Responses to Posthearing Questions Related to GAO's Testimony on
the U.S. Government's Consolidated Financial Statements for
Fiscal Year 2002 (16-JUN-03, GAO-03-848R).
On April 8, 2003, GAO testified before the House Committee on
Government Reform, Subcommittee on Government Efficiency and
Financial Management at a hearing on our report on the U.S.
government's consolidated financial statements for fiscal year
2002. This letter responds to questions related to our testimony
from the Subcommittee's Chairman and the Ranking Minority Member
and to subsequent questions from the Vice Chairman that the
Chairman asked us to answer for the record.
-------------------------Indexing Terms-------------------------
REPORTNUM: GAO-03-848R
ACCNO: A07215
TITLE: Responses to Posthearing Questions Related to GAO's
Testimony on the U.S. Government's Consolidated Financial
Statements for Fiscal Year 2002
DATE: 06/16/2003
SUBJECT: Cost control
Environmental monitoring
Financial management
Financial management systems
Financial statement audits
Financial statements
Health insurance cost control
Pension plan cost control
DOD Defense Environmental Restoration
Program
Medicaid Program
Medicare Program
Social Security Program
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GAO-03-848R
Page 1 GAO- 03- 848R CFS Posthearing Questions United States General
Accounting Office
Washington, DC 20548 Comptroller General of the United States
June 16, 2003 The Honorable Todd R. Platts Chairman Subcommittee on
Government Efficiency
and Financial Management Committee on Government Reform House of
Representatives
Subject: Responses to Posthearing Questions Related to GAO*s Testimony on
the U. S. Government*s Consolidated Financial Statements for Fiscal Year
2002
Dear Mr. Chairman: On April 8, 2003, I testified before your subcommittee
at a hearing on our report on the U. S. government*s consolidated
financial statements for fiscal year 2002. 1 This letter responds to
questions related to our testimony from you and the Ranking Minority
Member and to subsequent questions from the Vice Chairman that you asked
us to answer for the record. The questions and my responses follow.
Question from Chairman Platts 1. What is the status of the financial
management systems modernization effort, agency by agency?
At a meeting with subcommittee counsel and staff on April 16, we agreed on
an approach based primarily on available data sources and an end- of- June
time frame for separately providing this information. We will compile a
list of the 24 Chief Financial Officers (CFO) Act agencies* core financial
systems along with key data related to each system, such as whether it is
a commercial off- the- shelf system. We will identify the status of
agencies* plans to acquire new core financial systems and whether any
mixed financial systems at the agencies are slated to be updated.
1 U. S. General Accounting Office, Fiscal Year 2002 U. S. Government
Financial Statements: Sustained Leadership and Oversight Needed for
Effective Implementation of Financial Management Reform, GAO- 03- 572T
(Washington, D. C.: Apr. 8, 2003). The fiscal year 2002 Financial Report
of the
United States Government, issued by the Department of the Treasury on
March 31, 2003, is available through GAO*s Web site at www. gao. gov and
Treasury*s Web site at www. fms. treas. gov/ fr/ index. html.
GAO- 03- 848R CFS Posthearing Questions Page 2 Question from Ranking
Minority Member Towns 1. The Department of Energy for a number of years
had problems estimating
its environmental liabilities, which it has since corrected. How did
Energy manage to correct its problem, and can these solutions be used at
the Department of Defense?
The Department of Energy (DOE) is responsible for management and cleanup
of environmental contamination related to the process of producing nuclear
weapons. For fiscal year 1998, the DOE Inspector General*s (IG) financial
audit opinion stated that auditors were unable to satisfy themselves that
DOE*s recorded environmental liability of $186 billion was fairly stated
because of the following deficiencies:
DOE lacked adequate documentation to support some cost estimates and
costestimating methodologies.
Valid environmental liabilities were not included in the estimate.
Cost estimates had not been updated through the end of the fiscal year
under audit.
Established cost- estimating guidelines were not consistently applied. For
fiscal year 1999, the DOE IG was able to conclude that DOE*s reported $231
billion environmental liability was fairly stated. According to the DOE
IG, DOE*s Office of Environmental Management completed corrective actions
during fiscal year 1999 that included strengthening internal controls over
developing the estimate; assessing individual cost estimates that make up
the environmental liability in terms of scope, cost, and schedule; and
quantifying the uncertainty of the estimates caused by technical problems
and funding shortfalls. To ensure the reliability of future environmental
liability estimates and to guide cleanup efforts, DOE developed a program,
which it documented in the June 1998 publication Accelerated Cleanup:
Paths to Closure, based on site- developed, project- by- project forecasts
of the scope,
schedule, and costs to complete DOE*s approximately 350 projects. The
objective was to manage the cleanup of 90 percent of contaminated sites by
2006. This program, which had the support of top management, was key to
DOE*s success.
The Department of Defense (DOD) is responsible for management and cleanup
of very diverse types of environmental contamination, including
closed and open sites where past and current waste disposal practices,
leaks, spills, and other activities have created a risk to public health
or the environment;
closed, transferring, and active military ranges where contamination and
unexploded ordnance create environmental hazards; and
cleanup, demilitarization, and disposal of nuclear and non- nuclear
weapons systems, chemical weapons, and munitions.
Although the types of cleanup are different, the obstacles to reliable
cost estimation are similar to those faced by DOE in fiscal year 1998. For
the past few years, the DOD IG has reported that the environmental
liability figure reported in DOD*s financial statements is not auditable
because of problems related to insufficient
GAO- 03- 848R CFS Posthearing Questions Page 3 guidance, lack of audit
trails, use of inconsistent or unvalidated cost- estimating
models, and incomplete inventories of sites. We have also cited
deficiencies in DOD*s reported environmental liabilities as a disclaimer
issue in the governmentwide audit reports since fiscal year 1997, and we
have issued reports on several kinds of environmental cleanup issues,
including training ranges and ongoing operations. 2 In its fiscal year
2002 performance and accountability report, DOD management
included a discussion of progress being made to address material
weaknesses, including environmental liabilities. According to the report,
DOD
has issued improved guidance* for all areas except ongoing operations*
that will help its components compile complete, accurate, and fully
substantiated environmental liability data;
is developing and maintaining adequate supporting documentation and audit
trails for cost- to- complete estimates for the environmental restoration
of more than 30,000 closed contaminated sites on open installations,
closed installations, and Base Realignment and Closure sites;
has validated the cost- estimating models used in the calculation and
documentation of environmental liability costs;
has developed a sound methodology for estimating liabilities associated
with nuclear- powered ships and submarines; and
has completed inventories of all but training ranges and sites with
ongoing operations that result in contamination.
DOD has also reviewed Paths to Closure and believes that DOE*s approach is
similar to that used by DOD to estimate and report for the Defense
Environmental Restoration Program (DERP). DOD reports site- by- site
information in its DERP report to Congress each year and estimates cleanup
costs for those sites out to the year 2030. DOD has stated that it has
also begun reconciling the DERP reported costs to the financial statement
reported costs. Finally, DOD has designated the Deputy Under Secretary of
Defense (Installations and Environment) as the focal point for all
environmental restoration and cleanup issues except for chemical
demilitarization, which is the responsibility of the Under Secretary of
Defense (Acquisition, Technology and Logistics).
DOD claims that various components of its environmental cleanup and
disposal costs are now auditable. For fiscal year 2003, the DOD IG plans
to review the Navy*s methodology for estimating liabilities associated
with nuclear- powered ships and submarines and also to audit the Army*s
chemical demilitarization cost estimates.
2 U. S. General Accounting Office, Environmental Liabilities: DOD Training
Range Cost Estimates Are Likely Understated, GAO- 01- 479 (Washington, D.
C.: Apr. 11, 2001), and Environmental Liabilities: Cleanup Costs from
Certain DOD Operations Are Not Being Reported, GAO- 02- 117 (Washington,
D. C.: Dec. 14, 2001).
GAO- 03- 848R CFS Posthearing Questions Page 4 Questions from Vice
Chairman Blackburn Submitted on April 24 1. What are your recommendations
to arrest spending on Medicare/ Medicaid
and Social Security?
As I have testified on numerous occasions before various committees,
reducing the relative future burdens of Social Security and health
programs is critical to promoting a sustainable budget policy for the
longer term. 3 While much of the public debate concerning the Social
Security and Medicare programs focuses on trust fund balances* that is, on
the programs* solvency* the larger issue concerns program sustainability.
Absent reform, the impact of federal health and retirement programs on
budget choices will be felt long before projected trust fund insolvency
dates when the cash needs of these programs begin to seriously constrain
overall budgetary flexibility.
Early action to change these programs would yield the highest fiscal
dividends for the federal budget and would provide a longer period for
prospective beneficiaries to make adjustments in their own planning.
Waiting to build economic resources and reform future claims entails
risks. First, we lose an important window where today*s relatively large
workforce can increase saving and enhance productivity, two elements
critical to growing the future economy. Second, we lose the opportunity to
reduce the burden of interest payments, thereby creating a legacy of
higher debt as well as elderly entitlement spending for the relatively
smaller workforce of the future. Finally, and most critically, we risk
losing the opportunity to phase in changes gradually so that all can make
the adjustments needed in private and public plans to accommodate this
historic shift.
Unfortunately, the long- range challenge has become more difficult, and
the window of opportunity to address the entitlement challenge is
narrowing. In fact, the leading edge of the baby boom generation will
become eligible for Social Security in only 5 years. As baby boomers
retire and the numbers of those entitled to these retirement benefits
grow, the difficulties of reform will be compounded. Accordingly, it
remains more important than ever to deal with these issues over the next
several years. Many proposals to control spending, increase revenues, and
restructure Social
Security and Medicare have been put forth by various commissions, members
of Congress, and independent *think tanks.* Although we do not make
specific policy recommendations, to assist Congress in its deliberations,
we have developed criteria for evaluating Social Security reform proposals
and soon will issue criteria for evaluating health care reforms. Our
criteria for evaluating Social Security reform proposals aim to balance
financial and economic considerations with benefit adequacy and equity
issues and the administrative challenges associated with various
3 See, for example, U. S. General Accounting Office, Medicare: Financial
Challenges and Considerations for Reform, GAO- 03- 577T (Washington, D.
C.: Apr. 10, 2003); Medicare: Observations on Program Sustainability and
Strategies to Control Spending on Any Proposed Drug Benefit, GAO03- 650T
(Washington, D. C.: April 9, 2003); Social Security: Analysis of Issues
and Selected Reform Proposals, GAO- 03- 376T (Washington, D. C.: Jan. 15,
2003); Budget Issues: Long- Term Fiscal Challenges, GAO- 02- 467T
(Washington, D. C.: Feb. 27, 2002).
GAO- 03- 848R CFS Posthearing Questions Page 5 proposals. The use of these
criteria can help facilitate fair consideration and informed
debate of reform proposals. The weight that different policymakers may
place on different criteria will vary, depending on how they value
different attributes.
The proposals we have examined, both in 2002 and earlier, reflect the
likelihood that the structural changes required to restore Social
Security*s long- term viability generally may require some combination of
reductions from currently scheduled benefits and revenue increases, and
may include the use of some general revenues. 4 Proposals employ possible
benefit reductions within the current program structure,
including modifying the benefit formula, raising the retirement age, and
reducing cost- of- living adjustments. Revenue increases might take the
form of increases in the payroll tax rate and/ or wage base, expanding
coverage to include the relatively few workers who are still not covered
under Social Security, or allowing the trust funds to be invested in
potentially higher- yielding securities, such as stocks. Similarly, some
proposals rely on general revenue transfers to increase the amount of
money going toward the Social Security program. Some proposals include
individual accounts that would also involve Social Security benefit
reductions and/ or revenue increases. Medicare also faces a long- range,
fundamental, and more serious financing problem
driven by known demographic trends and projected escalation of health care
spending beyond general inflation. As with Social Security, Medicare
reform would be done best with considerable lead time to phase in changes
and before the changes that are needed become dramatic and disruptive.
Given the size of Medicare*s financial challenge, it is only realistic to
expect that reforms intended to bring down future costs will have to
proceed incrementally. We should begin this now, when retirees are still a
far smaller proportion of the population than they will be in the future.
The sooner we get started, the less difficult the task will be.
We should also remember that the sources of some of Medicare*s problems*
and its solutions* are outside the program and are universal to all health
care payers. Some tax preferences mask the full cost of providing health
benefits and can work at crosspurposes to the goal of moderating health
care spending. Therefore, it may be important to reexamine the incentives
contained in current tax policy and consider potential reforms. Advances
in medical technology are also likely to keep raising the price tag of
providing care, regardless of the payer. Although technological advances
unquestionably provide medical benefits, judging the value of those
benefits* and weighing them against the additional costs* is more
difficult. Consumers are not as informed about the cost of health care and
its quality as they may be about other goods and services. Thus, while the
greater use of market forces may help to control cost growth, it will
undoubtedly be necessary to employ additional transparency and cost
control methods as well. Ultimately, we will need to look at broader
health care reforms to balance health care spending with other societal
priorities. In doing this, it is important to note the fundamental
differences between health care wants, which
4 See, for example, U. S. General Accounting Office, Social Security
Reform: Analysis of Reform Models Developed by the President*s Commission
to Strengthen Social Security, GAO- 03- 310 (Washington, D. C.: Jan. 15,
2003), and Social Security: Evaluating Reform Proposals,
GAO/ AIMD/ HEHS- 00- 29 (Washington, D. C., Nov. 4, 1999).
GAO- 03- 848R CFS Posthearing Questions Page 6 are virtually unlimited;
needs, which should be defined and addressed; and overall
affordability and sustainability, of which there is a limit. We are
preparing a health care framework that includes a set of principles to
help policy makers in their efforts to assess various health financing
reform options. This framework will examine health care issues systemwide
and identify the interconnections between public programs that finance
health care and the private insurance market. The framework can serve as a
tool for defining policy goals and ensuring the use of consistent criteria
for evaluating changes. By facilitating debate, the framework can
encourage acceptance of changes necessary to put us on a path to fiscal
sustainability.
For Medicare and Medicaid, the sustainability challenge has three levels*
the level of the individual programs, the health care system in which they
are embedded, and our long- term federal fiscal challenge. GAO*s long-
term budget simulations continue to show that to move into the future with
no changes to federal health and retirement programs is to envision a very
different role for the federal government. Assuming, for example, that the
tax reductions enacted in 2001 do not sunset and discretionary spending
keeps pace with the economy, by midcentury federal revenues may not even
be adequate to pay Social Security and interest on the federal debt. To
obtain budget balance, massive spending cuts, tax increases, or some
combination of the two would be necessary. Neither slowing the growth of
discretionary spending nor allowing the tax reductions to sunset
eliminates the imbalance. In addition, while economic growth would help
ease our burden, the projected fiscal gap is too great for us to grow our
way out of the problem.
2. What is your recommended course of action to address the true cost of
new legislation (for example, veterans* benefits, prescription drug
plans)? Current budget reporting is not always designed to promote the
recognition and
explicit consideration of the costs of some policies and programs. For
example, the government undertakes a wide range of responsibilities,
policies, programs, and activities that may obligate it to future spending
or simply create an expectation for such spending. These *fiscal
exposures* range from explicit liabilities to implicit promises embedded
in current policy or public expectations. The examples you cite of new
legislation for veterans* benefits or prescription drug plans could be
viewed as creating new fiscal exposures. We have made the following
recommendations 5 to increase the visibility and transparency of such
exposures:
First, we recommend that OMB report the future estimated costs associated
with certain exposures as a new budget concept** exposure level** as a
notational item in the Program and Financing schedule of the President*s
budget. As opposed to cash, the *exposure level* might be reported in
present value terms.
5 U. S. General Accounting Office, Fiscal Exposures: Improving the
Budgetary Focus on Long- Term Costs and Uncertainties, GAO- 03- 213
(Washington, D. C.: Jan. 24, 2003).
GAO- 03- 848R CFS Posthearing Questions Page 7 Specifying the estimated
potential future costs associated with current decisions
would promote transparency.
We also recommend that OMB report annually on fiscal exposures, including
a concise list and description of such exposures, cost estimates where
possible, and an assessment of methodologies and data used to produce the
cost estimates. Explicitly and directly integrating this report with long-
range projections and analysis of the budget as a whole would increase its
usefulness for assessing the potential implications for long- range fiscal
sustainability and flexibility. Legislation proposed by the President
could be included if the report were issued as part of the President*s
budget and thus could help inform and provide longterm context to budget
deliberations.
Other entities also can promote transparency and visibility of fiscal
exposures by various actions:
FASAB. Continue to make progress on the accounting and reporting front (e.
g., trust funds and social insurance).
Treasury. Enhance disclosures in the annual governmentwide performance and
accountability report.
GAO. Continue to emphasize the issue in existing reports and testimonies.
Comment on any annual fiscal exposures report published by OMB.
Congress. Consider requiring that discounted present value numbers be
considered for major revenue- and spending- related legislative proposals
before legislation is enacted.
In addition, we have stated that Congress may wish to consider exploring
options for improving the information available on and the attention given
to fiscal exposures. 6 To increase congressional attention to such
exposures, Congress could develop
budget process mechanisms that prompt more deliberation about fiscal
exposures. One type of mechanism that could be used is a point of order.
Congress could modify budget rules to provide for a point of order against
any proposed legislation that creates new exposures or increases the
estimated costs of existing exposures over some specified level. Or,
revised rules could provide for a point of order against any proposed
legislation that does not include estimates of the potential costs of
fiscal exposures created by the legislation. A second type of budget
process mechanism that would prompt deliberation of fiscal exposures would
be to establish triggers that require some action when the estimated
future costs of a given exposure rise above some specified threshold.
3. How are audit results being used to affect budgeting processes for the
current and next year, and how should they be used? Ultimately, the
objective is for agencies to generate high- quality data and measure
performance in a meaningful way to help inform decision makers during the
budget 6 GAO- 03- 213.
GAO- 03- 848R CFS Posthearing Questions Page 8 process when allocating
resources and determining the most efficient and effective
means of achieving policy objectives. Financial audit results are the
beginning point in this process and should be considered along with the
results of programmatic audits and performance reviews.
Financial statements are included in the annual performance and
accountability reports for the 24 CFO Act agencies. These financial
statements, along with the accompanying management analysis and
performance reports, can provide a wealth of information regarding agency
performance and financial condition that can be considered as budgeting
decisions are made. One of the objectives of federal financial management
reform legislation is to improve the quality and availability of
information for decision makers. The results of agency financial statement
audits, including the related identification of any internal control
weaknesses, noncompliance, and systems issues, provide the starting point
for considering an agency*s ability to generate the information necessary
to make informed decisions about its efficiency and effectiveness in
achieving its mission and goals. For fiscal year 2002, while 21 of the 24
CFO Act agencies received an unqualified opinion on their financial
statements, auditors for 19 of the 24 agencies reported that the agencies*
systems did not comply substantially with at least one of the three
requirements of the Federal Financial Management Improvement Act. This
lack of compliance raises questions about the ability of these agencies to
generate timely, useful, and reliable information needed for day- to- day
management and congressional oversight.
The audited financial statements also provide indications of the quality
of certain data included in budget requests and historical information
that could be considered during budget deliberations. For example, the
Statement of Budgetary Resources in the agency*s audited financial
statements provides information as to the status and uses of budgetary
resources, such as amounts remaining available for obligation as of the
end of the fiscal year. Because this information is audited, it provides
assurance as to the reliability of these amounts in relation to the
financial statements as a whole. In areas such as direct loans and loan
guarantees, the accounting used for the financial statements under
generally accepted accounting principles closely mirrors the Credit Reform
Act requirements used for the budget. This means that errors, weaknesses
in the estimation process, or other issues identified during the financial
statement audit may also be present in related budget requests.
In addition, the audited financial statements provide information not
presented in the budget that could also be considered in the budgeting
process. For example, liabilities for the total estimated cost of
environmental cleanup and other liabilities, such as those for federal
employees* and veterans* benefits, are presented in the financial
statements. These amounts should include the entire estimated liability
for these programs, rather than the projected cash flows for limited
periods included in the budget. Further, the statements present
information on social insurance programs, such as Social Security and
Medicare, that shows the long- term fiscal challenges associated with
these programs that could also be considered in the budget process. While
much of this information is included in individual agency financial
statements, the presentation of this information in the consolidated
financial
GAO- 03- 848R CFS Posthearing Questions Page 9 report of the U. S.
government can provide a basis for analyzing the overall long- range
fiscal challenges faced by our government as a whole, during the
deliberative process on the budget.
The audited financial statements present data as of a single point in time
or for a specific period. Even if an agency*s financial statements
received an unqualified opinion, there are no direct assurances about
other data from the agency, such as quarterly results or performance
information. However, as part of the audits, material weaknesses in
internal control and inadequate financial systems are often identified.
These deficiencies can affect an agency*s ability to generate reliable
cost information and measure the performance of its programs. The impact
of these conditions on the reliability of other, unaudited agency data
should be considered from an oversight or budget perspective.
I am providing copies of this letter to the Ranking Minority Member and
Vice Chairman of your subcommittee. This letter is also available on GAO*s
Web site at www. gao. gov.
If you or your staff have questions about the responses to your questions,
please contact me at (202) 512- 5500 or Gary T. Engel, Director, at (202)
512- 3406 or engelg@ gao. gov.
Sincerely yours, David M. Walker Comptroller General of the United States
(198195)
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