[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

                              ----------                              
                                                                   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:]


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

                                 
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