    [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

                                   __________

                                 APRIL 14, 2010

                                   __________

                               Serial No. 111-146

                                   __________

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

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             Available via the World Wide Web: http://www.fdsys.gov
                          http://www.house.gov/reform

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                  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 L. MICA, Florida
    DENNIS J. KUCINICH, Ohio             MARK E. SOUDER, Indiana
    JOHN F. TIERNEY, Massachusetts       JOHN J. DUNCAN, Jr., Tennessee
    WM. LACY CLAY, Missouri              MICHAEL R. TURNER, Ohio
    DIANE E. WATSON, California          LYNN A. WESTMORELAND, Georgia
    STEPHEN F. LYNCH, Massachusetts      PATRICK T. McHENRY, North Carolina
    JIM COOPER, Tennessee                BRIAN P. BILBRAY, California
    GERALD E. CONNOLLY, Virginia         JIM JORDAN, Ohio
    MIKE QUIGLEY, Illinois               JEFF FLAKE, Arizona
    MARCY KAPTUR, Ohio                   JEFF FORTENBERRY, Nebraska
    ELEANOR HOLMES NORTON, District of   JASON CHAFFETZ, Utah
        Columbia                         AARON SCHOCK, Illinois
    PATRICK J. KENNEDY, Rhode Island     BLAINE LUETKEMEYER, Missouri
    DANNY K. DAVIS, Illinois             ANH ``JOSEPH'' CAO, Louisiana
    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
    JUDY CHU, California

                          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            BLAINE LUETKEMEYER, Missouri
    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 April 14, 2010...................................     1
    Statement of:
        Barton, John, manager of public information, Texas
          Legislative Budget Board; Michael J. Hettinger, director of
          practice planning and marketing, Grant Thornton LLP; and
          Veronique de Rugy, Ph.D., senior research fellow, Mercatus
          Center, George Mason University............................   111
            Barton, John.............................................   111
            de Rugy, Veronique.......................................   129
            Hettinger, Michael J.....................................   122
        Dodaro, Gene L., Acting Comptroller of the United States;
          Richard L. Gregg, Acting Fiscal Assistant Secretary, U.S.
          Department of Treasury; Danny Werfel, Controller, Office of
          Federal Financial Management, Office of Management and
          Budget; James L. Millette, Deputy Assistant Secretary for
          Global Financial Services, Department of State; and Mark E.
          Easton, Deputy Chief Financial Officer, Department of
          Defense....................................................     9
            Dodaro, Gene L...........................................     9
            Easton, Mark E...........................................    94
            Gregg, Richard L.........................................    54
            Millette, James L........................................    73
            Werfel, Danny............................................    64
    Letters, statements, etc., submitted for the record by:
        Barton, John, manager of public information, Texas
          Legislative Budget Board, prepared statement of............   114
        de Rugy, Veronique, Ph.D., senior research fellow, Mercatus
          Center, George Mason University, prepared statement of.....   131
        Dodaro, Gene L., Acting Comptroller of the United States,
          prepared statement of......................................    12
        Easton, Mark E., Deputy Chief Financial Officer, Department
          of Defense, prepared statement of..........................    97
        Gregg, Richard L., Acting Fiscal Assistant Secretary, U.S.
          Department of Treasury, prepared statement of..............    56
        Hettinger, Michael J., director of practice planning and
          marketing, Grant Thornton LLP, prepared statement of.......   125
        Millette, James L., Deputy Assistant Secretary for Global
          Financial Services, Department of State, prepared statement
          of.........................................................    75
        Werfel, Danny, Controller, Office of Federal Financial
          Management, Office of Management and Budget, prepared
          statement of...............................................    66

                   OVERSIGHT OF FEDERAL FINANCIAL MANAGEMENT

                                  ----------

                           WEDNESDAY, APRIL 14, 2010

                      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 10:05 a.m., in
    room 2247, Rayburn House Office Building, Hon. Diane E. Watson
    (chairwoman of the subcommittee) presiding.
        Present: Representatives Watson, Cooper, Connolly, Cuellar,
    Quigley, Schock, Luetkemeyer, and Issa (ex officio).
        Staff present: Bert Hammond, staff director; Valerie Van
    Buren, clerk; Adam Bordes and Deborah Mack, professional staff
    members; Adam Fromm, minority chief clerk and Member liaison;
    Hudson Hollister, minority counsel; and Mark Marin, 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.
        Without objection, the Chair and the ranking member will
    have 5 minutes for opening statements, followed by opening
    statements not to exceed 3 minutes by any other Members.
        Without objection, Members and witnesses may have five
    legislative days to submit a written statement or extraneous
    materials for the record.
        I will now begin the hearing with my statement.
        I would like to welcome everyone to this morning's hearing
    on the Federal Government's consolidated financial records and
    statements for fiscal year 2009 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 testimony.
        The Government Management Reform Act of 1994 instructs the
    Secretary of Treasury, in coordination with the Director of the
    Office of Management and Budget, to submit financial statements
    on an annual basis to the President and to the Congress. GAO is
    required to audit these statements, and today's hearing will
    review the findings of the Department of Treasury and OMB, as
    well as GAO's audit.
        For the 13th consecutive year, GAO was unable to render an
    unqualified audit opinion for fiscal year 2009 due to ongoing
    material weaknesses that were caused by problems related to
    internal controls over financial reporting. The statement of
    social insurance, however, was issued a clean audit opinion and
    the total number of reoccurring material weaknesses held
    constant at 29, but the overall number of weaknesses documented
    increased from 32 to 38, mostly due to irregularities in
    financial management and reporting.
        The subcommittee would like to hear how the material
    weaknesses in financial reporting and other internal controls
    by Federal agencies continue to affect the Federal Government's
    fiscal conditions. The subcommittee is particularly interested
    in hearing more from Mr. Millette of the State Department and
    Mr. Easton from the Department of Defense about their agencies'
    challenges in these areas and their efforts to resolve these
    issues.
        The subcommittee is aware of the extraordinary and
    unprecedented efforts the Federal Government has undertaken to
    shore up the Nation's fiscal markets in 2009, as well as the
    fiscal challenges our Government faces in meeting its
    obligations for major social insurance programs that will
    appear down the road. Obviously, there comes a time when the
    rubber must meet the road, and many of us would agree, to use a
    mixed metaphor, that there is a shrinking window of opportunity
    for implementing necessary policy changes to meet these
    critical budgetary challenges.
        With that in mind, I look forward to the observations of
    our panel of Government witnesses on the current conditions of
    the Nation's financial health, as well as any other
    observations you may have on what efforts must be made to
    ensure the ongoing fiscal health of our Nation.
        And for our second panel, we will hear from several expert
    witnesses regarding Representative Henry Cuellar's legislation,
    H.R. 2142, or 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 excessed at least once every 5 years. The
    legislation also establishes the performance improvement
    council and agency improvement offices.
        Once again I would like to thank our panelists for joining
    us today. I look forward to their testimony.
        Now I will call on our prestigious minority representative.
        Mr. Schock. Thank you, Madam Chair. I appreciate your
    convening today's meeting on this very important matter.
        Auditing the Federal Government's financial statements is a
    massive responsibility but a vitally important one.
    Understanding how and how well the Federal Government manages
    and spends our taxpayer dollars will lead to greater
    transparency for the American people, an opportunity to see
    where financial management improvements can be made, and can
    potentially save billions of dollars each year.
        In 1996, only six agencies received a clean audit. Now we
    are up to 20 out of the 24 CFO Act agencies receiving an
    unqualified opinion on their financial statements. There is no
    doubt that some improvements have been made; however,
    persistent problems remain.
        For the 13th straight year, GAO was unable to render an
    opinion on the Government's consolidated financial statements
    due to persistent financial management problems at the
    Department of Defense, the Government's inability to account
    for interagency funding activity, and other ineffective
    systems, processes, and internal controls at our Federal
    agencies. In fact, the very agencies that are responsible for
    public company reporting and tax compliance do not have
    effective control over their own financial reporting.
        At the Securities and Exchange Commission GAO found that
    automatic accounting systems could not generate useful
    financial reports, requiring extensive manual work-arounds. At
    the IRS, GAO found that financial management systems failed to
    comply with the law. One could fairly ask: how can these
    agencies require effective financial reporting from companies
    and individuals in the private sector and not practice it
    themselves?
        The private sector, which has frequently faced the
    challenge of reconciling transactions between disparate
    subsidiaries of a consolidated corporate parent, has developed
    technology solutions to similar accounting problems. The
    Federal Government lags far behind the private sector in
    implementing and making use of these technological solutions.
        GAO was able to offer an unqualified opinion on the
    statement of social insurance, which includes Medicaid and
    Social Secretary. However, as a recent news story on this topic
    stated, ``While the bookkeeping of the statement of social
    insurance might be reliable, it is hardly good news.'' The
    financial statements show that the projected scheduled benefits
    exceed the earmarked revenues for Social Security and Medicaid
    by $46 trillion during the next 75 years.
        According to GAO, increased spending and borrowing and
    decreased revenue associated with TARP and stimulus spending
    added massively to the Nation's debt, and GAO states in its
    report that Federal debt held by the public as a share of GDP
    could exceed the historical high reach in the aftermath of
    World War II by 2020, 10 years sooner than projected just 2
    years ago. GAO concludes that the Federal Government is on an
    unsustainable long-term fiscal path.
        I am also concerned about the ongoing and growing problem
    of improper payments. An improper payment is Government jargon
    for a dispersal of taxpayer money which should never have been
    made, a payment that went to the wrong company or organization
    or that was made for an incorrect amount. In fiscal year 2009,
    OMB reported that the Federal Government made $98 billion in
    improper payments, and OMB admits that this figure doesn't even
    cover all of the at-risk outlays, and therefore doesn't reflect
    the full total of incorrect payments the Federal Government
    made in the fiscal year 2009.
        With that, Madam Chair, I thank you once again for holding
    this hearing today and look forward to the testimony of our
    panelists and the productive conversation on how we can
    continue to improve the financial management of our Federal
    Government.
        With that, I yield back.
        Ms. Watson. I now yield to the distinguished Member, Mr.
    Quigley.
        Mr. Quigley. Thank you, Madam Chairman.
        I think this is my anniversary. I have been here a year
    now. I was expecting a cake.
        [Laughter.]
        Mr. Quigley. What is striking to me in that anniversary
    date is where I came from. I was a Cook County Commissioner in
    Chicago, and when I got there 11 years ago the big scandal was
    that our Forest Preserve District had not done appropriate
    audits for 5 years, and we found out we were $19 million in
    debt, and we had people on the payroll who weren't attached to
    the budget. That was seen as an extraordinary problem. I guess
    fast forward to today. It is extraordinarily frightening that
    the decimal point moves way over to the right, but the fact
    that we don't know, we don't have a handle on our finances is
    all the more frightening, because without proper audits of the
    Federal Government's finances we are essentially flying blind,
    and it is a big plane.
        How can we begin to create efficiencies or cut waste if we
    don't have a proper accounting of where and how our funds are
    being spent? We have to have an accurate lay of the land before
    we begin reforming. The path out needs to know where we are in
    the first place. Proper oversight of the Federal spending is
    especially important now. The Federal Government is taking on
    unprecedented amounts of debt and liability through the
    stimulus, TARP, including extraordinary investments in Fannie
    and Freddie. Our National debt as a percentage of GDP is on
    track to reach levels not seen since World War II due to
    entitlement growth and unchecked spending.
        We need some serious reforms to reign in Federal spending
    and put our budget in a sustainable path. All I would say is
    that the first part of this must be an accounting. It must be
    an appropriate accounting so we know where we are and we know
    what changes that we put in place will do to affect our balance
    sheet.
        Thank you, Madam Chairman.
        Ms. Watson. Thank you.
        I now yield to the distinguished Mr. Darrell Issa.
        Mr. Issa. Thank you, Madam Chair, and thank you for holding
    what I hope will be the first of many hearings that begin to
    grapple with the larger problem.
        In reference to the larger problem, one of the people that
    is not given enough credit in history for creating the modern
    Government was Dwight David Eisenhower. He began the process of
    saying that we were going to have to increase the efficiency in
    using modern technology. Sadly, he went to his grave, and many
    Presidents since him have gone to his grave without the Federal
    Government knowing how to use computers to actually do more
    than put pretty Web sites up that tell people how well we are
    doing.
        It is sad that we spend as much money as we spend on
    automation and yet cannot begin to accurately mimic what we
    demand the private sector do.
        I hope today that as all of you testify--and I will be
    going between two subcommittee hearings of this whole
    committee--that you will bear in mind that if we are going to
    solve this problem we first have to, as Dwight David Eisenhower
    used to say, take a big problem and make it larger.
        It is very clear that there is no central plan for an
    efficient and effective system of exchanging information within
    the Federal Government. That has been pervasive, as the acting
    GAO would tell us. It has been pervasive in our intel
    community. It has been a problem at DOD at all levels. And, of
    course, if we can't get it right we cannot work with our allies
    around the world to exchange information to keep America safe.
        So although I consider this problem a huge problem, I would
    hope today that we begin to focus on the fact that unless there
    is a strategic plan to solve this problem through transparency
    and interoperability so that the roll-up of an organization, if
    today you are part of Homeland Security and tomorrow you are
    part of an entirely different Cabinet position, that it should
    be as transparency as simply saying this is now being
    redirected with a few strokes of the keys to another
    department. Today it would be hopeless to consider that. As a
    matter of fact, it would be a plan of probably 3 to 5 years in
    order to transition so that something could be done other than
    manually.
        I have looked at your testimonies. I look forward to
    repeated followups. I would ask the Chairwoman that all
    Members, both present and those seated on the committee but not
    present today, have time to ask questions as followups to
    today's hearing and that they be answered in writing.
        Ms. Watson. Are you referring, Mr. Issa, to----
        Mr. Issa. To our witnesses.
        Ms. Watson. To the witnesses?
        Mr. Issa. That we be allowed to have followup, because
    their statements are very good and I think we are going to
    probe a long way into it, but, as is the custom of the
    committee, I would ask unanimous consent that all Members have
    the ability and that we get the acquiescence of the people
    testifying here today to take followup questions from any
    member of the committee.
        Ms. Watson. Mr. Issa, you know that is standard procedure,
    and without objection we will do that.
        Mr. Issa. Thank you, Madam Chair.
        Ms. Watson. Thank you for reminding us.
        Mr. Issa. It was not for the Chair. It was actually for the
    witnesses. Some of them are not used to getting a committee
    that looks at all of this and follows up with numerous
    questions, sometimes two and three times. Obviously, Mr. Dodaro
    is very familiar with it. But I asked for that reason.
        Ms. Watson. Well, let me reassure you, Mr. Issa, that we
    definitely will leave the record open, and we are open for your
    written testimony, as well as your written comments, as well as
    your response to Members' questions.
        Again, thank you, Mr. Issa.
        Mr. Issa. Thank you, Madam Chair.
        Ms. Watson. Yes.
        I now yield to Mr. Cooper for an opening statement.
        Mr. Cooper. Thank you, Madam Chair.
        This on the surface looks like a fairly small,
    inconsequential hearing. It is not. We are talking today about
    one of the most important issues that our entire Nation faces.
    As important as these auditing issues are, that is really not
    what is at stake here. What matters is the big picture, the
    aggregate, and I am worried that we missed the forest for the
    trees.
        A lot of folks back home don't realize that the Federal
    Government is the last large entity left in America that
    refuses to use real accounting, so-called accrual accounting.
    In a business, if you can't measure it, you can't manage it. We
    in the Federal Government are refusing to use the real numbers,
    and it has been this way for a long, long time.
        When David Walker was the Comptroller General he used to
    put explicitly in his Auditor's letter that the United States
    faced, back in his day, some $50 trillion in unfunded
    obligations. That number has grown. According to my staff's
    aggregate look at it, it is more like $62 trillion, and it is
    growing every day. It is growing by about $3 to $6 trillion a
    year.
        These are promises that policymakers have made to Medicare
    recipients and Medicaid recipients and Social Security
    recipients, and we know today that we do not have enough money
    to make good these promises. So here we are in a situation in
    which every stockholder in America gets an annual report on
    their favorite company. It might be IBM. It might be some other
    company. But here we are as citizens, most of us don't even
    know there is an annual report for our favorite country, and
    most people are not going to the Treasury or GAO Web sites and
    downloading it.
        Now, this year the report was shockingly late. It has been
    put out in past years on December 15th, and there are probably
    good reasons for a new administration to be slow getting it
    out. I still haven't seen a hard copy yet, and here we are well
    into 2010. But this is fundamental information if you care
    about the future of America. Moody's, Standard and Poor's,
    other rating agencies are already talking negatively about the
    future outlook of the U.S. Treasury bond, itself, what Moody's
    has called the anchor to the world's financial system.
        We cannot risk a downgrade of the Treasury bond, but that
    is actually what is at stake. If you read the front page of USA
    Today yesterday, you saw shocking increase in debt, and that is
    actually using the conservative measure. If you look at what we
    are putting on the national credit card, not just in our cash
    account, it is even more frightening.
        So the President, by Executive order, has appointed a
    fiscal responsibility commission, a bipartisan group to look
    into this. I am hoping and praying that people of goodwill on
    both parties, not only in Congress but across the country, will
    start paying more attention to these issues.
        The hearing today on the financial report of the U.S.
    Government for 2009 is a good way to begin that debate, because
    these are the only real numbers available to average citizens
    to use real accounting to talk about our problems.
        I am thankful that the statement of social insurance is
    audited. That is robust. That is ready for a robust public
    discussion.
        So thank you, Madam Chair, for calling this hearing. This
    is a good way to begin.
        Ms. Watson. Thank you, Mr. Cooper.
        I now yield to the gentleman from Virginia, Mr. Connolly.
        Mr. Connolly. Thank you, Madam Chairman. I thank you for
    holding these hearings and thank our panelists for being here.
        Like Mr. Cooper, I think this really is a very important
    subject; however arcane for some, at least on the surface.
    Accounting is not always the most sensational of topics, and
    yet how we account for Federal spending, how we account for
    Federal budgeting actually is really critical to the fiscal
    health of the country as we move forward.
        While I agree with my friend on much of what he had to say
    about accrual accounting and about making sure that there is
    transparency in what our obligations long-term are, I think it
    is important we not overstate the case. The Federal Government
    is not about to declare insolvency. Investments in Federal debt
    continue to be robust. And if you look at the out years in
    terms of the interest rate picture, it would suggest continuing
    confidence in the United States as an investor's safe haven.
        That isn't to say that all is well, but it certainly is to
    suggest that the sky is not falling. We have some time. I think
    Mr. Cooper's words need to be taken to heart. We have some time
    to act. We have some time to make sure our fiscal house is
    brought into order once this recession is fully accounted for.
        We had some good news this week. It looks like we are going
    to shave at least $300 billion off the projected debt--and that
    is good news--largely because of improved economic activity. It
    looks like the TARP program that was approved in the previous
    Congress and the previous administration actually may, at the
    most, have a net cost to taxpayers not of $700 billion
    originally appropriated, but of about $89 billion, and that is
    still counting. It may yet break even, or even turn a slight
    profit.
        That is good news in terms of Federal spending and the
    taxpayer, but at the end of the day, as Mr. Cooper suggests, it
    is really about political will. It is about whether both sides
    are willing to suspend their respective theologies and look at
    the revenue picture and look at the spending picture in as much
    of an unbiased way as we can to try to make sure we are willing
    to put the tough decisions on the table and elect to act on
    some of them.
        As a member of the Budget Committee, I am committed to
    certainly doing that as a deficit hawk, and I thank you, Madam
    Chairwoman, and my friend from Tennessee for constantly
    reminding us of the seriousness of this issue.
        I look forward to the testimony.
        Ms. Watson. Thank you so much.
        I want to have members of this committee rest assured that
    this is just part of a continuing group of hearings that will
    look at the efficacy of the way we spend money, the way we
    purchase, and the way we address our deficits. We are all
    keenly aware that we are in a deficit mode that will take years
    to recover from, recession. But there is a light at the end of
    the tunnel, even if it is a search party with a lantern. So we
    are going to try to get to the bottom and find ways to improve
    how we proceed.
        With that said and no other Members present, we are going
    to proceed on with panel one.
        Glad to see you, Mr. Cuellar. Would you have an opening
    statement, because we are going to be discussing your bill.
        Mr. Cuellar. Not right now.
        Ms. Watson. All right. Thank you very much.
        It is the policy of the Committee on Oversight and
    Government Reform to swear in all witnesses before they
    testify, and I would like to ask all of you to please stand and
    raise your right hands.
        [Witnesses sworn.]
        Ms. Watson. Let the record reflect that the witnesses
    answered in the affirmative.
        I will now introduce each one of you on the panel.
        First we have Gene L. Dodaro, the acting Comptroller
    General of the United States and the head of the Government
    Accountability Office, the investigative and auditing agency
    for Congress. Mr. Dodaro has held such a position as chief
    operating officer and the head of Government Accountability
    Office's accounting and information management division over
    the course of his distinguished career with the agency.
        Next, Mr. Richard L. Gregg has served at the Department of
    Treasury with distinction for 36 years. He also is a
    Commissioner of the Financial Management Service for 9 years,
    and before that served as Commissioner of the Bureau of the
    Public Debt for 10 years. Mr. Gregg has also held numerous
    other management positions at Treasury during his long career.
        Danny Werfel serves as the Controller of the Office of
    Federal Financial Management within the Office of Management
    and Budget, referred to as OMB. He oversees OMB's initiative to
    improve financial management across the Federal Government,
    including financial reporting and proper payments and real
    property management.
        Mr. Werfel also develops the Federal Government's policies
    regarding fiscal accountability standards, grant management,
    and financial systems. He previously served OMB as Deputy
    Controller, Chief of the Fiscal Integrity and Analysis Branch,
    Budget Examiner in the Education Branch, and as Policy Analyst
    in the Office of Information and Regulatory Affairs.
        James Millette is Deputy Assistant Secretary for Global
    Financial Services at the Department of State. He oversees the
    Resource Management Bureau, which includes integrated budget
    planning and performance. He also serves as the Deputy
    Assistant Secretary for Global Fiscal Services based in
    Charleston, South Carolina, which has an integrated fiscal
    service center in Bangkok and offices in Paris and Washington,
    DC, right here in the District. Previously, Mr. Millette was
    Deputy Assistant Secretary for State Programs, Operations, and
    Budget, as well as Senior Policy Advisor of the Chief Fiscal
    Officer.
        And Mark E. Easton is the Primary Advisor to the Department
    of Defense, DOD, Controller, and Chief Financial Officer, and
    also serves as a senior staff member regarding all issues
    involving the amended CFO Act of 1990 and related financial
    management reforms. Mr. Easton is responsible at the Executive
    level for ensuring DOD's budget and financial execution in
    support of national security objectives, particularly in
    relation to finance and accounting policy, management, and
    controlled systems and general business transformation program.
        He also oversees DOD's compliance with the Legislative and
    Executive financial management initiatives. Previously, Mr.
    Easton served as a Deputy Assistant Secretary of Navy and as
    Director for Financial Operations in the Office of the
    Assistant Secretary of the Navy. In 2002 he retired as a
    captain in the Navy Supply Corps after serving for 29 years.
        I want to thank all of you witnesses.
        I ask that each of the witnesses now give a brief statement
    of your testimony, and keep your summary under 5 minutes in
    duration, if you can. Your complete written statement will be
    included in the hearing record.
        We would like now to proceed with Mr. Dodaro.

    STATEMENTS OF GENE L. DODARO, ACTING COMPTROLLER OF THE UNITED
     STATES; RICHARD L. GREGG, ACTING FISCAL ASSISTANT SECRETARY,
     U.S. DEPARTMENT OF TREASURY; DANNY WERFEL, CONTROLLER, OFFICE
       OF FEDERAL FINANCIAL MANAGEMENT, OFFICE OF MANAGEMENT AND
       BUDGET; JAMES L. MILLETTE, DEPUTY ASSISTANT SECRETARY FOR
      GLOBAL FINANCIAL SERVICES, DEPARTMENT OF STATE; AND MARK E.
     EASTON, DEPUTY CHIEF FINANCIAL OFFICER, DEPARTMENT OF DEFENSE

                      STATEMENT OF GENE L. DODARO

        Mr. Dodaro. Thank you very much, Madam Chairwoman,
    Congressman Schock, members of the subcommittee. I am very
    pleased to be here today to discuss GAO's report on the fiscal
    year 2009 consolidated final statements of the U.S. Government.
        As has been mentioned in your opening comments, we did
    render an unqualified opinion on the statement of social
    insurance, and this is very important because the programs that
    it covers, Social Security and Medicare, are very important to
    understand the financial condition of the Federal Government
    and the sustainability of the commitments that have been made.
        Unfortunately, as in past years, we have been unable to
    give an opinion on the accrual based financial statements of
    the Federal Government for a wide range of reasons, including
    serious financial management problems at the Department of
    Defense and the inability to eliminate inter-governmental
    transactions among Federal agencies.
        As Congressman Issa mentioned, there are a lot of system
    problems that have also been noted in our audit reports. We
    have also, in the report, cited, as Congressman Schock
    mentioned, the almost $100 billion in improper payments that
    have been made, and there are pervasive information security
    problems with the Federal Government systems that need attended
    to. We made a number of recommendations. Actions are underway.
        Now, our report also--and the report of the Government's
    financial statements--begins to shed some light on the affects
    of the recession on the Federal Government's finances, as well
    as the efforts that have been taken in order to deal with
    stabilizing our financial markets and stimulating economic
    growth. As a result, a lot of the transaction activity of the
    TARP program, of the American Recovery and Reinvestment Act are
    beginning to show up on the financial statements, but that
    story has not been told yet. There are a lot of uncertainties
    yet. There is a lot of money still to be spent under the
    Recovery Act, and so it will be important to follow through
    those activities in the coming years.
        Now, it also, our report, talks about the long-term fiscal
    path of the Federal Government. We concluded, as has been
    mentioned today, and have concluded for a while that the
    Federal Government is on an unsustainable long-term fiscal path
    and action needs to be taken. As this chart shows and has been
    alluded to in your opening statements, under this simulation,
    which is based on past practices and policy preferences, the
    Federal Government debt held by the public within the next 10
    years could exceed the historical high level as a percent of
    gross domestic product that was set back in World War II at 109
    percent. Last year it was at 53 percent. This year it is
    approaching two-thirds of the gross domestic product annual
    deficit. But this is total debt held by the public.
        Now, what does that mean in terms of the magnitude of the
    challenge? The next chart shows that by 2020, if you hold
    revenue constant at the 40-year average of 18.1 percent, the
    Federal Government would have enough revenue to pay for the net
    interest on the debt, Medicare, Medicaid, and Social Security,
    and would have to borrow the equivalent amount of money to pay
    for the entire rest of the operations of the Federal
    Government, including the Defense Department and
    Transportation, etc., going forward.
        Now, the next chart shows, as Congressman Connolly
    mentioned, there is a window of opportunity to deal with this
    issue, but that window is rapidly closing. The first members of
    the Baby Boom generation, which are the creation of the
    demographic wave which is driving a lot of these changes, have
    already begun to apply for Social Security in 2008, 2 years
    ago. The Medicare trust fund is in a cash deficit situation.
        In this fiscal year the Social Security system actually has
    negative cash influx. That was not expected to happen, but
    because of the recession and other things, so that the Social
    Security program had been making a net contribution to help
    reduce the borrowing cost of the Federal Government, that has
    changed temporarily. And within the next 6 years or so, it is
    estimated to have negative cash-flows on a consistent and
    growing basis.
        So action is urgently needed to begin to address this
    issue. I recognize the economy is still fragile. We need to
    keep an eye on that in the short term. But the Congress and the
    administration, the President, need to focus on coming up with
    a plan with the same intensity that they focused on in dealing
    with economic recovery and employment situations right now in
    order to address this issue.
        I was very pleased to see the Congress pass the pay-go
    provisions, which will help deal with programs going forward to
    make sure they are funded for, but we have to deal with these
    legacy issues and the estimated commitments.
        As Congressman Cooper mentioned, I was also pleased to see
    the President appoint the deficit commission. I think that is a
    very important step forward.
        This concludes my statements.
        I might note in my last chart, though, that we also, in
    addition to doing long-term simulations of the Federal
    Government, we also have begun doing simulations of the State
    and local sector. And the State and local sector is on the same
    ominous path of continual deficits that are large and growing.
    And this chart shows the solid line is the Federal Government's
    projections on annual deficits going forward. If you add the
    State and local sector to that, you get the dotted line. And so
    right now both the Federal Government and the State and local
    sector are under great fiscal stress.
        I thank you for the opportunity to be here today, and I
    look forward to addressing your questions at the appropriate
    time.
        [The prepared statement of Mr. Dodaro follows:]

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        Ms. Watson. Thank you so much, Mr. Dodaro.
        Now we will proceed with Mr. Gregg.

                       STATEMENT OF RICHARD GREGG

        Mr. Gregg. Chairwoman Watson and Congressman Schock, thank
    you for inviting me to discuss the financial report of the U.S.
    Government for fiscal year 2009 and the related audit by the
    Government Accountability Office. Your interest in improving
    financial management is greatly appreciated.
        The financial report is prepared from the audited financial
    statements of specifically designated Federal agencies,
    including Cabinet departments and many smaller independent
    agencies. In fiscal year 2009, 20 of the 24 CFO Act agencies
    earned unqualified opinions on their financial audits. It is
    particularly noteworthy that the Department of Treasury,
    itself, received a clean audit this year. Given the number and
    the complexity of the new programs that deal with the economic
    crisis, the clean opinion reflects exceptional work by Treasury
    and its auditor, GAO.
        The U.S. Government also achieved a third consecutive
    unqualified or clean audit on the statement of social
    insurance; however, for fiscal year 2009 GAO was again unable
    to express an opinion on the other Government-wide financial
    statements. The disclaimer on those statements stems from three
    longstanding material weaknesses: serious financial management
    and control issues at the Department of Defense, the inability
    to adequately reconcile and account for intergovernmental
    activities and balances between agencies, and deficiencies in
    the process of preparing the consolidated financial statements.
        We nevertheless have made progress over the years in
    resolving many GAO findings. Treasury and OMB's efforts to date
    have resulted in the reduction of GAO findings and
    recommendations by more than two-thirds, from more than 150 a
    few years ago to just over 40 in fiscal year 2008.
        But we have been less successful in fixing some basic
    structural problems. GAO, for example, has repeatedly
    identified our inability to balance the intergovernmental
    transactions between Government agencies, and, while it will
    take all agencies working together to eliminate this as a
    material weakness, Treasury, working with OMB, will assume
    responsibility for fixing it.
        The process for preparing consolidated financial statements
    is also a material weakness. This material weakness includes
    numerous shortfalls, but, most importantly, there is a
    structural deficiency whereby key accounting components had not
    been included in our consolidation process. Treasury has
    developed an accounting structure to resolve this issue. This
    new structure will need to be tested and implemented, but
    within a couple years we should be able to make significant
    improvements in the financial report preparation process.
        The Government's mainly accrual based net operating cost
    for fiscal year 2009 increased nearly $250 billion from a year
    earlier to $1.25 trillion. This increase results primarily from
    the substantial decline of more than $460 in Government
    revenues, due in large part to the effects of the recession and
    tax changes associated with the stimulus package. The
    Government's budget deficit for 2009 was $1.4 trillion.
        The Government's balance sheet shows that its liabilities
    exceed its assets by more than $11 trillion, and the largest
    categories of liabilities are the Government's debt held by the
    public, $7\1/2\ trillion, and the Federal employees' and
    veterans' post-employment liabilities are more than $5
    trillion.
        For fiscal year 2009 the Government's balance sheet
    reflects that many investments have been made pursuant to the
    economic recovery shortfalls. These include $240 billion in
    outstanding TARP investments, as well as investments in Fannie
    Mae and Freddie Mac, two preferred stock purchase agreements
    valued at $65 billion, and $185 billion of mortgage backed
    securities.
        It is important to note that the financial report also
    discloses significant activity that occurred after fiscal year
    2009, including an additional $90 billion repaid from TARP
    recipients and a modifying of funding commitment cap for Fannie
    and Freddie.
        Although market stabilization and economic recovery were
    the priority for fiscal year 2009, the continued issue of
    fiscal sustainability is not being overlooked. The report
    discusses the Government's long-term fiscal challenges of
    funding Social Security, Medicare, and Medicaid programs,
    programs which will account for a large and growing portion of
    total Government spending in both the near term and the long
    term.
        An important message conveyed in this year's financial
    report is that the longer that action to resolve these
    shortfalls is delayed, the greater the challenge will be to
    bring these important programs into fiscal balance.
        For the third year, Treasury, with support from OMB and
    GAO, has issued a companion document, the Citizen's Guide for
    the Financial Report, which is an abbreviated form of the
    longer financial report and is a much easier read for the
    American citizens.
        Finally, in closing, I do appreciate the work that the
    committee has done. The efforts on pulling together the
    financial report is a challenging one, with very large
    Government agencies trying to compile hundreds of thousands of
    documents and information in a very short period of time and
    get it right.
        I think we have made progress. We still have a long way to
    go, and I certainly recognize that.
        Thank you, Chairwoman Watson. I look forward to your
    questions.
        [The prepared statement of Mr. Gregg follows:]

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        Ms. Watson. Thank you so much, Mr. Gregg. I just want to
    refer all Members to the Federal Government's financial health.
    I think it would be very informative for all of us to read it
    thoroughly.
        I would like now to proceed to Mr. Werfel. Will you
    continue, please.

                       STATEMENT OF DANNY WERFEL

        Mr. Werfel. Thank you, Chairwoman Watson, Congressman
    Schock, and other members of the subcommittee for the
    invitation today to discuss Federal financial management issues
    with you.
        This November will mark the 20th anniversary of the Chief
    Financial Officers Act of 1990. This is an opportune time to
    reflect on Federal financial management community's progress
    during the last 20 years and plot a course for where and how
    the community will advance in the next 20 years.
        Over these past 20 years, the Federal Government has built
    a solid foundation of strong accounting practice, including
    disciplined and consistent financial reporting, high
    functioning risk management frameworks that are driving
    internal control improvements in financial reporting, and
    integration between transaction processing and our accounting
    records. As a result, the number of clean audit opinions at
    Federal agencies has risen steadily over time, while auditor
    identified material weaknesses have declined.
        This does not mean that our journey is complete. To the
    contrary, more work is necessary to strengthen this foundation,
    including addressing the ongoing weaknesses that prevent the
    Department of Defense, NASA, the Department of Homeland
    Security, the State Department, and the Government, as a whole,
    from achieving a clean audit opinion.
        Perhaps even more critical, significant work remains in
    areas of financial management that tie more directly to the
    American public's bottom line: the elimination of Government
    waste in areas such as improper payments, unneeded Federal real
    estate, and cost overruns in the deployment of our new
    financial systems. Moreover, as the public demands increases
    for information on where taxpayer dollars are going and how
    they are being used, the Federal financial community must rise
    to this challenge and produce this information more timely and
    reliably.
        Before I turn to these priorities, I would like to spend a
    few moments on the important impacts that the Federal economic
    recovery efforts are having on the Federal financial management
    community today.
        First, I would like to commend the Treasury Department for
    the extraordinary accomplishment of achieving a clean opinion
    on the first ever audit of the financial statements for the
    Troubled Asset Relief Program [TARP]. The TARP program presents
    a unique financial reporting challenge, given the complex
    nature of the transactions and the volume of activity involved.
    For the Treasury Department to achieve a clean audit in the
    very first year of the program demonstrates how far the Federal
    Government has come in the sophistication and adeptness of our
    solutions for reporting traditional accrual based financial
    statements.
        At the same time, the American Recovery and Reinvestment
    Act presented a different reporting challenge to the Federal
    financial management community, requiring more frequent and
    detailed information on Federal spending than has ever been
    traditionally captured by our financial statements. Due to
    system limitations and challenges of readily producing this
    information, many agencies have relied on herculean manual
    efforts to compile or combine information from several
    disparate systems to reply with the Recovery Act reporting
    requirements. In other words, we are commendably meeting the
    significant reporting challenge of the Recovery Act, but we
    need to reexamine our reporting infrastructure so that it
    better aligns to our efforts.
        It is with this backdrop that OMB, working closely with the
    community, has established the following critical priorities
    moving forward. First, eliminating waste by reducing improper
    payments and/or investments in unneeded real estate. Second,
    closing the efficiency and technology gap in financial
    operations by ending an era of failed large-scale financial
    system modernizations in favor of shorter term targeted
    solution that reduces risk and cost by focusing only on our
    most critical business needs and aligning better to the
    capacity of our organizations to manage change.
        And, third, promoting accountability and innovation through
    open government, by improving the reliability and completeness
    of Federal spend data, importantly including meeting the full
    mandate of the Federal Accounting and Transparency Act to
    capture sub-award data on USASPENDING.GOV, and by aligning the
    financial reporting model so that the information we report and
    audit is the most relevant to the public and agency
    decisionmakers, and that the internal controls that we
    scrutinize and prioritize resources to strengthen are more
    closely tied to the most significant financial risks we face.
        My written testimony, along with the 2009 financial report,
    go into additional detail on each of these priorities.
        I look forward to working with this subcommittee and other
    Members of Congress as we tackle these important issues.
        Thank you again for inviting me to testify today. I look
    forward to answering your questions.
        [The prepared statement of Mr. Werfel follows:]

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        Ms. Watson. Thank you.
        We will proceed with Mr. Millette.

                      STATEMENT OF JAMES MILLETTE

        Mr. Millette. Chairwoman Watson, Mr. Schock, and other
    distinguished Members, I am pleased to have the opportunity
    today to testify on the State Department's 2009 financial
    statements. Our annual audit and agency financial report is the
    cornerstone of our efforts to disclose the Department's
    financial status and provide transparency and accountability to
    the U.S. people. We take this responsibility very seriously and
    take great pride in the improvements we have made in the
    Department's financial platform over the last decade.
        The Department's financial activities are complex and set
    against a backdrop of global issues and engagements we face
    with nations around the world carrying out our foreign policy.
    They reflect the immense financial work that occurs behind
    scenes every day by the Department's financial officials
    operating at 260 locations around the world in over 172
    different countries, operating with 150 different currencies,
    in often very dangerous places like Haiti, Afghanistan, and
    Iraq.
        They also reflect our position as a shared financial
    service provider for over 40 customer agencies overseas, and we
    also have teamed with the Agency for National Development and
    run their financial system, as well.
        We know that strong financial management and interest
    controls provide the building blocks to support the
    transparency of operations and accountability to effectively
    manage limited resources. We have worked diligently to embrace
    the broadening landscape of financial compliance and reporting
    requirements and proactively incorporate them into our ongoing
    budgetary and financial operations on a day-to-day basis.
        We are proud that the Department has received clean audit
    opinions for eight out of the last 10 years. Last year's annual
    audit process was extremely difficult as we engaged a new audit
    firm to conduct our annual audit. Our experience told us that
    our worldwide operations and complexities carrying out our
    foreign policy was going to be difficult for a new firm to
    ascertain in the tight timeframes. Unfortunately, this proved
    so in the outcome, and we believe that the outcome of the audit
    doesn't really reflect the status of our finances.
        Coming into the fiscal year 2009, the Department faced no
    previously identified material weakness in internal controls,
    and significant work had been done to address the 2008
    significant deficiencies. In addition, I am pleased to report
    the Department maintains a robust system of internal controls
    overseen by the Department's senior leadership and administered
    by the Bureau of Resource Management.
        For 2009 the Secretary was able to provide an overall
    unqualified statement of assurance about the Department's
    internal controls in accordance with the Federal Financial
    Manager's Integrity Act, as well as an unqualified statement of
    assurance for internal controls on financial reporting.
    However, the Department's new auditor issued an unqualified
    opinion for our consolidated statement of net costs and
    qualified opinions for our consolidated balance sheet and
    consolidated statement of net position.
        The qualified opinions were based on the auditor's
    inability to satisfy themselves that property and equipment
    were free of material misstatements as of September 30, 2009.
    The new auditors were not able to satisfy themselves as to
    whether 2009 combined statement of budgetary resources was free
    of material misstatement in time to meet the deadlines, even
    though we were given a 30-day extension.
        The new auditor identified three material weaknesses and
    three significant deficiencies that are the result of their
    work in 2009. The material weaknesses related to the need for
    the International boundary and Water Commission's liability
    statements refer to the accounting for our property and
    equipment and the timeliness of our fairness reporting. While
    we were extremely disappointed in the results, we are committed
    to addressing the items cited by the auditor and implementing
    corrective action plans to ensure we are in a better position
    this year as we move down the process.
        I have included information in my statement on all these
    material weaknesses and would be happy to answer any questions.
        [The prepared statement of Mr. Millette follows:]

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        Ms. Watson. Thank you, Mr. Millette.
        Let's now proceed with Mr. Easton.

                        STATEMENT OF MARK EASTON

        Mr. Easton. Thank you. Chairwoman Watson, Congressman
    Schock, distinguished members of the committee, thank you for
    the opportunity to appear today, and thank you especially for
    your continued support of America's armed forces. Having worn
    the uniform for many years, I personally appreciate that
    support.
        I have submitted a statement for the record and would like
    to summarize it briefly.
        I was asked to speak about the results of DOD's financial
    statement audit for fiscal year 2009. As you know, the
    department continues to receive a disclaimer of opinion on our
    consolidated financial statements, but we are making progress,
    although major challenges remain from allowing us to achieve an
    unqualified opinion.
        For one thing, many of our systems are old and handle
    information in ways never intended to meet current audit
    standards. This problem makes financial auditability extremely
    difficult in a large organization that is functionally
    decentralized. Our legacy systems are also not well integrated,
    and they do not consistently collect data at the transaction
    level. This leads to business processes that tend to be non-
    standard, often lacking effective financial controls, and in
    these cases consistent application of additional compensating
    controls becomes critical.
        The organizations and financial entities within DOD--and
    there are a few, getting larger and more complex--that have
    achieved auditability have been small enough to be able to
    overcome those deficiencies thus far.
        The scale of our business operation adds to the problem.
    Every business day we obligate between $2 and $3 billion and
    handle hundreds of thousands of payment transactions, often
    under combat conditions. Given our size and mission
    requirements, it would be prohibitively costly to deploy an
    army of accountants to solve our problems manually. That is
    specifically why our current DOD business transformation is so
    critical, including the ongoing development of a business
    enterprise architecture and introduction of modern systems,
    both of which initiatives are well underway.
        In short, we need a more disciplined automated business
    environment to maintain necessary controls cost effectively,
    but meanwhile we are making progress. The auditor's report on
    DOD's financial statements includes description of several
    material financial reporting weaknesses, and the department is
    following a revised strategy to address these weaknesses and
    improve the quality of the financial management information
    that are used each day by the department.
        My written statement contains details of our strategy and
    progress and several current areas of weakness, including
    property management, environmental liabilities, military health
    care liabilities, funds bound with Treasury reconciliation, and
    intergovernmental transactions, but there is much more work to
    do.
        In retrospect, earlier efforts, while making progress,
    lacked a coherent strategy to engage the full enterprise. Our
    new strategy was instituted a little bit less than a year ago
    by the department's new comptroller and CFO, who saw that DOD
    lacked a common goal and priorities in the audit readiness
    area.
        As a result, he consulted with senior leaders and military
    departments and defense agency, our colleagues that you heard
    from at OMB, GAO, as well as congressional staff members, and
    last August we issued a memorandum that outlined the new
    priorities. These priorities focused on improving the quality,
    accuracy, and reliability of financial information that we use
    every day. This will focus on budgetary information,
    specifically that we use for resource allocation decisions, and
    the physical accountability, existence, and completeness of our
    assets that our war fighters rely upon.
        So why is this going to be different? Congress has showed
    support for our new approach and identified that in the
    National Defense Authorization Act of 2010. Since then, we have
    taken specific steps to implement.
        First, the initiative has the appropriate priority and full
    senior leadership support. It is 1 of our top 10 business
    priorities.
        Second, we have a quarterly governance board that is
    chaired by the department's CFO. It includes a new office that
    has been established, our chief management officers and their
    representatives, as well as our comptrollers, in addition to
    having personal oversight by Deputy Secretary Lynn, our chief
    management officer.
        Third, we have obtained resources to support our plan.
    Allocating resources for this kind of initiative competes with
    other war-fighting priorities, but as we have seen in southwest
    Asia, good, strong business practices are a force multiplier.
        Fourth, we have made improvement of audit readiness among
    the components, one of our high-priority performance goals in
    the OMB priority, and we focus on that and measure each year.
        Recognizing the importance of demonstrating measured
    progress, our plan includes interim goals that we will achieve,
    that we intend to achieve each year. We also will provide
    Congress with a semi-annual report on our financial improvement
    and audit readiness every May and November, and the first
    report will be issued within the next month.
        In addition, we expect to report to Congress on a feasible
    approach for achieving fully auditable statements.
        For now we are focusing, as I mentioned, on the financial
    information that are most useful to management. That will allow
    us to establish a firm foundation. That foundation is internal
    controls and installation of more capable business systems that
    will support our auditability, as well as the auditability of
    the Federal Government's statements.
        As we look ahead and implement this approach, we believe it
    is important to also buildupon the existing strengths within
    Defense financial management. Our Defense financial managers
    are providing DOD's war fighters the resources and financial
    services needed to meet their national security objectives, and
    we are doing this around the world, including Iraq and
    Afghanistan.
        We also have effective financial processes in many areas.
    Our payment processes produce timely and accurate payments in a
    very high percentage of cases. Interest payments have been
    dramatically reduced. Our process with which we distribute and
    account for funds has been externally validated. And so we have
    progress that we can buildupon.
        My point is that we are doing much in our business well,
    but further improvements are necessary, and a revised focus on
    our business processes is using a financial auditor's lens.
        In conclusion, our ongoing efforts to improve the quality
    of financial information will build on current strengths,
    producing changes that will ultimately result in a favorable
    opinion. We need to make improvements in the Department of
    Defense financial management while continuing to provide strong
    budget and financial information to our war fighters.
        As the Deputy Chief Financial Officer, I am personally
    committed to this initiative. We are striving to support our
    national security mission by addressing these material
    weaknesses. Most importantly, we need to reinforce your
    confidence in our stewardship over public funds.
        Thank you for inviting me today and for your support for
    our efforts. I welcome your questions.
        [The prepared statement of Mr. Easton follows:]

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        Ms. Watson. I would like to thank each one of the witnesses
    in this first panel.
        We are now going to move to the question period and proceed
    under the 5-minute rule. I am going to start the questioning,
    and my first question, comment and then question, will be to
    Mr. Dodaro, and then we will move to the other witnesses, as
    well.
        GAO has frequently cited the Federal Government's
    ineffective process for preparing the consolidated financial
    statements as a major impediment that precludes the issuance of
    an audit opinion. Which agencies have been relatively more
    successful in dealing with this challenge? I heard several of
    the witnesses refer to Treasury Department, but what have the
    agencies done differently, and could their experiences be used
    to better address this problem in other agencies? And when do
    you anticipate that this material weakness will be resolved and
    no longer cited in the U.S. Government reports?
        Mr. Dodaro. The issue of the preparation of the
    consolidated financial statements has really three dimensions
    to it. One, you need to have good information at the individual
    agencies. As we have heard this morning, the Department of
    Defense, Homeland Security, NASA, and State have not been able
    to get unqualified opinions, some for many years, so that is
    one issue. You have to have the foundation in the individual
    agencies.
        Second is that the individual agency's financial statements
    need to be consistent with Treasury's accumulated financial
    reporting that it has in place, and so far there have been some
    difficulties reconciling the audited financial statements of
    individual deposition and agencies with Treasury's records.
        Ms. Watson. Are there firewalls between these agencies? Are
    they not sharing? What do you find?
        Mr. Dodaro. There is sharing of information, but part of
    the problem is that there are different systems----
        Ms. Watson. Tracking.
        Mr. Dodaro [continuing]. That keep the records. This is
    particularly problematic in the agencies resolving differences
    in these intergovernmental transactions, themselves, and there
    are tens of billions, if not more, transactions that take
    place, and for a decade or more now different things have been
    tried in order to get the agencies to reach agreement among
    themselves. OMB and Treasury have tried to facilitate those
    type of reconciliations, and some progress has been made, but
    not enough in that area.
        Now, some of the new ideas that OMB and Treasury are
    beginning in this new innovation office that they are creating
    to have more central accounting systems with standardized
    definitions and having data from the vendors offers a lot of
    promise to use modern technology to solve this issue. And
    unless there are better technical applications or the
    technology, as Congressman Issa mentioned--I mean, this problem
    is so pervasive, and you have so many different systems it is
    hard to do that reconciliation.
        So I am hopeful that the concepts underpinning some of
    these new initiatives that OMB and Treasury are just starting--
    I know they know the issues very well. The solutions have
    eluded them to date, but I am hopeful with new applications and
    technology that they can be solved.
        We have had a decade of experience now trying to solve this
    with the agencies working among themselves and that hasn't
    proven to be fruitful.
        Ms. Watson. Well, we know technology is really progressing,
    keeping up with it----
        Mr. Dodaro. Right.
        Ms. Watson [continuing]. And being that it paid for it is
    one of the stumbling blocks.
        In testimony before this committee last summer, you
    expressed concern about the January 9, 2009, revision of OMB
    Circular No. A-27. Do you remember that? Financial management
    systems? And noting that the revised circular sustainability
    reduces the scope and the rigor of compliance testing for
    agency and financial management systems?
        Mr. Dodaro. Yes. My understanding is that there will be
    further refinements to that circular coming out shortly, and we
    are going to take a look at that. And once we make that
    assessment, we would be happy to provide our assessment to the
    subcommittee.
        Ms. Watson. That would be great.
        How might the closing of the financial systems integration
    office further affect agency compliance with fiscal year 2010
    financial reporting requirements? Were you aware?
        Mr. Dodaro. Yes. Yes, I was aware that action was going to
    take place. We closely coordinate with OMB and Treasury to the
    joint financial management improvement program. I believe that
    the concerns underpinning that and the fact that there have
    been a lot of expenditures made to improvement systems, they
    haven't always made the necessary improvements.
        And I believe that this needs to be monitored carefully
    going forward. I think that, again, the concepts that OMB and
    Treasury are moving to I think are worthy concepts, but a lot
    will rely on the implementation of the programs. And there will
    have to be careful attention to make sure that the standards
    that were in place before are adhered to.
        But I think the fundamental premise that technology was
    moving faster than the agencies could keep up with was a
    correct interpretation of the situation, and I do think that
    their new efforts can be effective, but a lot will depend on
    the implementation and the details.
        Ms. Watson. Thank you so much.
        We are now going to proceed on with the minority member,
    Mr. Schock.
        Mr. Schock. Thank you, Madam Chairman. And thank you to our
    panelists for your remarks.
        Obviously, you are the messengers, but as our constituents
    want to hold us accountable back home, we have to look to you
    to be accountable for the oversight.
        There is so much content in this, and I hope this is, as
    Mr. Issa said, the first of many hearings on this issue,
    because one of the numbers that is glaring to me is this $98
    billion figure. I am reminded of a year ago when the President
    brought together his Cabinet and said, we are going to begin by
    tackling the budget deficit, by asking my Cabinet members to
    bring forward $100 million in voluntary savings for next year
    over this year.
        Now, I don't know where we are with getting those
    recommended $100 million in potential savings, but I know one
    thing: $100 million is a pittance compared to $100 billion. And
    with all the talk this year with the health care reform bill
    and cutting out fraud, waste, and abuse, it would seem to me
    one of the biggest abuses in these discoveries is the fact that
    we potentially paid $98 billion of taxpayer money to people who
    shouldn't have received the money.
        I would feel a little better if we were moving in the right
    direction, but it is almost a 30 percent increase over the last
    year's estimate of unnecessary payments.
        So I guess my question is, to Mr. Dodaro and Mr. Werfel, if
    you feel comfortable piping in, is: what are we doing and what
    do we need to do to ensure that, No. 1, we are moving in the
    right direction and hopefully some day we are not spending
    nearly $100 billion of taxpayer money to folks who shouldn't
    receive this. Clearly, this wouldn't be acceptable in the
    private sector, and I think tribe just perpetuates the notion
    that many of our taxpayers and constituents back home have that
    the Federal Government doesn't do a very good job of managing
    their tax dollars.
        Mr. Dodaro. Thank you, Congressman Schock. You are right.
    This situation is not acceptable and there needs to be action
    taken to address it. One of the things I would point out is
    that one of the success stories coming out of the CFO Act and
    the emphasis on financial statements has been the
    identification and quantification of improper payments. Prior
    to that, there was really no quantification of it.
        Now, we are moving in the right direction. What needs to be
    done is, No. 1, not all programs that should be reporting
    improper payments are reporting improper payments yet. Part D
    in the Medicare program, for example, is not yet quantifying
    improper payments, and there is a number of other areas.
        No. 2, there needs to be consistent methodologies used over
    a period of time so that you can have comparable information.
    Right now, one of the big reasons for the increase has been a
    change in the methodology used under the Medicare program and
    the improper payments.
        Third, there needs to be key accountability, targets, and
    metrics expressed for each of these individual programs,
    because some of them have a long history of data, theirs have
    just one data point. I might point out--and I am sure Mr.
    Werfel elaborated on it--is that OMB has just put out guidance
    implementing an executive order to name accountable officials
    for each of the areas where there are improper payments, to put
    a dashboard in place and metrix, and to report targets for
    reducing improper payments.
        I am very encouraged by those, and I believe those will
    provide the foundation for further evaluations or progress.
        Mr. Schock. Let me followup to that. I am aware of the
    Executive order, but from my perspective this doesn't seem to
    be a problem of not having the appropriate number of experts.
    In other words, I don't have reason to suggest that the people
    who are working on this in pastures who have attempted to
    reduce the number organization improper payments were not
    capable of doing so. And I am asking for your opinion on this.
        Mr. Dodaro. Right.
        Mr. Schock. I might suggest that perhaps it is the data in
    the systems that we are using to be able to hold these
    different agencies internally, themselves, accountable for how
    they are paying out, whether it is their POs or their
    accounting systems. And so my question would be: do you think
    it would be appropriate for Congress to mandate a universal
    accounting system and collection of data so that across the
    systems, across these different departments they would all be
    using a similar mechanism, which would not only allow them to
    be held accountable but, more importantly, would allow folks
    like yourself, Mr. Werfel, and all the respective parties to
    appropriately audit them and better hold them accountable.
        Mr. Dodaro. The systems issues are definitely integral to
    solving the problem, but each of the programs are a little bit
    different, so I think Congress should begin examining each of
    the individual programs and make sure they have the appropriate
    systems in place.
        Now, part of the dilemma in solving this problem is the $98
    billion is an estimate, so it is not an accumulation of a lot
    of specific improper payments that then you could go pursue,
    and there is a lot of reasons. In some cases they are paying
    people who aren't eligible for the program. In other cases
    there are duplicate payments or overpayments. There are a lot
    of reasons and there are a lot of different reasons for the
    different programs.
        But you are right: better systems are the key, but they
    need to be tailored to the specific types of programs.
        Ms. Watson. Thank you. Your time is up.
        Mr. Connolly.
        Mr. Connolly. Thank you, Madam Chairwoman.
        Before you start my time, Mr. Dodaro, I noticed you may
    have some back problems, and if you would be more comfortable
    answering my questions standing up, please feel free to do so.
        Mr. Dodaro. I appreciate your consideration.
        Mr. Connolly. I am a fellow back sufferer.
        Thank you, Madam Chairwoman.
        I am so glad my friend and colleague from Illinois brought
    up the issue of overpayments. Don't I recall a GAO report last
    fall that cited $61 billion in overpayments to Medicare?
        Mr. Dodaro. I believe the number last year for Medicare and
    Medicaid was close to the 40-some billion. Let me just check.
    OK, it was over 50.
        Mr. Connolly. Over 50?
        Mr. Dodaro. Right.
        Mr. Connolly. And don't I recall that the health care
    reform bill we passed recently in part is financed by trying to
    get our arms around some of those overpayments, a substantial
    portion of those overpayments; is that not true?
        Mr. Dodaro. I believe there are efforts. I am not as--I am
    not completely sure on that answer. I know there is a lot of
    effort to try to reduce some of the waste in those programs.
        Mr. Connolly. Right. I just find it ironic that some on the
    other side of the aisle expressed enormous skepticism about our
    ability to finance health care by getting our arms around
    overpayments. It had to. It had to, in fact, reduce benefits,
    when, in fact, overpayments are substantial, and if we can get
    our arms around those overpayments--and I believe the health
    care reform bill, by the way, enhances enforcement to try to
    get at these overpayments--as a matter of fact, we can reduce
    Medicare and Medicaid expenditures without eating into
    benefits.
        In theory would that not be true, Mr. Dodaro?
        Mr. Dodaro. There is definitely action that can be taken to
    eliminate waste and fraud in the health care area. I think that
    is well demonstrated.
        Mr. Connolly. Thank you.
        Let me ask a question, maybe to both you and Mr. Gregg.
    Would it be fair to say that one of the chief, if not the
    chief, contributing factor to deficits, growing deficits in the
    out years, is, in fact, health care costs to the Federal
    budget?
        Mr. Dodaro. Definitely. Rising health care costs and
    changing demographics, but the health care cost, rising health
    care costs, are the primary driver. I will ask Mr. Gregg.
        Mr. Gregg. I think it is a series of things, Congressman,
    everything from Medicare, Medicaid, Social Security, Defense,
    and on down the list. For fiscal year 2009, also unemployment
    was exceptionally high. And we also had, like, $460 billion of
    revenues that had been there the previous year but didn't show
    up because of the economy. So it is a long list of things.
    Certainly health care is one of the big drivers.
        Mr. Connolly. You saw the CBO report that said that in the
    first 10 years the health care reform bill we passed in
    Congress would reduce the total debt by about $138 billion, but
    in the second 10 years would reduce it by at least $1.2
    trillion. Any reason to doubt those numbers?
        Mr. Gregg. I am not an expert in that, but CBO is well
    respected, so I think they have a lot of credibility.
        Mr. Connolly. Just interested. Have either of you ever seen
    any legislation passed by Congress before that has ever been
    projected to reduce the deficit by $1.2 trillion, combined $1.3
    trillion plus over 20 years?
        Mr. Gregg. I can't say that I have.
        Mr. Dodaro. I can't think of anything offhand.
        Mr. Connolly. I can't either. Thank you.
        Mr. Dodaro, if you look at declining, where we were as a
    percentage of GDP in terms of debt immediately after World War
    II, and you look at the next 30- or even 40-year time period,
    would it be fair to say that actually we brought down the debt
    as a percentage of GDP, primarily through a combination of
    economic growth and other control measures, not so much by
    cutting spending?
        Mr. Dodaro. If my memory serves me right in terms of
    historical purposes, there was considerable economic growth,
    which was a contributing factor, but I do think there were
    fiscal discipline or approaches that were put in place, as
    well, to help control and contain and make appropriate
    decisions from a fiscal prudence standpoint.
        Mr. Connolly. But I mean if you looked at Federal spending
    patterns, for example, in the 1960's, big spurt in growth.
        Mr. Dodaro. There was a big spurt in growth, but there were
    also small surpluses and----
        Mr. Connolly. But we weren't slashing Federal spending, is
    my point, in that 40-year time period under either Republican
    or Democratic administrations.
        Mr. Dodaro. No, but there was control in making sure that
    the Federal Government spending decisions would be close to
    anticipated revenue collection during that period of time.
    Otherwise, you wouldn't have had that pattern of growth. That
    is all I am saying. Economic growth is important and will be
    important going forward to address this problem, but economic
    growth alone, in our opinion, won't solve it by itself.
        Mr. Connolly. I would agree with you, of course, but I am
    only getting at the historic record would suggest we did not
    bring down the debt as a percentage of GDP by massive spending
    cuts. That is not what the record shows.
        Mr. Dodaro. Well, there is a lot of reasons for it. I agree
    with that.
        Mr. Connolly. Thank you. I believe my time is up. I call on
    Mr. Cuellar from Texas.
        Mr. Cuellar. Thank you very much. I will save my questions
    for the next set of panelists, but I do want to thank all of
    you for being here. I think the issues that you all have
    brought up are so important for all of us and I do want to
    thank all of you, but I want to reserve my questions for the
    next panel.
        Ms. Watson. I have just a few more questions I would like
    to address for the panel, and so we will do a second round. If
    there is anything else that you would like to chime in on,
    please let me know.
        Since improper payments have been mentioned several times,
    OMB recently issued guidance for the implementation of
    Executive Order 13520, reducing improper payments. What impact
    do you think these additional tools would likely have on
    efforts not only to reduce but to prevent future improper
    payments? GAO has recommended that OMB take actions to ensure
    that smaller programs with higher risks are covered by the
    Single Audit Act, so any one of you that would like to?
        Mr. Werfel. Ms. Chairwoman, I will address that question.
        There has been a good discussion so far on improper
    payments. I would like to, before I get to your direct
    question, just respond to some of the earlier comments that
    were made.
        First of all, one of the important--let's start with the
    premise that $98 billion in improper payments is completely
    unacceptable and clear action needs to be taken. One of the
    things that has caused that number to go up over time has been
    basically an increase in outlays, increase in unemployment
    outlays, so even if you have, for example, in the unemployment
    program a constant error rate of 10 percent, as the numbers go
    up in terms of the outlays the improper payment total goes up,
    and we have seen that both in the health care realm and
    unemployment insurance and other ways.
        Another reason why the number goes up is because we are
    measuring more programs and we are getting better at detecting
    where our errors are and uncovering them, so the $98 billion is
    not good news, but within that construct there are some
    positive elements, in particular our ability to find and root
    out these errors more effectively.
        We respect to the Executive order, what we have done under
    the Executive order is take the collective 8 years of
    experience managing the improper payments problem, since the
    Improper Payments Information Act was first brought to law in
    2002, and tried to define what we believe to be the most
    effective targeted solutions that are going to move the dial.
        Mr. Dodaro mentioned assigning a senior accountable
    official in each organization for improper payments, and we
    have already seen that has engaged a higher level in senior
    leadership attention to the issue.
        We have also looked a lot at incentives, and the Executive
    order tackles this issue of incentives in terms of one of the
    major payers in improper payments are State governments. Many
    of these programs, for example Medicaid and others, are
    administered through State governments, and it is important
    that the State government officials, who are playing such a
    critical role in implementing these programs, feel accountable
    and incentivized to try to measure and do more on their error.
    So one of the things the Executive order does, it establishes a
    working group, an intergovernmental working group, to define
    and identify different incentives that can be put in place to
    drive States to do more to drive errors down.
        We are also looking at incentives for contractors to report
    improper payments that are paid to them earlier in the process
    so they are part of the solution as we work to prevent these
    errors.
        And, Ms. Chairwoman, you mentioned the single audit
    process. One of the things that the Executive order does is it
    recognizes that the single audit, which is the main driver
    which Federal funds are evaluated, the appropriateness of how
    they are spent is done through the single audit at the State
    and local level.
        And if you look at the single audit today--and we have
    started to examine it very closely--a lot of the questions that
    are scrutinized during the single audit process don't relate to
    the bottom line of whether the money was paid out correctly and
    for the right purposes. There are a lot of what could be
    arguably termed extraneous questions during the single audit
    process about other compliance elements which aren't essential
    to the bottom line question of whether the money is being paid
    out correctly.
        So what we are looking to do is looking at ways of shifting
    the footprint or the focus of the single audit so that we are
    pounding away at the question of whether these moneys were
    spent correctly and in the right amount for the right purpose,
    rather than some of the other what I would argue are less
    central compliance issues, because in any audit--and I am sure
    Mr. Dodaro would concur with this--there is limited resources,
    so you have to use a risk management approach in terms of where
    you scrutinize.
        We believe at OMB that the single audit is a place where we
    can really shift our emphasis to improper payments in a way
    that is going to improve our results in this area.
        Ms. Watson. We have many, many more questions that we would
    like to ask, but being aware of the time we are going to move
    to the second panel.
        I want to thank each and every one of you for your
    testimony. Other questions we can send to you in writing, and
    we would hope to get a response that we will share with the
    committee and with the full committee.
        Thank you so very much.
        It is the policy in Government and Reform to swear in all
    the witnesses before you testify, and I would like to ask all
    of you to please stand and raise your right hands.
        [Witnesses sworn.]
        Ms. Watson. Let the record reflect that the witnesses
    answered in the affirmative.
        I will now take a moment to introduce our distinguished
    witnesses.
        Mr. John Barton is the manager of the public information
    and report production for the Texas Legislative Board, where he
    has worked since 1984. He oversees the preparation of budget
    evaluation and performance related publications and analysis
    for the Texas Legislature. You have a counterpart in California
    by the name of John Barton. You might know him. His brother was
    here in the House.
        Mr. Michael J. Hettinger is director of practice planning
    and marketing for the Grant Thornton LLPD's global public
    sector and practice. Mr. Hettinger oversees firm-wide strategic
    business planning and Federal marketing activities. Previously,
    Mr. Hettinger served as staff director of the House Committee
    on Oversight and Government Reform's Subcommittee on Government
    Management, Finance, and Accountability, where he developed and
    helped to pass the Department of Homeland Security Financial
    Accountability Act. He also worked as a senior lobbyist at
    Patton Boggs LLP, and as chief of staff to former
    Representative Tom Davis of Virginia.
        Veronique de Rugy earned her doctorate in economics at the
    University of Paris and the Patheon Sarbonne in the areas of
    public choice and public finance. She currently serves as the
    senior research fellow at the Mercatus Center at George Mason
    University, where she also previously served as a post-doctoral
    fellow and visiting scholar.
        I welcome all of you and thank you for your patience. I ask
    that each one of the witnesses now give a brief summary of your
    testimony and keep the summary, if you can, under 5 minutes in
    duration, because your complete written statement will be
    included in the hearing record.
        Mr. Barton, you may proceed.

    STATEMENTS OF JOHN BARTON, MANAGER OF PUBLIC INFORMATION, TEXAS
      LEGISLATIVE BUDGET BOARD; MICHAEL J. HETTINGER, DIRECTOR OF
       PRACTICE PLANNING AND MARKETING, GRANT THORNTON LLP; AND
      VERONIQUE DE RUGY, PH.D., SENIOR RESEARCH FELLOW, MERCATUS
                    CENTER, GEORGE MASON UNIVERSITY

                        STATEMENT OF JOHN BARTON

        Mr. Barton. Chairwoman Watson, Mr. Cuellar, good morning.
    My name is John Barton and I am the public information officer
    and manager of report production for the Texas Legislative
    Budget Board. I have been on the staff of this nonpartisan,
    highly respected legislative agency for the past 25 years.
    During this time, we have developed and implemented numerous
    good government accountability initiatives. Please see Exhibit
    A.
        I am privileged to serve as a resource witness on H.R.
    2142. This morning I would like to touch upon three of the good
    government accountability initiatives that were developed and
    implemented during the 1990's, namely Statewide strategic
    planning, performance budgeting, and performance monitoring.
    These initiatives are the foundation of our fiscal
    accountability system, a system that Representative Cuellar, as
    sponsor of H.R. 2142, championed in Texas throughout the
    1990's.
        In 1991, Texas faced a massive budget deficit. To engender
    support for a tax bill and a response to a growing sense of
    frustration on the part of the legislature and the public as to
    what are we getting for our money, three inter-dependent
    initiatives were subsequently enacted: strategic planning,
    performance budgeting, and performance monitoring. Please see
    Exhibit B.
        The strategic planning process requires State agencies to
    identify the goals and strategies and performance measures that
    constitute the basis for the biennial request for
    appropriations. The strategic planning process is a long-term
    iterative and future oriented process of assessment, goal
    setting, and decisionmaking. An agency's strategic plan is used
    as a starting point for developing the agency's budget
    structure, i.e., goals, strategies, measurements, measure
    definitions, and items of appropriation. Please see Exhibit C.
        The development of performance budgets occurred during the
    legislative appropriations process. Performance measures,
    definitions, and targets were established for each item of
    appropriation, and each agency develops a budget structure that
    includes its performance measures and definitions and targets.
    Please see Exhibit D for an example.
        Once the State budget is enacted, performance monitoring
    involves each agency reporting to the Legislative Budget Board
    electronically every quarter on their success in achieving
    agency-specific performance targets. To ensure the integrity of
    the performance information that is being reported, measure
    certification audits are conducted by the State auditor's
    office on an ongoing basis. Assessments of how well agencies
    are able to achieve their performance targets provide essential
    information for the next iteration of the biennial
    appropriations and strategic planning process.
        After more than 15 years of daily use, we have learned many
    important lessons about our fiscal accountability system. For
    example, our system enables legislators and citizens alike to,
    one, understand what we are getting for our money, two, assess
    agency and program performance, and, three, improve and ensure
    greater governmental accountability and transparency. That
    said, the system cannot and should not be used to abdicate the
    hard policy budget and political decisions that we as public
    servants have an obligation to make in the best interest of the
    public and the taxpayer.
        I should note that Texas' fiscal accountability system is
    the foremost system of its type in the United States. During
    the past 15 years, 28 delegations of foreign government
    officials representing 38 countries have traveled to Austin to
    learn how Texas has integrated strategic planning, performance
    budgeting, and performance monitoring into a seamless system
    that promotes Statewide accountability, effectiveness, and
    efficiency, and, most importantly, extols the many virtues of
    budget transparency.
        I would be delighted to respond to any questions. Thank you
    very much.
        [The prepared statement of Mr. Barton follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Ms. Watson. Thank you, Mr. Barton.
        Mr. Hettinger, you may proceed, please.

                     STATEMENT OF MICHAEL HETTINGER

        Mr. Hettinger. Thank you very much. Madam Chair, members of
    the subcommittee, Mr. Cuellar, thank you very much for the
    opportunity to testify today. I have a longer written statement
    which I submitted to the committee, and I would like to have
    that included in the record, but I will try to summarize those
    remarks here this morning.
        As was previously mentioned, from 2003 to 2006 I served as
    staff director of this subcommittee, then known as the
    Subcommittee on Government Management, Finance, and
    Accountability, then under the leadership of Todd Platts of
    Pennsylvania. As a result, I know first-hand that the work of
    this subcommittee is extremely important to the efficient and
    effective operation of the Federal Government.
        Also, as was previously mentioned, I am currently a
    director with Grant Thornton's global public sector practice,
    but I am here today as a witness based on my experience in the
    U.S. Congress, specifically my time on this subcommittee, and
    my testimony does not necessarily reflect the views of Grant
    Thornton.
        My testimony today is really focused on two areas of
    specific interest to the subcommittee: Government performance
    and budgeting, generally, and, second, H.R. 2142, Mr. Cuellar's
    legislation, known as the Government Efficiency, Effectiveness,
    and Performance Improvement Act of 2009.
        Linking budgets to performance with the expectation of
    achieving better results is extremely important and something I
    know this subcommittee has spent a great deal of time focused
    on. When Congress passed the Government Performance and Results
    Act [GPRA], in 1993, I believe it envisioned a comprehensive
    integration of agency annual performance plans with the annual
    budget process, a worthwhile goal. GPRA also sought a more
    open, accountable, and transparent Government. As we sit here
    today, 17 years after GPRA's enactment, I believe we continue
    to strive to achieve that vision.
        GPRA did provide a sound baseline for linking budget and
    performance. Agency strategic plans as required under GPRA
    force agencies to think strategically about the implementation
    of their budgets and how those budget expenditures achieve
    results. I believe we have seen significant improvement as a
    result of GPRA.
        Building on GPRA and prior management improvement efforts,
    such as President Clinton's reinventing Government, the Bush
    administration implemented the President's management agenda to
    drive agencies to better performance and results. The PMA also
    implemented a management tool known as the Program Assessment
    Rating Tool [PART]. PART, as I am sure the committee members
    know, over the 8 years of the Bush administration reviewed the
    performance of all programs 20 percent a year over a 5-year
    period, utilizing a simple questionnaire, and then making that
    information available to the general public via RESULTS.GOV.
    This effort, while well intentioned, was not without
    controversy, both at the agency level and here in Congress, in
    large part due to the fact that the effort was driven by OMB,
    as opposed to the Congress or the individual agencies. In
    addition, many stakeholders felt the reviews were being used
    for political purposes.
        This brings me to my discussion of Representative Cuellar's
    legislation, H.R. 2142, the Government Efficiency,
    Effectiveness, and Performance Improvement Act of 2009. This
    legislation is very similar to legislation that Representative
    Platts and I developed in 2004 known as the Program Assessment
    and Results Act [PAR], reported out of this committee in the
    108th Congress. Like Representative Cuellar's bill, this
    legislation sought to ensure the periodic review of Government
    programs to measure their efficiency and effectiveness.
        In addition to the basic requirement of this legislation
    that all Federal programs be reviewed at least once every 5
    years, H.R. 2142 includes a number of other key provisions that
    I believe are essential should this bill move forward. These
    include, first, providing for advanced publication of the list
    of programs to be reviewed. Second, requiring the development
    of a process to receive stakeholder comment. Third, requiring
    the reporting of the results of the program assessments through
    the annual budget process. And last, requiring the development
    of an improvement plan to address weaknesses identified through
    these reviews.
        The bill also designates the agency performance improvement
    officer as the key official responsible for program assessment
    and review, a position, I would add, that did not exist when
    Representative Platts' legislation was introduced.
        I wanted to share with the committee today some of the
    important lessons I learned through the effort to move
    Representative Platts' legislation through this committee.
    First and foremost, let me say I believe the concept of
    reviewing Federal programs for effectiveness on a regular basis
    is a good idea. It is only through this type of effort that we
    are able to determine if the programs are achieving the results
    we desire.
        As you consider H.R. 2142, I encourage you to look to the
    following issues that were raised by various stakeholders
    during consideration of Representative Platt's legislation.
        First, congressional intent must be an overriding
    consideration when determining the effectiveness of a program.
    In the vast majority of cases, there is a legislative
    underpinning to a Federal program, and, while that program may
    have changed or evolved over time, the intent of Congress when
    that legislation was passed or the express congressional
    content as the program evolved must be a strong factor in
    determining its effectiveness. I encourage the committee when
    looking at this legislation to work with their counterparts on
    the Appropriations Committee, as well as the Authorization
    Committees of jurisdiction and obtain their input on the bill.
        Second, reviews must be empirical, fact-based, and made
    without political judgment.
        Third, the metrics used to assess the effectiveness must
    match the intent of the program, i.e., there must be agreement
    in advance on what outcome the program was intended to achieve,
    and it must be judged against that intended outcome.
        Fourth, some results are subjective and therefore it is
    more difficult to assess the effectiveness of certain programs
    than others.
        Fifth, any effort to review program effectiveness must be
    driven at the agency level rather than dictated from OMB. OMB
    should, however, play an active advisory role in the process.
        Last, common sense must prevail.
        I applaud the committee for its ongoing efforts to improve
    the transparency, efficiency, and effectiveness of the Federal
    Government. The more transparent our Government is, the more I
    believe the citizens of this country will be able to trust that
    their hard-earned tax dollars are being used in a way that
    achieves results.
        I also applaud Representative Cuellar for his ongoing
    efforts to enhance the legislative debate that Chairman Platts
    started 5 years ago regarding the need to review the
    effectiveness of Government programs on a recurring basis.
        Thank you again for the opportunity to appear before the
    subcommittee today. I would be happy to answer any questions.
        [The prepared statement of Mr. Hettinger follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Ms. Watson. Thank you.
        Now Ms. de Rugy.

                     STATEMENT OF VERONIQUE DE RUGY

        Ms. de Rugy. Good morning, Chairwoman Watson and members of
    this subcommittee. It is an honor to appear before you today to
    discuss the financial situation of the U.S. Government.
        My name is Veronique de Rugy. I am a senior research fellow
    at the Mercatus Center at George Mason University, a research
    based organization where I study budget and tax issues. It is
    in this capacity that I have studied and reported on America's
    fiscal situation for a number of years.
        As GAO has noticed, America's financial situation is
    unsustainable. In 2009, the Federal Government ran a $1.4
    trillion deficit. That reports 10 percent of GDP, a level
    unseen since the second World War. More worrisome, the CBO
    projects that without policy changes, we will be running annual
    average deficit of $1 trillion during the next 10 years.
        Also, as our Nation's two most expensive programs, Medicare
    and Social Security, continue to grow, the trust fund of these
    programs will run larger cash-flow deficits. Over the next 75
    years, the Government has promised benefits for these two
    programs in excess of anticipated payroll tax revenues equal to
    $7.7 trillion and $38 trillion respectively. The Treasury
    Department estimates that tax would have to rise by about one-
    third to pay all the promises that have been made for these two
    programs, alone, and OMB estimates that in the absence of
    massive cuts in Social Security, Medicare, and other programs,
    or an equivalent massive tax increase, the national debt will
    rise to 77 percent of GDP in 2020, 100 percent in GDP in 2030,
    and more than twice GDP in 2050.
        You have heard from other witnesses about the Federal
    Government's financial situation, so I will shift gears and
    focus the rest of my remarks on two points: first, deficits and
    debt matters; second, the accounting practices and methods used
    by the Federal Government underestimate the gravity of our
    situation.
        First, some commentator on both sides of the aisles
    continue to insist this deficit and debt do not matter much. It
    is important to understand why they are mistaken. My written
    testimony details six reasons why deficit and debt matter, but
    I will focus on three here.
        First, debt is expensive, and the more that we borrow, the
    higher the cost of borrowing. This year, alone, the Federal
    Government will pay $700 billion in interest. That is the
    equivalent of the money we spent on two wards and the entire
    budget of the Defense Department.
        Second, large and unsustained deficit and debt cripple
    economic growth. Americans simply do not save enough to both
    lend the Government everything it needs to finance persistent
    deficit and continue to invest in the growth of the private
    sector. This means that every dollar that the Government
    borrows makes it harder for the private sector to borrow an
    extra dollar it needs to invest in the economy. This hinders
    economic growth.
        Third, a growing debt sends signals to investors that we
    are becoming risky borrowers. Over the last 2 years, the United
    States had become increasingly reliant on short-term debt,
    which makes sense in time of very low interest rates; however,
    in the long run, our lenders might reassess the credit risks
    that the Government represents and start applying rates to
    reflect that risk, or simply might be less willing to lend us
    money. When that time comes, access to capital will become
    harder for everyone. It will be more expensive to buy a house,
    to fund a business, or to save for the future.
        To conclude on this point, running deficits can certainly
    be appropriate at times of particular stress, such as wars and
    recession, but in the long run persistent large deficits and
    growing debt undermine our Nation's prosperity.
        My final point deals with the way that the Federal
    Government accounts for its financial. One of the most
    compelling examples of this misrepresentation is seen as how
    the Federal Government accounts for IOUs in the Social Security
    trust fund. This is on top of everything GAO has mentioned
    today.
        While the Department of Treasury's financial statement of
    the United States depicts the financial situation of the
    country much more accurately than the budget of the United
    States, as it uses accrual accounting rather than cash-flow, it
    is still deceptive because it leaves out some important
    elements that hide our true level of debt.
        For instance, it does accurately represent some of the
    Government's unfunded liability, but it also leaves out over
    $4.4 trillion in intra-governmental debt, $2\1/2\ trillion of
    which is due to Social Security. This is a breach of trust
    because it fails to inform taxpayers that the same people who
    already contributed to the trust fund will have to contribute
    once again once the Government starts repaying its debts to
    Social Security.
        The complex and confusing ways in which the Federal
    Government goes about accounting for its assets and liability
    does not allow policymakers and agency decisionmakers to make
    informed decisions about the Nation's true fiscal position.
    This needs to change.
        I thank you again for the opportunity to testify on this
    important topic, and I look forward to answering your
    questions.
        [The prepared statement of Ms. de Rugy follows:]

    [GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

        Ms. Watson. Thank you so much. I really appropriate the
    witnesses' input.
        Since, Mr. Cuellar, we are really looking at your bill and
    seeing if it addresses some of the points that were made by our
    witnesses, I am going to turn the questioning over to you. We
    only have 5 minutes left for the duration of this committee,
    and I will yield to you to use those 5 minutes.
        Let me just say to the witnesses, too, you need to take
    into consideration the United States. You need to take into
    consideration how we make changes and move forward. And you
    need to take into consideration and suggest to us how we serve.
        It was mentioned that our Nation's prosperity, how do we
    continue to prosper under the current global conditions that
    are existing today? Do we raise taxes? Do we cut the safety
    net? What do we do? So we need your guidance. We need your
    input. That is the reason why we are holding these hearings.
        I now yield to Mr. Cuellar.
        Mr. Cuellar. Thank you, Madam Chair. Thank you, again, for
    allowing this bill to be considered today.
        I want to thank all the witnesses for being here. I thank
    you very much.
        If I can just give a quick background, when we talk about
    results-oriented Government, it is, I think, an idea that both
    Democrats and Republicans can work on. If I can just give you
    my personal experience, back in Texas we started in 1991 with
    Governor Ann Richards, then in 1994 Governor Bush at that
    time--then, of course, President Bush--came in. One of the
    concerns I had was you have a shift from a Democrat to a
    Republican. Are they going to change things? Actually, Governor
    Bush at that time went on and built on this idea of
    performance-based budgeting.
        In between that in 1993, I guess around that time, under Al
    Gore, where this got started on this, there was a gentleman by
    the name of John Sharp and a team of Texans that came up here
    and basically talked, gave advice and suggestions to the
    Clinton administration, a lot of it based on what we had done
    in Texas. Of course, then the present law that we have built on
    that.
        Then, of course, as the witness, Mr. Hettinger, came in
    when then Governor Bush and then President Bush came in, he
    then started building up on what was done by President Clinton.
        So it is an idea that serves both. It doesn't matter if you
    are a Democrat or a Republican on this particular issue.
        Ms. Watson. Let me just interrupt you here. We were left
    with a sizable surplus after the Clinton administration, so
    that is something that he picked up I think during that time.
    And now in the last 8 years we have been down like this. I
    would hope that in these hearings we would try to put our
    thing--and I understand what you are trying to do, and I
    quizzed my staff this morning as to what was the real intent.
    As we look at performance based, we are looking at the efficacy
    of our policies, what works and what doesn't, so that we can
    dig ourselves out. It will be, I think, decades before we dig
    ourselves out and reduce the deficit.
        Mr. Cuellar. Right. Exactly.
        Ms. Watson. We have to find the right thing.
        Mr. Cuellar. Another piece of legislation that got passed
    already, pay-go, pay-go was in place, pay-go got expired in
    2003. Two wars got started. Part D Medicare came in and put in
    a credit card, and then we saw what happened to the surplus on
    that. That is the pay-go part of it. Today I am talking about
    results-oriented Government, which basically means if you put
    one dollar in you want to know what you get for that dollar.
    This is the effort of this.
        As you know, under the Blue Dove Coalition, this is one of
    the 15 measures that coalition is pushing. In fact, some of the
    Members over here a while ago are all cosponsors of this
    legislation.
        The effort of this is just basically we want to know if we
    put in one dollar what are we getting for this dollar. I know
    that when I served on the Budget Committee we asked some of the
    agencies do we really know what we are getting out of this, and
    the experts came in and told us at that time no we don't, we
    really don't know what we are doing in a lot of the efforts
    that we are doing.
        Basically, if I can just show you what we are trying to do,
    if we can move the performance based budgeting, basically what
    gets measured gets done. If we don't know how we are spending
    our dollars, then we certainly have a problem with that.
        Moving on, let me give you a bill pattern. I think this is
    very important. As an example, in Texas in the 1970's, early
    1970's, we basically had line items. This is a line item.
    Basically, you can see even in the budget you had seasonal
    help. It was just line items. We are spending this money here
    on this and this.
        Then we moved into the next one into the 1980's and you go
    more into program spending. If you look at our budget right
    now, Madam Chair, we basically in the U.S. Congress have a
    program type of spending, combined with a line item also on
    that.
        If you look into the 1990's--and I think Mr. Barton in your
    testimony you had something that went a little bit more into--I
    think it is a little bit more up there than what I have here,
    but then you go into measures. If you put in $1,000, what do
    you get for the $1,000. This is what we are trying to get the
    Federal Government, because I think our Federal Government's
    budget is so stuck in the almost 1970's, 1980's type of
    budgeting part of it.
        My question, Madam Chair and Mr. Barton, if you can address
    this, in the early 1990's Texas was also in a deficit, very
    severe type of situation, so we had come in. We are facing the
    same type of situation, and I think we are in the perfect time,
    Madam Chair, to say we are concerned about spending, we are
    concerned about how we are spending the money. Are we getting
    the best bang for the dollar? What do we need to do? And I will
    ask Mr. Barton and Mr. Hettinger, because, as you know, both of
    you under Mr. Platt had similar legislation. We added some
    changes, of course, but I want to see if you all can address in
    a deficit type of situation how can this bill help.
        Mr. Barton. In 1991 we had a $6 billion budget deficit. The
    leadership wanted to pass a $3 billion tax bill, and directed
    the Legislative Budget Board and the Texas performance review
    to come up with $3 billion in cost savings. That review process
    took 5 months, involved 120 staff from not only State
    government but the private sector, and we were able to produce
    $3 billion in savings.
        One of the fundamental questions we asked ourselves is
    whether or not various State programs were worthwhile. We talk
    a lot about efficiency and effectiveness, but we often don't
    talk about whether or not the program is worthwhile to begin
    with. That was one of the questions we asked ourselves in 1991.
        Subsequent to 1991, we incorporated these review processes
    on an ongoing basis. In Texas we have a sunset commission that
    reviews every agency top to bottom once every 12 years.
        Mr. Cuellar. That was in 1991. That was under Democratic
    Governor Ann Richards, Democratically controlled State Senate
    and House Members on that, before Bush comes in in 1995--or
    1991, I am sorry. Go ahead.
        Mr. Barton. Yes. So we have a once every 12 year sunset
    review process that reauthorizes State agencies and looks at
    whether or not programs are worthwhile, agencies are
    worthwhile, as well as whether or not they are efficient and
    effective.
        We also have an ongoing biennial review of various State
    programs. The Legislative Budget Board produces on a biennial
    basis between 70 and 100 separate reports on any number of the
    State's 2,000 programs that receive State appropriations.
        And then, in addition, we do have a process that involves
    the State auditor's office, looking at the financial
    accountability aspects of agency expenditures.
        All told, I think we have a fairly robust system of fiscal
    accountability that allows us to not again only look at the
    efficiency and effectiveness of programs, but the question as
    to whether or not they are worthwhile and the extent to which
    we can use cost/benefit analysis in the appropriations process.
        Mr. Hettinger. Just to add a little bit to those comments
    and maybe spin it back to the idea of how this actually helps
    us to manage the deficit, I think from my perspective this is
    one piece. Program assessment and review is one piece of a
    larger financial picture. If you look at what has been done
    traditionally with the program assessments and the
    recommendations that have come as a part of the budget as a
    result of those program assessments, I would venture a guess to
    say that 75 to 80 percent of the recommended cuts, based on
    whether they be PART reviews or other program assessments,
    Congress has chosen to fund. So that is an issue that you need
    to look at.
        I had in my broader statement a discussion of sort of my
    thinking around what I call two budget processes, one being the
    process of agencies working with OMB on the development of
    their budget, and then the second piece of that being the
    agency work with their appropriators to actually put funding
    behind those programs. They are really two separate pieces, and
    when you are talking about program assessments, at least as
    they have traditionally been done, those are done in the first
    part, which is the agency working with OMB. That is why I think
    it is important as you look at this legislation that you get
    the buy-in from the appropriators.
        I will say, if we could have gotten buy-in 4 or 5 years ago
    from the appropriators, we probably would have been able to
    enact that legislation that Chairman Platts had introduced, but
    we didn't get that buy-in, and so I think that is a really
    important piece that you need to look at going forward. We can
    talk here or I can share some stories with you offline. I mean,
    we met with the appropriators, we talked a lot about this.
        One of the issues, and I didn't address this in my
    testimony and I am not sure how it is addressed in your
    legislation, but the PART system as President Bush implemented
    it has a score. It says effective, ineffective, results not
    demonstrated, etc., but it also gives it a score, a numeric
    score, 75, 80, 100, whatever it may be, or in some cases a 25.
    And if you look at it from the perspective of the
    Appropriations Committee, if I fund a program that got a 25 and
    that is a transparent process, you actually put yourself in a
    somewhat awkward situation because you are essentially asking
    them to fund what has been termed an ineffective program.
        Again, the score is an issue that I think folks need to
    look at.
        I will stop with that, but I do think, as I said, it is one
    piece. It can certainly help the deficit reduction, but
    Congress needs to play a part in that, too.
        Ms. de Rugy. Can I add something. The Mercatus Center has
    done a lot of work on performance based management and
    transparency, and there is actually a very large economic
    literature on the topic. Really the main conclusion is that
    unless there is accountability and a bill or this type of
    performance based budgeting has real teeth in actually holding
    people accountable and effectively cutting spending, it is just
    not working. It is like with transparency, transparency is
    certainly a necessary piece of the process, but it really isn't
    sufficient. You need to have both things together.
        So it is a first very good step in that direction, but it
    won't be performing effectively, especially I mean like the
    difference I think between State budgeting and Federal
    budgeting is that in theory the State governments are not
    allowed to run deficits, so they are put in a situation where
    they have to do something. I will grant you that a lot of the
    things they do is use gimmicks to actually make it look as if
    their budget is balanced, and in that sense I actually think
    that their performance based budgeting can help. But the
    Federal Government doesn't have this obligation, and, as you
    have used the term putting it on the credit card, you are
    absolutely correct.
        As the Chairwoman noted, while there has been, for about 17
    or 20 years, a lot of talk about transparency, a lot of talk
    about looking at performance of programs, yet we have managed
    to go from a situation of surplus to a situation of deficit,
    and gigantic deficit.
        I think in order for any bill to include the full process,
    it needs to have the transparency aspect, but also the
    accountability that goes with it. That is key.
        Mr. Cuellar. Thank you.
        Ms. Watson. We are out of time.
        Let me just say this: I feel that your bill will help us in
    terms of what works in terms of program. When you get Executive
    orders, we went into a war and spent $15 billion a month. That
    is going to affect the bottom line. The appropriators have
    nothing to do with that, and I am hearing the witnesses saying
    this ought to be an issue that the appropriators listen to, so
    we have to unscramble some rotten eggs.
        I do thank you for the point you are raising, because we
    are going to have to look at each sector of government. We are
    the Federal Government. What happens in the States? And then
    what happens in local government? And so this whole apparatus
    needs looking at, but you give us a way to start looking to see
    what does work. I hope we can build on what you are putting out
    there. We certainly are going to have a series of these
    hearings so that we can look at new directions for operating a
    country like ours.
        We are not isolated. We are impacted with what is happening
    with the rest of the world. China, with 1.3 billion people, is
    looming to become a nation in just a matter of a decade or so
    that is going to be handling the finances for the entire globe,
    it appears. So we have many different issues to look at with
    this, and I do thank you for coming and for sharing with us. We
    will call you back again.
        With that, we are going to adjourn this committee meeting.
    Thank you so much.
        [Whereupon, at 12:10 p.m., the subcommittee was adjourned.]