is that, despite the fact that it contains more than 
180 pages of detailed information on the government's financial 
condition, it is not a practical document for communicating 
with the American citizen or the Congress. In response to this 
feedback, the Treasury Department and OMB, in cooperation with 
GAO, developed and issued the summary report that Mr. Werfel 
mentioned. This guide provides a summary of the key data and 
issues addressed in the full report in a manner that is user-
friendly to the general public.
    The process of preparing the Financial Report of the U.S. 
Government and the annual agency financial reports can have an 
impact on improving management and control of the government's 
finances. However, these reports are of limited or even minimal 
value if they go unread. As such, in addition to continuing to 
pursue resolution of the governmentwide reporting weaknesses, 
we will continue to focus on how to make the document and the 
information it contains more relevant and useful to the general 
public.
    Thank you, Mr. Chairman. This concludes my formal remarks, 
and I look forward to your questions.
    Senator Carper. Well, gentlemen, thank you all for that 
testimony.
    I say this to my colleagues, I am sitting here listening, 
and we are encouraged that for the first time, I think the 
first time ever, we actually have the Statement of Social 
Insurance that is done, signed off on, and I think it said 
about 80 percent of our 24 major Federal agencies have gotten 
clean audit opinions, and that is encouraging as well.
    There is an irony, though, at least for me, that even as we 
have a better financial reporting that is beginning to occur, 
something we all welcome, the picture that is presented by that 
better financial reporting is bleak and very discouraging.
    There is part of me that says--and I almost said it may be 
better if we did not know just what an awful situation we are 
in, but to be serious, we need to know. And the fact that we 
have actually information that is reliable, that has been 
documented, in the end that will be a good thing.
    I do want to commend those whose efforts led us to really 
to achieve those benchmarks and milestones. Obviously, we are 
not done, but that is progress, and people are to be commended 
for that.
    Let me just start with the Department of Defense and let's 
focus on their progress, or lack thereof. In addressing their 
financial management problems, I think they are having a big 
impact on our ability or our inability to obtain a clean 
opinion governmentwide. I would just ask this panel--I do not 
care who takes the first shot at it, but why is this the case? 
And what can be done further by you, by us, by the 
Administration to get a clean opinion at the Department of 
Defense?
    Mr. Dodaro. I will take the first shot at that. The 
Department of Defense----
    Senator Carper. I know you all have some ideas because I 
read them.
    Mr. Dodaro. Yes, I believe you did, Senator. Actually, the 
Department of Defense's problems are very serious ones. They 
comprise in whole or in part about 15 of the 28 areas that we 
have on our high-risk list at GAO that we have been maintaining 
since 1990. The problems fall into several different 
categories. One, for an enterprise as large as the Department 
of Defense and the fact there was no requirement for annual 
financial statements of the Federal Government prior to 1996, 
they had hundreds of systems that were in place that were 
developed in isolation of one another. So their financial 
systems and the volume of their transactions were enormous, and 
they are not well postured to bring those systems together to 
produce reliable financial statements.
    Second, they have great difficulty accounting for financial 
statement purposes, for equipment, property, inventory given 
the volume of their activities going forward.
    Third, they have enormous liabilities. Just pick one 
related to environmental clean-up. When they close a base or a 
facility, they have difficulty coming up with estimates that 
are auditable to be able to be in a position to know exactly 
what the size of those clean-ups were.
    They have tried various improvement efforts over the years. 
They have made some incremental progress, but they still have a 
long way to go. They are trying right now to put in place a 
data structure so that they have a common set of requirements 
across the departments. They are going to try to go to a 
different approach to be prepared to be ready, to have 
auditable statements, but their current estimate is out into 
2017 before that occurs. And if there is one recommendation I 
would have for this Subcommittee going forward, it would be to 
focus on the Department and have them here and to keep the 
sustained attention on their efforts to go forward.
    A big issue now is leadership. We are about ready to change 
to a new Administration. This will only be the second new 
Administration since the CFO Act was passed. So it is really 
important that the momentum be changed. We have recommended 
that there be a Chief Management Officer at the Department of 
Defense that spans Administrations----
    Senator Carper. Let me just interrupt. Has the Department 
taken the position the Deputy Secretary should assume those 
responsibilities?
    Mr. Dodaro. That is their position.
    Senator Carper. Gordon England is highly regarded, 
certainly by me and I think by many others. But is the 
suggestion that this is just--given everything else that is on 
the Deputy Secretary's plate, this is probably not something 
that he or she has time to do well.
    Mr. Dodaro. That is correct. We have respect for Mr. 
England as well, but, there is a lot going on with the 
Department of Defense right now, and these are not the type of 
problems that can be solved within a year or two of attention. 
They are going to span a wide number of years, and somebody 
needs to focus on them full-time. That is the way some of the 
smaller departments and agencies have made progress, and that 
is why they are where they are today.
    Senator Carper. Do you envision this person being a 
political appointee who would come and go with the beginning or 
the end of an Administration? Or is this somebody who would be 
there like maybe even a career professional or somebody that 
would be there for an extended period of time?
    Mr. Dodaro. What we had envisioned was somebody that would 
have a 5- to 7-year term that would span Administrations, that 
would be able to work on these problems with a sustained 
improvement plan across time.
    One of the other factors that occurs at the Department of 
Defense, and whether it is weapons systems development, or 
whatever, there is a lot of movement of leadership within the 
Department, and that has been one of the things that we pointed 
out over time. When you have these long-term efforts--and this 
is a long-term effort because you are talking about business 
management systems dealing with one of the largest entities in 
the world, you are not going to be able to do it on a part-time 
basis.
    Senator Carper. That reminds me, just checking in with my 
colleagues, when we observe all the folks that are nominated 
for positions in the Executive Branch for which they need 
Senate confirmation, the process that the folks go through, it 
is, as you know, time-consuming. Then the process of 
confirmation, going through the hearings, and then going to the 
floor, and avoiding holes, we end up going for extended periods 
of time with key positions not being filled. It is not a good 
situation.
    Anyone else on this first question before I yield? Yes, Mr. 
Werfel?
    Mr. Werfel. Yes, I would like to add to Mr. Dodaro's 
comments. I have had the honor and the privilege of working 
with the Defense Department on their clean audit plans since 
2003.
    Senator Carper. OK.
    Mr. Werfel. And one thing I can assure you of is that any 
lack of progress is not due to a lack of talent and dedicated 
professionals at the Pentagon.
    Senator Carper. That is good to hear.
    Mr. Werfel. They are a great group.
    If you look over time, you see a lot of progress being 
made, and there are things that we can point to, more 
liabilities getting to audit readiness, more internal controls 
being improved, clean audits at some of the small services. The 
U.S. Army Corps of Engineers just recently achieved a qualified 
audit, which was a major milestone.
    But what you have is--excuse the pun or metaphor, but a lot 
of it is trying to boil the ocean. The Department is so large 
and complex, so many thousands of transactions a minute going 
on, and so many different complexity to their organization----
    Senator Carper. Mr. Dodaro mentioned in 1996 all the 
different systems that did not talk with each other, and we 
have had 12 years to go beyond that. Is it as bad as it was? 
Any idea?
    Mr. Werfel. It is getting better, but it is a slow--it is 
like a glacier moving. It is an inch-by-inch process.
    Senator Carper. It is like turning an aircraft carrier? 
[Laughter.]
    Mr. Werfel. Well, we certainly do not turn on a dime in the 
government. But one of the things that I would like to share is 
that what we are starting to think more and more that will help 
the Defense Department is to start segmenting their milestones 
around objectives that do two things:
    First of all, we can prioritize areas that are material to 
the consolidated financial statement, because what you have 
with the Defense Department is they are so big and so large 
that some of their line items are material to our line items at 
the consolidated--things like their cash and their plant, 
property, and equipment, and their environmental liabilities. 
So if we can target those components in particular and target 
those areas that have the greatest nexus today towards mission 
effectiveness at the Defense Department--because if you look 
totally at their clean audit action plan, you can start to 
prioritize. Well, if they did a better job with these things, 
that is really going to impact their mission and their ability 
to support the warfighter and do other things. And then you can 
look down the list and say, well, these are good things to do 
but less impact. I think we need to go through a prioritization 
exercise with the Defense Department along those lines.
    And the last point I will make is one of the challenges is 
that, as you have heard me testify before, November 15 is a big 
day for the Federal agencies, the CFO community. We all sweat 
that one out as we wait for the auditors to come in and find 
out whether we got a clean audit opinion. And that type of 
pressure really motivates and generates a lot of accountability 
at the agencies.
    The Defense Department does not have that type of November 
15 because they are not getting an audit right now, and 
sometimes I have talked about it as there is no moment of truth 
in the near future from a public transparency standpoint. So as 
we think about prioritizing the Defense Department's efforts, 
we might also want to think about how can we create public 
transparency around how they are doing along these key 
milestones. So the next moment of truth is in 2017, and we are 
looking forward to working with GAO and Congress to think about 
how to implement that, assuming that is something that 
resonates with you.
    Senator Carper. Good. Thank you. I am about 2 minutes over 
my time.
    Mr. Carfine, do you want to add anything or sort of 
underline anything that has been said by the first two 
witnesses?
    Mr. Carfine. The only thing that I want to mention is that 
the problems at the Department of Defense as well as the other 
material weaknesses related to the financial statements are 
difficult problems to address. And we are committed to 
supporting the recommendations that OMB has for addressing the 
Department of Defense and are willing to help in any way that 
we can in order to move that process along.
    Senator Carper. Good. Thanks so much. Dr. Coburn.
    Senator Coburn. Well, thank you for your testimony. One of 
the things my staff did this spring is we took all the GAO 
reports, all the IG reports, all the CBO reports, and all the 
CRS reports on government waste, and we combined them. You know 
what the total came to on an annual basis? Waste and fraud, 
$300-plus billion a year.
    Put up the supplemental.
    If, in fact, we had Congress working as hard on waste as 
they work on earmarks, all these supplementals could have been 
paid for. That is the trend line on supplementals. 
Supplementals are borrowed--every penny of it is borrowed. 
Agree? Anybody disagree with that? Every penny of it is 
borrowed money. It is supplemental funding that we do not have 
outside of the budget 302s. It is money that we are going to go 
and borrow.
    So had we worked--you all are doing the basic background of 
creating the systems and the measurement with which we can 
manage. But had we worked to not allow supplementals--in other 
words, to make the hard choice, what do we get rid of if we are 
going to spend, like we did in 2005, $140 billion of which $96 
billion of that was on the war. But $54 billion was not on the 
war--$54 billion just was a way to get--Senator Carper 
mentioned PAYGO. If we really had PAYGO and we really enforced 
it--which we do not. We only enforce it when it is convenient 
politically. But if we really had PAYGO and we applied it to 
supplementals, what would happen is we would not see that and 
we would get rid of a good portion of the $300 billion worth of 
waste, fraud, and abuse because we would be forced to, kind of 
like when you are a governor and you have to operate under a 
Balance Budget Act.
    So the question I have, and mainly it is directed to my 
favorite quarterback, Mr. Werfel, is this Administration 
refuses to force the Congress to make hard choices on 
supplementals, and so they had----
    Senator Carper. Before you ask this question, let me say, 
won't it be a great day when that famous quarterback will at 
some time be mistaken for this guy?
    Senator Coburn. I am sure he is all the time. [Laughter.]
    Senator Carper. And he will pretend he is here to try to 
get better rooms in hotels----
    Senator Coburn. Look at him ruin my point. I do not even 
know where I was now. [Laughter.]
    Senator Carper. Your favorite quarterback.
    Senator Coburn. But why is the Administration sending 
supplementals up here and saying, ``I want this money spent 
outside of the budget,'' when they know this same number is 
$300 billion worth of waste, fraud, and abuse. Why not send a 
supplemental and say, ``We want a supplemental within the 
budget''?
    The last time Congress did a rescission was 1995. And the 
assumption behind that for the American people is everything is 
running efficiently, we do not have any waste, we do not have 
any fraud. And, by the way, if we have some hiccup come along, 
we are not going to make hard choices. We are just going to put 
a credit card in the machine and send it on down the road so 
that we go not from $9.8 trillion--by the way, the debt is 
rising $1.2 million a minute as we are sitting in here, $1.56 
billion a day. Instead, we just do not make the hard choice.
    Why do you keep sending requests up here for supplemental 
spending when you know there is waste there and you do not 
force the Congress to make the hard choices? You enable the 
Congress to fail by not requesting that it be within the budget 
guideline. That is a question.
    Mr. Werfel. OK. I am ready. Well, Senator, I would answer 
that by saying that I think the Administration's position is 
that what we are asking for in supplemental appropriations are 
funds that are absolutely necessary to meet obviously mission-
critical priorities related to the current global war on terror 
and other priorities. And what we try to do is make sure that 
we are putting forward responsible plans that are meeting those 
needs. And those proposals to happen separately and apart from 
the President's budget which happens in February. And, again, 
with the President's budget, we are trying to do the same exact 
thing, is put forward a budget, a responsible budget that meets 
our needs.
    I am not sure that--and it is possible that making sure 
that both of those things are happening on the same track will 
lead to the type of tough decisions that need to be made. But I 
think it is hard to go through both the President's budget and 
the supplemental that are submitted by the Administration and 
find things that are not critically important for the health 
and welfare of the American people.
    Senator Coburn. Quite frankly, I will say that is a 
disappointing answer because every family in this country right 
now has supplemental emergency needs based on the price of 
gasoline. And you know what they are doing? They are making 
hard choices about priorities. And when the Administration 
knows that we have a supplemental request at least for $80 
billion a year the last 5 years and does not put it in their 
budget, what they are saying is the rules do not apply to 
government that apply to every other taxpayer in this country. 
And I think it is almost criminal that we continue to say in 
something that we know is going to be at least $80 billion next 
year in the budget, that we put it outside of the budget so we 
do not have to do the hard work. And, unfortunately, there is 
not enough of us in Congress that want us to do that, and 
absent the leadership to that, what we are doing is we are 
continuing to waste the $300 billion a year.
    And this Administration knows at least that $80 billion is 
going to get spent next year on the war. They knew that 3 years 
ago. And to not have that in the budget says the rules are 
different for the people who take your taxes than for the 
people who pay them. And the reason the American public has an 
11-percent rating for Congress and slightly higher than that 
for the President is this very issue. There is a double 
standard. When OMB sends a budget up here and a request that is 
not within the confines of the reality that everybody else 
lives in, what we do is perpetuate--we can do all the work we 
want to do as far as GAO and OMB and the Treasury in terms of 
trying to fix the management, but when the underlying principle 
for that is we are going to spend it.
    The other point I would make is every time we pass a 
supplemental, what does that do to the baseline? We all know 
the answer to that. The one that is getting ready to come is 
going to have over the next 2 years $60 billion in extra 
spending in it. The one that is going to hit the floor this 
week, $28 billion this year. That raises the baseline on every 
one of those programs so that we start at a higher level, $28 
billion. If it is truly an emergency, then we ought to find 
some of the waste to get rid of it.
    I know I am kind of preaching to the choir. I know you are 
not in opposition to that. But the point is if we are ever 
going to handle the big problems, the demographic problems, the 
Medicare problems, the Medicaid problems, the Social Security 
problems, the interest problems, we have to have the confidence 
of the American people that we are handling the small problems 
right. And I would put forward that we are not.
    As a percentage--who had the chart on the percentage of 
qualified statements? Would you put that chart back up for a 
minute.
    That is a percentage of the statements. That pie chart 
looks pretty good. But when you put it as a percentage of the 
total spending, what does it look like?
    Mr. Dodaro. Basically, the net costs combined by the red 
portions of the five agencies is about 28 percent of the total 
net cost.
    Senator Coburn. OK. So it does reflect the net cost, not 
the percentage of agencies that have----
    Mr. Dodaro. No. This is for the agencies. My point----
    Senator Coburn. That is showing 18 percent, right?
    Mr. Dodaro. Yes. My point with the chart, Senator was a 
couple-fold. I was under scoring the fact that we have 19 
agencies right now that have unqualified opinions. In 1996, 
there were only six when we started.
    Senator Coburn. Right.
    Mr. Dodaro. Point one is that it is important for the next 
Administration to continue to make progress and not slip back 
from the 19 there.
    The second point is that the five that did not get there 
are large agencies, DOD being a particularly large one.
    Senator Coburn. Agriculture.
    Mr. Dodaro. Agriculture, Department of Homeland Security, 
State Department, and NASA are the other four. They are all 
large agencies. This is not meant to represent the cost 
percentages.
    Senator Coburn. Right, OK. First of all, thanks to Senator 
Carper, I am sure we are going to keep doing this. So no matter 
who the President is, I feel confident that we have an 
agreement that the pressure is going to stay on from this 
Subcommittee that we are going to keep looking at this and 
holding it accountable.
    Rather than take more time, Mr. Chairman, I am going to 
submit a series of questions to each of you, if you wouldn't 
mind answering them, and a timely answer would be great so we 
can get it back.
    I thank you very much for the time.
    Senator Carper. You bet. Thank you. Senator Voinovich.
    Senator Voinovich. Yes, thank you. When do you think you 
are going to have an unqualified audit from the Defense 
Department?
    Mr. Dodaro. Senator, I really do not know. They are 
projecting 2017 that they believe they will be in a position to 
be ready. If they execute their plans and implement the 
proposals that they have going forward, that may be possible. 
But I would have to wait to see what kind of incremental 
progress they make each year.
    Senator Voinovich. Have you looked at their plan in order 
to accomplish it and commented on whether you think it is a 
real plan or smoke?
    Mr. Dodaro. We have started to look at the new plan. We are 
going to spend more time focused on it and provide them some 
more detailed comments going forward. But, again, this plan has 
to be adopted by the next Administration and then executed 
going forward. And so our plan would be to try to put this on 
the radar screen of the new leadership of the Department, in 
addition to working with the current people until they leave, 
and to try to make sure that it gets implemented properly.
    We have seen in a number of areas at the Department of 
Defense a lot of good plans over a wide range of issues, and I 
know you have been involved very heavily in some of the high-
risk areas. Part of the problem is that they have a lot of good 
plans, but they are not executed very effectively. So, part of 
this is having a good plan. We will look at it. We will give 
them a lot of comments. But they are going to have to execute 
it.
    Senator Voinovich. Well, I would like to suggest to this 
Subcommittee that GAO stay on it and that there be a comment on 
whether or not it is a real plan or not so that at least we can 
have metrics to stay on top of it to see if there is any 
progress that is being made.
    Senator Coburn. Would you yield for a second?
    Senator Voinovich. Sure.
    Senator Coburn. You said they do not have any audit now, 
and the question was about an unqualified audit. In their plan, 
when will they get their first audit, real audit?
    Mr. Dodaro. Well, they have--and maybe Mr. Werfel will want 
to comment on this. They have parts of the Department being 
audited, but there is no----
    Senator Coburn. Yes, but I mean a complete audit.
    Mr. Dodaro. No, they do not have a complete audit right 
now. Their plan calls for trying to have an unqualified opinion 
on the entire set of financial statements for the Department 
like the other ones we talked about by 2017.
    Senator Coburn. I did not make my point clear. When will 
they have a complete audit of the thing, whether it is 
qualified or unqualified?
    Mr. Werfel. The action plan--it is called a FIAR plan, 
Financial Improvement and Audit Readiness--actually does not 
provide the level of specificity out in the 2014, 2015, 2016, 
2017 range to indicate when at a consolidated level they will 
be ready for an audit opinion, whether that audit opinion is 
clean or qualified. So we do not have an answer.
    One thing I would point out in the interest of looking at 
this glass as half-full is that when we started this process, 
at least when I got involved at the start of the 
Administration, the Defense Department was pointing to a fiscal 
year 2007 date as when they were going to get a clean audit 
opinion. But, of course, as you peeled back the onion on that, 
you could not find the path forward that would get them a clean 
audit opinion in 2007.
    And so what we did was we worked with them, a lot of help 
from Congress putting pressure through legislation and GAO, to 
say put together a realistic plan, because right now you do not 
have a realistic one because there is no path to 2007. That is 
unrealistic.
    What they came up with, the FIAR plan, puts it out to 2017. 
But there is a lot of detail at the start of that plan. If you 
look at the plan, there is a lot of detail between now and, 
let's say, 2012. But beyond that, it starts to get more and 
more white spaces in the pages as you go on.
    But, I think there is a positive in that this is a more 
realistic time frame. Even though it is frustrating, we now 
have a realistic time frame of 10 years or about a decade, and 
can start to look for opportunities to accelerate within that. 
But when the plan was 2007, there was not a lot to work with.
    Senator Coburn. Thank you.
    Senator Voinovich. We need to know what the plan is. We 
need to look at metrics to determine whether or not there is 
progress on the plan. I would like to also know who is 
responsible for the plan in terms of people that are on civil 
service or how involved is someone that is going to be 
appointed.
    That gets back to transformation of the whole Department, 
and I have been arguing, frankly, because of the recommendation 
from the Government Accountability Office of having a CMO over 
there and try to get Gordon England to do that. And I thought 
we were almost there, and then he chickened out, as far as I am 
concerned. And now we have somebody that is in charge of 
transformation, or a CMO, but there is no term connected with 
it, so you do not get the continuity. And anybody that knows 
anything about transformation, whether it be in a screwed up 
Department like Defense or another screwed up one like the 
Department of Homeland Security, knows that it is not going to 
happen overnight. And I would like you to comment on how 
important you think it is that we get involved here and get 
that CMO, give him or her a title, and have them be able to 
work on it.
    Now, we have come a long way--I do not know if you know 
this or not. In the Department of Homeland Security, we now 
have a Deputy Secretary on the same level as the Deputy 
Secretary--one is management and one is operations. But that 
person that has got the management has no term. And so there is 
no chance--I mean, depending on how it all works out, we are 
not going to get--well, you comment. I would like to hear what 
you have to say about how important you think it is for us to 
get this change that we need to have here.
    Mr. Dodaro. I think for the Department of Defense and for 
the Department of Homeland Security, it is very important that 
these positions get enacted because you have basically huge 
management challenges in both of those Departments, and as you 
point out, they are not going to be solved overnight. They need 
sustained and full-time attention. You need to have a person 
that is going to span Administrations to basically solve these 
problems.
    So we think it is critical. Not every Department needs 
that, but the large Departments that have these intractable 
problems definitely need it. We think it is very important.
    Senator Voinovich. I would like to just comment also on 
what Senator Coburn was talking about, emergency spending. The 
ability to know how much money that you are going to spend on 
this war in Iraq is obvious, and you can get people right now 
that will sit down with you and tell you that even if we go 
down to 30,000 troops, it is going to cost us, I do not know, 
$100 billion a year. And we constantly keep getting requests 
and they are emergency, and I think, frankly, the reason for it 
is that they want to kind of hide the fact how much this is 
costing so that the budget is going to be--would show, the 
figures would show that the budget is a lot more in balance 
than what it does, and the way around that is just call it 
emergency spending.
    It is the same thing when I came here in 1999, we had a big 
deal about the on-budget surplus and--what is it?--the uniform 
budget. And we started separating, letting folks know that the 
on-budget surplus includes the money we borrow from ourselves. 
Now, you just said $200 billion. That never shows up. The 
public does not understand just how much in debt that we are. 
And this year, if we keep going and look at all the things, it 
is going to be about $756 billion----
    Senator Coburn. More than that.
    Senator Voinovich. You think more--that is just going to go 
on the debt. And I think it is maybe too late for this 
Administration, but it seems to me that the next Administration 
ought to invoke a new policy.
    I will never forget, we spent $3 billion for the Department 
of Homeland Security because everybody in the Senate was taking 
the heat because of the immigration bill, and it was a hot 
potato. And so to make everybody feel good, they put another $3 
billion into the Department of Homeland Security to take care 
of--what is it?--the CBP. And I got a hold on some folks over 
at OMB, and I said this is outrageous. You guys came in with a 
gigantic increase in your budget for the Department of Homeland 
Security. The committee that has that, the authorization 
committee, they increased it substantially over that. 
Unbelievable increase. And this thing, when you put the $3 
billion, I think it is about a 52-percent increase. And they 
said, Well, we do not really like it, but you know what? It is 
emergency spending.
    Now, pretty cynical. And I think part of the reason why we 
are in the jam we are in is that when it came time for 
controversial spending around here, we chalked it up on 
emergency spending. I really think that is the reason why we 
have not paid for this war, because we fool the American 
people, and not a dime--not a dime for the war. It has all 
been--most of it, emergency spending. Hide it from the public. 
Maybe what we should do is make this report mandatory to get 
out to every single citizen in the United States and maybe 
educate them about how bad the situation is, and maybe if they 
understand it, maybe we would start to see some action around 
here, both in Congress and with the Administration.
    Senator Carper. A couple of questions for this panel. And 
if Dr. Coburn and Senator Voinovich have questions, they are 
certainly welcome to ask them, and then we will excuse you and 
move to our second panel.
    The three of us spent some time together yesterday. The 
full Committee on Homeland Security and Governmental Affairs 
was meeting, and we were conducting what we call a markup of a 
number of bills that were on the agenda. One of the bills that 
was on the agenda is something that Dr. Coburn and I and 
Senator McCaskill and our staffs and other folks, too, have 
worked on for some time, and that is to take the original 
improper payments legislation and to make it better. I always 
like to say if it is not perfect, make it better. Well, it is 
not perfect, and we are trying to make it better.
    Dr. Coburn and I and Senator McCaskill, I think we actually 
had a pretty good bill, and there is one area that we have been 
still unable to close, completely come to agreement on, and I 
am just going to mention it to you and ask you all to put on 
your thinking caps and maybe not necessarily right here right 
now, but over the next week give us your ideas.
    How do we make sure that agencies actually comply with the 
improper payments law? And some do. Too many do not. And Dr. 
Coburn came up with an idea to try to put in sort of an 
escalating schedule of compliance sticks, if you will, for 
those agencies that were not doing a very good job of 
complying. Keep me out of trouble on this, Senator Coburn, but 
the first year an agency did not comply, we would authorize 
them to move money around within their agency so they would 
have more money for financial management the first year. The 
second year without compliance, I think we said we mandated 
that they move money around within their agency to provide for 
better financial management. The third year if they still were 
not in compliance, we did, I think, up to 5 percent--yes, 5 
percent of their budget would be moved over to help address 
their financial management deficiencies. And the fourth year 
would be--basically they would be pretty much out of business, 
and we would really hammer them bad, take away their ability to 
spend money for their mission.
    There was unease in our Subcommittee, and outside of the 
Subcommittee. I think we talked with OMB and GAO about this as 
well. But there was some unease about pulling the trigger like 
that, especially in the fourth year. And what we are trying to 
come up with is an approach that will better ensure compliance 
and the status quo but maybe not in the terms of one of our 
colleagues who said--they called it, I think, the ``death 
penalty,'' year four, would avoid the death penalty.
    Put your hats on and think about that, and just come back 
to us within the next week or so, to our respective staffs, and 
give us some good ideas. If you will do that, when we have our 
next markup sometime by the end of July, we will be able to 
pass, I think, a very strong bill.
    Another one, I think this may fall into your jurisdiction 
more, Mr. Carfine, than others, but Dr. Coburn and I have 
thought a whole lot about the idea that a bunch of folks owe 
taxes in this country and they are not paying them. Many of us 
are, but too many are not. And there is a big tax gap out 
there. Here is $300 billion or more per year, monies that are 
owed and not being collected. And I understand that--what can 
we do about it? What are you all doing about it, and what can 
we do to help you?
    Mr. Carfine. Well, the issue relating to----
    Senator Carper. Sort of like the flip side of the improper 
payments deal. It is on the revenue side. What can we do to 
help? What are you all doing, and what can we do to help?
    Mr. Carfine. Well, the issue regarding the tax gap is an 
important issue for all of us, and I know that the Department 
is working with the Internal Revenue Service on aggressively 
addressing the issues related to the tax gap.
    There have been some proposals in the 2008 and 2009 budgets 
on how to deal with that. But I have to say this is a little 
bit out of my area of expertise. If you have some specific 
questions, I would be glad to take them back and get answers 
for you.
    Senator Carper. Good. Thanks. Mr. Dodaro.
    Mr. Dodaro. Basically, the tax gap is a very important 
issue. Right now the net estimated tax gap is $290 billion. I 
think that when decisions start being made to deal with some of 
the harsh fiscal realities that we have been talking about this 
afternoon, questions will come up about whether people are 
paying their fair share that they owe right now. We are doing a 
series of reports at GAO trying to identify different areas of 
noncompliance.
    For a number of years, IRS was not doing the research 
necessary to understand the nature of the tax gap and the size 
of it. Now that they have done that, we are beginning to have 
the tools available to delve into these areas more, and 
determine whether it is sole proprietorships or different types 
of taxpayers, paying community, etc., and to dissect it a 
little bit better. I would be happy to provide for the record 
the work that we have done to date and what we are planning to 
do.
    Senator Carper. That is good. I do not know if we have 
scheduled it, but we were thinking about maybe having a 
roundtable as opposed to maybe a straight out hearing that 
would focus on the tax gap.
    Mr. Dodaro. Yes, I think that is very important.
    Another area we have highlighted in the tax area are tax 
expenditures, which in any 1 year can be as large as the 
discretionary spending of the budget. The tax expenditures are 
largely off the radar screen for regular review. We think that 
this is another area that could need some attention as well.
    Senator Carper. Good. We would like to work with you on 
that. That is great. Thanks. Mr. Werfel.
    Mr. Werfel. I just wanted to supplement some of Mr. 
Carfine's comments, and I have a little bit more detail in the 
President's budget. We do have 16 targeted tax law change 
proposals in the President's budget that would close about $36 
billion over the next 10 years of the gap, which is a healthy 
downpayment on the gap. And those proposals, just to give you 
an overview of them, they involve getting more information from 
taxpayers in terms of trying to validate that we are getting 
the right amounts. And there is always that balance between 
needing more information and imposing taxpayer burden. But we 
think that the proposals that we have chosen to promote in the 
President's budget achieve that balance.
    Of course, we are always open to looking at additional 
proposals, and this is a very important issue and one that can 
have an impact.
    Senator Carper. We are told--and we have been holding a 
series of meetings within my own office and staff with 
different folks who have a lot of insight into the tax gap. And 
one of the things we have learned, in situations where there is 
withhold, there is actual withholding, there is about 99 
percent compliance. In situations where there is reporting, a 
1099, there is maybe 90 percent or better compliance. In 
situations where it is basically a cash economy, maybe 20 
percent, if we are lucky.
    One of the things that we have, I said a bit earlier in 
this hearing, my staff spent much of this morning trying to 
figure out what we need to focus on to get done in this year, 
before the Congress goes home and hang it up. But what do we 
absolutely want to get done? And one of the things we want to 
get done is to identify just a handful of niches, if you will, 
that fall within the tax gap umbrella that we can focus on.
    Dr. Coburn and I focused on in the last couple years 
something called ``cost-effective airlift in the 21st Century'' 
and found out that we could actually save a couple billion 
dollars within the defense budget. And ultimately, I think with 
our encouragement, that actually took place. But we found a 
niche within the defense budget where we had some jurisdiction, 
and we worked with the committee of jurisdiction and got it 
done.
    What I hope we will do is a similar kind of thing with 
respect to the tax gap, and not try to address it all--it is 
huge. It is too big for us--but to find some niches that work 
for us so we can just go after something, drill down and just 
not give up so that it is sort of unrelenting. And we look 
forward to working with you on that.
    I have some other questions, and I will submit those for 
the record.
    Senator Carper. Let me just turn to my colleagues. Dr. 
Coburn, anything else you would like to ask these fellows 
before we excuse them?
    Senator Coburn. No, I am fine. We really appreciate your 
service. I would just say that sometimes we get a little wound 
up because we have a certain amount of passion on what is 
getting ready to happen to the next two generations in this 
country. But without your service, we could not be doing what 
we are trying to do, and we know you are sitting there holding 
the line. So please continue what you are doing. Thank you.
    Senator Carper. I would certainly agree with that. Senator 
Voinovich, please.
    Senator Voinovich. For several years now, I have been very 
disturbed with the way that we do our appropriations and have 
the omnibus appropriations bill. Would any of you like to 
comment on the negative impact that this way of operating has 
on the management perhaps of your own respective agencies or on 
other agencies? Because it is just mind-boggling to me that we 
do not do--and this year probably, people are coming to me and 
they want to know how much money am I going to have or how is 
it going to work out, and I tell them, according to the 
grapevine, we probably will not pass the omnibus appropriation 
bill. Maybe we will pass a couple of appropriations bills, but 
it will not happen until after the next President is sworn into 
office. So that means October, November, December, January, 
February, and I know--and I am sure--I was going to say Senator 
Carper agrees with me--as a governor that if we did not get our 
job done on time and pass our State budgets or as the mayor of 
Cleveland, if I did not get my appropriations and budget done 
on time, the people would have run me out of office. They would 
say this is outrageous. Every newspaper in the State would 
editorialize.
    I would like your comments on it, what that does to try to 
manage properly.
    Mr. Dodaro. It makes it difficult to predict. From GAO's 
standpoint, over the last 10 years, in seven of those years we 
have operated for part of the year under continuing 
resolutions, some for a few days, some for several months. A 
lot depends on the nature of the continuing resolution and also 
whether or not there have been marks established with the 
Appropriations Committees ahead of time.
    If you have some general idea where you think you are going 
to end up at the end of the day, you are in a better position 
to try to manage toward that than if you have no general idea. 
A lot depends on what the status was of the appropriations 
process prior to the execution of the continuing resolution.
    But, in an optimal world, it is difficult to manage within 
any degree of uncertainty, and so it makes it a bit of a 
challenge. The extent of the challenge depends on the nature of 
the CR and what you know in advance.
    Mr. Werfel. I would agree with that. I do not think the 
metric exists, but a cost of operations that is incurred by a 
continuing resolution environment. I know from working with the 
Federal CFO community very closely, we see instances that are 
very upsetting to us, where we have to, for example, stop a 
contract that is flowing well and moving well and wait until 
the appropriation has been passed, then restart up again. And 
there is a tremendous cost that goes into that type of delay or 
pause in the action.
    I think it is something that we hope we can get more 
transportation over time to Members of Congress that the 
continuing resolution environment is having negative impacts on 
the taxpayer.
    Senator Carper, can I just clarify one point for the 
record?
    Senator Carper. Yes, sir.
    Mr. Werfel. Going back to the question on supplementals--
and I do not pretend to have all the answers. But one point I 
did want to make, just to make sure that it is clear, is that 
government spending, whether through supplemental or otherwise, 
is captured in both the President's budget deficit total and 
the statement of net operating cost total that tracks funds 
going in and out. So at the end of the day, there is some 
transparency, important transparency, into what the government 
is spending versus what it is taking in that is capturing all 
outlays, whether they are occurring as a result of the 
supplemental or not.
    Now, I am not saying that satisfies your question, which is 
a very good one, but I just want to point out that there is 
public transparency into all Federal funds that are flowing in 
and out of the government.
    Senator Coburn. So in the budget request for the President 
this year, the cost of the war is included in that budget 
request, it is included in the supplemental and it--no, see, 
and that is my point. It is not transparent because that $80 
billion, which is going to be $126 billion this year, is going 
to add to the debt. And that is not captured in the President's 
budget. And so, therefore, we are playing funny numbers with 
the American people. And we know that because that makes us 
look better when we do not put it in the budget.
    I am not saying it is right or wrong. I am just saying if 
any other business had a recurring cost that they knew was 
going to be there and you went to your chief executive or the 
chief financial officer and said here is a cost, but, oh, this 
is not here, we do not want to show you that, we will look a 
whole lot better here. And that is exactly what we are doing 
with the American public.
    So I am not saying there is an intentional sleight of hand. 
What I am saying is that it is a poor way to run the 
government.
    Mr. Werfel. And just a final point on that is the point 
that I was making is if the President sends a target to balance 
the budget by 2012, that accounts for any of the funds that are 
going out the door through the supplemental. But your point is 
well taken.
    Senator Carper. All right. I think your point is well 
taken, too. I am glad you made it twice. [Laughter.]
    Senator Coburn. Sometimes points have to be made twice 
around here, and three times and four times and five times.
    Senator Carper. Before we excuse this panel, I also want to 
come back to a point that Senator Voinovich was making 
referring to our days in our last jobs in our respective 
States, and if we did not pass our budgets, if we did not get 
our budgets passed, then people would be looking for a new 
governor in our States.
    The other thing that they would--if I as governor of 
Delaware, and I suspect as governor of Ohio, if we had come 
into the legislature and said this is our budget, it is way out 
of balance, this is what our spending plan is, you balance it, 
they would run us out of Dover and Columbus, respectively. That 
is just not the kind of leadership we need from the Executive 
Branch. Any time I have ever seen government bodies, small, 
local, State, Federal, actually be fiscally responsible, the 
chief executive--it just is inherent, it is incumbent that they 
provide the strong leadership, because it is not the nature of 
legislative bodies to just do it on our own, unfortunately.
    Let me just say, Mr. Dodaro, have you testified before this 
panel before?
    Mr. Dodaro. Not this particular panel, but I have testified 
before Congress many times.
    Senator Carper. In a sidebar conversation, I said to Dr. 
Coburn, ``That guy Dodaro is not bad, is he?'' [Laughter.]
    David Walker is a tough act to follow, but you did a nice 
job today. And, Mr. Werfel, you always do. Mr. Carfine, it has 
been a pleasure to have you before us as well. You may have 
some questions, some follow-ups from us, and maybe from some 
others that are not here, and we would just appreciate you 
giving it your attention and responding to us forthwith.
    Last, on our improper payments legislation, we are trying 
to find a good compromise, something that will really help this 
work in terms of compliance. Help us with that within the next 
week or so, that would be much appreciated.
    Senator Coburn. Both of us.
    Senator Carper. Yes.
    Mr. Dodaro. Will do.
    Senator Carper. Good Gentlemen, thank you all very much. 
You are excused.
    Dr. Coburn has asked me if I know what our vote status is. 
Let me just take a moment just to share what I know, and I will 
look over here to John Kilvington for clarification. We are 
told there might be a vote on some judges between 4 and 4:30 
p.m. Is there anything that changed that? So we are still 
looking maybe to have that. My hope is that we can hear from 
this panel before have to break for those judges and then come 
back.
    Let me just briefly welcome our panel. It is great to see 
all of you again, and our first witness needs little 
introduction. David Walker, in addition to providing great 
leadership at GAO for many years, is today testifying as CEO 
and President of the Peter G. Peterson Foundation. He was our 
Comptroller General I think for--was it 10 years?
    Mr. Walker. Nine and a half.
    Senator Carper. Nine and a half. Well, we will round it up.
    Mr. Walker. Yes, that is right. Close enough.
    Senator Carper. Good to see you. Welcome back.
    Robert Bixby, known to some as David Bixby?
    Mr. Bixby. Not by too many.
    Senator Carper. Not to be confused with. Now Executive 
Director of the Concord Coalition, a position he has held for 
over 10 years, I believe. And prior to his work with the 
Concord Coalition, Mr. Bixby practiced law and served as chief 
staff attorney of the Court of Appeals of Virginia.
    Our third witness is James Horney--do I have that correct?
    Mr. Horney. Yes.
    Senator Carper. All right. Director of Federal Fiscal 
Policy at the Center on Budget and Policy Priorities, and 
previously, I am told, you served as Deputy Democratic Staff 
Director at the Senate Budget Committee. Who was the chairman 
then when you were there?
    Mr. Horney. Kent Conrad.
    Senator Carper. All right. Good. And as chief of the 
Projections Unit of the Budget Analysis Division of the 
Congressional Budget Office.
    And last, but not least, the Hon. Maurice McTigue, Vice 
President of the Mercatus Center at the George Mason 
University, Director of the Center's Government Accountability 
Program. Prior to joining Mercatus, Mr. McTigue served as a New 
Zealand Member of Parliament, a cabinet member, and as the 
Ambassador to Canada. I would just say by way of introduction, 
at the Commonwealth Awards Dinner in Wilmington, Delaware, 
several months ago, your former Prime Minister was recognized. 
We recognized a number of people for their work in science, 
journalism, government, and so forth, and your Prime Minister 
who just stepped down in the last year was recognized and 
honored right there. Quite an impressive performance by the 
country of New Zealand. We are delighted that you are here.
    Mr. McTigue. Thank you.
    Senator Carper. With that, the bells just went off. It does 
not say there is a vote. It says we are in a quorum call. So, 
with that having been said, your entire statements will be made 
a part of the record. We invite you to summarize. Again, as I 
said to the first panel, if you can stick fairly close to 5 
minutes, that would be good. If you cannot, try to stay fairly 
close. All right?
    Welcome, one and all. We are delighted that you are here. 
Thank you for coming.

TESTIMONY OF DAVID M. WALKER,\1\ PRESIDENT AND CHIEF EXECUTIVE 
             OFFICER, PETER G. PETERSON FOUNDATION

    Mr. Walker. Thank you, Chairman Carper, Dr. Coburn, and 
Senator Voinovich. It is a pleasure to be back before this 
Subcommittee, this time as a private citizen.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Walker appears in the Appendix on 
page 114.
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    Before I address the Nation's fiscal challenge, I would 
like to re-emphasize a couple of points with regard to the 
fiscal year 2007 financial statement audit, and I had the 
pleasure and the honor to sign the audit opinion on behalf of 
GAO. There were two noteworthy accomplishments.
    First, it was the first time that an opinion has ever been 
expressed on any statement within the consolidated financial 
statements, namely, the Statement of Social Insurance, which 
has the largest numbers in the financial statements.
    Second, the publication of the first Summary Annual Report, 
although personally I prefer this Summary Annual report, which 
every Senator and Member of Congress should have received a 
copy of by now. By the way, it fits in your coat pocket, so it 
is very easy to be able to take with you, and I encourage you 
to take it with you the next time you have a trip, because I 
think it will be illuminating.
    As has been said, the Department of Defense is the tail on 
the dog, and ultimately, as I note in my statement, I think the 
GAO is going to have to assume responsibility for auditing the 
Department of Defense. They are going to need the help of the 
Inspector General. They are going to need contractor 
assistance. And they are going to need additional resources and 
support from the Congress in order to be able to do that.
    This document, which is ``The State of the Union's 
Finances,'' has a lot of nice-looking graphics in it. The 
problem is that it paints a very ugly fiscal picture. The 
problem is not the present. The problem is not the past. The 
problem is the future. And basically we are moving towards 
Third World status from the standpoint of debt to GDP unless we 
start making some touch choices soon.
    As I note in my testimony, we need to improve transparency 
with regard to our current accounting and budgeting systems. We 
also need to change our financial reporting, and I have a 
number of specific recommendations in my testimony to that 
regard. We also need to reimpose tough budgetary controls from 
a statutory standpoint on both the spending and tax sides of 
the ledger. And in my view, we are going to need some type of 
capable, credible and bipartisan commission or task force to 
make recommendations to the next Congress and the next 
President, ideally for an up or down vote on at least four 
things: First, on statutory budget controls; second, on 
comprehensive Social Security reform; third, on round one of 
tax reform; and, fourth, on round one of health care reform.
    I think if it is done the right way, you can achieve a $10 
to $15 trillion downpayment on the $53 trillion imbalance. That 
is a pretty good downpayment. But that $53 trillion goes up by 
$2 trillion every year.
    In addition to publishing this guide, the Foundation has 
also purchased a I.O.U.S.A documentary that will be coming to 
theaters in August of this year. We will have a private showing 
for Members of Congress on July 9 at the Library of Congress. 
All of you and a number of your colleagues will receive 
invitations. I urge you to attend. But, with your permission, 
Mr. Chairman, now that I have 2 minutes left, I have a 2-minute 
trailer on the film that I would like your permission to show.
    Senator Carper. That would be great.
    Mr. Walker. Thank you.
    Senator Carper. Thank you so much. So this is PG?
    Mr. Walker. This is PG. You are OK. [Laughter.]
    Senator Carper. That is good to know.
    Mr. Walker. Except for the numbers.
    [Videotape shown.]
    Mr. Walker. Thank you, Mr. Chairman.
    Senator Carper. Thank you very much. I have been wondering 
for months who was going to portray you in this film. 
[Laughter.]
    Mr. Walker. I had a pretty realistic double.
    Senator Carper. I thought it might be Sting, but----
    Mr. Walker. As you know, we were born on the same day.
    Senator Carper. Same day, month, and year.
    Mr. Walker. Month and year, that is right.
    Senator Carper. And Sting's real name is David Walker--no, 
not really. All right. Thank you very much.
    Mr. Bixby.

   TESTIMONY OF ROBERT L. BIXBY,\1\ EXECUTIVE DIRECTOR, THE 
                       CONCORD COALITION

    Mr. Bixby. Thank you. Well, that might be appropriate 
because Mr. Wakler has been described as the rock star of the 
Fiscal Wake-Up Tour, so maybe it is true.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Bixby appears in the Appendix on 
page 124.
---------------------------------------------------------------------------
    Chairman Carper, Senator Coburn, and Senator Voinovich, 
thank you for inviting me to discuss the 2007 Financial Report 
of the U.S. Government and our Nation's long-term fiscal 
challenges. As has been observed, the good news in the 2007 
report is that the Statement of Social Insurance received a 
clean opinion from the Government Accountability Office. That 
means the numbers are reliable. But, of course, that leads to 
the bad news, which is that the unqualified numbers paint such 
a stark picture of future promises that cannot be sustained by 
the level of dedicated revenues. The detailed numbers have 
already been laid out, so I need not go into those.
    Why do we have this problem? Well, there are two basic 
facts, two basic factors that stand out: Demographics and 
health care costs. And these facts are not--it is not a matter 
of ideology. It is a matter of arithmetic. Over the next 30 
years, the number of Americans aged 65 and over is expected to 
grow from about 13 percent today to about 20 percent. And as a 
result, the ratio of workers paying into Social Security and 
Medicare relative to the number of beneficiaries will fall by 
roughly one-third.
    But demographics is only part of the problem. Rising health 
care costs is another big part of the problem, and actually a 
bigger problem as you go out in time. Health care costs have 
consistently outpaced economic growth by about 2.5 percentage 
points annually since 1960. If you assume that the same growth 
rate maintains over the next 40 years as has happened for the 
past 40 years, you would find that just two programs--Medicare 
and Medicaid--would take up about as much of our GDP as the 
entire Federal budget does today.
    Now, some people will say that the government should be tax 
and spend at about 18 percent of GDP, and some people would say 
it would be acceptable to both tax and spend at about 30 
percent, or 20 percent to 30 percent of GDP. No reasonable 
person would suggest that we could tax at 18 percent of GDP and 
spend at about 25 or 30 percent of GDP. And yet that is the 
track that we are headed on if we do not change course.
    Improving this outlook will require hard choices on both 
spending and tax policy. As a framework for action, the Concord 
Coalition has recommended that the incoming President and the 
new Congress commit to a balanced budget; incorporate long-term 
projections and controls into the budget process; take steps to 
constrain the rising cost of heath care and retirement 
programs--Social Security and especially Medicare; and 
acknowledge that ultimately taxes cannot be cut unless programs 
are cut commensurately. There is no free lunch.
    Just to say a word about each, balancing the budget would 
be a very good first step, but we have to keep in mind that 
even if we had a balanced budget, we would still have an 
unsustainable policy over the long term. So bringing a long-
term perspective into the budget process is very important. One 
way to do that is we have recommended perhaps putting some 
long-term targets into the annual budget process. You could 
make that even stronger by adding some triggers that might 
automatically adjust spending or revenues or premiums for these 
programs if the targets were missed.
    The Financial Report itself might also help to combat 
myopic budget planning by including a Statement of Fiscal 
Sustainability or other similar assessment of our long-term 
trends. The Statement of Social Insurance is very good, but it 
could go further with sort of an assessment of the long-term 
trends.
    Entitlement reform is obviously very important. There is 
going to have to be some combination of scaling back the 
promises that were made or, if we do not do that, having to 
raise revenues to pay for them, because, again, there is no 
free lunch.
    We cannot treat taxes and spending as separate deals. In 
the final analysis, government revenues must be sufficient to 
pay its costs.
    I want to close by emphasizing the importance of public 
engagement. As you know, I have been out on the Fiscal Wake-Up 
Tour with David Walker; people from Brookings and Heritage have 
joined us on that. And we think that it is very important to 
get the public involved in this. We have been to your State, 
Mr. Chairman, and your State, Mr. Voinovich. And perhaps in 
2009, we will be to your State, Dr. Coburn.
    Senator Coburn. I have been on the Fiscal Wake-Up Tour for 
the past 3\1/2\ years.
    Mr. Bixby. Well, we disagree on some things, but we all 
agree that current fiscal policy is unsustainable, that there 
are no easy solutions to this, that the best way to make the 
hard choices is through a bipartisan process, that public 
engagement is very important, and, finally, and most 
importantly, we all agree that this is not about numbers. 
Fundamentally, it is a moral issue about the legacy that we 
will leave to future generations. Thank you.
    Senator Carper. Governor Voinovich said under his breath, 
as you made that last comment about a moral obligation, he 
said, ``That is absolutely right. I agree.''
    Mr. Horney, please proceed. Thank you for coming.

TESTIMONY OF JAMES HORNEY,\1\ DIRECTOR, FEDERAL FISCAL POLICY, 
             CENTER ON BUDGET AND POLICY PRIORITIES

    Mr. Horney. Chairman Carper, Dr. Coburn, and Senator 
Voinovich, thank you for allowing me to come here today to talk 
about the long-term problem that is facing this Nation. And as 
a former staffer for Kent Conrad, I appreciate you making me 
feel at home with the budget charts.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. Horney appears in the Appendix on 
page 148.
---------------------------------------------------------------------------
    I wanted to make four points here today, a couple of them 
that I do not need to say very much at all. The first one is 
that we are on an unsustainable path. The Center on Budget has 
produced detailed, long-term projections. We come to the same 
conclusion that GAO, CBO, and the Administration come to, which 
is eventually we would have debt rising so rapidly, it would do 
serious harm to the economy. Something has to be done about 
that.
    The second point is that the real keys here are Medicare 
and Medicaid and revenues. The point has already been made that 
we have a demographic problem that drives Social Security, but 
that is much smaller than what is driving Medicare and 
Medicaid, which is a combination of demographics and, much more 
importantly, the per person growth of the cost of providing 
health care.
    One point I do really want to make, though, is that the 
rising cost per person of Medicare and Medicaid is not due to 
any flaw in those programs, that basically for the last 30 
years, that so-called excess growth in Medicare and Medicaid 
has mirrored the excess growth in the private health care 
system. And as CBO Director Peter Orszag has testified a number 
of times, the main reason for this growth is the advancement in 
medical technologies and medical treatments. That is not to say 
there are not some inefficiencies in the system, but the reason 
for the growth has been that we have all of these new drugs, 
treatments, and so on. And most experts think without changes 
in policies for the health care system, this is going to 
continue going forward. And, in particular, it makes the point 
that if we want to bring health care costs of Medicare and 
Medicaid under control without creating a dual system, we need 
to bring down the cost of health care, providing health care 
overall. I know David Walker, when he was Comptroller General 
and since, has made that point many times, and he is absolutely 
right.
    Just very quickly, we have to keep in mind, as Bob Bixby 
said, revenues have to be part of the consideration here. 
Obviously, it is one-half of the deficit equation. We have got 
to raise money to pay for what we want to spend.
    One thing I really do want to say--and, again, this mirrors 
some of what has already been said, which is it is absolutely 
going to take leadership from the President to make this 
happen. It is also going to take leadership from the bipartisan 
leadership in Congress. That is the only way we are going to 
make progress in this problem. They are going to have to work 
together, have to decide that deficit reduction is a very high 
priority, a high enough priority to give in and compromise on 
strongly held beliefs that people have against raising taxes 
and against cutting spending.
    I do want to address one point that Senator Voinovich had 
asked in his opening statement about a commission and what we 
thought about a commission. And David Walker said a commission 
would be a good idea. I do not think there is any substitute 
for the President and the bipartisan leadership of Congress 
coming to the point where they think we have to make these 
tough choices and we have to be willing to compromise. I do not 
think establishing a commission or setting budget targets with 
automatic cuts will force them to do that.
    Now, let me just give a couple of historical examples of 
why I think this is true.
    In 1994, there was frustration, just like now, and 
certainly I sympathize with the frustration of everybody here 
with the unwillingness so far of the leaders in the Executive 
Branch and in Congress to address this problem. There was 
frustration that led to the appointment of the Kerrey-Danforth 
Entitlement Commission. But there was no consensus among the 
President, and leadership in Congress at that time in either 
party that this was a time to move forward, this was a time to 
make hard choices. And the Commission was a total failure. They 
could not agree on anything. They did not move the process 
forward.
    Now, in contrast, people often point to the 1983 Social 
Security Solvency Commission and say, look, that is an example 
of a commission that worked. That is absolutely right. That was 
a very helpful commission, but it is important to remember in 
1983, President Reagan, Speaker Tip O'Neill, and most of the 
bipartisan leadership in the House and Senate had already 
reached agreement that we needed to take some pretty serious 
steps to make Social Security solvent, we needed to address 
both revenues and spending, and they decided that a commission 
would be a useful way to negotiate the details of that and to 
help build public support for the plan. So the President, 
through an Executive Order--this was not legislation--through 
an Executive Order appointed a commission and then used the 
members of that commission--Bob Ball, Alan Greenspan, and 
others--to facilitate the negotiations and build support for 
this.
    Now, one other important point about that was the proposal 
of the Commission was considered through the normal legislative 
process. It went through markups in the House and Senate; it 
went through the amendment process in the House and Senate. And 
that turned out to be very important because one of the key 
elements of the final plan that was enacted, which was moving 
back the normal retirement age for Social Security, was not in 
the proposal that came out of the Commission. It was added by 
an amendment on the floor of the House.
    So you need to be careful, I think, of thinking that 
commissions can do too much. I also would urge you not to 
automatically accept that forcing Congress to take an up or 
down vote on whatever a commission puts out is the best way to 
go.
    Just one more point, which is that in 1990, we had the 
current President's father and most of the bipartisan 
leadership of Congress decide we really need to do something 
about a deficit. They decided they did not need a commission. 
They decided they could go straight to negotiations face to 
face at Andrews Air Force Base. And they came together and they 
worked out a deficit reduction package that reduced deficits by 
$500 billion over 5 years--a very strong thing. So you need a 
consensus. We need to do everything we can, whether it is 
films, whether it is the Fiscal Wake-Up Tour, the papers that 
the Center on Budget writes, everything we can to convince the 
President and bipartisan leadership we need to take action. But 
we need to develop that consensus before we start putting in 
place commissions, procedures, or anything that might play a 
part in getting to where we want to go. Thank you.
    Senator Carper. Thank you very much. You gave us a lot to 
think about. Thank you.
    Mr. McTigue, welcome. Please proceed.

   TESTIMONY OF MAURICE P. MCTIGUE,\1\ VICE PRESIDENT OF THE 
   MERCATUS CENTER, AND DIRECTOR, GOVERNMENT ACCOUNTABILITY 
                PROJECT, GEORGE MASON UNIVERSITY

    Mr. McTigue. Thank you, Mr. Chairman. and thank you for the 
invitation to be present in front of your Subcommittee once 
more.
---------------------------------------------------------------------------
    \1\ The prepared statement of Mr. McTigue appears in the Appendix 
on page 157.
---------------------------------------------------------------------------
    Balancing the budget five times in 40 years by any 
reasonable person would be considered to be irresponsible 
behavior, and that is really the record of the U.S. Government 
over the last 40 years. That period spans seven Republican 
Administrations, five Democrat Administrations, and a House 
predominantly controlled by Democrats, but not all the time; a 
Senate split fairly evenly between Democrats and Republicans. 
So it is no good accusing other parties of being sinful. 
Everybody has been.
    So where might we look for solutions? I have spent some 
time looking at other countries that have had a similar culture 
of overspending and they have cured that culture and reversed 
their process of overspending. I found three countries that are 
similar in background to the United States--New Zealand, 
Australia, and Great Britain.
    The interesting thing that we can learn from these 
countries is that they have adopted a fairly similar philosophy 
to change their culture of overspending, and that philosophy is 
based around accrual accounting, making certain that the 
financial picture of the country is fully transparent, and 
statutes that define fiscal responsibility. In the case of New 
Zealand, it's new law was called the Fiscal Responsibility Act 
of 1994. In the case of Australia, it was the Budget Honesty 
Act. I like that term. And in the case of Great Britain, it was 
the Code of Fiscal Stability.
    Interestingly, each of those countries, immediately on the 
implementation of those statutes, went to surplus. New Zealand 
is now in its 16th year of surpluses. Last year, its surplus 
amounted to 7.5 percent of GDP; the current year, 5.5 percent 
of GDP. When I was in the Cabinet we posted our first full 
accrual set of accounts, which actually disclosed that New 
Zealand had negative equity equivalent to about 20 percent of 
GDP. We thought that was sort of an esoteric figure that nobody 
would be interested in, except to our surprise the media and 
the public picked up on it and related to it as the Government 
of New Zealand being financially insolvent or bankrupt. And 
each succeeding year they watched that figure until it went 
from negative net worth to positive in 1996. And today New 
Zealand has positive net equity of about 67 percent of GDP.
    When we look at Australia and Great Britain, they have been 
doing it for a shorter period of time. New Zealand, in my view, 
has been irresponsible in running surpluses that are far too 
high. But in Australia and the United Kingdom, they have 
settled on surpluses that are around about the 1 percent of 
GDP. Australia has had an average since 1998 of about 1 percent 
surplus of GDP. It has retired a lot of its debt, and it has 
brought it down to a much lower level than the United Kingdom.
    The United Kingdom has averaged around 0.1 of 1 percent of 
GDP, and it has determined that fiscal responsibility is a debt 
level around about 34 or 35 percent of GDP.
    What actually caused these changes, in my view, is that no 
politician can afford to be portrayed as being fiscally 
irresponsible. And by setting down in statute what the criteria 
was for responsibility, then you actually made or created 
incentives that made politicians abide by those determinations 
of fiscal responsibility.
    I have five recommendations that I think the U.S. Congress 
could do and do almost straight away.
    The first is require that budgets and financial reports 
cover a much longer time horizon, at least 10 years forward, 
but preferably even more, say 15 or 20 years, and 4 or 5 years 
backwards, so that every time you look at the budget accounts 
you get a picture over time. One of the interesting things that 
the Government of Australia and the United Kingdom have done is 
that they have required of their government agencies what they 
call ``intergenerational reporting.'' In the case of Great 
Britain, that means every 3 years they have to project forward 
40 years and show what the consequences of current policy will 
be 40 years out. That is both in outcomes and in financial 
cost. In the case of Australia, the review is once every 5 
years, and they go forward 50 years. Those are innovations that 
I think could easily be put in place.
    The second is return the supplementary appropriation 
process to one that allows emergency spending only. That is in 
the hands of Congress. Define emergency. In my view, emergency 
should be defined as an unpredictable event. If the spending 
proposal is not something that occurred as a result of an 
unpredictable event, do not allow it. It is interesting to go 
back and look at war spending since the Second World War we see 
that nearly all of that spending was included in normal 
budgets, not supplementary budgets.
    The third, pass a law that requires the American Government 
to operate in a fiscally responsible manner and define ``fiscal 
responsibility.''
    The fourth, move the whole of the Federal accounting 
process to full accrual accounting.
    And the fifth, introduce an appropriation process that is 
based upon the purchase of outputs designed to produce given 
outcomes instead of a process that is designed around 
allocating bulk funds of money to a particular issue with no 
real understanding of exactly what the government gets in 
return for those expenditures. Certainly at the time of 
appropriation, there is no indication that those expenditures 
will buy this reduction in hunger, this reduction in poverty, 
or this improvement in military superiority or readiness. Thank 
you, Mr. Chairman.
    Senator Carper. Thank you very much.
    I am just going to start, if I could. Our vote has not 
started. We were expecting it to start by now. I am told we 
have two judicial votes, maybe more voters later tonight. But 
let's go as far as we can quickly.
    Mr. McTigue, you shared with us there the advice to 
Congress in five pieces, and I think that was in your 
testimony. But I think those are much welcome, much 
appreciated. What advice would you have in terms of things that 
the Executive Branch needs to do?
    Mr. McTigue. The solution to this problem, in my view, does 
not belong with the departments or the agencies. The solution 
belongs on Capitol Hill and at 1600 Pennsylvania Avenue. Unless 
those two groups are prepared to buy into the solution, it is 
not going to happen.
    Senator Carper. I understand that, but the advice that you 
gave was directed to the Congress. What advice would you have 
for the chief executive?
    Mr. McTigue. Abide by those rules that the Congress will 
actually implement.
    Senator Carper. Should the chief executive's 
responsibilities include suggesting these rules or some 
variations of these rules, encouraging?
    Mr. McTigue. However you can get the job done, I would buy 
into it.
    Senator Carper. I would suggest that it would be helpful to 
have--when I look at Delaware's--we used to have the worst 
credit rating in the country, all the 50 States. We were the 
best in the country in terms of overestimating revenues and 
underestimating spending. I was in the Navy for 23 years. I 
have seen drunken sailors spend. And we were pretty much the 
counterpart of that in State government in my State. We had 
great leadership from our former governor, Pete du Pont, and 
working with the legislature, we are really providing strong 
moral suasions. So I keep coming back to that, I know, but I 
appreciate very much the advice you have given to the Congress. 
I would remind us all that it is helpful to have a chief 
executive who believes this stuff is important and pushes for 
it.
    Let me just ask the other three panelists, react, if you 
will for us, to the list of recommendations that Mr. McTigue 
has been good enough to provide.
    Mr. Walker. I think they are generally consistent with some 
of the ones that I have in my testimony, and I also have an 
exhibit that has a number of other recommendations in it as 
well.
    If you do not have a President that is going to provide 
leadership on this, you are not going to get much progress. I 
mean, the country only has one chief executive officer, and 
that is the President of the United States. The Congress is a 
co-equal branch of government, but it is a committee, and you 
cannot lead by committee. And, therefore, you need a President 
who will make it a priority, and you need them to be able to 
work on a bipartisan basis, and you have to have the support of 
bipartisan leadership. But you need a few people who care, and 
I think the three of you are it.
    The last thing I would say is, we talk a lot about waste. 
We ought to define it. And after we define it, we can try to 
measure it, and then we can create more visibility. I would 
respectfully suggest that waste is the failure of the taxpayers 
as a whole to receive reasonable value for money due to an 
inappropriate act or omission by anybody with discretionary 
control over government resources. That could be a Member of 
Congress. That could be somebody in the Executive Branch. That 
could be a contractor. And if you define it on that basis, it 
accounts for a lot of money.
    Senator Carper. Thank you. Are there other comments on Mr. 
McTigue's suggestions? Please.
    Mr. Bixby. Just one of the things that he mentioned that I 
very much agree with is the idea of the long-term perspective 
on the budgets, and that was one of our recommendations as 
well, whether it is 50 years or whether you put a target on it 
or whether you do triggers or something, those are all details. 
But I think some mechanism of injecting the long-range view 
into the budget process is really very important.
    Senator Carper. Is there any disagreement on that point on 
this panel?
    Mr. Horney. No. I think it is very important to look very 
hard at the long term. I would point out that, in fact, the 
President's budget already includes projections over the long 
term in the Analytical Perspectives Volume. Now, it does not 
get highlighted as much as it should, so perhaps one thing to 
do is just highlight that more. But it is in the President's 
budget. The Congressional Budget Office does long-term 
projections. They have been doing them every 2 years. I think 
Director Orszag has now committed that they will do those at 
least annually. So I think trying to highlight those long-term 
projections is a good idea.
    Trying to build them into the budget process I think could 
present a lot of difficulties in the same way that trying to 
make the budget a fully accrual budget I think has some 
downsides that you need to be careful about.
    My memory of that was in the fiscal year 1992 budget that 
OMB Director Darman proposed and got included in the 
President's budget a proposed change in the treatment of the 
Pension Benefit Guaranty Corporation to put it on a net present 
value or accrual basis, which certainly has some conceptual 
appeal to it. But what he did was he said let's change the 
accounting for PBGC; by the way, let's put in place some 
changes in PBGC that will start taking effect 10 or 20 years 
from now. And they save on a net present value, $1 billion. Oh, 
and by the way, that will pay for the tax cut that we want to 
put in place this year.
    So just a warning that I think trying to integrate some of 
this stuff into the budget and scorekeeping process has some 
hidden problems that need to be very carefully considered.
    Senator Carper. Good. Thank you. Let me see if this is a 
vote starting. Yes, it is. All right. I have some other 
questions, but I want to yield to Dr. Coburn, if I may. Thank 
you.
    Senator Coburn. Well, thank you for your testimony. I just 
finished reading an economic treatise on the percentage of GDP 
to government, what would have happened in this country if 
total government expenditure had been 20 percent instead of the 
35 percent. We would have produced 65 more--we would have a GDP 
of $65 trillion right now, not $13 trillion. So I do not think 
it is as important that we have a percent. I think what is 
important is that we manage what we do.
    Being an accountant, I cannot--even though it gets gamed--
and you are very accurate in that. I can get gamed. But we game 
in everything now. Accrual accounting is the only way you can 
accurately reflect what is happening and what is going to 
happen. What we need to do is put in the--if we put in accrual 
accounting, make sure you cannot game it. That I think was 
basically your point. They used accrual accounting so they 
could look better to cut taxes. The point is we want accrual 
accounting so it accurately reflects where we are going and 
accurately measures where we have been.
    I think what we have seen, both the Concord Coalition and 
several others do, along with David Walker, is raising the 
level of awareness in this country about the significance of 
our problems. Washington does not change until it is demanded 
to be changed by the American people. And I think you are on 
the right track in doing that. I am intrigued by Mr. McTigue's 
recommendations, especially the intergenerational report card, 
because that is part of that communication process. And I 
wonder what you all would think about that. I know what Mr. 
McTigue thinks.
    Mr. Walker. When I was Comptroller General, we recommended 
several years ago to create a new financial statement that 
would be for fiscal sustainability and intergenerational 
equity. And I think that is critically important because we are 
mortgaging the future of our kids and grandkids, and that is 
not only fiscally irresponsible, it is morally reprehensible.
    Senator Coburn. OK. One of the things we hear all the time 
is what we cannot do because of the Budget Act and the rules 
and how we score it. What are your thoughts about dynamic 
scoring versus static scoring?
    Mr. Horney. First of all----
    Senator Coburn. You have a lot to say on that, I am sure.
    Mr. Horney. It is something I have been involved in for a 
long time working at CBO and other places.
    First of all, I just want to be clear that, in fact, both 
the Congressional Budget Office and the Joint Committee on 
Taxation do not do purely static scoring. They take behavioral 
effects into account, so they take into account that if excise 
taxes on cigarettes are increased, people will smoke less. So 
they take that into account.
    What they do not do is take into account the macroeconomic 
effects. They assume that total GDP, real and nominal, is not 
changed. While conceptually everybody understands that the 
things we do can have effects on the macro economy, there are 
two big problems with trying to integrate that in.
    One is the models are not very good about exactly what 
those effects are. They give you a wide range of results. They 
also generally show that on most of the kinds of changes that 
the Congress and the President are considering, the effects are 
pretty small.
    The other thing is that it really depends on how they are 
paid for. For instance, the Treasury did a study last year of 
the macroeconomic effects of extending the President's tax 
cuts. They agreed, the same way that many other models do, that 
macroeconomic effect, is pretty small, but even that small 
effect they only got because they assumed that the extension of 
the tax cuts would be fully paid for by reductions in spending.
    So in order to do it, you have to know what is going to 
happen--is it going to be paid for or not?--and then trying to 
figure out the exact models. And so people who say conceptually 
it makes sense, I think almost all the Joint Committee on 
Taxation and CBO, and I think even the Administrations in 
general have said it is not ready to be put into the scoring 
system. It is something, certainly, that should be considered 
when legislation, big major legislation is being considered.
    Senator Coburn. That is a great comment, but I note with 
certain consistency how inaccurate CBO is when we see what 
their estimates were and then we look back and see the effect. 
So I do not know that we have got a good handle on that either 
historically or static or dynamically.
    Mr. Walker.
    Mr. Walker. Obviously, you have to make a lot of 
assumptions when you do dynamic scoring. I think it is fine to 
use as a supplemental disclosure, but just understand that 
dynamic scoring can work for or against you.
    For example, if you assume that we continue on our present 
path, tax at roughly the same percentage of GDP that we have 
been, and do not reform our entitlement programs, do not 
constrain spending, then that means that debt levels will 
mushroom, causing a drag on the economy, and causing upward 
pressure on interest rates. So dynamic scoring can work for you 
or against you.
    The last thing I would say is that in order to achieve 
change, the pain associated with doing nothing has to be more 
acute than the pain incurred by doing something. And, 
therefore, one of the concepts that we are exploring at the 
Peterson Foundation is identifying all those members who are 
tacitly sponsors of the ``do nothing'' plan and to demonstrate 
what the ``do nothing'' plan will do to America. It's not a 
pretty picture.
    Senator Carper. Let me just interrupt for a moment. We have 
probably about 14 minutes to go before time runs out entirely, 
and if it is agreeable to my colleagues, we may want to 
consider concluding here, finish asking our questions, but 
yielding then to Senator Voinovich for his questions, and then 
complete this.
    Senator Coburn. I will just have one more question.
    Senator Carper. Go ahead.
    Senator Coburn. I read with interest, Mr. Horney, your 
statement on health care. The problem I have with that is, as I 
look at health care, I do not think we are spending too little 
on health care. I think we are spending too much. And I think 
when we look at the health care outside of the government as 
well as the health care inside the government, what we have is 
a model that is highly inefficient. There is no market forces 
that truly play because we do not have a true market anywhere 
in health care.
    The other thing is nobody talks about health care from the 
prevention paradigm. We talk about it in terms of the treatment 
paradigm. And we will never get out of the problem of health 
care until we switch our paradigm to prevent the chronic 
diseases that consume 75 percent of our health care dollars.
    So anything we do in terms of health care, we have to do 
two things: One, we need to let competitive forces work to 
allocate the resources better; but, two, we have to change our 
paradigm to where we emphasize prevention rather than 
emphasizing treatment. And in 15 years, we will start to see 
this tremendous--with the demographic shift, we will start to 
see this 9-percent average--or it may be less than that. You 
said 2.5 percent, I think, above--but, anyhow, the only thing 
that is above it is higher education. And it is the same thing. 
There is not a good enough competitive model there.
    So my hope is that as you all carry this message, you 
incorporate the fact is that we have to change the paradigm 
under which we do health care in this country. And countries 
that have done that are achieving good savings today on the 
downside of that.
    With that, I would end. Thank you.
    Senator Carper. Great questions. Senator Voinovich.
    Senator Voinovich. How do we get the Presidential 
candidates involved, make it an issue in their campaigns about 
doing something about that entitlement?
    Mr. Bixby. Well, we have been to Iowa and New Hampshire and 
South Carolina and Florida and a lot of places like that. I 
think we put out a statement--the Fiscal Wake-up Tour did--of 
questions for the Presidential candidates that we brought to 
all of the media markets in those areas.
    I mean, ultimately, you cannot force them to address this 
issue, but you can try to make it as much of a public issue as 
you can. I know that is what we are doing with the Fiscal Wake-
Up Tour.
    Mr. Walker. One of the reasons that we are releasing the 
film in August is that it directly precedes the Presidential 
election cycle. We are also going to be part of film festivals 
at both the Democratic and Republican National Conventions. We 
are also going to release an 8-minute version that we are going 
to send to every political program to encourage them to use 
some of the material that is in it and to ask tough questions. 
We are going to send it to debate moderators. We are going to 
analyze all of the positions of the Presidential candidates on 
the issues of interest to the foundation, and we are going to 
publicize those results as well.
    It is nice to be able to have a fair amount of money to be 
able to focus on some of these issues, because, frankly, having 
been involved in the Fiscal Wake-Up Tour for 2\1/2\ years, the 
American people are smarter than people give them credit for. 
When you state the facts and speak the truth, they get it. They 
get it pretty quick.
    Senator Voinovich. Well, I am just saying--go ahead, Mr. 
Horney.
    Mr. Horney. I would love to see a full-blown debate between 
Presidential candidates about what to do. I am not sure I 
think, given the way campaigns work, that is going to happen. 
My hope--and I think it is a little more realistic--is that 
neither candidate will take pledges, ironclad pledges that lock 
them into positions that make it hard to do what needs to be 
done after they are elected. I hope that at least.
    Senator Voinovich. Yes. Well, one of the thoughts that I 
had was that we have--and I am running out of time, but Mr. 
Bixby and General Walker have been working on--we have the SAFE 
legislation over in the House, SAFE in the Senate, and we have 
the Commission on Fiscal Responsibility that Kent Conrad--and I 
know you do not like commissions, but the fact of the matter is 
that my thought is that if you could get us to form the 
commission that is made up of legislators but for two people in 
the commission, fiscal commission, legislation--I think SAFE 
has got a couple of other people on it.
    I think the Government Accountability Office and--but, 
anyhow, the point would be that if you could get the 
Presidential candidates--they are both in the Senate--to sign 
onto this and say that if the commission is put in place, I 
will appoint my treasurer, I will put my head of OMB on there 
so we could get started with this. And then the neat thing 
about this is that you have expedited--you tell the people on 
the committee that if three-quarters of them agree that you get 
expedited procedure and you are going to get an up and down--
now, maybe you could provide for some amendments or something 
like that. But nobody is going to really work on this unless 
they know that after they do their work, something is going to 
happen. And we do not want to have happen what happened to 
Connie Mack and to John Breaux where they went out and I think 
they did a halfway decent job--in fact, I am tempted to just 
take their work product and stick it in, just introduce it. 
There are some controversial things, but they did a great job. 
And it was dead on arrival at the White House after the White 
House had pledged themselves that they were going to do 
something about entitlements and about that.
    You have to have something to force this to happen, or we 
will be here 5 years from now still talking about it. Mr. 
Walker.
    Mr. Walker. Let me say something quickly. I had the 
opportunity to testify before the House Budget Committee a 
couple of days ago, and one of the things that I was asked is 
what we should expect from the Presidential candidates. And I 
said five things that are in my testimony, one of which is that 
they should endorse a capable, credible, and bipartisan 
commission or task force to make recommendations to the next 
Congress and the next President. That also keeps them from 
being able to get too specific with regard to what proposals, 
but it provides a mechanism in which we hopefully can make some 
progress.
    Thank you.
    Mr. Bixby. The dean at my law school once used to tell us 
that water does not run uphill without a pump, and cutting 
taxes--cutting these programs or raising taxes is sort of the 
equivalent of expecting water to run uphill.
    So the purpose of the commission, I agree with Mr. Horney 
that if there is not a political consensus to address these 
issues, no commission is going to help. But I think there is a 
developing political consensus as we see on the Fiscal Wake-Up 
Tour, that there is a problem to be dealt with, and maybe the 
commission can help provide the pump for water to run uphill.
    Senator Carper. Mr. McTigue, just one minute and we need to 
go.
    Mr. McTigue. My very brief response to you, Senator 
Voinovich. Perhaps if somebody was to look at the British, the 
Australian, or the New Zealand legislation, introduce a bill 
shaped on that on fiscal responsibility, and invite the 
participation of the candidates, you might actually get them to 
take a position.
    Senator Carper. Good point.
    I just want to conclude. Sometimes we have these hearings, 
and we come to the conclusion, and we are ready to leave, and 
the witnesses are, too. In this case, I am not ready to leave, 
but we have other responsibilities that we need to meet.
    I just want to say thank you for being part of this 
excellent session, and we know that you have been working these 
venues for a long time--frankly, so have we. We are going to 
continue to do our dead level best, and we know that you are as 
well.
    Thank you so much for joining us today, and that said, this 
hearing is adjourned.
    [Whereupon, at 4:50 p.m., the Subcommittee was adjourned.]


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