[House Hearing, 111 Congress]
[From the U.S. Government Publishing Office]





               OVERSIGHT OF FEDERAL FINANCIAL MANAGEMENT

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

                                HEARING

                               before the

                 SUBCOMMITTEE ON GOVERNMENT MANAGEMENT,
                     ORGANIZATION, AND PROCUREMENT

                                 of the

                         COMMITTEE ON OVERSIGHT
                         AND GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                     ONE HUNDRED ELEVENTH CONGRESS

                             FIRST SESSION

                               __________

                              JULY 8, 2009

                               __________

                           Serial No. 111-57

                               __________

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


  Available via the World Wide Web: http://www.gpoaccess.gov/congress/
                               index.html
                      http://www.house.gov/reform


                  U.S. GOVERNMENT PRINTING OFFICE
57-382 PDF                WASHINGTON : 2010
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing 
Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; DC 
area (202) 512-1800 Fax: (202) 512-2104  Mail: Stop IDCC, Washington, DC 
20402-0001










              COMMITTEE ON OVERSIGHT AND GOVERNMENT REFORM

                   EDOLPHUS TOWNS, New York, Chairman
PAUL E. KANJORSKI, Pennsylvania      DARRELL E. ISSA, California
CAROLYN B. MALONEY, New York         DAN BURTON, Indiana
ELIJAH E. CUMMINGS, Maryland         JOHN M. McHUGH, New York
DENNIS J. KUCINICH, Ohio             JOHN L. MICA, Florida
JOHN F. TIERNEY, Massachusetts       MARK E. SOUDER, Indiana
WM. LACY CLAY, Missouri              JOHN J. DUNCAN, Jr., Tennessee
DIANE E. WATSON, California          MICHAEL R. TURNER, Ohio
STEPHEN F. LYNCH, Massachusetts      LYNN A. WESTMORELAND, Georgia
JIM COOPER, Tennessee                PATRICK T. McHENRY, North Carolina
GERALD E. CONNOLLY, Virginia         BRIAN P. BILBRAY, California
MIKE QUIGLEY, Illinois               JIM JORDAN, Ohio
MARCY KAPTUR, Ohio                   JEFF FLAKE, Arizona
ELEANOR HOLMES NORTON, District of   JEFF FORTENBERRY, Nebraska
    Columbia                         JASON CHAFFETZ, Utah
PATRICK J. KENNEDY, Rhode Island     AARON SCHOCK, Illinois
DANNY K. DAVIS, Illinois             ------ ------
CHRIS VAN HOLLEN, Maryland
HENRY CUELLAR, Texas
PAUL W. HODES, New Hampshire
CHRISTOPHER S. MURPHY, Connecticut
PETER WELCH, Vermont
BILL FOSTER, Illinois
JACKIE SPEIER, California
STEVE DRIEHAUS, Ohio
------ ------

                      Ron Stroman, Staff Director
                Michael McCarthy, Deputy Staff Director
                      Carla Hultberg, Chief Clerk
                  Larry Brady, Minority Staff Director

  Subcommittee on Government Management, Organization, and Procurement

                 DIANE E. WATSON, California, Chairman
PAUL E. KANJORSKI, Pennsylvania      BRIAN P. BILBRAY, California
JIM COOPER, Tennessee                AARON SCHOCK, Illinois
GERALD E. CONNOLLY, Virginia         JOHN J. DUNCAN, Jr., Tennessee
HENRY CUELLAR, Texas                 JEFF FLAKE, Arizona
JACKIE SPEIER, California            ------ ------
PAUL W. HODES, New Hampshire
CHRISTOPHER S. MURPHY, Connecticut
MIKE QUIGLEY, Illinois
                      Bert Hammond, Staff Director






















                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on July 8, 2009.....................................     1
Statement of:
    Cuellar, Hon. Henry, a Representative in Congress from the 
      State of Texas.............................................    59
    Dodaro, Gene L., Acting Comptroller General of the United 
      States; and Richard L. Gregg, Acting Fiscal Assistant 
      Secretary, U.S. Department of the Treasury.................     3
        Dodaro, Gene L...........................................     3
        Gregg, Richard L.........................................    50
    Sherry, Peggy, Acting Chief Financial Officer, Department of 
      Homeland Security; Ronald Spoehel, Chief Financial Officer, 
      NASA; and Brian M. Riedl, Senior Policy Analyst and Grover 
      Hermann fellow in Federal Budgetary Affairs, the Heritage 
      Foundation.................................................    75
        Riedl, Brian M...........................................   105
        Sherry, Peggy............................................    75
        Spoehel, Ronald..........................................    90
Letters, statements, etc., submitted for the record by:
    Cuellar, Hon. Henry, a Representative in Congress from the 
      State of Texas, prepared statement of......................    61
    Dodaro, Gene L., Acting Comptroller General of the United 
      States, prepared statement of..............................     6
    Gregg, Richard L., Acting Fiscal Assistant Secretary, U.S. 
      Department of the Treasury, prepared statement of..........    53
    Riedl, Brian M., Senior Policy Analyst and Grover Hermann 
      fellow in Federal Budgetary Affairs, the Heritage 
      Foundation, prepared statement of..........................   108
    Sherry, Peggy, Acting Chief Financial Officer, Department of 
      Homeland Security, prepared statement of...................    78
    Spoehel, Ronald, Chief Financial Officer, NASA, prepared 
      statement of...............................................    92

 
               OVERSIGHT OF FEDERAL FINANCIAL MANAGEMENT

                              ----------                              


                        WEDNESDAY, July 8, 2009

                  House of Representatives,
            Subcommittee on Government Management, 
                     Organization, and Procurement,
              Committee on Oversight and Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2 p.m., in 
room 2247, Rayburn House Office Building, Hon. Diane E. Watson 
(chairwoman of the subcommittee) presiding.
    Present: Representatives Watson, Cuellar, and Bilbray.
    Staff present: Bert Hammond, staff director; Valerie Van 
Buren, clerk; Adam Bordes and Deborah Mack, professional staff; 
Adam Fromm, minority chief clerk and Member liaison; 
Christopher Hixon, minority senior counsel; Jonathan Skladany, 
minority counsel; and Brien Beattie, minority professional 
staff member.
    Ms. Watson. The Subcommittee on Government Management, 
Organization, and Procurement of the Committee on Oversight and 
Government Reform will now come to order. Today's hearing will 
review the outcomes of the Government Accountability Office's 
[GAO's], audit of the Federal Government's consolidated 
financial statement for the fiscal year 2008.
    I am so sorry to announce that we have a vote on the floor 
and our key witness, Mr. Cuellar, is down voting. I am going to 
recess for the next 20 minutes. I think we have three votes, so 
please be patient. Thank you so much for coming. As soon as we 
finish, we shall return. Thank you so much. We appreciate your 
attendance.
    [Recess.]
    Ms. Watson. We want to come out of our recess. Since we are 
working against the clock, I am going to go on and make my 
opening statement while my staff tries to find our first 
witness. If we don't get the first witness, we will go to the 
second panel.
    I thank you for your patience. I want to welcome you to 
this afternoon's hearing on the Federal Government's 
consolidated financial statements for 2008 and the 
subcommittee's review of Federal agencies' progress to date in 
modernizing their management systems and internal controls. I 
welcome our distinguished witnesses and look forward to hearing 
all of your testimonies.
    As you know, we had this hearing scheduled for a previous 
date. We had to postpone that because of conflicts.
    I am pleased to state that some progress has been made 
since last year and for the second year running, GAO was able 
to offer unqualified opinions on the 2008 Statement of Social 
Insurance. In 2008, a total of 21 out of 24 CFO Act agencies 
received unqualified opinions for an increase of one additional 
clean audit opinion over last year. This is the highest total 
reported in the last 6 years. Also, I am happy to share that 
for the 4th year in a row, all major Federal agencies satisfied 
the 45 day financial audit deadline as mandated by the 
stringent reporting guidelines established by the OMB.
    Across the Government, the overall number of material 
weaknesses decreased from 39 to 32, or 18 percent, mostly due 
to a decline in material weaknesses related to deficiencies in 
agency financial systems and security. The outstanding material 
weaknesses are linked to deficiencies in financial management 
and reporting; financial systems and security; property, plant, 
and equipment; and budgetary recording. Some of the changes 
needed to improve these areas are related to the financial 
preparation process; changes in information technology 
security; the receipt and the tracking of property, plant, and 
equipment; and funds control.
    The good news is that for the fifth consecutive year, there 
has been an almost 50 percent decrease in material weaknesses 
since the year 2001.
    However, throughout the Federal Government, agencies 
continue to demonstrate deficiencies that prevent the GAO from 
rendering an opinion on the U.S. Government's consolidated 
financial statement. For the 12th year in a row, GAO was unable 
to render an opinion on the Federal Government's consolidated 
financial report statement, mostly due to material weaknesses 
in financial reporting. This is an area where change must occur 
without delay.
    We recognize that the Federal Government has recently 
undertaken drastic steps to stabilize the Nation's financial 
markets and the long term effects of these actions in the midst 
of a recession are unknown. This is all the more reason why 
Federal agencies must be more aggressive in streamlining their 
management systems and operations.
    Mr. Dodaro, I will be interested in hearing your comments 
regarding the status of Federal agencies' efforts to put in 
place effective management systems and internal controls in 
this time of limited resources and how Federal agencies can 
expedite their efforts to address weaknesses related to 
financial reporting, systems management, and improper payments.
    I also look forward to hearing Mr. Gregg's comments 
regarding the impact of the ongoing recession and last year's 
action by the Federal Government to stabilize the markets on 
our Nation's future financial condition.
    In addition, we will hear from Ms. Sherry and Mr. Spoehel 
regarding the changes their agencies are making to improve 
their protocols related to financial reporting and management 
systems.
    As we review the performance of our Federal agencies today, 
we will also hear from Congressman Henry Cuellar about the 
legislation he has sponsored--if we can find him--H.R. 2142: 
The Government Efficiency, Effectiveness, and Performance 
Improvement Act of 2009. The intent of Mr. Cuellar's 
legislation is to buildupon the Government Performance and 
Results Act of 1993 by requiring that every Federal program be 
assessed at least once every 5 years. The legislation also 
requires the Performance Improvement Council and agency 
improvement officers to comply.
    Once again, I would like to thank the panelists for joining 
us today. We look forward to your testimony.
    Ms. Watson. Members who come in, without objection we will 
have them put their statements on the record. I will allow the 
minority member, the ranking member, to make an opening 
statement. We hope that we get other Members, and if so, they 
can make a very short statement.
    But what I am going to do is call up the second panel. So I 
am going to ask the second panel to come up. We will start with 
Mr. Dodaro and then he will be followed. You can sit in the 
order that you see your name tags.
    Now, it is the committee's policy that witnesses be sworn 
in. I would like the members of the panel to now stand. I will 
administer the oath. Would you please raise your right hands?
    [Witnesses sworn.]
    Ms. Watson. Thank you. Let the record show that the 
witnesses have answered in the affirmative. You may now be 
seated.
    Mr. Dodaro is the Acting Comptroller General of the United 
States and the head of the Government Accountability Office, 
the investigative and auditing agency for the Congress. He has 
held such positions as Chief Operating Officer and the head of 
the GAO's Accounting and Information Management Division over 
the course of his distinguished career with the agency.
    I ask that each of the witnesses now give a brief summary 
of their testimony. Keep this summary under 5 minutes if you 
can. Your complete written statement will be included in the 
hearing record.
    Let me go on and introduce Mr. Richard L. Gregg who has 
served at the Department of Treasury with distinction for 36 
years. Prior to his retirement, Mr. Gregg was the Commissioner 
of the Financial Management Service for 9 years. Before that, 
he served as the Commissioner of the Bureau of the Public Debt 
for 10 years. Mr. Gregg has also held numerous other management 
positions at the Treasury Department during his long career.
    So let us start now with Mr. Dodaro. Please proceed.

STATEMENTS OF GENE L. DODARO, ACTING COMPTROLLER GENERAL OF THE 
 UNITED STATES; AND RICHARD L. GREGG, ACTING FISCAL ASSISTANT 
           SECRETARY, U.S. DEPARTMENT OF THE TREASURY

                  STATEMENT OF GENE L. DODARO

    Mr. Dodaro. Good afternoon, Madam Chairwoman. I appreciate 
the opportunity to be with you today to discuss GAO's audit of 
the consolidated financial statements for the Federal 
Government for fiscal year 2008.
    As you pointed out in your opening statement, this year for 
2008 like prior years, we were unable to give an opinion on the 
overall consolidated financial statements on accrual basis 
largely due to a wide range of serious deficiencies. But two 
that I would single out, one would be serious and longstanding 
problems at the Department of Defense, and two is the inability 
to reconcile transactions that take place among Federal 
Government agencies. Those have been problems from the very 
beginning and remain problems today, although progress is being 
made.
    As you noted in your opening statement, 21 departments and 
agencies were able to get clean opinions this past year. That 
is clearly notable progress and we are pleased to see that. 
That compares to only 6 of the 24 agencies when the CFO Act 
implementation requirements were made Government-wide back in 
1996. So that is clear progress.
    The issues that remain, however, are significant. The three 
that do not have clean audit opinions are three of the largest 
Federal departments: DOD, the Department of Homeland Security, 
and NASA. So those agencies need to continue to work on their 
problems and make progress like the rest of the Federal 
agencies across the Government.
    Now as you mentioned, last year since we prepared our audit 
on Treasury's financial statements, there have been significant 
efforts made through the Economic Stabilization Act to create 
the Troubled Asset Relief Program and also the American 
Recovery and Reinvestment Act. Both of those programs authorize 
huge sums of money, in one case $700 billion and in the case 
$787 billion. They bring new financial management challenges to 
the Federal departments and agencies, so those issues will have 
to be worked on this year.
    But they also bring new requirements to Treasury to finance 
the Government's operations. If I could direct your attention 
to the charts, I would like to show the impact that it is 
having on the Federal Government's financial position. We are 
going to use the first one, please.
    The first one shows debt held by the public and how that 
has changed, Madam Chairwoman. The debt held by the public in 
fiscal year 2001 was $3.3 trillion or about 33 percent of the 
gross domestic product. By fiscal year 2008, that had jumped to 
$5.8 trillion and almost 41 percent of the gross domestic 
product. That is before some of these huge new initiatives had 
been approved. Next year's projection is that the debt held by 
the public will go to $8.5 trillion or almost 60 percent of the 
gross domestic product. Also, the current debt ceiling for the 
Federal Government is $12.1 trillion. That is likely going to 
have to be raised again this year to accommodate financing 
these operations.
    The next chart shows what the future could look like. The 
blue line projection is the CBO's baseline extended which shows 
that we are headed to historical high levels. The largest debt 
that we have ever had as a percent of gross domestic product 
occurred during World War II. At that point it was 109 percent 
of the gross domestic product. Our projections show that it 
could reach that level again as early as around 2020, between 
2020 and 2025, unless some action is taken.
    The last chart I will show gives you some idea of the 
magnitude of the gap that is occurring. Basically, the Federal 
Government is on an unsustainable long term fiscal path. This 
shows right now in 2008 the revenue that is expected to be 
collected, represented by the line, is not enough to fund the 
entire Federal Government's activities and so we borrow the 
rest of the money. That borrowing is going to go up in 2019 and 
by 2020, unless some action is taken, we would only have enough 
money to pay interest on the national debt. That is the blue 
bar at the bottom. The green bar is Social Security payments to 
individuals. The red bar is Medicare and Medicaid. We wouldn't 
even have enough money to pay that. And the orange is all the 
rest of the Federal Government, including the Department of 
Defense. So this is a very serious issue.
    Clearly, our Government had to move to deal with 
stabilizing the banking system. Clearly, the Government had to 
move to deal with the economic downturn, which is very serious. 
But that same level of intensity needs to be focused on a long 
term plan to bring the Federal Government's financial situation 
on a more sustainable long term path.
    That concludes my opening statements, Madam Chairwoman. I 
would be happy to answer questions at the appropriate time.
    [The prepared statement of Mr. Dodaro follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    
    Ms. Watson. Thank you so much. Mr. Gregg, you can proceed.

                 STATEMENT OF RICHARD L. GREGG

    Mr. Gregg. Thank you, Chairwoman Watson. It is a pleasure 
to be here today to discuss the Financial Report of the U.S. 
Government and the related audit by the Government 
Accountability Office.
    The Financial Report, incorporating the consolidated 
Government-wide financial statements, is designed to report on 
the financial position and condition of the Federal Government 
following U.S. Federal generally accepted accounting 
principles. Your interest in improving Federal financial 
management is greatly appreciated.
    The Financial Report reflects the Treasury's and OMB's 
longstanding responsibility to provide the Congress and the 
public with timely and reliable information on the cost of 
Government's operations, the source of funds used to fund them, 
and the implications of the Government's financial 
responsibilities.
    The Government's net operating cost for fiscal year 2008 
was just over $1 trillion, more than triple the net operating 
cost of the prior fiscal year. This increase resulted from 
Government revenues that stayed relatively flat while costs 
increased. The Government's budget deficit for the fiscal year 
ending on September 30, 2008 was $455 billion, which is more 
than double the deficit for the prior year.
    Appropriately, the Financial Report discusses the key 
fiscal challenges facing the Federal Government. At the end of 
fiscal year 2008, the Government had just begun to initiate a 
number of unprecedented actions to deal with the economic 
downturn. As such, the Financial Report discusses the financial 
impact on the Government's operations stemming from those steps 
and the steps the Government took to restore stability in the 
U.S. financial system. While these events had minimal impact on 
the fiscal year 2008 statements, they will almost certainly 
play a more substantial role in fiscal year 2009.
    Although the economy and market stabilization issues arose 
in 2008 and of course remain ongoing concerns, the longer term 
issues of fiscal sustainability cannot be overlooked. 
Accordingly, the Report also discusses the Government's long 
term fiscal challenges funding Social Security, Medicare, and 
Medicaid.
    For fiscal year 2008, GAO was again unable to express an 
opinion on most of the Government-wide financial statements 
that appear in the Financial Report. The lone exception was a 
second consecutive unqualified or clean audit opinion on the 
Statement of Social Insurance which shows the estimated net 
present cost of the Government's exposures of its social 
insurance programs, primarily Social Security and Medicare, 
over 75 years.
    The disclaimer on the remainder of the statements stems 
from three longstanding material weaknesses: First is serious 
financial management control issues at the Department of 
Defense. Second is the Government's inability to adequately 
account for and reconcile intragovernmental activity and 
balances between agencies. Third is the Government's 
deficiencies in the process for preparing the consolidated 
financial statements.
    DOD continues to work toward resolution of many accounting 
issues including those pertaining to property, inventory, 
accounts payable, and several other areas. DOD faces no small 
challenge in trying to integrate and modernize hundreds of 
financial systems. But the Department did show progress in 
fiscal year 2008 as the Corps of Engineers obtained a clean 
opinion for the first time.
    The Treasury Department, working with OMB and other 
Government agencies, has made considerable progress toward 
resolving the intragovernmental transactions and consolidation 
weaknesses. Intragovernmental transactions imbalances occur 
when two agencies conducting business with each other as 
trading partners record and report the same transaction 
differently.
    We continue to make progress on the third material 
weakness, the need to improve the process for preparing and 
consolidating the Financial Report. We have made significant 
strides in the Financial Report's preparation and consolidation 
by developing short term and long term strategies. These 
include improving data collection, better disclosure 
requirements, and more information from the agencies on an 
ongoing basis.
    In all, Treasury's and OMB's efforts to date have resulted 
in the reduction of GAO findings and recommendations by more 
than two thirds from over 150 just a few years ago to just over 
40 for the fiscal year 2008 audit. During 2008 we continued to 
make significant progress, leading to the closure of 16 of 56 
recommendations that were outstanding from the previous audit 
reports. We have implemented major strategies to address these 
remaining 40 findings through contractor support, targeted task 
groups, and extensive engagement of the CFO and audit 
community.
    In fiscal year 2009, we expect to resolve 14 of those 
remaining 40 findings. GAO identified only four new issues in 
the fiscal year 2008 audit, all of which we anticipate will be 
resolved in fiscal year 2009.
    Decision makers not only need reliable information but they 
also need timely information. While Treasury and other agencies 
continue to work toward systems and process solutions, they 
continue to meet ambitious deadlines. Agencies continue to meet 
the OMB accelerated reporting deadline of November 15th, just 
45 days after the end of the fiscal year, while Treasury 
continues to successfully compile the Government-wide report 
from the many agency reports just 30 days later. In addition, 
as you mentioned, 21 of 24 CFO agencies earned an unqualified 
opinion.
    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 
position and condition, it is not a practical document for 
communicating with American citizens or the Congress. In 
response, beginning in fiscal year 2007, the Treasury 
Department and OMB in cooperation with GAO developed and issues 
a summary report entitled, ``The Government's Financial Health: 
A Citizen's Guide to the Financial Report of the U.S. 
Government.'' This guide, which is included in the Financial 
Report, provides a summary of the key data and issues addressed 
in the full Report in a user friendly manner to the public.
    Despite our recent accomplishments and progress, much work 
remains. We will continue to work toward resolution of the 
Government's reporting process weaknesses. However, these 
reports are of limited or even minimal value if they go unread. 
As such, in addition to addressing process issues, we will 
continue to seek ways to make the Financial Report and the 
information that it contains more relevant and useful to the 
general public.
    Thank you, Chairwoman Watson. That concludes my opening 
remarks.
    [The prepared statement of Mr. Gregg follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Ms. Watson. We certainly want to thank the two of you. I 
would like you to say in place and we are going to go back to 
panel one.
    We are going to submit the questions we had to you and you 
can respond in writing in the interests of time. There is a 
little game-playing going on on the floor. There are motions to 
adjourn. So rather than run back and forth, we are going to 
stay here and at least hear your presentations. You can explain 
your bill and then we will ask for the answers, the questions 
and then the answers, through mail. I am sorry we can't share 
the responses with the audience but we are busy on the floor as 
you can see.
    Mr. Cuellar, please. Stay in place; he can use the third 
mic.

 STATEMENT OF HON. HENRY CUELLAR, A REPRESENTATIVE IN CONGRESS 
                    FROM THE STATE OF TEXAS

    Mr. Cuellar. Thank you very, very much for allowing me to 
be here with you. I want to join the Members that have helped 
me out in this particular bill.
    One of the things I have always believed is that the 
Federal Government can do two things to become more efficient, 
more effective, and more accountable. That is, we can implement 
program assessment standards and we can use those standards to 
conduct legislative oversight. But in order to perform both 
tasks, we must have accurate financial information from our 
agencies. That is a necessity.
    The piece of legislation that I have introduced is H.R. 
2142: The Government Efficiency, Effectiveness, and Performance 
Improvement Act. Improving the performance of our agencies is a 
bipartisan issue, which is a hallmark of good government. Also, 
adequate program assessments will provide agencies with data 
that can help them in the formulation of accurate financial 
information.
    Certainly, I want to thank my colleague Dennis Moore for 
his significant contributions to this legislation as well as 
other Members that have cosponsored this legislation. Also, I 
want to thank Bernice Steinhardt from the Government 
Accountability Office. She and her colleagues have written 
extensively on this area. I certainly ask you all to take a 
look at her work.
    What gets measured gets done. This is the focus of this 
particular focus that we have. It is basically looking at 
results oriented government, setting goals and performance 
targets for our agencies, and making sure that those measures 
become results that we are looking at.
    There was a book that was written more than 10 years ago, 
back in 1992, by David Osborne and Ted Gaebler. It is a book 
that they called Reinventing Government. There they talk about 
certain principles. I think, Madam Chair, that this is very 
important. They talk about how what gets measured gets done.
    If you don't measure results, you can't tell success from 
failure. If you can't see success, you can't reward it. If you 
can't reward success, you are probably rewarding failure. If 
you can't recognize failure, you can't correct it. If you can 
demonstrate results then you can win public support.
    To summarize this, I would like to just give you a little 
bit of show and tell. The rest of my testimony is here. I would 
ask you to look at bill patterns. Bill patterns for 
appropriations have been transformed across the States. As you 
know, most States have done what we call results oriented 
government. The Federal Government did a little bit in 1993 
under President Clinton, but I am using Texas as the pattern 
just as an example.
    What you see is that the bill pattern that a lot of States 
have gone to is what we call, first, the line item pattern. 
What you see there is basically that they say one item like 
travel, this is how much they get. This is how much they get 
for, let us say, services that they provide. You can see it is 
a very simple way. You don't get much information. That was in 
the 1970's.
    You move into the 1980's and move more into what we call a 
program type of bill pattern. You look at it and it sets up a 
little bit more of the programs instead of very detailed items. 
You can see a little bit of evolution.
    Then you move into the modern, and I am using Texas as an 
example. Basically, here what you would see is that you have 
the amount of services but you also have, if you keep going 
down on the area, you see goals there. You see outcomes. You 
see strategies. You get the efficiencies and how much it costs 
to do certain things, outputs.
    When you look at this type of information, the financial 
information that is provided is put in a particular area in a 
particular way that provides you more information and therefore 
provides better legislative oversight. Madam Chair, you will 
see there that you will have a goal for the agency and you will 
see what results you want to see. Instead of measuring 
activity, you will measure the results that you want to see.
    Finally, as the last thing, let me show you the next one. 
Basically, the next one is what the Federal Government looks 
like. If you look at the Federal budget, this is what we have. 
In many ways, it reminds me of what we were doing in the 1970's 
in a lot of States. You see there that it basically will say 
this program gets X amount of dollars and this next program 
gets X amount of dollars.
    It is basically what States were doing in the 1970's. Here 
we are already in the 21st century and our Federal Government 
has not gone to measuring results, measuring the information 
that we need to look at. We are still in the 1970's in many 
ways, or before that at the Federal Government.
    I think this committee, Madam Chair, has a great 
opportunity, especially now when we are spending a lot of 
money, to start looking at results instead of saying here is $1 
billion to do this.
    There is a lot more detail but I think it is all in my 
testimony. I think the show and tell was probably the best way 
to show where we are as the Federal Government and how we are 
probably light years behind what a lot of the States have gone 
to. Most of the States have moved into these performance 
measures. I know the GAO and other organizations have done a 
great job at talking about this.
    Madam Chair, I present this in a short period of time 
because we have to go vote but I would ask you to take a look 
at this information. Hopefully we can spend more time at a 
later time discussing this particular topic.
    [The prepared statement of Hon. Henry Cuellar follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Ms. Watson. While you are still seated there, let me just 
ask you this: We have had hearings on the moneys that we have 
sent into Iraq after the mission was accomplished and the plane 
loads flew. We still can't account for $9 billion. Would this 
new format that you are laying out in your bill be able to tell 
us from the Department of Defense and the Pentagon how to trace 
this money and where possibly it will go? Looking for results, 
I don't know if we got results.
    Mr. Cuellar. Right, exactly. If you look at the Federal 
bill pattern, and I can----
    Ms. Watson. Is that page 27?
    Mr. Cuellar. Well, that is part of it. It is one of my 
attachments there.
    I just gave you an example. You can put the military in the 
same thing with program military A, program military B, program 
military C, and the amounts of billions of dollars. If we would 
put it, go back to that one right here where you see the goals, 
you say we are going to give you $1 billion and from the $1 
billion we want you to meet this particular goal. Here are the 
measures that we want you to meet and if you don't meet those 
measures then, if there is a variance, we want you to come back 
and tell us why.
    The problem is we have been giving moneys in programs and 
not in setting the goals, the strategies, the outcomes that we 
want. Part of this is our problem, Madam Chair, as Members of 
Congress. We are not providing the proper oversight with the 
tools that will provide us this information.
    I believe that if you look at this, this is just an 
example, imagine if we said here is the money, billions of 
dollars, that we are sending off to Iraq. Let us say that you 
look at reconstruction. Here is the goal for reconstruction. 
Here are the outcomes we want to see. Here is the strategy. 
Here are the outputs that we want to look at. That will provide 
us more oversight to this.
    Again, Madam Chair, if you look at this, we are still stuck 
in a 1970's or pre-1970's format. I believe this committee has 
the opportunity to change the way we do business in the Federal 
Government. We are still setting moneys in programs. Here is 
the example; this is what we are doing: We are just saying 
program A, you get this amount of dollars. Sure, there has been 
some performance measures that have been done in different 
programs but they are not assessable in an easy way to Members 
of Congress.
    I guess the best thing I can do to summarize is that if you 
look at my attachments, look at the 1970's and look at the 
1980's bill patterns. Look at 2000 as the example of what Texas 
is doing. You can use California or you can look at other 
States that are doing this. Then look at what the Federal 
Government is doing. You will see that we are still stuck in 
the 1970's, pre-1970's format.
    Ms. Watson. I really want to thank you for the thought that 
you have put into your proposed legislation. Our oversight 
responsibility has not been utilized to get the best results. 
We have to find out where our dollars are going, particularly 
during the time when we have such great deficits and our debt 
is growing every day.
    Mr. Cuellar. I ask you to look at the statement, Madam 
Chair, from David Osborne. I think it summarizes it. What gets 
measured gets done. If you don't measure results, you can't 
tell success from failure. If you can't see success, you 
probably are rewarding failure.
    Ms. Watson. It is how you lay out that measurement to get 
the kind of information you want.
    Mr. Cuellar. That is correct.
    Ms. Watson. I do thank you for your proposal in front of 
us. To the audience, we will go through it and we will have 
certain questions. We are just running out of time. But we will 
have certain questions we will want to ask the witnesses and 
then they can respond in writing. We will have another hearing 
so that we can share the information that we get back with the 
general public. Thank you so much.
    We are now going to turn to the third and final panel. 
Again, I will have to ask you to stand and raise your right 
hand to be sworn in.
    As they are coming up, if you will continue to stand? First 
there is Ms. Peggy Sherry. She is the Acting Chief Financial 
Officer for the Department of Homeland Security. Ms. Sherry 
previously served as the Deputy Chief Financial Officer for the 
U.S. Holocaust Memorial Museum and as an auditor for the 
Government Accountability Office. Let me send you our 
condolences on the incident that happened within an area of 
your responsibility.
    Mr. Ronald Spoehel is the Chief Financial Officer for NASA. 
Mr. Spoehel has served as the executive vice president, chief 
financial officer, and director of ICX Technologies; as 
executive vice president, chief financial officer, and director 
of ManTech International Corp.; and as chairman and founder of 
Alpine Partners.
    Mr. Brian Riedl is a senior policy analyst and Grover 
Hermann fellow in Federal budgetary affairs for the Thomas A. 
Roe Institute for Economic Policy Studies at the Heritage 
Foundation. His areas of expertise include Federal spending, 
appropriations, economic growth, agriculture, and welfare 
reform.
    While you are standing, I will administer the oath of 
office.
    [Witnesses sworn.]
    Ms. Watson. All right, you may be seated. Let the record 
reflect that the witnesses answered in the affirmative.
    I would like to proceed with Ms. Sherry first. The briefer 
you could be, the better. Thank you.

  STATEMENTS OF PEGGY SHERRY, ACTING CHIEF FINANCIAL OFFICER, 
    DEPARTMENT OF HOMELAND SECURITY; RONALD SPOEHEL, CHIEF 
  FINANCIAL OFFICER, NASA; AND BRIAN M. RIEDL, SENIOR POLICY 
ANALYST AND GROVER HERMANN FELLOW IN FEDERAL BUDGETARY AFFAIRS, 
                    THE HERITAGE FOUNDATION

                   STATEMENT OF PEGGY SHERRY

    Ms. Sherry. Thank you, Chairwoman Watson, Ranking Member 
Bilbray, and members of the subcommittee for the opportunity to 
testify before you on the results of the Department of Homeland 
Security's fiscal year 2008 financial statement audit.
    I also thank you for enacting the DHS Financial 
Accountability Act. With the passage of this act, DHS launched 
an ambitious multi-year effort to build assurances for internal 
controls as well as to execute corrective actions to improve 
financial accounting and reporting.
    DHS received a disclaimer of opinion on its fiscal year 
2008 financial statements. However, for the third consecutive 
year, audit results show we continue to make steadfast 
progress. Auditors noted the Department's progress in 
implementing corrective actions and improving the quality and 
reliability of our financial reporting. Our multi-year 
corrective action plans led to reducing the number of material 
weaknesses from 10 to 7 to 6 in the past 3 years. We also 
reduced the number of disclaimer conditions from 10 to 6 to 3 
in the past 3 years.
    In addition, the Secretary's Financial Reporting Assurance 
Statement has improved from a statement of no assurance in 
fiscal year 2005 to a statement that illustrates internal 
controls are well designed in fiscal year 2008. For fiscal year 
2009, the Department's goal is to provide our first ever 
assurance that internal controls are effectively working with 
the exception of those in a few components.
    Audit challenges do remain but in more focused areas. We 
are partnering with and providing oversight to the Coast Guard, 
the Transportation Security Administration, and FEMA to address 
audit disclaimer and material weakness conditions.
    We continue to demonstrate progress in performance 
reporting. I am pleased that our 2008 Performance Report was 
recently ranked fourth highest in the Federal Government for 
providing useful information on the public benefits and 
outcomes that DHS delivers. This is particularly noteworthy 
since 2 years ago DHS was ranked 21 out of 24. We improved the 
link between resources and outcome oriented performance goals, 
and we described our improvement strategies when goals were not 
met.
    We continue to implement initiatives aimed at increasing 
financial management competencies and sustaining financial 
management improvements throughout the Department. For 
instance, in the fall we released the DHS Financial Management 
Policy Manual. This online manual provides guidance on budget 
formulation, execution, financial management, accounting, and 
reporting while introducing standardization throughout DHS with 
a strong focus on internal controls.
    Also, we issued the third edition of the Internal Control 
Playbook which outlines the Department's strategy and process 
to eliminate internal control weaknesses and build strong 
management assurances.
    The most important part of building our core financial 
management competencies is strengthening and training our 
workforce. We are in our fourth series of the CFO Mentorship 
Program for mid-level managers to help create a pipeline of 
strong candidates for senior financial management leadership 
roles at DHS. Additionally, nearly 400 newly hired employees 
from across the country have attended common financial 
management training. They learn about the different missions 
within the Department, our core financial functions, and key 
financial management fundamentals. I also sponsor a recurring 
certification program to professionalize the DHS workforce.
    As we make improvements in our financial reporting and 
strengthen the skills of our workforce, we continue moving 
forward to consolidate our financial systems. This initiative 
will greatly improve the quality of and control over DHS 
financial data, making financial accounting processes more 
efficient and serving as the foundation for standard business 
and financial management practices across the Department.
    Financial management has come a long way at DHS and I am 
inspired by the extraordinary efforts of our dedicated staff at 
headquarters and in the components. We remain committed to 
improving financial management, continuing our efforts to 
strengthen internal controls, and to realigning business 
processes for improved effectiveness and efficiency in support 
of our mission and the American taxpayer.
    I appreciate the support we have received from the OIG, the 
GAO, this committee, and Congress. Thank you for your 
leadership and your continued support of the Department of 
Homeland Security.
    [The prepared statement of Ms. Sherry follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Ms. Watson. Thank you. We will now proceed with Mr. 
Spoehel.

                  STATEMENT OF RONALD SPOEHEL

    Mr. Spoehel. Thank you, Chairwoman Watson, Ranking Member 
Bilbray, and members of the subcommittee. I am pleased to be 
here this afternoon to discuss NASA's financial management and 
reporting and the seriousness with which NASA takes reporting 
its financial and operational performance to the President, to 
the Congress, and to the citizens of the United States.
    On an annual basis, NASA prepares a full set of financial 
statements that are independently audited with three audit 
reports on financial statements, internal controls, and legal 
compliance. Since fiscal year 2003, though, NASA has received a 
disclaimer of opinion from its auditors. While the auditors' 
reports for fiscal year 2008 complimented NASA on its recent 
progress, as with prior years they also noted NASA's continued 
inability to provide sufficient evidential support for the 
amounts presented in some accounts in the financial statements. 
They cited two internal control material weaknesses as well as 
certain non-compliance with regulatory requirements for 
accounting and for financial systems.
    In order to address the underlying problems preventing NASA 
from regularly obtaining unqualified audit opinions on its 
financial statements, the agency took an entirely new and 
holistic approach in fiscal year 2008 for resolving weaknesses, 
improving the fidelity of its financial data, as well as 
expanding the usefulness of reported financial information to 
drive enhanced financial and operational performance.
    With respect to the preparation of its accounts and 
financial statements, this change in approach began with 
developing and implementing a new global financial management 
strategy, the Comprehensive Compliance Strategy or CCS, that 
focuses on assuring full compliance with generally accepted 
accounting principles [GAAP], and other financial reporting 
requirements across the agency.
    This approach begins with identifying the requirements for 
meeting all applicable accounting and regulatory standards for 
each financial statement line item, including audit evidence 
for each such account, and the associated internal controls 
needed. It also addresses overarching financial reporting 
process and related IT system requirements.
    To ensure CCS remains current, it is updated on a 
continuous basis with all applicable governing regulations and 
accounting standards.
    To support effective CCS implementation and operation, NASA 
has also developed and implemented a Continuous Monitoring 
Program [CMP], which provides the overall management control 
framework and detailed processes designed to drive agency 
compliance with CCS. CMP performance certifications from the 
individuals responsible are also required on a monthly basis. 
These are backed by a rigorous quality control process 
documenting that each and every control activity has been 
performed at each of NASA's centers monthly.
    Since NASA implemented CCS and CMP midway through last 
year, a significant decline in the number and dollar value of 
exception reports and a clear path forward to full compliance 
have been demonstrated. With these approaches providing 
validated performance for its financial statement processes and 
for adherence to GAAP, NASA should be able to demonstrate the 
effectiveness of management and internal controls, allowing the 
agency to eliminate the first of its two internal control 
weaknesses for financial systems analysis and oversight.
    There are, however, key challenges remaining for obtaining 
an unqualified opinion. In particular, NASA's audit reports 
have for many years noted two critical issues with respect to 
the reporting of legacy property, plant, and equipment, PP&E. 
The first is with a sufficiency of evidential support for the 
PP&E balances reported and the second is with the internal 
controls for property accounting.
    To remediate the property accounting, NASA has already 
implemented new property accounting policies and procedures and 
has incorporated a new integrated asset management module 
within its financial management system, taking care of those 
issues.
    However, with respect to legacy PP&E assets, whose 
acquisition began before the CFO Act of 1990 and before the 
mandated use of GAAP accounting by the Government, NASA does 
not have the necessary supporting information available to 
provide auditable book values under current accounting 
standards. This includes, for example, NASA's legacy Shuttle 
and Space Station related assets that comprise the overwhelming 
portion of PP&E net asset value, about $19 billion of the $21.6 
billion reported last year.
    While the Space Station depreciation schedule brings the 
net asset value down to an immaterial level and naturally leads 
to resolution by 2016, NASA is presently developing a variety 
of alternatives in alignment with anticipated changes to PP&E 
Federal property accounting standards with a view to achieving 
a timelier, albeit still cost effective and efficient, solution 
for this issue.
    The agency has made considerable progress in the last year 
as it established the foundation for financial management 
excellence with its Comprehensive Compliance Strategy, 
Continuous Monitoring Program, and expanded financial reporting 
capabilities along with improvements and consolidations to its 
financial management and operations. This year the agency is 
focused on and is committed to rigorous execution using this 
foundation, improving effective operation of its financial 
systems and processes, moving closer to achieving auditability 
of its financial statements, and driving even better financial 
performance across the agency's operations and projects.
    Madam Chairwoman, thank you again. I would be pleased to 
respond to any questions you or the other members of the 
subcommittee may have.
    [The prepared statement of Mr. Spoehel follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Ms. Watson. Thank you so much. Let us now proceed to you, 
Mr. Riedl.

                  STATEMENT OF BRIAN M. RIEDL

    Mr. Riedl. Chairwoman Watson and Ranking Member Bilbray, 
good afternoon. My name is Brian Riedl. I am the Grover Hermann 
fellow in Federal Budgetary Affairs at the Heritage Foundation. 
The views I express here are my own and should not be construed 
as representing any official position of the Heritage 
Foundation.
    The most striking part of the 2008 Financial Report of the 
U.S. Government is not the balance sheets showing assets of $2 
trillion dwarfed by liabilities of $12 trillion. Rather, it is 
the Statement of Social Insurance which shows $43 trillion in 
excess future expenditures over future revenues for Social 
Security and Medicare. Indeed, the Statement of the Comptroller 
General notes the need for the Nation's leaders to ``turn their 
attention to the long term challenges of addressing the Federal 
Government's large and growing structural deficits.'' He also 
warns that ``the Federal Government is on an unsustainable long 
term fiscal path.''
    As a member of the bipartisan Fiscal Wake-Up Tour that 
consists of representatives of the Concord Coalition, the 
Heritage Foundation, the Brookings Institution, as well as 
former U.S. Comptroller General David Walker, I have spoken to 
thousands of Americans at public town hall meetings from coast 
to coast on the need to reform these entitlements. I would like 
to share with you what I have shared with these audiences.
    First, in the short term, President Obama has offered a 
budget that would increase Federal spending to a peacetime 
record of 24.5 percent of GDP by 2019. That is not even 
counting the health care plan. Because tax revenues will not 
keep up with this spending growth, the President's budget would 
add $9 trillion in new debt over the next decade. It would 
double the National debt to 82 percent of GDP.
    By steeply increasing spending and digging the Nation 
deeper into debt, the Nation would have less financial 
flexibility and fewer resources to deal with that $43 trillion 
shortfall that Social Security and Medicare face.
    The basic entitlement challenge is as follows: The first of 
77 million baby boomers have already begun retiring. Combined 
with longer life spans, these retirements drive down the ratio 
of workers supporting each retiree. In 1960, five workers paid 
the benefits of each retiree. Today, three workers pay the 
benefits of each retiree. By 2030, that ratio will be two to 
one.
    Now, what does a two to one worker to retiree ratio really 
mean? Imagine a boy and a girl born today in 2009. In 2030, 
they get married and start their own family. This young couple 
just staring out will have to support themselves, their 
children, and the Social Security and Medicare benefits of 
their very own retiree. Every married couple will have that 
burden.
    The costs will be enormous, especially given the steep rise 
in health care costs that plagues Medicare. Don't forget, the 
baby boomers' long term care expenses will raise Medicaid costs 
up as well. Overall, the combined cost of Social Security, 
Medicare, and Medicaid is projected to rise by 10 percent of 
GDP from 8.4 percent of GDP to 18.4 percent of GDP by 2050. 
There are really not a lot of options here.
    The first option is to raise taxes. But if you raise taxes 
to close that 10 percent of GDP gap, that would be the 
equivalent today of raising taxes by $12,000 per household. 
That is what 10 percent of GDP would feel like. According to 
the Congressional Budget Office, the middle class would be 
pushed into a 63 percent income tax bracket and the wealthy 
into an 88 percent income tax bracket. That assumes that health 
care costs slow down. Even allowing the 2001 and 2003 tax cuts 
to expire, even including all of those for lower income 
individuals, would close just one tenth of the long term gap.
    So a second option would be to finance these entitlements 
by cutting other programs. Surely there is a lot of waste in 
the Federal budget to eliminate. But in order to make room for 
the big three entitlements, every program but Defense would 
have to be eliminated by 2030. By 2049, Defense would have to 
be eliminated, too. At that point, 100 percent of the Federal 
budget would have to go to Social Security, Medicare, Medicaid, 
and net interest.
    The third option, simply running budget deficits, is no 
better. Borrowing an additional 10 percent of GDP would be like 
today borrowing an additional $1.4 trillion every year. That 
would drive the national debt to levels unseen in history and 
create a vicious circle of rising interest rates and debt 
resulting in economic collapse.
    The only real option is to reform Social Security, 
Medicare, and Medicaid. An entitlement reform commission, such 
as the SAFE Commission proposed by Congressmen Jim Cooper and 
Frank Wolf, could design sustainable entitlement reforms and 
allow Congress to vote up or down on that package.
    Now, some have asked why Congress should worry about the 
long term problems now. Well, the big three entitlements 
already consume 42 percent of all Federal spending. But more 
importantly, every year of delay raises the final reform cost 
by $1 trillion. Additionally, some people have said that anyone 
over age 55 should be exempt from entitlement reforms. But 
every year, four million baby boomers cross that threshold. By 
2019, all baby boomers will be 55. So at that point your only 
choice would be to pull the rug out from under those over age 
55.
    Nor does the Social Security Trust Fund reduce these long 
term obligations either. Yes, the Social Security Trust Fund 
likely guarantees that benefits will be paid through 2037. But 
without any actual economic assets in the Trust Fund, the 
painful tax increases and spending cuts I have described will 
need to begin in 2016 when the Social Security program falls 
into deficit. The Trust Fund does not reduce the future burden 
on taxpayers by a nickel.
    In conclusion, the challenge of financing retirement 
benefits is perhaps the greatest economic challenge of our era. 
Unless lawmakers promptly reform Social Security, Medicare, and 
Medicaid, America faces a future of soaring taxes and 
Government spending that will cause poor economic performance 
and lower living standards. The longer lawmakers wait to enact 
these reforms, the more painful they will be.
    Thank you.
    [The prepared statement of Mr. Riedl follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Ms. Watson. I want to thank all of the witnesses.
    Mr. Riedl, when we propose our questions to you, I would 
like not only responses to those questions but recommendations. 
If we have to reform the entitlement programs, the top three, 
where does that leave the safety net for society? So I would 
like you to let us know from your investigation research what 
you would recommend.
    Mr. Riedl. That is a great question. I will be happy to 
answer it.
    Ms. Watson. OK. I would like to call on Mr. Bilbray, our 
ranking member.
    Mr. Bilbray. Let me just say as a former mayor and county 
chairman, let us also not forget about the fact that the 
Federal Government thinks of itself in isolation. But then you 
have the other segments of the front line service--the 
counties, the cities, and the States--and the impact there.
    You are looking at just the resources of 40 percent of the 
Federal Government. But when we get into this crisis, it is a 
very real possibility that we will want to make a priority 
decision and basically say that the Federal Government needs to 
absorb all of the government funds that are generated in this 
country and supersede local and community funding.
    Do the American people want to see now all funding and 
power centralized in the Federal system and to literally bleed 
the local and community systems dry of any money? Because there 
is only so much capital in there. We totally ignore the fact of 
the eventual impact on the local communities. We might have to 
decide, is Medicare more important than having sewer service? 
Is Social Security more important than having a firefighter? 
Those are legitimate arguments.
    We forget that the great separations of power in this 
country are not between the three branches of the Federal 
Government but actually between the city, county, State, and 
Federal Governments. Those other segments are going to be 
impacted somewhere down the line as a revenue source that we 
could tap into but at what cost.
    Thank you very much. I yield back.
    Ms. Watson. Thank you so much. I thank the audience for 
being here with us and for your patience. I will now declare 
the meeting adjourned. Thank you.
    [Whereupon, at 4:10 p.m., the subcommittee was adjourned.]

                                 
