[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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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
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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:]
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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:]
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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:]
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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.]