Major Management Challenges and Program Risks: Departments of Defense,
State, and Veterans Affairs (Testimony, 03/07/2001, GAO/GAO-01-492T).

Drawing on GAO's high risk series (GAO-01-241 to GAO-01-263), this
testimony discusses major government programs prone to waste, fraud,
abuse, and mismanagement. This testimony focuses on (1) the range of
governmentwide challenges and opportunities the 107th Congress and the
new administration face to enhance performance and accountability of the
federal government, (2) the major management challenges and program
risks facing three key agencies--the Departments of Defense, State, and
Veterans Affairs, and (3) whether these departments are meeting
performance and accountability goals and measurements that are required
under the Government Performance and Results Act of 1993.

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

 REPORTNUM:  GAO-01-492T
     TITLE:  Major Management Challenges and Program Risks: Departments
	     of Defense, State, and Veterans Affairs
      DATE:  03/07/2001
   SUBJECT:  Strategic planning
	     Information technology
	     Risk management
	     Performance measures
	     Internal controls
	     Accountability
	     Productivity in government
	     Financial management
IDENTIFIER:  Medicare Program
	     Medicaid Program
	     South America
	     Colombia
	     Latin America
	     Caribbean
	     High Risk Series 2001
	     GAO High Risk Program

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GAO-01-492T

MAJOR MANAGEMENT CHALLENGES AND PROGRAM RISKS

Departments of Defense, State, and Veterans Affairs Statement of David M.
Walker Comptroller General of the United States

United States General Accounting Office

GAO Testimony Before the Subcommittee on National Security, Veterans

Affairs, and International Relations, Committee on Government Reform, House
of Representatives

For Release on Delivery at 10: 00 a. m., EST Wednesday, March 7, 2001

GAO- 01- 492T

Page 1 GAO- 01- 492T

Mr. Chairman and Members of the Subcommittee: I am pleased to be here today
to discuss major management challenges and program risks confronting
selected federal agencies. As requested, my testimony today will focus on
(1) the range of governmentwide challenges and opportunities the 107 th
Congress and the new administration face to enhance performance and
accountability of the federal government, (2) the major management
challenges and program risks facing three key agencies-- the Departments of
Defense (DOD), State, and Veterans Affairs (VA)-- who fall under the
jurisdiction of this Subcommittee, and (3) whether these departments are
meeting performance and accountability goals and measurements that are
required under the Government Performance and Results Act of 1993 (GPRA).
Appendix I lists the major management challenges for each of the three key
agencies.

Our testimony is derived, in part, from a special series of reports we
recently issued on this subject entitled Performance and Accountability
Series: Major Management Challenges and Program Risks in January of this
year. The series, listed in appendix II, contains separate reports on 21
agencies-- one on each of the cabinet departments and on most major
independent agencies as well as the U. S. Postal Service. As a companion to
this series, we have also issued our High- Risk Series: An Update, which
discusses those government operations and programs that our work has
identified as “high risk” because of their greater
vulnerabilities to waste, fraud, abuse, and mismanagement.

MAJOR MANAGEMENT CHALLENGES: THE GOVERNMENTWIDE PERSPECTIVE

Mr. Chairman, I want to commend you for holding this hearing at this
particular time and discussing these issues because we are engaged in three
important transitions. First, we are ending one presidential administration
and beginning another. Second, we are at the outset of the 107 th Congress.
Third, we are at the dawn of a new millennium. As our nation moves into the
21 st century, the 107 th Congress and the new administration face an array
of challenges and opportunities to enhance the performance and assure the
accountability of the federal government for the benefit of all Americans.
Increased globalization, rapid technological advances, shifting
demographics, changing security threats, and various quality of life
considerations are prompting fundamental changes in the environment in which
the government operates. These trends are placing a premium on increasing
strategic planning, using integrated approaches, enhancing
resultsorientation, improving responsiveness, and ensuring accountability
within the federal government.

At the same time, the current projected trend of budget surpluses presents
both an opportunity and an obligation for the legislative and executive
branches of government to look at a range of fundamental policy and fiscal
issues in advance of the forthcoming demographic tidal wave associated with
the retirement of the “baby boom” generation.

Page 2 GAO- 01- 492T

This includes comprehensively reassessing what government does and how
government does business in the 21 st century. It also includes focusing on
the longer term fiscal implications of current programs and policies and a
range of existing and emerging major management challenges and program risks
confronting the federal government. For example, entitlement programs
currently represent approximately 41 percent of the federal budget, up from
31 percent in 1962. At the same time, defense spending currently represents
about 16 percent of the federal budget, down from about 50 percent in 1962.
Some of these changes can be explained by the end of the Cold War, but not
all of them. One of the less publicized stories is that most of the decline
in defense spending over the years has been used to pay for additional
health spending (for example, Medicare and Medicaid). Our most fundamental
long- range budget challenge is how to control mandatory spending, which now
accounts for about two- thirds of all federal spending, up from about one-
third in 1962.

We have many initiatives underway to help the Congress and the executive
branch meet the challenges to the well- being and financial security of the
American people, address security threats facing our nation, and deal with
the issues raised by global interdependence.

With regard to improving overall government performance and accountability,
the main actions needed to shape an efficient and effective federal
government for the 21 st century are as follows:

First, give high priority to fully implementing existing legislative reforms
essential to modernizing performance management, financial accountability,
and information technology practices.

Second, address the urgent need to revamp the federal government's entire
strategic approach to human capital (people) management before the erosion
of government's capacity to perform more dramatically undermines agencies'
abilities to efficiently and effectively serve the American people.

Third, continue to attack government activities at particular risk of fraud,
waste, abuse, and mismanagement in order to save billions of dollars,
improve services and programs, and strengthen public confidence and trust in
government.

Fourth, confront critical challenges facing individual departments and
agencies in carrying out their missions.

Page 3 GAO- 01- 492T

Fifth, pursue organizational approaches that recognize the reality of
evolving global, technological, workforce, and other dynamics and needs
associated with a transition to a knowledge- based economy.

Beyond addressing this fundamental management foundation, however, lie
certain added dimensions to the challenge of governing in the 21 st century.
Among these are

promoting a more sustainable longer term budget and economic outlook to help
safeguard the ability of future generations to afford the commitments of
today and make decisions regarding the role of the federal government in the
future given our aging society; and

taking advantage of the window of opportunity presented by the current
improvement in the federal government's financial position not only to
reassess fiscal policies, but also to (1) review options for improving the
efficiency and effectiveness of individual federal programs, (2) thoroughly
reassess what government does and how government does business, and (3)
revisit targeting approaches that distribute assistance to beneficiaries by
recognizing the differences between wants, needs, and affordability.

It is also important to reach a consensus on needed changes and forge
executive/ legislative partnerships to promote effective implementation of
agreed upon goals-- both on the policy front and with regard to certain
management reforms that are central to strengthening the performance and
accountability of our federal government. For example, progress achieved to
date in improving financial and information management and a results-
oriented focus has only been attained through the use of a solid legislative
framework and concerted, sustained executive and congressional attention. In
this regard, congressional oversight is essential to further progress. Now
is the opportune time to review, revise, and reinvigorate the oversight
process to help address today's challenges and prepare our country for
tomorrow.

In many government agencies, the transition to modern performance
management, and along with it, to strategic human capital management, will
require a cultural transformation that will take time. Changing what
agencies do and how they do business is tough work. Many government
organizations need to become less hierarchical, process oriented, stove
piped, and inwardly focused than they have in the past. They will need to be
more partnerial, results oriented, integrated, and externally focused in the
future. To change in a meaningful and lasting manner, most people believe
that one needs to have a “burning platform.” Stated differently,
we must convince people that they and their organizations must change or
there are likely to be serious consequences.

Page 4 GAO- 01- 492T

For the three agencies we are focusing on today-- Defense, State, and VA--
we have identified and reported management challenges that have hampered the
economy, efficiency, and effectiveness of their support functions in
carrying out their missions. To their credit, each of the agencies has
implemented a number of changes to improve their operations, but much more
needs to be done, especially in connection with the Defense Department.
These challenges, many of which have been long- standing in scope, also
underscore the critical role that the principles of performance- based
management, as embraced in GPRA, can play in successfully providing the
products, services, and results that taxpayers expect.

CHALLENGES FACING THE DEPARTMENT OF DEFENSE While DOD has the most effective
warfighting force in the world, the same level of excellence is not evident
in many of the business processes that are critical to the achievement of
the Department's mission in a reasonably economical, efficient, and
effective manner. In addition to the governmentwide challenges in the human
capital and computer security areas, we consider all or part of six areas
relating to DOD's financial management, information technology,
acquisitions, contracts, support infrastructure, and logistics to be high
risk.

Performance and Accountability Challenges

Developing strategic plans that lead to desired mission outcomes

Hiring, supporting, and retaining military and civilian personnel with the
skills to meet mission needs

Establishing financial management operations that provide reliable
information and foster accountability

Effectively managing information technology investments

Reforming acquisition processes while meeting military needs

Improving processes and controls to reduce contract risk

Creating an efficient and responsive support infrastructure

Providing logistics support that is economical and responsive

Page 5 GAO- 01- 492T

Strategic Planning Shortfalls Sound strategic planning is needed to guide
improvements to DOD's operations. It also sets the fundamental direction of
the agency, its purpose, what it hopes to achieve, and how it will do it.
Without strategic planning, decisionmakers and stakeholders may not have the
information they need to ensure that the Department has strategies that are
well thought- out for resolving ongoing problems, achieving its goals and
objectives, becoming more results oriented, and ensuring its accountability
for the several hundred billion dollars annually allocated to the
Department. While the Department has improved its strategic planning
process, its strategic plan is not tied to desired mission outcomes. As
noted in several of the other key challenges, sound plans linked to the
Department's overall strategic goals are critical to achieving needed
reforms. Inefficiencies in the planning process have led to difficulties in
assessing performance in areas such as combat readiness, support
infrastructure reduction, force structure needs, and the matching of
resources to program spending plans.

Since the mid- 1980s, we have reported that DOD employs overly optimistic
planning assumptions in its budget formulation. As a result, DOD all too
frequently has too many programs for the available dollars, which often
leads to program instability, costly program stretch- outs, and program
reductions and terminations. Moreover, optimistic planning makes defense
priorities unclear because tough decisions and trade- offs between needs and
wants are avoided. Until DOD presents realistic assumptions and plans in its
future budgets, the Congress will lack the accurate and realistic
information it needs to properly exercise its decision- making and oversight
responsibilities. To help overcome inefficiencies in DOD's strategic
planning processes and to promote more realistic budgeting, DOD must follow
results- oriented management principles in performing the next Quadrennial
Defense Review in 2001. To provide a clear picture of DOD's performance, we
also recommend that DOD include more qualitative and quantitative goals and
measures in its annual performance plan and report to gauge progress toward
achieving mission outcomes.

Human Capital Challenges Given the large number of military and civilian
personnel within the Department, human capital management represents a huge
challenge that impacts virtually every major activity. DOD is dealing with
military personnel issues such as shortages of junior officers for the
career force, problems in retaining certain skills (such as intelligence
analysts, computer programmers, pilots, and acquisition workforce
personnel), and the military services' failure to meet recruiting goals. The
Department also faces significant challenges in managing its civilian
workforce. For example, the sizable reduction in civilian personnel since
the end of the Cold War has led to an imbalance in age, skills, and
experience that is jeopardizing certain acquisition and logistics
capabilities within DOD.

Page 6 GAO- 01- 492T

Moreover, over a third of DOD's current employees are more than 50 years old
and approaching retirement. According to a February 2000 Defense Science
Board Task Force study on Human Resources Strategy, approximately 58 percent
of DOD's civilian workforce will be retirement eligible by 2005. The net
effect is a workforce that is not balanced by age or experience and that
risks the orderly transfer of institutional knowledge. Although we cannot
say what the appropriate balance between younger and older employees should
be, the continuing increase in the number of retirement- age employees could
make it difficult for DOD to infuse its workforce with new and creative
ideas and develop the skilled civilian workers, managers, and leaders it
will need to meet future mission requirements.

The Department has initiatives to address military and civilian human
capital issues. However, to guide individual initiatives and link them
together, we recommended that DOD assess the relative success and cost-
effectiveness of the services' recruiting strategies and put tools in place
for measuring success in reducing attrition.

Also, in recent testimony, we noted that DOD should better align its
civilian human capital management with its strategic planning and core
business practices. For example, during our work on the early phases of the
DOD downsizing, some DOD officials voiced concerns about what was perceived
to be a lack of attention to identifying and maintaining a balanced basic
level of skills needed to maintain in- house capabilities as part of the
defense industrial base. Others have registered concerns about the fairness
of the competitive sourcing process and whether a level playing field exists
for competition between the public and private sector. In that regard, I
have been legislatively mandated to convene a panel of experts to study the
transfer of commercial activities currently performed by government
employees to federal contractors, a procedure commonly known as
“contracting out” or “outsourcing.”

Financial Operations Reforms While improved in recent years, financial
management remains a high- risk area for DOD. For fiscal year 2000, none of
the military services or the Department as a whole passed the test of an
independent financial audit because of pervasive weaknesses in its financial
management systems, operations, and controls, including an inability to
compile financial statements that comply with generally accepted accounting
principles. Also, despite genuine progress, ineffective asset accountability
and lack of internal controls continue to adversely affect visibility over
weapon systems and inventories. Further, unreliable cost and budget
information negatively affects DOD's ability to effectively measure
performance, reduce costs, and maintain adequate fund control. As we
recently testified, we are concerned that many of the planned financial
management improvement initiatives are designed to result in a one- time,
year- end number for financial statement purposes. As such, they will not
result in the production of timely, reliable, and useful financial and
performance information for ongoing use by management. In addition, the
Department's financial management deficiencies, taken

Page 7 GAO- 01- 492T

together, continue to represent the single largest obstacle to achieving an
unqualified opinion on the U. S. government's consolidated financial
statements.

To address these deficiencies, in the short term, DOD needs to focus on
improving its basic processes and controls to better manage its every day
operations. In the long term, a sustained commitment from the highest levels
of DOD leadership will be needed to overhaul DOD's financial systems and to
ensure that personnel throughout the Department share the common goal of
establishing financial management systems and processes that can not only
produce financial statements that can withstand the test of an audit, but
more importantly routinely generate timely and reliable financial
information for day- to- day management purposes.

Information Technology Challenges Effective management of information
technology is also key to implementing many of DOD's planned management
reforms. However, significant management weaknesses in this area place the
ultimate success of many reform initiatives at risk. Effective systems
modernization requires the Department to implement fundamental management
controls, such as integrated enterprise architectures, disciplined
investment management practices, and mature system development and
acquisition processes, that ensure mission performance and accountability.
However, this is not occurring on a systematic basis within DOD. The
Department recognizes that improvements are needed in information technology
management, such as comprehensive and integrated enterprise architectures to
guide and direct its modernization efforts and structured and disciplined
processes for selecting and controlling business technology options. Equally
important, we have also recommended that the Department ensure that
corrective actions are taken to address identified computer security
vulnerabilities and more accurately and realistically define the
responsibilities, mechanisms, and expected outcomes of its efforts to manage
and integrate information assurance throughout DOD. These vulnerabilities
could seriously jeopardize operations and compromise the confidentiality,
integrity, or availability of sensitive information.

Acquisition Reform Acquiring modern, effective, reliable, and safe weapons
for the military forces is central to accomplishing DOD's mission. However,
the weapon systems acquisition process continues to be a high- risk area.
Notwithstanding ongoing reform initiatives, the process is still too slow
and costly. Pervasive problems persist regarding the process to acquire
weapons; cost, schedule, and performance estimates; program affordability;
and the use of high- risk acquisition strategies such as acquiring weapons
based on optimistic assumptions about the maturity and availability of
enabling technologies. Our work also shows that leading commercial firms are
getting the kinds of outcomes from their development of new products that
the Department seeks. Specifically, these firms are developing increasingly
sophisticated products in significantly less time and at a lower

Page 8 GAO- 01- 492T

cost than their predecessors. Valuable lessons can be learned from the
commercial sector and applied to the development of weapon systems. Leading
commercial firms expect that their program managers will deliver high
quality products on time and within budget. We believe DOD should be
required to apply these types of practices in its acquisition management
processes except in cases where there is a clear and compelling national
security reason not to.

Contract Management Reform Closely related to the weapon systems acquisition
process is the contracting for goods and services. This is also a high- risk
area at DOD. Over the last few years, several broadbased changes, including
the establishment of key metrics, have been made to acquisition and
contracting processes and management to improve Department and contractor
relationships and rules. But we and the DOD Inspector General continue to
identify risks in contracting, including (1) improving oversight and
accountability in the acquisition of services, (2) preventing erroneous and
improper payments being made to its contractors, (3) implementing commercial
practices for contract pricing, and (4) managing health care contracts.
Without effective control over its contract management activities, DOD will
continue to risk erroneously paying contractors millions of dollars and
perpetuating other financial management and accounting control problems.

Weak systems and controls also leave the Department vulnerable to fraud and
improper payment. For example, DOD continues to overpay contractors,
although the full extent of overpayments is not known. Under current law,
contractors are not required to inform DOD of the overpayment or to return
the money prior to DOD issuing a formal demand letter requesting repayment.
In effect, the overpayment provides an interest free loan to the contractor.
Contractors should be required to notify the government of overpayments when
they become aware of them and to return the money promptly upon becoming
aware of the overpayments. If they do not return the money promptly, there
should be some economic consequence. We have testified that the application
of commercial best practices, such as the use of more cost- effective buying
strategies for commercial spare parts, can improve acquisition and
contracting processes and help reduce contract risk.

Support Infrastructure Inefficiencies Regarding specific operations
challenges, DOD has to address inefficiencies in its support infrastructure.
Again, while progress has been made in this area, more needs to be done if
the Department expects to reduce infrastructure costs and improve business
operations through its reform initiatives. After the Cold War, the defense
force structure and military spending were reduced, and the Department
realized it must make its operations and support infrastructure smaller,
more efficient, and more responsive to warfighter needs and to create
savings for other needs like weapons modernization. Although the Department
has reduced its forces by about 25 percent and closed many

Page 9 GAO- 01- 492T

bases, the percentage of its budget spent on support infrastructure has
remained relatively constant. Because of continued inefficiencies in its
support infrastructure, this continues as a high- risk area for the
Department. The effectiveness of many civilian agencies has also been
undermined by outmoded organizational structures that drain resources needed
to make improvements to mission delivery capabilities. We recommended that
the Department develop and implement a comprehensive, integrated, and long-
range plan to sustain and fully implement its reform initiatives and also
rightsize and recapitalize its facilities infrastructure.

Addressing facilities infrastructure will also require DOD to reach an
agreement with the Congress regarding the need for additional base
realignment and closure rounds. The Secretary of Defense and other officials
have expressed concern that the Department continues to retain more
infrastructure than needed, despite four base closure rounds between 1988
and 1995. Defense officials have proposed two additional rounds of base
closures and estimates new savings of $3.4 billion a year once realignment
and closure actions were completed and the costs of implementing these
actions were offset by savings. Our work has shown that, despite limitations
in precision, past base realignment and closure recommendations will result
in substantial savings once implementation costs have been offset and net
savings begin to accrue. Further, we also found that the majority of
communities surrounding bases that were closed from 1988 through 1995 were
faring well economically in relation to the national average. For example,
as of 1997, 68 percent of the communities had average or lower unemployment
compared with 60 percent in 1988. The infrastructure problems in civilian
agencies also suggest the possible relevance of a civilian facility closure
and realignment process.

Logistics Support Inefficiencies Providing economical and responsive
logistics support is also central to achieving the Department's mission.
While the system gets the job done, it is often described as a brute force
process that is uneconomical and inefficient. Although DOD has progressed in
improving logistics support, especially through the application of best
inventory management practices, serious weaknesses persist throughout its
logistics activities, and it is unclear to what extent its ongoing
reengineering management improvement initiatives will overcome them. A key
area of the logistics process that remains high risk is inventory
management. The Department continues to spend more than necessary to procure
and manage inventory. As of September 30, 1999, DOD records showed that the
Department had inventory on order valued at about $1.6 billion that would
not have been ordered based on current requirements. At the same time, DOD
has experienced equipment readiness problems because of a lack of key spare
parts. For years, insufficient spare parts have been recognized as a major
contributor to aircraft performing at lower mission capable rates than
expected. Again, sound integrated plans for achieving logistics reforms are
central to making improvements.

Page 10 GAO- 01- 492T

To enhance DOD's reengineering efforts, we have recommended that DOD develop
an overarching plan that integrates the individual service and defense
agency logistics reengineering plans to include an investment strategy for
funding reengineering initiatives and details for how DOD plans to achieve
its final logistics system end state. We also recommended that DOD reassess
its schedule for testing, evaluating, and implementing the initiatives;
establish a methodology showing the savings or improvements that come from
reengineering concepts; and reassess its approach for addressing various
combat command concerns, such as the presence of increasing numbers of
contractor personnel on the battlefield. Also, to improve inventory
management, we recommended that DOD make more use of supply- chain best
management practices similar to those used in the private sector to help cut
costs and improve customer service.

Observations on DOD's GPRA Performance Plan and Report DOD has made
substantial progress in improving its GPRA reporting. For example, DOD
identified and discussed the roles of federal agencies in crosscutting
activities, added more information on its efforts to ensure the credibility
of its performance information, and included initial goals and performance
measures for financial management. However, the extent to which DOD has
achieved the key program outcomes is not completely clear in its fiscal year
1999 performance report and fiscal year 2001 performance plan. One of the
reasons for the lack of clarity is that most of the key program outcomes DOD
is striving to achieve are complex and interrelated and may require a number
of years to accomplish. Another, however, is that DOD did not provide a full
assessment of its performance. The report does not include any performance
goals and measures related to several key outcomes. Also, reported measures
often did not address a cost- based efficiency aspect of performance, making
it difficult for DOD to fully assess the efficiency as well as effectiveness
of its performance. Additionally, DOD's performance report and plan did not
include goals or measures to assess progress in overcoming a major
management challenge confronting the Department, namely contracting. We
recommended that the Secretary of Defense enhance DOD's fiscal year 2002
performance plan and fiscal year 2000 performance report by considering
additional qualitative and quantitative information in the areas cited by
our analysis.

CHALLENGES FACING THE DEPARTMENT OF STATE In carrying out its mission, the
Department of State faces a number of significant performance and
accountability challenges, as our work has shown. In addition to the
governmentwide challenges in the human capital and computer security areas,
the State Department's challenges cover a wide spectrum of U. S. government
operations around the world affecting Americans at home and abroad.

Page 11 GAO- 01- 492T Performance and Accountability Challenges

Improve the security and maintenance of U. S. facilities overseas

Help decrease the level of illegal drugs entering the United States

Address the threats illegal immigration continues to pose to Americans at
home

Address additional challenges to building a high- performing organization
Embassy Security State's most critical infrastructure need is to enhance the
protection of U. S. embassies and other overseas facilities in response to
the increased threat due to terrorism. State has taken many steps to upgrade
security at its diplomatic missions around the world since the 1998 bombings
in Africa. These improvements include deploying hundreds of additional
security agents overseas and enhancing physical security through a variety
of means. In addition, State has begun replacing some of its most vulnerable
embassies and consulates with more secure facilities. State estimates that
it will cost $15 billion over 10 to 15 years for projects in more than 180
locations. Our work has shown that State will face several challenges in
administering this extensive security construction program, including right-
sizing its overseas posts; improving long- term planning for the program;
and working with the Congress in charting the future course, priorities, and
funding levels for the program. Right- sizing of overseas posts, which may
include use of relatively large regional or “hub” embassies,
with smaller embassies in other locations, may have potential for reducing
overall security costs and vulnerabilities. We recommended that State
develop a long- term, capital construction plan to assist decisionmakers in
reaching consensus on the program. Successful implementation of overseas
security enhancements and construction activities will improve the safety
and security of U. S. employees working abroad.

Drug Control Illegal drugs, primarily cocaine and heroin, continue to
threaten the health and wellbeing of American citizens. The principal source
of cocaine and heroin entering the United States is South America, and
specifically Colombia. In 1993, the United States developed a policy
designed to reduce the production of illegal drugs in South America and stem
their flow through Latin America and the Caribbean. Our work has shown that
billions of dollars invested by the United States and foreign countries to
carry out this policy have resulted in the arrest of major drug traffickers
and the seizure of large

Page 12 GAO- 01- 492T

amounts of drugs, but the availability of drugs in the United States has not
been materially reduced. To continue to attack this problem, the Congress
recently provided more than $1 billion in counternarcotics assistance to
Colombia, which State will largely oversee. In October 2000, we reported
that State had experienced difficulty effectively managing past assistance
to Colombia and recommended that State develop implementation plans to
ensure that the new assistance is well managed and used effectively. We also
noted that a sustained long- term commitment will be necessary to notably
reduce the level of illegal drugs entering the United States. Ultimately, to
successfully implement an international drug control strategy, State will
have to coordinate with numerous agencies, including Defense, Justice, and
Treasury.

Illegal Immigration State is responsible for providing expeditious visa
processing overseas to qualified applicants. State, in conjunction with the
U. S. Immigration and Naturalization Service, must also prevent the entry of
those who are a danger to U. S. security or are likely to remain in the
United States illegally. Over the years, State has introduced new
technologies, equipment, and controls designed to improve visa processing
and reduce the incidence of fraud. However, based on our work and that of
State's Office of Inspector General, visa processing remains a significant
challenge for the Department. The reasons for these problems include
staffing shortages, inexperienced staff, insufficient staff training, and
difficulties in managing visa antifraud programs. State recognizes that it
must remain vigilant in these areas to further reduce the vulnerability of
the visa system and has several initiatives underway or completed to counter
visa fraud.

Additional Challenges In addition to the specific performance challenges
cited previously, State faces several other agencywide performance and
accountability challenges that hamper its ability to become a high-
performing organization. These challenges are (1) better utilizing the 1993
Government Performance and Results Act process to help achieve its
objectives, (2) enhancing communication and information technology and
security, (3) improving financial management, (4) adopting modern human
capital practices, and (5) restructuring the U. S. overseas presence to
improve the efficiency and effectiveness of operations. State has recognized
these challenges and has demonstrated a commitment to addressing them, as
follows:

State has improved its strategic and performance planning to better capture
its goals and measures, but its performance reporting needs to better
demonstrate progress toward meeting its goals.

Page 13 GAO- 01- 492T

State has implemented many of our information technology and security
recommendations; however, new challenges have emerged as State embarks on
developing an interagency technology platform with its inherent security
risks.

State has made progress toward its goal of improving financial systems but
still needs to bring its systems into full compliance with federal financial
systems requirements and resolve internal control weaknesses. Unlike
previous financial reports, State was on time in issuing its financial
statement report that contained an unqualified opinion on its fiscal year
2000 financial statements. However the auditors reported that State's
financial management systems were not in compliance with the Federal
Financial Management Improvement Act of 1996, which requires federal
agencies to implement and maintain financial management systems that comply
substantially with federal financial management system requirements.
Further, a material weakness and several reportable conditions in its
internal controls remain unresolved.

Consistent with our studies of best practices in high performance
organizations, State's in- house studies highlighted the importance of
developing a human resource strategy that is in line with its mission. For
example, the Overseas Presence Advisory Panel convened by the Secretary of
State concluded that State needed to reform its human resource practices
because it does not currently have the flexibility, resources, or strategic
organization required to support its mission.

Over the years, we have recommended that State reassess its overseas
structure in light of changing political, economic, security, and
technological requirements, and, this effort is currently underway.

We believe that addressing these issues will be critical to State's ability
to effectively carry out U. S. foreign policy.

Observations on State's GPRA Performance Plan and Report As required by
GPRA, State has clearly articulated its strategic and diplomatic readiness
goals of regional security, economic growth, and more. Our review of State's
performance plans for fiscal years 1999 through 2001 indicates that State
continues to improve its planning but additional improvements are needed to
measure and assess performance in a meaningful way. State's fiscal year 2001
performance plan provides much more detail on its intended performance
compared to prior years' plans. However, State's approach of listing
individual performance goals and measures by bureau does not lend itself to
assessing the agency's performance as a whole. Further, the Department has
not developed overall priorities for achieving its strategic goals, and,
consequently, has no overall basis for allocating resources to priorities.

Page 14 GAO- 01- 492T

The Department's fiscal year 1999 performance report, the first one required
under GPRA, lists numerous foreign policy accomplishments from the signing
of peace agreements to trade agreements, but it does not adequately
demonstrate State's level of success or participation in achieving the
desired outcomes. Additionally, it was unclear how much the Department
contributed to some of the outcomes it discussed or how unmet goals would be
achieved in the future. For example, under the regional stability strategic
goal, the performance report states that "U. S. access to Persian Gulf oil
resources continued uninterrupted" but does not identify how the Department
has contributed to that positive outcome. Under expanding foreign markets,
State did not indicate how it would meet its unmet targets for completing
bilateral investment treaties with target countries.

CHALLENGES FACING THE DEPARTMENT OF VETERANS AFFAIRS The Department of
Veterans Affairs' mission reflects the nation's historic commitment to care
for veterans, their families, and their survivors. VA administers a variety
of programs, including one of the world's largest health care systems. The
Department estimates that, in fiscal year 2000, it spent about $42 billion--
more than 80 percent of its total budget-- to provide health care services
to 3.6 million veterans and to pay disability compensation and pensions to
over 2.5 million veterans and their families and survivors. In addition to
the governmentwide challenges in the human capital and computer security
areas, VA faces several performance and accountability challenges.

Performance and Accountability Challenges

Ensure timely and equitable access to quality VA health care

Maximize VA's ability to provide health care within available resources

Process veterans' disability claims promptly and accurately

Develop sound agencywide management strategies to build a high- performing
organization

Health Care Access Over the past several years, VA has undertaken many
initiatives to improve veterans' overall access to VA- provided health care,
such as shifting its emphasis from inpatient to outpatient primary care and
increasing the number of outpatient clinics it operates. VA has also
undertaken efforts to improve the quality of the care it provides, including

Page 15 GAO- 01- 492T

introducing patient safety initiatives. However, several areas require
continued emphasis if VA is to achieve its goals. For example, VA cannot
ensure that veterans receive timely care at VA medical facilities. Nor can
it ensure that it has maintained the capacity to provide veterans who have
spinal cord injuries, serious mental illnesses, or other special needs the
care that they require, as mandated by the Congress. VA must also assess its
capacity to provide long- term care for its aging veteran population and
respond to emerging health care needs, such as treating veterans for
hepatitis C. At the same time, VA is facing a potential shortage of skilled
nurses- if nationwide projections for the next several years bear out, which
could have a significant effect on VA's quality of care initiatives.

To begin to respond to these concerns, VA must address long- standing
weaknesses in the quality and reliability of its workload and cost data.
Without good data, VA cannot link its strategic planning to areas that need
improvement or emphasis, appropriately budget for and allocate funds and
other resources, or measure its performance in providing care for all
veterans enrolled in its health care system. We have made recommendations
related to improving data on waiting times and services for disabled
veterans. More specifically, we recommended that VA determine the extent and
causes of waiting times and then develop a spending plan with initiatives
that would solve the identified problems, as well as enhance monitoring of
potential service delivery problems for veterans.

Health Care Resource Utilization To expand care to more veterans and respond
to emerging health care needs, VA must continue to aggressively pursue
opportunities to use its health care resources-- including its appropriation
of about $20 billion-- more wisely. VA has reduced its per- patient costs-
one of its key performance measures-- by 16 percent, but it could achieve
additional efficiencies by realigning capital assets and human capital based
on changing demographics and veterans' health care needs. For example, VA
needs to further modify its infrastructure to support its increased reliance
on outpatient health care services and expand its use of alternative methods
for acquiring support services, such as food and laundry. VA spends as much
as one- quarter of its annual health care budget to operate and maintain
about 4,700 buildings and 18,000 acres of property. Savings achieved from
eliminating or reducing unneeded facilities could be reinvested toward
providing more and better care to veterans. However, the ability to close
unneeded facilities may not totally be within VA's control and, ultimately,
a nonpartisan commission similar to DOD's base closure process may be
necessary.

VA also needs to pursue additional opportunities with DOD to determine cost-
effective ways to serve both veterans and military personnel, including
sharing services and facilities. For example, opportunities exist to jointly
procure pharmaceuticals, medical supplies, and equipment that each now
procures separately. In addition, VA must ensure

Page 16 GAO- 01- 492T

that it collects the money it is entitled to from third- party payers for
health care services they have provided to veterans whose conditions are not
service- connected.

To start to realize these efficiencies, VA has committed to systematically
assessing its future infrastructure and health care services needs within
its 22 Veterans Integrated Service Networks as well as continuing to involve
key officials in its strategic planning efforts and decision- making
processes. We have made several recommendations to VA that would help
improve its infrastructure planning, provide more cost- effective support
services, and enhance sharing with DOD.

Disability Compensation VA must also turn around its long- standing
difficulties in ensuring timely and accurate decisions on veterans' claims
for disability compensation. Veterans with a broad array of conditions,
ranging from combat injuries to chronic illnesses (such as diabetes)
incurred or aggravated while on active duty, are eligible for compensation.
VA has improved its quality assurance system in response to our
recommendations, but large and growing backlogs of pending claims and
lengthy processing times persist. Moreover, veterans are raising concerns
that claims decisions are inconsistent across VA's 57 regional offices. VA
is taking steps to improve its information systems, performance measures,
training strategies, and processes for reviewing claims accuracy. However,
VA also needs better analyses of its processes in order to target error-
prone types of cases and identify processing bottlenecks – as well as
determine if its performance goals are realistic. In addition, although VA
disability payments are intended to compensate for potential losses in
earnings capacity, VA's outmoded rating schedule reflects the industrial
economy of 1945 rather than today's knowledge- based economy.

VA also needs to be vigilant in its human capital strategies to ensure that
it maintains the necessary expertise to process claims as newly hired
employees replace many experienced claims processors over the next 5 years.
VA's human capital problems can be seen as part of a broader pattern of
human capital shortcomings that have eroded mission capabilities across the
federal government.

Management Capacity Finally, VA has much more work to do to become a high-
performing organization and increase veterans' satisfaction with its
services. It must revise its budgetary structure and develop long- term,
agencywide strategies for ensuring an appropriate information technology
infrastructure and sound financial management. If its budgetary structure
linked funding to performance goals, rather than program operations, VA and
the Congress would be better positioned to determine the Department's
funding needs. VA's information technology strategy, which aims to provide
veterans and their families coordinated services, must be successfully
executed to ensure that VA can produce reliable performance and workload
data and safeguard financial, health care, and

Page 17 GAO- 01- 492T

benefits payment information. Last, similar to most other major agencies,
VA's financial management strategies must ensure that its systems produce
reliable cost data and address material internal control weaknesses and
Federal Financial Management Improvement Act requirements. In this regard,
VA received an unqualified opinion on its consolidated financial statements
for fiscal years 2000 and 1999. However, the auditor identified computer
security and integrated financial management system and control issues as
material internal control weaknesses and reported that VA was not in
substantial compliance with federal financial management systems
requirements under the Federal Financial Management Improvement Act of 1996.

Observations on VA's GPRA Performance Plan and Report Overall, VA's fiscal
year 1999 performance showed progress in providing quality health care at a
reasonable cost. On the other hand, VA has not made significant progress in
restructuring its health care infrastructure. The performance goals were
objective, measurable, quantifiable, and generally results- oriented. For
cases in which goals were not met, the performance report provided means and
strategies for achieving future goals. In addition, the report provides
means and strategies for achieving future goals that VA considers most
important. VA revised its health care performance goals and measures for
fiscal years 2000 and 2001 to reflect actual fiscal year 1999 performance as
well as VA's latest evaluation of how to best measure its success. VA also
made other changes, including dropping and adding performance goals, because
some goals were unrealistic, too many goals made it difficult to focus on
the more outcome- oriented ones, and some goals were met early.

VA failed by substantial margins to meet its fiscal year 1999 performance
goals for timely and accurate processing of veterans' disability
compensation and pension benefit claims. The performance reports explained
why it failed to meet its goals and provided means and strategies for
meeting its future goals. VA also revised its performance goals for fiscal
years 2000 and 2001 to make them more realistic. Although its goals are
objective, measurable, and quantifiable, VA is still developing results-
oriented goals for the compensation and pension programs.

SUMMARY This is a particularly opportune time to look at the management
challenges facing the federal government and especially as we did today, the
challenges facing the Departments of Defense, State, and Veterans Affairs.
This is a time of transition for the Congress and the administration. As our
nation moves into the 21 st century, the 107 th Congress and the new
administration face an array of challenges and opportunities to enhance the
performance and ensure the accountability of the federal government for the
benefit of all Americans. We should seize the opportunity to address the
governmentwide challenges, including addressing such issues as what the
government does and how the government should do business in the 21 st
century. At the same time,

Page 18 GAO- 01- 492T

we have an obligation to look beyond the near term to prolonged fiscal
challenges including such things as the long- term implications of today's
decisions and the impacts of the coming demographic tidal wave.

Specifically, as it relates to DOD, State, and VA, the agencies have taken
actions to address the various challenges we have identified. However, as we
have noted today, much more needs to be done and this is particularly the
case for DOD. For example, DOD is working to improve its weapon systems
acquisition process, but it still needs to create a better environment for
starting and managing weapon systems development programs. Similarly, State
is working to improve security at its diplomatic missions around the world
by deploying hundreds of additional security agents overseas and replacing
some of its vulnerable embassies and consulates with more secure facilities,
but faces several challenges in administering the extensive security
construction program. In addition, VA is working to improve veterans'
overall access to VA- provided healthcare, but it still must continue to
aggressively pursue opportunities to use its health care resources more
wisely.

Effectively addressing governmentwide and specific challenges will require
sustained attention by the Congress and the administration over a period of
years. In our report on Major Management Challenges and Program Risks: A
Governmentwide Perspective, we lay out various approaches that have provided
effective oversight of key management challenges such as the year 2000
challenge and implementation of key legislation on government performance
results, financial management, and information technology management. We
also suggest other mechanisms that could be used to facilitate oversight.

The stakes are high, and we stand ready to help the Congress and the
administration to address these management challenges by providing
professional, objective, and constructive assistance. Mr. Chairman, this
concludes my statement. I will be happy to respond to any questions you or
other members of the Subcommittee may have.

Appendix I Appendix I

Page 19 GAO- 01- 492T

MANAGEMENT CHALLENGES

Acquisition X

Contracts X

Logistics X

Embassy Security X Drug Control X Illegal Immigration X Health Care X X
Disabilities Programs X

DOD STATE VA Strategic Challenges

Planning X X X Human Capital X XX

Information Technology X X X Financial Management X X Infrastructure X X X
Interagency Coordination X XX

Operational Challenges

Note: Bold “X” indicates all or a portion of this area was
deemed to be high risk in GAO's January 2001 High-Risk Series update
(GAO-01- 263). The Human Capital and Information Technology challenges are
in bold to indicate that they are governmentwide high-risk areas..

Source: GAO's Performance and Accountability and High-Risk Series and
Government Performance and Results Act reports.

Appendix II Appendix II

Page 20 GAO- 01- 492T PERFORMANCE AND ACCOUNTABILITY SERIES

Major Management Challenges and Program Risks: A Governmentwide Perspective
(GAO- 01- 241).

Major Management Challenges and Program Risks: Department of Agriculture
(GAO- 01- 242).

Major Management Challenges and Program Risks: Department of Commerce (GAO-
01- 243).

Major Management Challenges and Program Risks: Department of Defense (GAO-
01- 244).

Major Management Challenges and Program Risks: Department of Education (GAO-
01- 245).

Major Management Challenges and Program Risks: Department of Energy (GAO-
01- 246). Major Management Challenges and Program Risks: Department of
Health and Human Services (GAO- 01- 247).

Major Management Challenges and Program Risks: Department of Housing and
Urban Development (GAO- 01- 248).

Major Management Challenges and Program Risks: Department of the Interior
(GAO- 01- 249).

Major Management Challenges and Program Risks: Department of Justice (GAO-
01- 250). Major Management Challenges and Program Risks: Department of Labor
(GAO- 01- 251). Major Management Challenges and Program Risks: Department of
State (GAO- 01- 252). Major Management Challenges and Program Risks:
Department of Transportation (GAO01- 253).

Appendix II Appendix II

Page 21 GAO- 01- 492T

Major Management Challenges and Program Risks: Department of the Treasury
(GAO- 01- 254).

Major Management Challenges and Program Risks: Department of Veterans
Affairs (GAO- 01- 255).

Major Management Challenges and Program Risks: Agency for International
Development (GAO- 01- 256).

Major Management Challenges and Program Risks: Environmental Protection
Agency (GAO- 01- 257).

Major Management Challenges and Program Risks: National Aeronautics and
Space Administration (GAO- 01- 258).

Major Management Challenges and Program Risks: Nuclear Regulatory Commission
(GAO- 01- 259).

Major Management Challenges and Program Risks: Small Business Administration
(GAO01- 260).

Major Management Challenges and Program Risks: Social Security
Administration (GAO01- 261).

Major Management Challenges and Program Risks: U. S. Postal Service (GAO-
01- 262). High- Risk Series: An Update (GAO- 01- 263).

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