Year-End Spending: Reforms Underway But Better Reporting and Oversight
Needed (Letter Report, 07/31/98, GAO/AIMD-98-185).

Pursuant to a congressional request, GAO reviewed the: (1) actions taken
to correct problems with federal yearend spending practices and the
award of government contracts; and (2) quarterly obligation data for
selected departments and agencies to determine if fourth quarter
obligations were higher than obligations in earlier quarters of the
fiscal year (FY).

GAO noted that: (1) changes in the budget environment and procurement
reforms have affected the opportunity and need to obligate funds quickly
at yearend; (2) agencies spend far less today than they did in 1980 on
providing goods and services directly, as payments to individual
beneficiaries and grants to state and local governments have increased;
(3) this trend, combined with limits on discretionary spending, has
significantly changed the budget environment for most agencies; (4) at
the same time, Congress has made funds available for longer periods for
many agencies, which reduces the pressure to spend funds at the end of
each year; (5) in addition, systemic procurement reforms addressed most
of the issues raised in the Subcommittee on Oversight of Government
Management, Senate Committee on Governmental Affairs' report although
problems persist in certain agencies and with some procurements; (6)
GAO's work and that of others indicates that today, there are more
safeguards against unplanned yearend spending and, in most discretionary
programs, fewer resources available for low-priority purchases than in
1980; (7) despite these changes, it is difficult to assess the patterns
of spending during the year because reported quarterly budget execution
data are not reliable; (8) without complete and timely information for
oversight, the Office of Management and Budget (OMB) and other
decisionmakers do not have an accurate assessment of the financial
status of federal programs during the year; (9) even at yearend, there
are significant differences in three comparable sets of data that
agencies report to OMB and the Department of the Treasury; (10) although
OMB officials stated that a new system they have built jointly with
Treasury to collect yearend data starting in FY 1999 should resolve or
greatly alleviate the differences in yearend budget data, more work is
needed to assure compliance with the requirement for quarterly data; and
(11) agencies' failure to report and reconcile budget execution
information mirrors broader financial management problems found in GAO's
financial audit of the FY 1997 Consolidated Financial Statements of the
United States government.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  AIMD-98-185
     TITLE:  Year-End Spending: Reforms Underway But Better Reporting 
             and Oversight Needed
      DATE:  07/31/98
   SUBJECT:  Yearend spending
             Reporting requirements
             Federal procurement
             Funds management
             Budget administration
             Intergovernmental fiscal relations
             Financial management systems
             Budget obligations

             
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Cover
================================================================ COVER


Report to the Chairman, Permanent Subcommittee on Investigations,
Committee on Governmental Affairs, U.S.  Senate

July 1998

YEAR-END SPENDING - REFORMS
UNDERWAY BUT BETTER REPORTING AND
OVERSIGHT NEEDED

GAO/AIMD-98-185

Year-End Spending

(935268)


Abbreviations
=============================================================== ABBREV

  BIA - Bureau of Indian Affairs
  CCA - Clinger-Cohen Act of 1996
  CICA - Competition in Contracting Act of 1984
  DAWIA - Defense Acquisition Workforce Improvement Act
  DOD - Department of Defense
  EPA - Environmental Protection Agency
  FAR - Federal Acquisition Regulations
  FASA - Federal Acquisition Streamlining Act of 1994
  FMS - Financial Management Service
  GOALS - Government On-Line Accounting Link System
  GSA - General Services Administration
  HUD - Department of Housing and Urban Development
  IG - inspector general
  NASA - National Aeronautics and Space Administration
  OMB - Office of Management and Budget
  SF - Standard Form

Letter
=============================================================== LETTER


B-280218

July 31, 1998

The Honorable Susan M.  Collins
Chairman
Permanent Subcommittee on Investigations
Committee on Governmental Affairs
United State Senate

Dear Madam Chairman: 

In fiscal year 1980, the Senate Subcommittee on Oversight of
Government Management held hearings and issued a report, Hurry-Up
Spending,\1 to address problems with federal spending practices and
the award of government contracts.  The Subcommittee found that the
rush to obligate expiring funds before the end of the fiscal year
frequently resulted in a lack of competition, poorly defined
statements of work, inadequately negotiated contracts, and the
procurement of low-priority items or services.  This report responds
to your request that we outline actions taken to correct these
management weaknesses.  In addition, you asked us to provide
quarterly obligation\2 data for selected departments and agencies to
determine if fourth quarter obligations were higher than obligations
in earlier quarters of the fiscal year. 


--------------------
\1 Hurry-Up Spending.  A report prepared by the Subcommittee on
Oversight of Government Management, Senate Committee on Governmental
Affairs, July 23, 1980. 

\2 Obligations are recorded when the government makes a firm
commitment to acquire goods or services.  In general, they consist of
orders placed, contracts awarded, and similar transactions. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

Changes in the budget environment and procurement reforms have
affected the opportunity and need to obligate funds quickly at
year-end.  Agencies spend far less today than they did in 1980 on
providing goods and services directly, as payments to individual
beneficiaries and grants to state and local governments have
increased.  This trend, combined with limits on discretionary
spending, has significantly changed the budget environment for most
agencies.  At the same time, Congress has made funds available for
longer periods for many agencies, which reduces the pressure to spend
funds at the end of each year.  In addition, systemic procurement
reforms addressed most of the issues raised in the Subcommittee's
report although problems persist in certain agencies and with some
procurements.  Our work and that of others indicates that today there
are more safeguards against unplanned year-end spending and, in most
discretionary programs, fewer resources available for low-priority
purchases than in 1980. 

Despite these changes, it is difficult to assess the patterns of
spending during the year because reported quarterly budget execution
data are not reliable.  Without complete and timely information for
oversight, the Office of Management and Budget (OMB) and other
decisionmakers do not have an accurate assessment of the financial
status of federal programs during the year.  Even at year-end, there
are significant differences in three comparable sets of data that
agencies report to OMB and the Department of the Treasury.  Although
OMB officials stated that a new system they have built jointly with
Treasury to collect year-end data starting in fiscal year 1999 should
resolve or greatly alleviate the differences in year-end budget data,
more work is needed to assure compliance with the requirement for
quarterly data.  Agencies' failure to report and reconcile budget
execution information mirrors broader financial management problems
found in our financial audit of the fiscal year 1997 Consolidated
Financial Statements of the United States Government.\3


--------------------
\3 Financial Audit:  1997 Consolidated Financial Statements of the
United States Government (GAO/AIMD-98-127, March 31, 1998). 


   BACKGROUND
------------------------------------------------------------ Letter :2

Wasteful year-end spending can occur when agencies rush to use funds
at the end of the fiscal year.  This is often an attempt to spend
funds that would otherwise expire, meaning they would no longer be
available for new obligations after the fiscal year ends. 

In its 1980 report, the Subcommittee recognized that higher fourth
quarter obligations may not indicate a problem with wasteful
spending.  The Subcommittee noted that spending at year-end may be
the result of legitimate, planned, and worthwhile spending intended
by Congress.  However, the Subcommittee found numerous examples in
which agencies took short cuts in the last few weeks of the fiscal
year that led to questionable contracts.  Hurry-up procurement
practices resulted in the purchase of millions of dollars worth of
goods and services for which there was no demonstrated current need. 
The Subcommittee found that to spend quickly, the government
frequently paid inflated prices, incurred higher administrative costs
for overtime, and awarded contracts that were not in the government's
best financial interest.  At the time the Subcommittee issued its
1980 report, civilian and defense agencies operated under separate
procurement systems with different authorities and regulations. 
Agencies were expected to use competition to the maximum extent
practicable, but there was no statutory requirement for the
justification and approval of sole-source contracts. 

Our prior work on year-end spending has shown that problems occurred
in the past when budget execution was not monitored effectively. 
Periodically, Congress has asked that we review and report on
agencies' rates of obligations.\4

A continuing theme of these earlier reports was the questionable
quality of the data reported to Treasury and OMB.  In our earlier
work, we used data published in the quarterly Treasury Bulletin,
which was aggregated by department, agency, and object
classification, that is, by items of expense.  The source of this
information was Treasury's Financial Management Service (FMS)
Standard Form (SF) 225 - Report on Obligations.  In December 1995,
according to Treasury officials, the reporting requirement and the
resulting data published in the Treasury Bulletin were eliminated to
reduce the reporting burden on agencies. 

OMB continues to require that agencies report their quarterly
obligations on the SF 133 - Report of Budget Execution (SF 133),
approximately 20 days after the close of each calendar quarter. 
Unlike the SF 225, obligations are not shown by object
classification.  Agencies are also expected to reconcile their
year-end SF 133 report with comparable data provided to the
Department of the Treasury on the FMS 2108 - Year-End Closing
Statement (FMS 2108) and the SF 224 - Statement of Transactions (SF
224).  These reports show budget execution data for each
appropriation or fund account established by Treasury for a specific
period of availability, i.e., annual, multiyear, or without fiscal
year limitation. 


--------------------
\4 Correspondence to Representative Byron L.  Dorgan transmitting
Tables of Gross Federal Obligations for Fiscal Years 1985-1990 by
Object Class for the Major Departments and Agencies (July 12, 1991);
Federal Year-End Spending Patterns for Fiscal Years 1982, 1983, and
1984 (GAO/AFMD-85-75, Revised November 4, 1985); and Federal Year-End
Spending:  Symptoms of a Larger Problem (GAO/PAD-81-18, October 23,
1980). 


   SCOPE AND METHODOLOGY
------------------------------------------------------------ Letter :3

To identify reforms in procurement and management practices, we
reviewed major legislation enacted since the Subcommittee's 1980
report was published.  Reforms include the Competition in Contracting
Act of 1984, the Government Performance and Results Act of 1993, the
Federal Acquisition Streamlining Act of 1994, and the Clinger-Cohen
Act of 1996.  We also interviewed knowledgeable OMB and inspectors
general (IG) staffs to ensure that we had a comprehensive view of
these reforms, to identify additional administrative efforts, and to
obtain multiple perspectives on whether improper year-end spending
was a significant problem. 

To collect current examples of problems in federal contracting, we
reviewed our work on federal contract management\5 and IG semiannual
reports dated from fiscal years 1995 through 1997 for 10 major
departments and agencies.  We looked for examples of problem
procurements that paralleled concerns identified in the
Subcommittee's report.  We were interested in reports that attributed
a rush to obligate funds at year-end as a cause for improper
contracting practices.  We reviewed all IG semiannual reports and
selected additional IG reports from fiscal years 1995 through 1997
for the Departments of Agriculture, Commerce, Defense, Energy, Health
and Human Services, Housing and Urban Development, the Interior, and
Transportation, and for the National Aeronautics and Space
Administration (NASA) and General Services Administration (GSA). 
Additional details on agencies for which we have identified contract
management as a high-risk area--Defense, Energy, the Environmental
Protection Agency (EPA), and NASA--with corresponding examples from
IG reports, are included in appendix I. 

For data on agencies' obligation rates, we obtained an automated OMB
report containing detailed budget execution information provided by
agencies through Treasury's Government On-Line Accounting Link System
(GOALS).  Using agency-reported SF 133 year-end obligation data, we
calculated quarterly rates of spending for fiscal year 1997, and
identified examples of incomplete reporting by agency and bureau.  In
those cases where fourth quarter cumulative data were missing, we
included cumulative data from the most recent quarter.  In a second
analysis, we compared these data with budget formulation data
published in the prior year column of the President's Fiscal Year
1999 Budget.  We did not independently verify the data that agencies
provided to OMB. 

Our work was performed in Washington, D.C., from October 1997 through
March 1998 in accordance with generally accepted government auditing
standards.  We requested comments on a draft of this report from the
Director of the Office of Management and Budget or his designee.  On
July 14, 1998, the Assistant Director for Budget; the Chief, Budget
Concepts Branch of Budget; and their staff provided us with comments,
which are discussed in the "Agency Comments and Our Evaluation"
section. 


--------------------
\5 Our examples were taken from our High-Risk Series, which
identified contract management as a high-risk area at several
civilian agencies and the Department of Defense.  High-Risk Series: 
An Overview (GAO/HR-97-1, February 1997); High-Risk Series:  Quick
Reference Guide (GAO/HR-97-2, February 1997); High-Risk Series: 
Defense Contract Management (GAO/HR-97-4, February 1997); and High
Risk Series:  Department of Energy Contract Management (GAO/HR-97-13,
February 1997). 


   POTENTIAL FOR IMPROPER YEAR-END
   SPENDING HAS BEEN CONSTRAINED
------------------------------------------------------------ Letter :4

Changes in the budget environment and procurement reforms have
reduced the potential magnitude of problems with year-end spending. 
Tight fiscal controls coupled with requirements for full and open
competition and advance planning make it less likely that year-end
spending will lead to sole-source or unplanned procurements.  This is
not to suggest that improper year-end spending no longer occurs or
that the procurement system cannot be improved further.  We have
identified contract management as a high-risk area for certain
agencies, and IGs continue to find individual contracts that are
poorly executed or monitored. 


      CHANGES IN THE BUDGET
      ENVIRONMENT AFFECT YEAR-END
      SPENDING
---------------------------------------------------------- Letter :4.1

Fewer funds, which have been made available for more than 1 year,
reduce the opportunity and need to spend funds quickly at year-end
for many agencies.  Increasingly, federal government spending is made
up of direct payments to individuals or grants to states not subject
to year-end spending pressures.  Correspondingly, funding for agency
operating expenses, e.g., costs for federal personnel, equipment,
supplies, printing, and contractual services, continues to decline as
a share of total spending.  As illustrated in figure 1, funding for
agency operations has decreased from 48 percent of total gross
obligations in fiscal year 1981 to 31 percent in fiscal year 1997. 

   Figure 1:  Operating Expenses
   of Government as a Share of
   Total Gross Obligations

   (See figure in printed
   edition.)

Deficit reduction legislation reinforced this trend by placing annual
limitations on the one-third of federal spending that is controlled
through the appropriations process--and that includes most government
day-to-day operations.  At the same time, appropriators have made
funds available for more than 1 year.  Today, approximately
two-thirds of budget accounts on an annual appropriations cycle have
some funds available for more than 1 year or available until spent
without fiscal year limitation. 

Agencies have been able to extend some contracts across fiscal years
even though their funding is appropriated annually.  Recently, the
National Defense Authorization Act for Fiscal Year 1998 broadened the
authority of the Department of Defense (DOD) to obligate appropriated
funds for severable service contracts that cross fiscal years if the
contract periods do not exceed 1 year.  As part of this provision,
Congress has asked that we report on any abuses of the provision,
including whether they have occurred in an attempt to circumvent
year-end spending limitations.\6 Comparable authority was given to
civilian agencies in the Federal Acquisition Streamlining Act of
1994. 


--------------------
\6 See H.  Cong.  Rep.  105-340, 771-772. 


      PROCUREMENT CHANGES ADDRESS
      THE SUBCOMMITTEE'S CONCERNS
---------------------------------------------------------- Letter :4.2

OMB officials stated that in their view, improper or unnecessary
contracts associated with the rush to spend funds at year-end are far
less of a problem than they once were due to open competition
requirements, improved agency procurement planning, and fewer
available resources.  The nine IG officials we contacted shared this
view.  Out of over 3,200 IG reports reviewed, only 1 report
explicitly identified a relationship between poor contracting
practices and the need to spend funds quickly at year-end.  However,
GAO and the IGs continue to find weakness in some agencies' handling
of contract management and with individual procurements.  In our
High-Risk Series, we identified a number of agencies with poor
contract management practices, such as poor planning and inadequate
oversight, that make them vulnerable to some of the same problems
with wasteful year-end spending that were identified in the
Subcommittee's 1980 report.  See appendix I for a summary of our
findings and examples taken from IG reports for those agencies for
which we identified contract management as a high-risk area. 

Despite problems with some agencies, the procurement system has
undergone significant changes since the Subcommittee's report and now
substantially incorporates the Subcommittee's recommendations.  The
Competition in Contracting Act of 1984 (CICA),\7 for example,
provided a more common procurement system for defense and civilian
agencies, established a "full and open competition" standard more
rigorous than the "maximum practicable competition" that preceded it,
and included sole-source approval and procurement notice requirements
in the procurement statutes.  The conference report on CICA suggests
that some of the act's changes to the procurement system were
intended to address the year-end spending concerns raised by the
Subcommittee.\8

The Defense Acquisition Workforce Improvement Act (DAWIA)\9 addressed
many of the Subcommittee's acquisition personnel-related concerns at
DOD by requiring improvements in the qualifications, training, and
career development of the defense acquisition workforce.  Two more
recent acts, the Federal Acquisition Streamlining Act of 1994
(FASA),\10 and the Clinger-Cohen Act of 1996 (CCA)\11 responded to
Subcommittee concerns regarding contract personnel performance
incentives.  Other CCA reforms required comparable qualification and
training standards for civilian agencies. 

To illustrate the way in which changes to the procurement system have
addressed the Subcommittee's concerns, table 1 associates the
Subcommittee's recommendations with descriptions of statutory
provisions that implement them in whole or in part. 



                                Table 1
                
                    Subcommittee Recommendations and
                         Corresponding Reforms

Subcommittee
recommendation      Corresponding reforms
------------------  --------------------------------------------------
Better planning     CICA requires that agencies use advance
and development of  procurement planning and market research in
advance             preparing a procurement, and prohibits
procurement         noncompetitive procedures based on funding
agendas             uncertainties or lack of planning justifications.

                    CCA specifically requires the application of
                    capital planning to information technology
                    investments.

Restrictions on     Under CICA, sole source acquisitions must be
sole-source         justified; the justification must include a
contracts           description of efforts the agency may take to
                    eliminate barriers to competition. Agencies must
                    publish notices of all procurements over $25,000,
                    with certain exceptions, and must consider all
                    responses to notices of sole-source acquisitions.

                    The basic principles of full and open competition
                    have been maintained in subsequent procurement
                    reforms.

Procedures for      DAWIA required the Secretary of Defense to develop
appraising civil    and implement a program to improve the
service             qualifications, training, and career development
performance in      of the defense acquisition workforce.
contract
management          FASA required OMB to establish policies, to the
                    maximum extent consistent with current law, to
                    provide for pay for performance and performance
                    consideration in promotion decisions for
                    acquisition positions.

                    CCA required qualification and training standards
                    for civilian agencies comparable to DOD and
                    encouraged career development and the use of
                    performance compensation incentives.

Increased           Executive agencies are required to establish and
oversight and       maintain a computer file containing records of all
monitoring through  acquisitions above the simplified acquisition
a government        threshold for a period of 5 years. Agency material
contracts database  is to be transmitted to the General Services
                    Administration for inclusion in the Federal
                    Procurement Data System.\a
----------------------------------------------------------------------
\a 41 U.S.C.    405(d)(4), 417. 

Procurement and management reforms continue to evolve and influence
the issue of year-end spending.  Two of the most significant
procurement reforms were enacted within the last 4 years and other
management reforms are in early phases of implementation.  As a
result, it is too early to assess their full impact or to determine
what further refinements may be needed.\12 FASA was intended to
simplify the procurement system and CCA added requirements for
information technology capital planning and career development and
performance incentives for non-DOD acquisition personnel. 

In addition, management reforms outside of the strictly procurement
sphere have influenced the procurement process, particularly
procurement planning.  The strategic planning provisions of the
Government Performance and Results Act of 1993 (Results Act), require
integration of capital procurement, budget, and program planning. 
The National Defense Authorization Act for Fiscal Year 1998 requires
expanded use of streamlined micropurchase procedures in DOD. 


--------------------
\7 Public Law 98-369, Div.  B, Title VII, 98 Stat.  1175 (1984). 

\8 See, e.g., S.  Rpt.  98-50, 98th Cong., 1st Sess.  pgs.  7, 12-13. 
The legislative history describes the 3 days of hearings held by the
Subcommittee on year-end spending that concluded that there was "a
relationship between negotiating under the crunch and unnecessary
noncompetitive contracting."

\9 Public Law 101-510, Div.  A, Title XII, 104 Stat.  1638 (1990). 

\10 Public Law 103-355, 108 Stat.  3243 (1994). 

\11 Public Law 104-106, Divisions D and E, 110 Stat.  642-703 (1996). 

\12 Acquisition Reform:  Implementation of Key Aspects of the Federal
Acquisition Streamlining Act of 1994 (GAO/NSIAD-98-81, March 9,
1998). 


   BUDGET EXECUTION DATA NOT
   RELIABLE
------------------------------------------------------------ Letter :5

Reliable quarterly obligation rates for fiscal year 1997 for the
major departments and agencies, as well as the government as a whole,
were not available because of incomplete reporting of budget
execution data.  Additionally, there were significant differences in
the three sets of data that agencies reported for fiscal year 1997. 
Data are reported in (1) final budget execution reports to OMB (SF
133), (2) the prior year column of the President's Fiscal Year 1999
Budget, and (3) Treasury's Fiscal Year 1997 Annual Report.  OMB told
us that the OMB and FMS project to merge these separate year-end
reporting requirements will resolve or greatly alleviate the
differences in year-end reporting data.  However, it is less likely
to address problems with quarterly reporting or ensure adequate
oversight of budget execution during the fiscal year.  Agencies'
failure to report and reconcile budget execution information is
another example of the broader financial management concerns we
raised in our financial audit of the fiscal year 1997 Consolidated
Financial Statements of the United States Government.\13


--------------------
\13 GAO/AIMD-98-127, March 31, 1998. 


      RATES OF OBLIGATION COULD
      NOT BE DETERMINED
---------------------------------------------------------- Letter :5.1

Because agencies did not report complete quarterly budget execution
data, we could not determine whether agencies obligated at a higher
rate in the fourth quarter than in previous quarters of fiscal year
1997.  Our review of OMB-provided agency quarterly budget execution
reports (SF 133) showed significant gaps in all major agencies as a
result of nonreporting.  Of the 1,054 treasury accounts in major
department and agencies that we reviewed, 332, or 32 percent, showed
no information in the first quarter.  Although some programs may not
incur obligations until later in the fiscal year, a similar
comparison in the last quarter showed that 88, or 8 percent, of the
accounts reported no cumulative obligations.  Although OMB did not
systematically follow up with nonreporting agencies during the year,
it did publish a comparison of year-end differences in budget
execution and formulation information for fiscal year 1997.\14 In
addition to the nonreporting we identified, OMB found 114
accounts--or 10 percent of the accounts published in the President's
Budget Appendix--that were expected to submit budget execution data
on SF 133 submissions but did not.  We found that three
agencies--DOD, the Department of Energy, and the Department of
Housing and Urban Development (HUD)--showed quarterly rates of
obligations that were particularly misleading because nonreporting
(1) was widespread, with Energy and HUD failing to report in two or
more quarters for at least half of their total accounts, and (2)
included accounts with significant resources. 


--------------------
\14 Budget Review and Concepts Division, OMB, Differences in FY 1997
Formulation and Execution Data, March 1998. 


      YEAR-END BUDGET EXECUTION
      AND FORMULATION DATA
      DIFFERED SIGNIFICANTLY
---------------------------------------------------------- Letter :5.2

We found significant differences when we compared year-end budget
execution obligation data with comparable data reported by agencies
in formulating the President's Fiscal Year 1999 Budget.  OMB Circular
A-11 requires that agencies report consistent year-end data to
Treasury for its Annual Report and to OMB for the final SF 133 -
Report on Budget Execution and prior year information for the
President's Budget.  We found that of the 14 major departments, 5
reported total fiscal year 1997 obligations that were at least 50
percent higher in the President's Fiscal Year 1999 Budget than the
amounts reported in their respective year-end SF 133s.  Of the major
departments and agencies, Education, HUD, and NASA each reported
total obligations that were over 85 percent higher in the President's
Fiscal Year 1999 Budget, while only DOD, Energy, EPA, and GSA
reported essentially the same information to OMB and Treasury. 

In its report,\15 OMB stated that the absolute value--that is, the
combined over-reporting and under-reporting of fiscal year 1997
obligations shown on agencies' SF 133s compared with actual
obligations reported in the President's Fiscal Year 1999 Budget--was
$324 billion, a reporting difference of 15 percent.  OMB reached
conclusions similar to ours, that (1) data in the actual-year column
in the President's budget request should agree with year-end budget
execution data reported to OMB, but did not and (2) governmentwide,
SF 133 data were understated when compared to data reported in the
President's Fiscal Year 1999 Budget.  According to OMB,
governmentwide obligations were understated by a net $152 billion in
the final fiscal year 1997 SF 133 reports. 


--------------------
\15 See footnote 14.  OMB's report differed from our analysis because
it (1) used more recent information--it reflected adjustments made
through the first quarter of fiscal year 1998, (2) compared data only
at an account level, and (3) included only those accounts with
discrepancies of $5 million or greater. 


      A NEW DATA SYSTEM IS
      UNLIKELY TO RESOLVE
      QUARTERLY REPORTING PROBLEMS
---------------------------------------------------------- Letter :5.3

FACTS II is a new data collection system that according to OMB, will
satisfy most of its and FMS' year-end reporting requirements. 
Currently, agencies report accounting information, including the FMS
2108 - Year-End Closing Statement, through GOALS, Treasury's
automated reporting system.  This system is also used to transmit
agencies' SF 133 reports to OMB, although Treasury does not verify
the accuracy or completeness of this information.  FACTS II will
collect a single set of year-end data from agencies beginning in
fiscal year 1999; OMB expects this to improve the link between budget
execution data and prior year information in the President's Budget. 
Merging separate Treasury and OMB reporting requirements should
eliminate discrepancies between budget execution and formulation data
for the prior fiscal year because FACTS II will be the only source
for this information.  However, there is nothing in this change that
fosters compliance with quarterly reporting requirements or the
oversight of the budget execution process during the fiscal year. 


      BUDGET EXECUTION REPORTING
      PROBLEMS REFLECT BROADER
      FINANCIAL MANAGEMENT
      CONCERNS
---------------------------------------------------------- Letter :5.4

Agencies' unreliable reporting and reconciliation of budget execution
data mirrors problems with other financial information found in the
first audit of the federal government's consolidated financial
statements.  For example, we found that government agencies reported
hundreds of billions of dollars of assets that were not adequately
supported by financial records.  Also, several major agencies were
not effectively reconciling their fund balances with Treasury
accounts.  For example, there were billions of dollars of unresolved
gross differences between agencies' and Treasury's records of cash
disbursements as of the end of fiscal year 1997.  The accuracy of the
appropriation and fund account balances reported on FMS 2108 -
Year-End Closing Statements and SF 224 - Statements of Transactions,
which are used to prepare the Treasury's Annual Report, depend on
agencies properly reconciling differences reported by Treasury during
the year. 

Each agency will need to consider these reporting and reconciliation
problems in order to prepare its Statement of Budgetary Resources and
Statement of Financing for its financial statements beginning in
fiscal year 1998.  Agencies whose financing is wholly or partially
from budgetary resources will need to report in these statements on
the availability and status of these funds for the reporting period. 
Since the Statement of Budgetary Resources is budget rather than
accrual-based, Statement of Federal Financial Accounting Standards
No.  7, Accounting for Revenue and Other Financing Sources and
Concepts for Reconciling Budgetary and Financial Accounting, requires
that agencies reconcile obligations and outlays reported on the SF
133 with other financial accounting information, which is then
included in the agency's audited financial statements.  The Statement
of Financing requires that agencies show the relationship between
budgetary resources obligated for a federal program entity and its
operations, and the net cost of operating that entity by reporting
differences and reconciling proprietary and budgetary accounts.  OMB
has the lead responsibility, in consultation with the Chief Financial
Officers Council and others, in developing the form and content of
these statements and in ensuring that agencies comply with reporting
requirements. 


   OBSERVATIONS
------------------------------------------------------------ Letter :6

Since the Subcommittee's 1980 report, substantial reforms in
procurement planning and competition requirements have changed the
environment, as has the declining share of federal funds available
for agency operations.  Agencies may still be tempted to quickly
spend funds that will expire, but year-end spending is unlikely to
present the same magnitude of problems and issues as before. 

Although agencies have the primary responsibility for ensuring that
their budgets are executed and accounted for properly, our study
revealed that the ability of Congress and OMB to oversee the rate and
timing of federal spending across agencies is limited in the absence
of complete and accurate reporting.  In addition, it points to
inadequate central oversight of the financial status of the federal
government because of agencies' widespread reporting noncompliance. 
Even at year-end, budget execution data reported to OMB and year-end
accounting data provided to Treasury do not agree for many agencies. 
The joint OMB and Treasury proposal to merge year-end reporting
requirements through a shared database will eliminate the potential
for discrepancies between reports, but by itself does nothing to
increase compliance with quarterly reporting requirements or
oversight of budget execution during the year. 

OMB needs to reemphasize the existing OMB Circular A-34 requirement
that agencies report budget execution information no later than 20
days after the close of the calendar quarter and investigate agency
nonreporting or questionable reporting of quarterly and year-end
data.  OMB also needs to examine areas in which obligations vary
significantly from planned or historical rates to ascertain the
reasons for these differences and to monitor agencies' implementation
of their Statements of Budgetary Resources and Statements of
Financing, which should provide additional insights. 


   RECOMMENDATION
------------------------------------------------------------ Letter :7

To improve oversight of agencies' execution of the budget, we
recommend that the Office of Management and Budget reemphasize
compliance with the OMB Circular A-34 requirement that agencies
provide quarterly data no later than 20 days after the close of a
calendar quarter, and examine quarterly reporting by agencies that
varies significantly from planned or historical rates.  We also
recommend that the Office of Management and Budget continue its
efforts to integrate budget and accounting reporting at year-end and
report periodically on progress made. 


   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :8

In oral comments, OMB stated that in the last 3 years it has taken
several steps to improve the quality of budget execution data.  OMB
officials said that they have actively directed a Treasury contractor
to build a new SF 133 data collection system that has been used since
1996 to allow OMB to access data directly.  Using these data, OMB
staff developed reports that present the data in different ways to
assist analysis by OMB examiners and agency analysts.  In addition,
OMB has embarked on a training program and is continuing to provide
extensive training within OMB and to the agencies on the value of SF
133 data. 

OMB's increased attention to monitoring budget execution data is
important and we support its effort to increase the quality and use
of this information.  OMB's inclusion of crosswalks in recent budget
formulation and execution circulars that show data relationships
between year-end reports should be particularly helpful to agencies. 
Persistent attention, including follow-up by OMB examiners when
agencies either do not provide data, do not provide data timely, or
when data are questionable, should signal the need for agencies to
take budget and financial management reporting and reconciliation
requirements seriously. 

OMB officials also provided clarifying comments, which we have
incorporated in the report where appropriate. 


---------------------------------------------------------- Letter :8.1

We are sending copies of this report to other interested Members of
Congress and the Director of the Office of Management and Budget.  We
will make copies available to others on request.  Please call me at
(202) 512-9573 if you or your staff have any questions.  Major
contributors to this report are listed in appendix II. 

Sincerely yours,

Paul L.  Posner
Director, Budget Issues


HIGH-RISK CONTRACT MANAGEMENT
AGENCIES
=========================================================== Appendix I

In 1990, we began reporting on federal program areas that were at
risk because of vulnerabilities to waste, fraud, abuse, and
mismanagement.  We periodically report on agencies' progress in
correcting deficiencies and on where additional actions need to be
taken.  Our most recent High-Risk Series, published in February 1997,
includes high-risk contract management in certain civilian agencies
and DOD.  Since the problems associated with wasteful year-end
spending--poor planning, insufficient competition, and inadequate
contract oversight--can occur at any time during the fiscal year, we
have included the following summary of our findings regarding
high-risk agencies based on our work.  We also include some related
examples drawn from our reviews of IGs' reports. 

We have identified contract management as a high-risk area at DOD,
Energy, NASA, and EPA and noted long-standing problems with their
contract payment and oversight functions.  For example, as noted in
our 1997 High-Risk Series, we found that in recent years, DOD
experienced numerous problems in making accurate payments to defense
contractors.  We noted that while DOD had taken steps to address its
payment problems, it should also (1) improve and simplify its
contract payment system and (2) further strengthen its oversight of
contractor cost-estimating systems.  Doing so would enable DOD to
achieve effective control over contract expenditures.\1 The DOD IG
also found examples of overpayment or unreasonable pricing.  In
fiscal year 1996, the DOD IG reported that overpayments of $43.6
million were made to a contractor because requests for progress
payments had not been prepared properly.\2 In another case, the IG
found that various defense construction and supply centers had paid
$15.8 million more than they should have on 63 procurements of spare
parts.\3

We also designated Energy's contract management as high risk because
its extensive reliance on contracting and history of inadequate
oversight of contractors failed to protect the federal government's
financial interests.  In our 1997 High-Risk Series, we reported that
Energy had made progress in developing an extensive array of policies
and procedures, such as publishing a new regulation adopting a
standard of full and open competition for the award of its management
and operating contracts.  We concluded that the department would need
to continually monitor the award of these contracts to maintain its
momentum and priority in implementing contract reform.\4 During 1997
and 1998, the Energy IG reported on problems with the
performance-based incentives for fiscal years 1995 and 1996 at four
sites.  They ranged from incentive payments in excess of the cost of
labor and materials for the work performed to the award of incentive
fees for work either not completed or for work done prior to
establishing the incentive program.\5 In addition, the IG for Energy
reported during 1997 on its assessment of the implementation of
performance-based incentive contracts.  In its report, Energy's IG
raised concerns about insufficient formal guidance for developing and
administering performance incentives and the lack of criteria for
measuring performance or allocating fees.\6

EPA has had long-standing problems in controlling contractors'
charges, particularly in its Superfund program.  In fact, we have
repeatedly reported that EPA has not overseen its cost-reimbursable
contracts to prevent contractors from overcharging the government. 
We also found that although EPA had recently strengthened its
management and oversight of Superfund contractors, the agency
remained too dependent upon contractors' own cost proposals to
establish the price of cost reimbursable work.  Thus, we suggested
that EPA could better estimate the costs of contractors' work, use
the estimates to negotiate reasonable costs, provide contractors with
appropriate incentives to hold down their administrative expenses,
and increase the timeliness of contract audits.\7

Although NASA has improved its contract and procurement operations by
placing greater emphasis on contract cost control and contractor
performance, we and NASA's IG continue to identify problems in NASA's
contract management and opportunities to improve procurement
oversight.  For example, NASA's IG concluded that one NASA-negotiated
contract included $22.7 million in financing, insurance interest, and
termination liability insurance costs that are generally prohibited
under Federal Acquisition Regulations (FAR).\8 In 1997, we suggested
that NASA identify its contract management problems early on so they
could be evaluated, monitored, and corrected before becoming
systemic.  We also suggested that additional agencywide guidance
could help NASA ensure more consistent and thorough coverage of the
procurement cycle.\9 While recent reforms have allowed agencies the
option of making small purchases by credit card, a NASA IG survey
report entitled NASA Procurement Initiatives, Credit Card Program
found that NASA split a $168,000 computer procurement into 80 single
purchases, enabling each purchase to fall below the Government Credit
Card limit of $2,500.  The IG concluded that NASA violated the FAR
prohibition against splitting requirements.  Similar problems were
reported by IGs at Commerce, Energy, and Transportation. 

Only one of the IG reports we reviewed explicitly identified a
relationship between poor contracting practices and the need to spend
funds quickly.  In its report, Interior's IG detailed the results of
its evaluation of the Bureau of Indian Affairs' (BIA) road
construction projects.\10 The IG reported that some of BIA's road
projects were poorly designed and planned because BIA rushed to award
contracts to avoid returning unspent funds to the Federal Highway
Administration at the end of the fiscal year.  The report concluded
that BIA's practices led to construction delays that increased costs
by $3.3 million. 


--------------------
\1 High-Risk Series:  Defense Contract Management (GAO/HR-97-4,
February 1997). 

\2 Office of the Inspector General, Department of Defense, Contract
Financing of the Family of Medium Tactical Vehicles Program, 1996
(96-228). 

\3 Office of the Inspector General, Department of Defense, Price
Challenges on Selected Spare Parts, 1995 (96-035). 

\4 High-Risk Series:  Department of Energy Contract Management
(GAO/HR-97-13, February 1997). 

\5 Office of Inspector General, Department of Energy, Inspection of
the Performance Based Incentive Program at the Richland Operations
Office, 1997 (IG-0401). 

\6 Department of Energy, Assessment of the Use of Performance-Based
Incentives in Performance-Based Management and Management and
Integration Contracts (October 1997). 

\7 High-Risk Series:  An Overview (GAO/HR-97-1, February 1997) and
High-Risk Series:  Quick Reference Guide (GAO/HR-97-2, February
1997). 

\8 Office of the Inspector General, National Aeronautics and Space
Administration, Commercial Middeck Augmentation Module (CMAM)
Contract Negotiated Price, 1995 (KE-95-009). 

\9 GAO/HR-97-1, February 1997 and GAO/HR-97-2, February 1997. 

\10 Office of the Inspector General, U.S.  Department of the
Interior, Road Construction Program, Bureau of Indian Affairs, 1996
(96-I-870). 


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix II

ACCOUNTING AND INFORMATION
MANAGEMENT DIVISION, WASHINGTON,
D.C. 

Denise M.  Fantone, Assistant Director

SAN FRANCISCO FIELD OFFICE

Inez M.  Azcona, Senior Evaluator
George R.  Senn, Senior Evaluator

OFFICE OF THE GENERAL COUNSEL

William Woods, Assistant General Counsel
John A.  Carter, Attorney

RELATED GAO PRODUCTS

U.S.  Government Financial Statements:  Results of GAO's Fiscal Year
1997 Audit (GAO/T-AIMD-98-128, April 1, 1998). 

Executive Guide:  Leading Practices in Capital Decision-Making
(Exposure Draft) (GAO/AIMD-98-110, April 1998). 

Financial Audit:  1997 Consolidated Financial Statements of the
United States Government (GAO/AIMD-98-127, March 31, 1998). 

Defense Acquisition:  Improved Program Outcomes Are Possible
(GAO/T-NSIAD-98-123, March 18, 1998). 

Best Practices:  DOD Can Help Suppliers Contribute More to Weapon
System Programs (GAO/NSIAD-98-87, March 17, 1998). 

Defense Management:  Challenges Facing DOD in Implementing Defense
Reform Initiatives (GAO/T-NSIAD/AIMD-98-122, March 13, 1998). 

Acquisition Reform:  Implementation of Key Aspects of the Federal
Streamlining Act of 1994 (GAO/NSIAD-98-81, March 9, 1998). 

Best Practices:  Successful Application to Weapon Acquisition
Requires Changes in DOD's Environment (GAO/NSIAD-98-56, February 24,
1998). 

Financial Audit:  Reconciliation of Fund Balances with Treasury
(GAO/AIMD-97-104R, June 24, 1997). 

Budget Issues:  Budgeting for Federal Capital (GAO/AIMD-97-5,
November 12, 1996). 

Information Technology Investment:  Agencies Can Improve Performance,
Reduce Costs, and Minimize Risks (GAO/AIMD-96-64, September 30,
1996). 

Budget and Financial Management:  Progress and Agenda for the Future
(GAO/T-AIMD-96-80, April 23,1996). 

*** End of document. ***